What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-16 compared with 2020-02-18 · 129 added, 91 removed, 173 unchanged (56% of the section changed)

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Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.

In January 2021, the SEC issued Final Rule Release No.

33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information .

This rule, which became effective on February 10, 2021, adopts amendments to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K.

Specifically, the amendments eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

We early adopted the amendments to two items resulting in the elimination of Item 301, Selected Financial Data , and the omission of Item 302(a), Supplementary Financial Information .

The amendments to Item 303(a)(b) MD&A , will be adopted in our Form 10-K for the year ended December 31, 2021.

COVID-19 Pandemic

Our business has been adversely affected by the ongoing COVID-19 pandemic.

In March 2020, our “non-essential” retail tenants were ordered to temporarily close and although substantially all re-opened in the latter part of June 2020, there are limitations on occupancy and other restrictions that affect their ability to resume full operations.

In limited circumstances, we have agreed to and may continue to agree to rent deferrals and abatements for certain of our tenants.

We have made the policy election available to us based on the Financial Accounting Standards Board’s (“FASB”) guidance for leases during the COVID-19 pandemic, which allows us to continue recognizing rental revenue for rent deferral agreements and to recognize rent abatements as a reduction to rental revenue in the period granted.

See Note 3 - Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report on Form 10-K for additional information.

Overall, we have collected approximately 95% of rent billed for the quarter ended December 31, 2020 (96% including rent deferrals under agreements which generally require repayment in monthly installments over a period of time not to exceed twelve months), including 100% for our office tenant, approximately 90% for our retail tenants (91% including rent deferrals) and approximately 98% for our residential tenants.

On September 10, 2020, Century 21, which leased 135,000 square feet at our Rego Park II shopping center ($6,400,000 of annual revenue), filed for Chapter 11 bankruptcy and closed its store on December 7, 2020.

Based on our assessment of the probability of collecting rent from certain tenants, we have written off as uncollectible tenant receivables of $4,122,000 during the year ended December 31, 2020, resulting in a reduction of rental revenues.

Of this amount, $2,716,000 is attributable to Century 21.

In addition, we have written off receivables arising from the straight-lining of rents related to these tenants of $10,837,000 during the year ended December 31 2020, resulting in a reduction of rental revenues.

Of this amount, $5,919,000 is attributable to Century 21.

Prospectively, revenue recognition for these tenants will be based on actual amounts received.

Overview - continued

Year Ended December 31, 2020 Financial Results Summary

Net income for the year ended December 31, 2020 was $41,939,000 or $8.19 per diluted share, compared to $60,075,000, or $11.74 per diluted share for the year ended December 31, 2019.

Net income for the year ended December 31, 2018 included $23,797,000, or $4.65 per diluted share, of expense for potential additional New York City real property transfer taxes on the 2012 sale of Kings Plaza Regional Shopping Center (“Kings Plaza”).

Funds from operations (“FFO”) (non-GAAP) for the year ended December 31, 2020 was $82,509,000, or $16.11 per diluted share, compared to $99,670,000, or $19.47 per diluted share for the year ended December 31, 2019.

FFO (non-GAAP) for the year ended December 31, 2018 included $23,797,000, or $4.65 per diluted share, of expense for the Kings Plaza transfer taxes.

Quarter Ended December 31, 2020 Financial Results Summary

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Square Footage, Occupancy and Leasing Activity

As of December 31, 2019, our portfolio was comprised of seven properties aggregating 2,449,000 square feet, of which 2,230,000 square feet was in service and 219,000 square feet (primarily the former Sears space at our Rego Park I shopping center) was out of service due to redevelopment.

As of December 31, 2020, our portfolio was comprised of seven properties aggregating 2,444,000 square feet, of which 2,366,000 square feet was in service and 78,000 square feet (a portion of our Rego Park I shopping center) was out of service due to redevelopment.

The in service square feet was 97% occupied as of December 31, 2020.

