ALEXANDERS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The following discussion should be read in conjunction with the financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) within this section is focused on the years ended December 31, 2021 and 2020, including year-to-year comparisons between these years. Our MD&A for the year ended December 31, 2019, including year-to-year comparisons between 2020 and 2019, can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 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 six properties in the 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. Our business has been adversely affected by the ongoing COVID-19 pandemic. Although substantially all our retail tenants are currently open and operating and previous government restrictions have been lifted, there continue to be economic conditions and other factors that adversely affect the financial health of our retail tenants. 28 Overview - continued Year Ended December 31, 2021 Financial Results Summary Net income for the year ended December 31, 2021 was $132,930,000 or $25.94 per diluted share, compared to $41,939,000 or $8.19 per diluted share for the year ended December 31, 2020. Net income for the year ended December 31, 2021 included $72,298,000, or $14.11 per diluted share, of income as a result of net gains on the sale of real estate, including $2,348,000, or $0.46 per diluted share, from discontinued operations. Funds from operations (“FFO”) (non-GAAP) for the year ended December 31, 2021 was $89,757,000, or $17.52 per diluted share, compared to $82,509,000, or $16.11 per diluted share for the year ended December 31, 2020. Square Footage, Occupancy and Leasing Activity As of December 31, 2021, our portfolio was comprised of six properties aggregating 2,454,000 sq uare feet, of which 2 ,218,000 squar e feet was in service and 236,000 square feet (primarily the former Century 21 space at our Rego Park II property and a portion of the former Sears space at our Rego Park I property) was out of service for redevelopment. Excluding residential, the in service square feet was 96% occupied as of December 31, 2021. The in service residential square feet was 95% occupied as of December 31, 2021. Real Estate Sales On June 4, 2021, we sold a parcel of land in the Bronx, New York (“Bronx Land Parcel”) for $10,000,000. Net proceeds from the sale were $9,291,000 after closing costs, the financial statement gain was $9,124,000 and the tax gain was $9,123,000. On October 4, 2021, we sold our Paramus Property to IKEA, the tenant at the property, for $75,000,000, pursuant to IKEA’s purchase option contained in the lease. Net proceeds from the sale were $4,580,000 after closing costs and the repayment of the $68,000,000 mortgage loan. The financial statement gain was $60,826,000, which was recognized in the fourth quarter of 2021, and the tax gain was $63,898,000. Prior to the sale, the Paramus Property had annual rental revenues of $7,200,000, annual operating expenses of $3,200,000 and annual interest and debt expense of $3,300,000. Marketable Securities In December 2021, we sold our 564,612 common shares of the Macerich Company (“Macerich”), realizing cash proceeds of $9,506,000. Financing Activity On April 7, 2021, we used our $50,000,000 participation in our Rego Park II shopping center loan to reduce the loan balance from $252,544,000 to $202,544,000. On October 4, 2021, our $68,000,0000 Paramus Property mortgage loan was repaid in connection with the sale of the property. Significant Tenant Bloomberg accounted for revenue of $113,140,000, $109,066,000, and $109,113,000 in the years ended December 31, 2021, 2020 and 2019, respectively, representing approximately 55%, 55% and 48% of our rental revenues in each year, respectively. No other tenant accounted for more than 10% of our rental 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. 29 Critical Accounting Estimates In preparing the consolidated financial statements we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Accounting estimates are deemed critical if they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Below is a summary of the critical accounting estimates used in the preparation of our consolidated financial statements. A discussion of our accounting policies is included in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K. Impairment Analyses for Real Estate 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 may not be recoverable. Impairment analyses are based on current plans, intended holding periods, ability to hold, and available information at the time the analyses are prepared. Assessing impairment can be complex and involves a high degree of subjectivity in determining if impairment indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions. These estimates can have a significant impact on the undiscounted cash flows or estimated fair value of an asset and could thereby affect the value of our real estate on our consolidated balance sheets as well as any potential impairment losses recognized on our consolidated statements of income. Collectability