ALEXANDERS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to “we,” “us,” “our,” “Company” and “Alexander’s” refer to Alexander’s, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO). We have seven properties in the greater New York City metropolitan area. We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends of the global, national and local economies, the financial condition and operating results of current and prospective tenants and customers, the availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population and employment trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels. 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. 27 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. 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. Quarter Ended December 31, 2020 Financial Results Summary Net income for the quarter ended December 31, 2020 was $18,432,000, or $3.60 per diluted share, compared to $14,434,000, or $2.82 per diluted share for the quarter ended December 31, 2019. 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. Square Footage, Occupancy and Leasing Activity 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. 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 Bloomberg accounted for revenue of $109,066,000, $109,113,000, and $107,356,000 in the years ended December 31, 2020, 2019 and 2018, respectively, representing approximately 55%, 48% and 46% of our total revenues in each year, respectively. No other tenant accounted for more than 10% of our total revenues. If we were to lose Bloomberg as a tenant, or if Bloomberg were to be unable to fulfill its obligations under its lease, it would adversely affect our results of operations and financial condition. In order to assist us in our continuing assessment of Bloomberg’s creditworthiness, we receive certain confidential financial information and metrics from Bloomberg. In addition, we access and evaluate financial information regarding Bloomberg from other private sources, as well as publicly available data. Critical Accounting Policies and Estimates 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. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements. 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. 28 Critical Accounting Policies and Estimates - continued Real Estate 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 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. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. We capitalize all property operating expenses directly associated with and attributable to, the development and construction of a project, including interest expense. The capitalization period begins when development activities are underway and ends when it is determined that the asset is substantially complete and ready for its intended use, which is typically evidenced by the receipt of a temporary certificate of occupancy. General and administrative costs are expensed as incurred. Our properties, including properties to be developed in the future, are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset, including an estimated terminal value calculated using an appropriate capitalization rate. Estimates of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. For our development properties, estimates of future cash flows also include all future expenditures necessary to develop the asset, including interest payments that will be capitalized as part of the cost of the asset. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. Revenue Recognition Our rental revenues include revenues from the leasing of space to tenants at our properties and revenues from parking and tenant services. We have the following revenue recognition policies: • Lease revenues from the leasing of space to tenants at our properties. Revenues derived from base rent are recognized over the non-cancelable term of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements. We commence rental revenue recognition when the underlying asset is available for use by the lessee. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease. Revenues derived from the reimbursement of real estate taxes, insurance expenses and common area maintenance expenses are generally recognized in the same period as the related expenses are incurred. As lessor, we have elected to combine the lease components (base and variable rent), non-lease components (reimbursements of common area maintenance expenses) and reimbursement of real estate taxes and insurance expenses from our operating lease agreements and account for the components as a single lease component in accordance with ASC Topic 842, Leases (“ASC 842”). • Parking revenue arising from the rental of parking spaces at our properties. This income is recognized as the services are transferred in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). • Tenant services is revenue arising from sub-metered electric, elevator and other services provided to tenants at their request. 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. 29 Critical Accounting Policies and Estimates - continued Income Taxes 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”). In order to maintain our qualification as a REIT under the Code, we must distribute at least 90% of our taxable income to stockholders each year. We distribute to our stockholders 100% of our taxable income and therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our stockholders, or fail to meet other REIT requirements, we may fail to qualify as a REIT, which may result in substantial adverse tax consequences. 30 Results of Operations – Year Ended December 31, 2020 compared to December 31, 2019 Rental Revenues 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 (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 lower operating expenses subject to recovery, including utilities and common area maintenance. Depreciation and Amortization 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 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 $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 $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 $8,599,000 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. 31 Results of Operations – Year Ended December 31, 2019 compared to December 31, 2018 Rental Revenues 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 $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 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 $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 $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. 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. 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 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. 32 Related Party Transactions Vornado As of December 31, 2020, Vornado owned 32.4% of our outstanding common stock. We are managed by, and our properties are leased and developed by, Vornado, pursuant to various agreements, which expire in March of each year and are automatically renewable. These agreements are described in Note 5 – Related Party Transactions , to our consolidated financial statements in this Annual Report on Form 10-K. Steven Roth is the Chairman of our Board of Directors and Chief Executive Officer, the Managing General Partner of Interstate Properties (“Interstate”), a New Jersey general partnership, and the Chairman of the Board of Trustees and Chief Executive Officer of Vornado. As of December 31, 2020, Mr. Roth, Interstate and its other two general partners, David Mandelbaum and Russell B. Wight, Jr. (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. Matthew Iocco, our Chief Financial Officer, is the Executive Vice President - Chief Accounting Officer of Vornado. Liquidity and Capital Resources 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. 