On September 23, 2019, we entered into a 10-year lease agreement with IKEA for 113,000 square feet at our Rego Park I shopping center, replacing a significant portion of the space formerly occupied by Sears.

IKEA has the option to terminate this lease after the fifth year of the lease term subject to payment to us of the lesser of $10,000,000 or the amount of rent due under the remaining term.

On October 3, 2018, we extended our mortgage loan on our Paramus property.

The $68,000,000 interest-only loan has a fixed rate of 4.72% and matures in October 2021.

Previously the loan bore interest at a fixed rate of 2.90%.

The tenant pays all of the interest on this mortgage loan as part of its rent.

On December 12, 2018, we completed a refinancing of our Rego Park II shopping center in the amount of $252,544,000.

The interest-only loan is at LIBOR plus 1.35% (3.15% as of December 31, 2019) and matures in December 2025.

As of December 31, 2019, we have a participation in the mortgage in the amount of $195,708,000 which for GAAP purposes is netted against the mortgage balance.

Therefore, the balance sheet amount of the mortgage loan is $56,836,000.

On February 14, 2020, we reduced our participation in the mortgage loan to $50,000,000 and received cash proceeds of approximately $145,000,000.

Overview - continued

Financing Activity

On February 14, 2020, we reduced our participation in our Rego Park II shopping center loan to $50,000,000 and received cash proceeds of approximately $145,000,000.

On September 14, 2020, we amended and extended the $350,000,000 mortgage loan on the retail condominium of our 731 Lexington Avenue property.

Under the terms of the amendment, we paid down the loan by $50,000,000 to $300,000,000, extended the maturity date to August 2025 and guaranteed the interest payments and certain leasing costs.

The principal of the loan is non-recourse to us.

The interest-only loan is at LIBOR plus 1.40% (1.55% as of December 31, 2020) which is subject to an interest rate swap with a fixed rate of 1.72%.

On October 23, 2020, we completed a financing of The Alexander apartment tower in the amount of $94,000,000.

The interest-only loan has a fixed rate of 2.63% and matures in November 2027.

Significant Tenant

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In addition, we access and evaluate financial information regarding Bloomberg from other private sources, as well as publicly available data.

On June 28, 2019, we entered into a lease agreement with Bloomberg for an additional 49,000 square feet at our 731 Lexington Avenue property.

Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Actual results could differ from those estimates.

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This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 3 – Summary of Significant Accounting Policies, to the consolidated financial statements in this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates - continued

Real estate is carried at cost, net of accumulated depreciation and amortization.

As of December 31, 2020 and 2019, the carrying amount of our real estate, net of accumulated depreciation and amortization, was $720,921,000 and $716,843,000, respectively.

Maintenance and repairs are expensed as incurred.

Maintenance and repairs are generally expensed as incurred.

Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components.

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Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.

Critical Accounting Policies and Estimates - continued

Revenue Recognition

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This revenue is recognized as the services are transferred in accordance with ASC 606.

Under ASC 842, we must assess on an individual lease basis whether it is probable that we will collect substantially all of the future lease payments.

We consider the tenant’s payment history and current credit status when assessing collectability.

When collectability is not deemed probable, we write-off the tenant’s receivables, including straight-line rent receivable, and limit lease income to cash received.

We recognize changes in the collectability assessment of our operating leases as adjustments to rental revenues.

Critical Accounting Policies and Estimates - continued

We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856 – 860 of the Internal Revenue Code of 1986, as amended (the “Code”).

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Rental revenues were $199,142,000 in the year ended December 31, 2020, compared to $226,350,000 in the prior year, a decrease of $27,208,000.

This decrease was primarily due to the Sears vacancy effective October 2018 at our Rego Park I property.

This decrease was primarily due to (i) $10,837,000 from the write-off of receivables arising from the straight-lining of rents from certain of our retail tenants, of which $5,919,000 is attributable to Century 21, (ii) $10,512,000 from retail tenant vacancies at our 731 Lexington Avenue property and (iii) $5,590,000 of lower rental income from certain of our retail tenants which were deemed uncollectible, of which $3,036,000 is attributable to Century 21.