Assessments for Revenue Recognition We evaluate on an individual lease basis whether it is probable that we will collect substantially all amounts due from our tenants and recognize changes in the collectability assessment of our operating leases as adjustments to rental revenue. Management exercises judgment in assessing collectability of tenant receivables and considers payment history, current credit status, publicly available information about the financial condition of the tenant, the impact of COVID-19 on tenants’ businesses, and other factors. Our assessment of the collectability of tenant receivables can have a significant impact on the rental revenue recognized in our consolidated statements of income. Recent Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K for a discussion concerning recent accounting pronouncements. 30 Results of Operations – Year Ended December 31, 2021 compared to December 31, 2020 Rental Revenues Rental revenues were $206,148,000 in the year ended December 31, 2021, compared to $199,142,000 in the prior year, an increase of $7,006,000. This was primarily due to (i) $10,837,000 fr om write-offs in the prior year related to receivables arising from the straight-lining of rents from certain of our retail tenants who were put on a cash basis and (ii) $8,163,000 of higher revenue from new tenants, partially offset by (iii) $12,905,000 from retail tenant vacancies at our 731 Lexington Avenue and Rego Park II properties. Operating Expenses Operating expenses were $91,089,000 in the year ended December 31, 2021, compared to $88,403,000 in the prior year, an increase of $2,686 ,000. This was primarily due to higher operating expenses subject to recovery, including utilities and common area maintenance. Depreciation and Amortization Depreciation and amortization was $32,938,000 in the year ended December 31, 2021, compared to $32,357,000 in the prior year, an increase of $581,000. General and Administrative Expenses General and administrative expenses were $5,924,000 in the year ended December 31, 2021, compared to $6,307,000 in the prior year, a decrease of $383,000. This was primarily due to $232,000 of lower professional fees and $150,000 of lower stock-based compensation expense from an initial award granted to a newly appointed member of our Board of Directors in the prior year. Interest and Other Income, net Interest and other income, net was $639,000 in the year ended December 31, 2021, compared to $2,667,000 in the prior year, a decrease of $2,028,000. This was primarily due to $1,544,000 of lower interest income due to a decrease in interest rates and $499,000 of lower dividend income from Macerich . Interest and Debt Expense Interest and debt expense was $19,686,000 in the year ended December 31, 2021, compared to $24,204,000 in the prior year, a decrease of $4,518,000. This was primarily due to $5,052,000 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 income of $3,482,000 in the year ended December 31, 2021, compared to an expense of $8,599,000 in the prior year, an increase to income of $12,081,000. This was due to the change in Macerich’s share price through December 2021, when we sold our Macerich common shares. Net Gains on Sale of Real Estate Net gains on the sale of real estate were $69,950,000 in the year ended December 31, 2021. This was due to $60,826,000 from the sale of our Paramus Property and $9,124,000 from the sale o f the Bronx Land Parcel. Income from Discontinued Operations Income from discontinued operations was $2,348,000 in the year ended December 31, 2021. This was due to the recognition of a previously deferred gain on the 2012 sale of Kings Plaza Regional Shopping Center to Macerich. The deferred gain was recognized due to the sale of our Macerich common shares. See Note 7 - Discontinued Operations , to our consolidated financial statements in this Annual Report on Form 10-K. 31 Related Party Transactions Vornado As of December 31, 2021, 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, 2021, 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, 26.0% of our outstanding common stock, in addition to the 2.2% th ey indirectly own through Vornado. Liquidity and Capital Resources Our cash requirements include property operating expenses, capital improvements, tenant improvements, debt service, leasing commissions, dividends to stockholders as well as development costs. The sources of liquidity to fund these cash requirements include rental revenue, which is our primary source of cash flow and is dependent upon the occupancy and rental rates of our properties, as well as our existing cash, proceeds from financings, including mortgage or construction loans secured by our properties and proceeds from asset sales. As of December 31, 2021, we had $483,505,000 of liquidity comprised of cash and cash equivalents and restricted cash. 