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. 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. 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 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, debt amortization and capital expenditures. 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. Dividends 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%. 33 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. Balance Interest Rate Maturity (Amounts in thousands) Paramus $ 68,000 4.72 % Oct. 04, 2021 731 Lexington Avenue, office condominium (1) 500,000 1.06 % Jun. 11, 2024 731 Lexington Avenue, retail condominium (2) 300,000 1.55 % Aug. 05, 2025 Rego Park II shopping center (3) 202,544 1.50 % Dec. 12, 2025 The Alexander apartment tower 94,000 2.63 % Nov. 01, 2027 Total 1,164,544 Deferred debt issuance costs, net of accumulated amortization of $13,034 (8,374) 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 $50,000 loan participation. Below is a summary of our contractual obligations and commitments as of December 31, 2020. 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 Commitments: Standby letters of credit $ 960 $ 950 $ 10 $ — $ — (1) Excludes committed tenant-related obligations as timing and amounts of payments are uncertain and may only be due upon satisfactory performance of certain conditions. (2) Principal repayments based on extended loan maturity dates. Interest on variable rate debt is computed using rates in effect as of December 31, 2020. (3) Net of loan participation and related interest. 34 Liquidity and Capital Resources - continued Commitments and Contingencies Insurance 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. Coverage for acts of terrorism (including NBCR acts) is up to $1.7 billion per occurrence and in the aggregate. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to FNSIC. For NBCR acts, FNSIC is responsible for a $275,000 deductible and 20% of the balance of a covered loss, and the Federal government is responsible for the remaining 80% of a covered loss. We are ultimately responsible for any loss incurred by FNSIC. We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism or other events. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for uninsured losses and for deductibles and losses in excess of our insurance coverage, which could be material. 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. If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties. Paramus In 2001, we leased 30.3 acres of land located in Paramus, New Jersey to IKEA. 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. The annual triple-net rent is the sum of $700,000 plus the amount of interest on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately $7,000,000 and recognize a gain on sale of land of approximately $60,000,000. If the purchase option is not exercised, the triple-net rent for the last 20 years would include debt service sufficient to fully amortize $68,000,000 over the remaining 20-year lease term. Rego Park I Litigation 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. In addition to injunctive relief, Sears sought, among other things, damages of not less than $4,000,000 and future damages it estimated would not be less than $25,000,000. In March 2016, Sears withdrew its claim for future damages leaving a remaining claim for property damages, which we estimate to be approximately $650,000 based on information provided by Sears. We intend to defend the remaining claim vigorously. 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. 35 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 Approximately $960,000 of standby letters of credit were issued and outstanding as of December 31, 2020. Other There are various other legal actions against us in the ordinary course of business. 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. 36 Liquidity and Capital Resources - continued Cash Flows for the Year Ended December 31, 2019 Cash and cash equivalents and restricted cash were $313,977,000 at December 31, 2019, compared to $289,495,000 at December 31, 2018, an increase of $24,482,000. This increase resulted from (i) $126,070,000 of net cash provided by operating activities, partially offset by (ii) $92,139,000 of net cash used in financing activities and (iii) $9,449,000 of net cash used in investing activities. Net cash provided by operating activities of $126,070,000 was comprised of (i) net income of $60,075,000, (ii) adjustments for non-cash items of $48,079,000 and (iii) the net change in operating assets and liabilities of $17,916,000. The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $36,515,000, (ii) the change in fair value of marketable securities of $8,757,000, (iii) straight-lining of rental income of $2,413,000 and (iv) stock-based compensation expense of $394,000. Net cash used in financing activities was primarily comprised of dividends paid of $92,124,000. Net cash used in investing activities was comprised of construction in progress and real estate additions of $9,449,000. Cash Flows for the Year Ended December 31, 2018 Cash and cash equivalents and restricted cash were $289,495,000 at December 31, 2018, compared to $393,279,000 at December 31, 2017, a decrease of $103,784,000. This decrease resulted from (i) $176,185,000 of net cash used in financing activities and (ii) $1,137,000 of net cash used in investing activities, partially offset by (iii) $73,538,000 of net cash provided by operating activities. Net cash used in financing activities of $176,185,000 was primarily comprised of net debt repayments of $81,896,000 (primarily the refinancing and subsequent repayment of the mortgage loan on our Rego Park I shopping center) and dividends paid of $92,100,000. Net cash used in investing activities of $1,137,000 was comprised of construction in progress and real estate additions of $3,966,000, partially offset by repayment of Rego Park II loan participation of $2,829,000. Net cash provided by operating activities of $73,538,000 was comprised of (i) net income of $32,844,000 and (ii) adjustments for non-cash items of $56,807,000, partially offset by (iii) the net change in operating assets and liabilities of $16,113,000. 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. Funds from Operations (“FFO”) (non-GAAP) 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. FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. A reconciliation of our net income to FFO is provided below. FFO (non-GAAP) for the years and quarters ended December 31, 2020 and 2019 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 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. 37 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) 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 Change in fair value of marketable securities 8,599 8,757 (2,190) 2,500 FFO (non-GAAP) $ 82,509 $ 99,670 $ 25,407 $ 24,626 FFO per diluted share (non-GAAP) $ 16.11 $ 19.47 $ 4.96 $ 4.81 Weighted average shares used in computing FFO per diluted share 5,120,922 5,118,198 5,122,206 5,118,698