Operating Expenses

Operating expenses were $88,403,000 in the year ended December 31, 2020, compared to $89,738,000 in the prior year, a decrease of $1,335,000.

This decrease was primarily due to bad debt expense in the prior year of $4,459,000, primarily due to the Sears bankruptcy and lease termination.

This decrease was primarily due to lower operating expenses subject to recovery, including utilities and common area maintenance.

Depreciation and Amortization

Depreciation and amortization was $31,351,000 in the year ended December 31, 2019 , compared to $33,089,000 in the prior year, a decrease of $1,738,000.

This decrease was primarily due to acceleration of depreciation and amortization in the prior year related to the Toys “R” Us, Inc.

(“Toys”) bankruptcy and lease termination at our Rego Park II property.

Depreciation and amortization was $32,357,000 in the year ended December 31, 2020, compared to $31,351,000 in the prior year, an increase of $1,006,000.

This increase is primarily due to the acceleration of amortization of deferred leasing costs related to Century 21 at our Rego Park II property.

General and Administrative Expenses

General and administrative expenses were $6,307,000 in the year ended December 31, 2020, compared to $5,772,000 in the prior year, an increase of $535,000.

This increase was primarily due to higher professional fees.

This increase was primarily due to higher stock-based compensation expense in connection with the fair value of deferred stock units granted to a newly appointed member of our Board of Directors during the second quarter of 2020, comprised of an initial award of $150,000 and a $56,000 annual award and $245,000 due to higher professional fees.

Interest and Other Income, net

Interest and other income, net was $2,667,000 in the year ended December 31, 2020, compared to $8,244,000 in the prior year, a decrease of $5,577,000.

This decrease was primarily due to (i) $7,126,000 of interest income in the prior year from our Rego Park II loan participation (on December 12, 2018, we refinanced our $252,544,000 Rego Park II shopping center mortgage loan and GAAP required that our $195,708,000 loan participation be treated as an extinguishment of debt), partially offset by (ii) $1,364,000 of higher interest income due to an increase in average interest rates and (iii) $1,600,000 of expense in the prior year from a litigation settlement.

This decrease was primarily due to $5,216,000 of lower interest income due to a decrease in interest rates.

Interest and Debt Expense

Interest and debt expense was $24,204,000 in the year ended December 31, 2020, compared to $38,901,000 in the prior year, a decrease of $14,697,000.

This decrease was primarily due to $7,178,000 of lower interest expense due to the refinancing of our Rego Park II shopping center loan, partially offset by $1,810,000 of higher interest expense resulting from an increase in average interest rates.

This decrease was primarily due to $15,149,000 of lower interest expense due to a decrease in LIBOR.

Change in Fair Value of Marketable Securities

Change in fair value of marketable securities was an expense of $8,757,000 in the year ended December 31, 2019, resulting from Macerich’s closing share prices of $26.92 and $43.28 as of December 31, 2019 and 2018, respectively, on 535,265 shares owned.

Change in fair value of marketable securities was an expense of $11,990,000 in the prior year, resulting from Macerich’s closing share prices of $43.28 and $65.68 as of December 31, 2018 and 2017, respectively.

Loss from Discontinued Operations

Loss from discontinued operations was $23,797,000 in the year ended December 31, 2018.

The loss was due to an expense for potential additional real property transfer taxes from the 2012 sale of Kings Plaza.

See Note 6 – Discontinued Operations , to our consolidated financial statements in this Annual Report on Form 10-K.

Change in fair value of marketable securities was an expense of $8,599,000 in the year ended December 31, 2020, consisting of $8,698,000 resulting from a decrease in Macerich’s share price of $16.25 on 535,265 shares owned, partially offset by $99,000 resulting from an increase in Macerich’s share price of $3.37 on 29,347 shares owned.

Change in fair value of marketable securities was an expense of $8,757,000 in the prior year, resulting from a decrease in Macerich’s share prices of $16.36 on 535,265 shares owned.