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 continue to evolve and cannot be predicted at this time but that impact could be material. Cash Flows for the Year Ended December 31, 2021 Cash and cash equivalents and restricted cash were $483,505,000 at December 31, 2021, compared to $449,877,000 at December 31, 2020, an increase of $33,628,000. This resulted from (i) $118,465 ,000 of net cash provided by operating activities and (ii) $75,457,000 of net cash provided to investing activities, partially offset by (iii) $160,294,000 of net cash used in financing activities. Net cash provided by operating activities of $118,465,000 was comprised of (i) net income of $132,930,000 and (ii) the net change in operating assets and liabilities of $16,456,000, partially offset by (iii) adjustments for non-cash items of $30,921,000. The adjustments for non-cash items were comprised of (i) net gains on sale of real estate of $72,298,000 (including $2,348,000 from discontinued operations) and (ii) the change in fair value of marketable securities of $3,482,000, partially offset by (iii) depreciation and amortization (including amortization of debt issuance costs) of $34,592,000, (iv) straight-lining of rental income of $9,817,000 and (v) stock-based compensation of $450,000. Net cash provided by investing activities of $75,457,000 was comprised of (i) proceeds from the sale of real estate of $81,871,000, (ii) proceeds from the sale of marketable securities of $9,506,000 and (iii) the return of short-term investments of $3,600,000, partially offset by (iv) construction in progress and real estate additions of $19,520,000. Net cash used in financing activities of $160,294,000 was primarily comprised of dividends paid of $92,220,000 and debt repayments of $68,000,000 in connection with the sale of our Paramus Property. 32 Liquidity and Capital Resources - continued 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 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 and real estate additions of $32,460,000. Dividends On January 19, 2022, 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 2022, would require us to pay out approximately $92,200,000 in 2022. Debt On April 7, 2021, we used our $50,000,000 participation in our Rego Park II shopping center loan to reduce the loan balance from $252,544,000 to $202,544,000. On October 4, 2021, our $68,000,000 Paramus Property mortgage loan was repaid in connection with the sale of the property. 33 Liquidity and Capital Resources - continued Below is a summary of our outstanding debt and maturities as of December 31, 2021. We may refinance our maturing debt as it comes due or choose to repay it. Balance Interest Rate Maturity (Amounts in thousands) 731 Lexington Avenue, office condominium (1) $ 500,000 1.01 % Jun. 11, 2024 731 Lexington Avenue, retail condominium (2) 300,000 1.72 % Aug. 05, 2025 Rego Park II shopping center (3) 202,544 1.45 % Dec. 12, 2025 The Alexander apartment tower 94,000 2.63 % Nov. 1, 2027 Total 1,096,544 Deferred debt issuance costs, net of accumulated amortization of $14,551 (6,931) Total, net $ 1,089,613 (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 was swapped to a fixed rate of 1.72%. (3) Interest at LIBOR plus 1.35%. Below is a summary of our principal and interest repayments scheduled as of December 31, 2021. Less than One to Three to More than (Amounts in thousands) Total One Year Three Years Five Years Five Years Long-term debt obligations $ 1,154,325 $ 15,845 $ 528,734 $ 513,651 $ 96,095 Total principal and interest repayments (1) $ 1,154,325 $ 15,845 $ 528,734 $ 513,651 $ 96,095 (1) Principal repayments based on extended loan maturity dates. Interest on variable rate debt is computed using rates in effect as of December 31, 2021. Commitments and Contingencies Insurance We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, of which the first $30,000,000 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 $287,500 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. 34 Liquidity and Capital Resources - continued 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. Both parties have filed motions for summary judgment and in November 2021, the parties stipulated to lift the stay to allow the motions to be decided by the court. Letters of Credit Approximately $960,000 of standby letters of credit were issued and outstanding as of December 31, 2021. 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. 35 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 certain 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 ended December 31, 2021 and 2020 FFO (non-GAAP) for the year ended December 31, 2021 was $89,757,000, or $17.52 per diluted share, compared to $82,509,000, or $16.11 per diluted share for the year ended December 31, 2020. The following table reconciles our net income to FFO (non-GAAP): For the Year Ended (Amounts in thousands, except share and per share amounts) December 31, 2021 2020 Net income $ 132,930 $ 41,939 Depreciation and amortization of real property 32,607 31,971 Net gains on the sale of real estate (including $2,348 from discontinued operations) (72,298) — Change in fair value of marketable securities (3,482) 8,599 FFO (non-GAAP) $ 89,757 $ 82,509 FFO per diluted share (non-GAAP) $ 17.52 $ 16.11 Weighted average shares used in computing FFO per diluted share 5,123,613 5,120,922 36