Results of Operations – Year Ended December 31, 2019 compared to December 31, 2018

Rental Revenues

Rental revenues were $232,825,000 in the year ended December 31, 2018, compared to $230,574,000 in the prior year, an increase of $2,251,000.

This increase was primarily due to (i) higher revenue from a new restaurant tenant at our 731 Lexington property and (ii) higher expense reimbursements, partially offset by (iii) lower revenue from Sears at our Rego Park I property and Toys at our Rego Park II property.

Rental revenues were $226,350,000 in the year ended December 31, 2019, compared to $232,825,000 in the prior year, a decrease of $6,475,000.

This decrease was primarily due to the Sears vacancy effective October 2018 at our Rego Park I property.

Operating Expenses

Operating expenses were $93,775,000 in the year ended December 31, 2018, compared to $85,127,000 in the prior year, an increase of $8,648,000.

This increase was primarily due to (i) higher bad debt expense of $4,406,000, (ii) higher real estate taxes of $2,180,000 and (iii) higher operating expenses of $1,664,000.

Operating expenses were $89,738,000 in the year ended December 31, 2019, compared to $93,775,000 in the prior year, a decrease of $4,037,000.

This decrease was primarily due to bad debt expense in 2018 of $4,459,000, primarily due to the Sears bankruptcy and lease termination.

Depreciation and Amortization

Depreciation and amortization was $31,351,000 in the year ended December 31, 2019, compared to $33,089,000 in the prior year, a decrease of $1,738,000.

This decrease was primarily due to additional depreciation and amortization of tenant improvements and deferred leasing costs of $2,444,000 related to a tenant lease termination at our 731 Lexington Avenue property in 2017.

This decrease was primarily due to acceleration of depreciation and amortization in 2018 related to the Toys “R” Us, Inc.

bankruptcy and lease termination at our Rego Park II property.

General and Administrative Expenses

General and administrative expenses were $5,772,000 in the year ended December 31, 2019, compared to $5,343,000 in the prior year, an increase of $429,000.

This increase was primarily due to higher professional fees.

Interest and Other Income, net

Interest and other income, net was $12,546,000 in the year ended December 31, 2018, compared to $6,716,000 in the prior year, an increase of $5,830,000.

This increase was primarily due to (i) $4,673,000 of higher interest income from the Rego Park II loan participation entered into in July 2017 and (ii) $3,693,000 of higher interest income due to an increase in average interest rates, partially offset by (iii) $1,600,000 of expense in 2018 from a litigation settlement and (iv) $760,000 of lower interest income due to lower average investment balances.

Interest and other income, net was $8,244,000 in the year ended December 31, 2019, compared to $12,546,000 in the prior year, a decrease of $4,302,000.

This decrease was primarily due to (i) $7,126,000 of interest income in 2018 from our Rego Park II loan participation (on December 12, 2018, we refinanced our $252,544,000 Rego Park II shopping center mortgage loan and GAAP required that our loan participation be treated as an extinguishment of debt), partially offset by (ii) $1,364,000 of higher interest income due to an increase in average interest rates and (iii) $1,600,000 of expense in 2018 from a litigation settlement.

Interest and Debt Expense

Interest and debt expense was $44,533,000 in the year ended December 31, 2018, compared to $31,474,000 in the prior year, an increase of $13,059,000.

This increase was primarily due to (i) $8,482,000 resulting from an increase in average interest rates, (ii) $2,620,000 resulting from the refinancing of the office portion of 731 Lexington Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $1,641,000 of higher amortization of debt issuance costs.

Interest and debt expense was $38,901,000 in the year ended December 31, 2019, compared to $44,533,000 in the prior year, a decrease of $5,632,000.

Change in Fair Value of Marketable Securities

Loss from Discontinued Operations

Loss from discontinued operations was $23,797,000 in the year ended December 31, 2018.

The loss was due to an expense for potential additional real property transfer taxes from the 2012 sale of Kings Plaza.

The loss was due to an expense for potential additional real property transfer taxes from the 2012 sale of the Kings Plaza Regional Shopping Center (“Kings Plaza”).

See Note 7 – Discontinued Operations , to our consolidated financial statements in this Annual Report on Form 10-K.

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(who are also directors of the Company and trustees of Vornado) owned, in the aggregate, 26.1% of our outstanding common stock, in addition to the 2.3% they indirectly own through Vornado.

Joseph Macnow, our Treasurer, is the Executive Vice President - Chief Financial Officer and Chief Administrative Officer of Vornado.

Matthew Iocco, our Chief Financial Officer, is the Executive Vice President - Chief Accounting Officer of Vornado.

Our affiliate, Vornado, owned 32.5% of Toys as of December 31, 2018.

On February 1, 2019, in connection with the Toys Chapter 11 bankruptcy, the plan of reorganization for Toys was declared effective and Vornado’s ownership in Toys was canceled and Toys’ Board of Directors was dissolved.

Joseph Macnow, Vornado’s Executive Vice President and Chief Financial Officer and Wendy A.

Silverstein, a member of our Board of Directors, represented Vornado as members of Toys’ Board of Directors.

Also in connection with the Toys Chapter 11 bankruptcy, Toys rejected its 47,000 square foot lease at our Rego Park II shopping center ($2,600,000 of annual revenue) effective June 30, 2018 and possession of the space was returned to us.

Liquidity and Capital Resources

Property rental income is our primary source of cash flow and is dependent on a number of factors including the occupancy level and rental rates of our properties, as well as our tenants’ ability to pay their rents.

Rental revenue is our primary source of cash flow and is dependent on a number of factors, including the occupancy level and rental rates of our properties, as well as our tenants’ ability to pay their rents.

Our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses, interest expense, recurring capital expenditures and cash dividends to stockholders.

As a result of the COVID-19 pandemic, in limited circumstances, we have agreed to and may continue to agree to rent deferrals and abatements for certain of our tenants.

Other sources of liquidity to fund cash requirements include our existing cash, proceeds from financings, including mortgage or construction loans secured by our properties and proceeds from asset sales.

We anticipate that cash flows from continuing operations over the next twelve months, together with existing cash balances, will be adequate to fund our business operations, cash dividends to stockholders and capital expenditures.

On January 15, 2020, we set our regular quarterly dividend to $4.50 per share (an indicated annual rate of $18.00 per share).

The dividend, if declared by the Board of Directors for all of 2020, would require us to pay out approximately $92,100,000.

Financing Activities and Contractual Obligations

On October 3, 2018, we extended our mortgage loan on our Paramus property.

The $68,000,000 interest-only loan has a fixed rate of 4.72% and matures in October 2021.

Previously the loan bore interest at a fixed rate of 2.90%.

The tenant pays all of the interest on this mortgage loan as part of its rent.

On December 12, 2018, we completed a refinancing of our Rego Park II shopping center in the amount of $252,544,000.

The interest-only loan is at LIBOR plus 1.35% (3.15% as of December 31, 2019) and matures in December 2025.

As of December 31, 2019, we have a participation in the mortgage in the amount of $195,708,000 which for GAAP purposes is netted against the mortgage balance.

Therefore, the balance sheet amount of the mortgage loan is $56,836,000.

On February 14, 2020, we reduced our participation in the mortgage loan to $50,000,000 and received cash proceeds of approximately $145,000,000.

As of December 31, 2020, we had $455,901,000 of liquidity comprised of $449,877,000 of cash and cash equivalents and restricted cash and $6,024,000 of marketable securities.

We may refinance our maturing debt as it comes due or choose to pay it down.

However, there can be no assurance that additional financing or capital will be available to refinance our debt, or that the terms will be acceptable or advantageous to us.

The challenges posed by the COVID-19 pandemic and the impact on our business and cash flows are evolving rapidly and cannot be predicted at this time but that impact could be material.

Consequently, we will continue to evaluate our liquidity and financial position on an ongoing basis.

On January 20, 2021, our Board of Directors declared a regular quarterly dividend to $4.50 per share (an indicated annual rate of $18.00 per share).

The dividend, if declared by the Board of Directors at the same rate for all of 2021, would require us to pay out approximately $92,200,000.

Financing Activity and Contractual Obligations

On February 14, 2020, we reduced our participation in our Rego Park II shopping center loan to $50,000,000 and received cash proceeds of approximately $145,000,000.

On September 14, 2020, we amended and extended the $350,000,000 mortgage loan on the retail condominium of our 731 Lexington Avenue property.

Under the terms of the amendment, we paid down the loan by $50,000,000 to $300,000,000, extended the maturity date to August 2025 and guaranteed the interest payments and certain leasing costs.

The principal of the loan is non-recourse to us.

The interest-only loan is at LIBOR plus 1.40% (1.55% as of December 31, 2020) which is subject to an interest rate swap with a fixed rate of 1.72%.

Liquidity and Capital Resources - continued

On October 23, 2020, we completed a financing of The Alexander apartment tower in the amount of $94,000,000.

The interest-only loan has a fixed rate of 2.63% and matures in November 2027.

Below is a summary of our outstanding debt and maturities as of December 31, 2020.

We may refinance our maturing debt as it comes due or choose to repay it.

Interest Rate

Balance Interest Rate Maturity

(Amounts in thousands)

731 Lexington Avenue, retail condominium (1)

Paramus $ 68,000 4.72 % Oct.

731 Lexington Avenue, office condominium (1)

500,000 1.06 % Jun.

731 Lexington Avenue, retail condominium (2)

300,000 1.55 % Aug.

Rego Park II shopping center (3)

202,544 1.50 % Dec.

The Alexander apartment tower 94,000 2.63 % Nov.

Total 1,164,544

Deferred debt issuance costs, net of accumulated amortization of $13,034 (8,374)

(1) Interest at LIBOR plus 1.40%.

Maturity date represents the extended maturity based on our conditional right to extend.

Total, net $ 1,156,170

(1) Interest at LIBOR plus 0.90%.

Maturity date represents the extended maturity based on our unilateral right to extend.

(2) Interest at LIBOR plus 1.40% which is subject to an interest rate swap with a fixed rate of 1.72%.

(3) Interest at LIBOR plus 1.35%.

The amount of this loan is net of our $195,708 loan participation (see Note 2 - Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report on Form 10-K).

The amount of this loan is net of our $50,000 loan participation.

Below is a summary of our contractual obligations and commitments as of December 31, 2020.

(Amounts in thousands)

Less than One to Three to More than

(Amounts in thousands) Total One Year Three Years Five Years Five Years

Contractual obligations (1) (principal and interest) (2) :

Long-term debt obligations (3)

$ 1,241,929 $ 86,617 $ 32,384 $ 1,024,327 $ 98,601

Operating lease obligations 4,800 800 1,600 1,600 800

Purchase obligations, primarily construction commitments 4,523 4,523 — — —

$ 1,251,252 $ 91,940 $ 33,984 $ 1,025,927 $ 99,401

Standby letters of credit $ 960 $ 950 $ 10 $ — $ —

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(3) Net of loan participation and related interest.

Liquidity and Capital Resources - continued

Commitments and Contingencies

We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all-risk property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for acts of terrorism, with sub-limits for certain perils such as floods and earthquakes on each of our properties.

We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, of which the first $1,000,000 includes communicable disease coverage, and all-risk property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for acts of terrorism, with sub-limits for certain perils such as floods and earthquakes on each of our properties and excluding communicable disease coverage.

Fifty Ninth Street Insurance Company, LLC (“FNSIC”), our wholly owned consolidated subsidiary, acts as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Act of 2002, as amended to date and which has been extended through December 2027.

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We are ultimately responsible for any loss incurred by FNSIC.

Liquidity and Capital Resources - continued

We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism or other events.

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We are responsible for uninsured losses and for deductibles and losses in excess of our insurance coverage, which could be material.

Our mortgage loans are non-recourse to us and contain customary covenants requiring us to maintain insurance.

The principal amounts of our mortgage loans are non-recourse to us and the loans contain customary covenants requiring us to maintain insurance.

Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future.

Further, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties.

If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties.

In 2001, we leased 30.3 acres of land located in Paramus, New Jersey to IKEA.

The lease has a purchase option in 2021 for $75,000,000.

The lease expires in 2041, with a purchase option in October 2021 for $75,000,000.

The property is encumbered by a $68,000,000 interest-only mortgage loan with a fixed rate of 4.72%, which matures in October 2021.

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Rego Park I Litigation

In June 2014, Sears filed a lawsuit in the Supreme Court of the State of New York against Vornado and us (and certain of our subsidiaries) with regard to space that Sears leased at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises, (b) two fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises’ parking garage.

In June 2014, Sears Roebuck and Co.

(“Sears”) filed a lawsuit in the Supreme Court of the State of New York against Vornado and us (and certain of our subsidiaries) with regard to the 195,000 square foot store that Sears formerly leased at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises, (b) two fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises’ parking garage.

Sears asserted various causes of actions for damages and sought to compel compliance with landlord’s obligations to repair the premises and to provide security, and to compel us to abate a nuisance that Sears claims was a cause of the water intrusions into its premises.

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We intend to defend the remaining claim vigorously.

The amount or range of reasonable possible losses, if any, is not expected to be greater than $650,000.

The amount or range of reasonably possible losses, if any, is not expected to be greater than $650,000.

On October 15, 2018, Sears filed for Chapter 11 bankruptcy relief resulting in an automatic stay of this case.

Tenant Matter

On April 13, 2019, Kohl’s closed its 133,000 square foot store at our Rego Park II shopping center.

On January 24, 2020, Kohl’s subleased its store to At Home and remains obligated under its lease which expires in January 2031.

Liquidity and Capital Resources - continued

Kings Plaza Transfer Tax

In 2012, we sold Kings Plaza and paid real property transfer taxes to New York City in connection with the sale.

In 2015, the New York City Department of Finance (“NYC DOF”) issued a Notice of Determination to us assessing an additional New York City real property transfer tax amount, including interest.

In 2014, in a case with similar facts, the NYC DOF issued a Notice of Determination to a Vornado joint venture assessing an additional New York City real property transfer tax amount, including interest.

In January 2017, a New York City administrative law judge made a determination upholding the Vornado joint venture’s position that such additional real property transfer taxes were not due.

On February 16, 2018, the New York City Tax Appeals Tribunal (the “Tribunal”) overturned the January 2017 determination.

The Vornado joint venture appealed the Tribunal’s decision to the Appellate Division of the Supreme Court of the State of New York and on April 25, 2019, the Tribunal’s decision was unanimously upheld.

The Vornado joint venture filed a motion to reargue the Appellate Division’s decision or for leave to appeal to the New York State Court of Appeals.

On December 12, 2019, that motion was denied and the case can no longer be appealed.

Based on the precedent of the Tribunal’s decision, we paid the additional real property transfer taxes of $23,797,000 ($15,874,000 of real property transfer tax and $7,923,000 of interest) on April 5, 2018.

On January 12, 2021, we decided not to further contest the additional real property transfer taxes paid in connection with the sale of Kings Plaza.

Letters of Credit

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In our opinion, the outcome of such matters in the aggregate will not have a material effect on our financial position, results of operations or cash flows.

Cash Flows for the Year Ended December 31, 2020

Cash and cash equivalents and restricted cash were $449,877,000 at December 31, 2020, compared to $313,977,000 at December 31, 2019, an increase of $135,900,000.

This increase resulted from (i) $78,066,000 of net cash provided by operating activities and (ii) $90,294,000 of net cash provided by financing activities, partially offset by (iii) $32,460,000 of net cash used in investing activities.

Net cash provided by operating activities of $78,066,000 was comprised of (i) net income of $41,939,000 and (ii) adjustments for non-cash items of $69,330,000, partially offset by (iii) the net change in operating assets and liabilities of $33,203,000.

The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $35,121,000, (ii) straight-lining of rental income of $21,102,000, (iii) the change in fair value of marketable securities of $8,599,000, (iv) write-off of tenant receivables of $4,122,000 and (v) stock-based compensation expense of $600,000, partially offset by (vi) $214,000 of dividends received in stock from Macerich.

Net cash provided by financing activities was primarily comprised of (i) proceeds from the reduction of our participation in our Rego Park II mortgage loan of $145,708,000 and (ii) proceeds from the financing of The Alexander apartment tower of $94,000,000, partially offset by (iii) dividends paid of $92,168,000 and (iv) debt repayments of $50,000,000.

Net cash used in investing activities was comprised of construction in progress, real estate additions and other of $32,460,000.

Liquidity and Capital Resources - continued

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The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $38,499,000, (ii) the change in fair value of marketable securities of $11,990,000, (iii) straight-lining of rental income of $5,924,000 and (iv) stock-based compensation expense of $394,000.

Cash Flows for the Year Ended December 31, 2017

Cash and cash equivalents and restricted cash were $393,279,000 at December 31, 2017, compared to $374,678,000 at December 31, 2016, an increase of $18,601,000.

This increase resulted from (i) $123,426,000 of net cash provided by operating activities and (ii) $97,146,000 of net cash provided by financing activities, partially offset by (iii) $201,971,000 of net cash used in investing activities.

Net cash provided by operating activities of $123,426,000 was comprised of (i) net income of $80,509,000 and (ii) adjustments for non-cash items of $43,372,000, partially offset by (iii) the net change in operating assets and liabilities of $455,000.

The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $38,681,000, (ii) straight-lining of rental income of $4,297,000 and (iii) stock-based compensation expense of $394,000.

Net cash provided by financing activities of $97,146,000 was primarily comprised of (i) $500,000,000 of proceeds from the refinancing of the office portion of 731 Lexington Avenue, partially offset by (ii) debt repayments of $303,707,000 (primarily the repayment of the former loan on the office portion of 731 Lexington Avenue) and (iii) dividends paid of $86,961,000.

Net cash used in investing activities of $201,971,000 was comprised of (i) Rego Park II loan participation of $200,000,000 and (ii) construction in progress and real estate additions of $3,434,000, partially offset by (iii) principal repayment proceeds from the Rego Park II loan participation of $1,463,000.

Funds from Operations (“FFO”) (non-GAAP)

FFO is computed in accordance with the December 2018 restated definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”).

FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”).

NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciable real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified items, including the pro rata share of such adjustments of unconsolidated subsidiaries.

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FFO (non-GAAP) for the year ended December 31, 2020 was $82,509,000, or $16.11 per diluted share, compared to $99,670,000, or $19.47 per diluted share for the year ended December 31, 2019.

FFO (non-GAAP) for the year ended December 31, 2018 included $23,797,000, or $4.65 per diluted share, of expense for the potential additional New York City real property transfer taxes on the 2012 sale of Kings Plaza.

FFO (non-GAAP) for the quarter ended December 31, 2020 was $25,407,000, or $4.96 per diluted share, compared to $24,626,000, or $4.81 per diluted share for the quarter ended December 31, 2019.

Funds from Operations (“FFO”) (non-GAAP) - continued

The following table reconciles our net income to FFO (non-GAAP):

For the Year Ended

For the Three Months Ended

(Amounts in thousands, except share and per share amounts)

For the Year Ended For the Three Months Ended

(Amounts in thousands, except share and per share amounts) December 31, December 31,

2020 2019 2020 2019

Net income $ 41,939 $ 60,075 $ 18,432 $ 14,434

Depreciation and amortization of real property 31,971 30,838 9,165 7,692

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Weighted average shares used in computing FFO per diluted share

5,120,922 5,118,198 5,122,206 5,118,698

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis