ALEXANDERS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Quarterly Report constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results, financial condition, results of operations and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Currently, one of the most significant factors is the ongoing adverse effect of the COVID-19 pandemic on our business, financial condition, results of operations, cash flows, operating performance and the effect it has had and may continue to have on our tenants, the global, national, regional and local economies and financial markets and the real estate market in general. The extent of the impact of the COVID-19 pandemic will continue to depend on future developments, including vaccination rates among the population, the efficacy and durability of vaccines against emerging variants, and governmental and tenant responses thereto, which continue to be uncertain but the impact could be material. Moreover, you are cautioned that the COVID-19 pandemic will heighten many of the risks identified in “Item 1A. – Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021. For a further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A. – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly, any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Management’s Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our consolidated financial statements for the three and six months ended June 30, 2022 and 2021. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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. Actual results could differ from those estimates. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year. Critical Accounting Estimates and Significant Accounting Policies A summary of the critical accounting estimates used in the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the year ended December 31, 2021 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and a summary of our significant accounting policies is included in “Note 2 – Summary of Significant Accounting Policies” to the consolidated financial statements included therein. For the six months ended June 30, 2022, there were no material changes to these policies. 15 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 world, 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. While substantially all the limitations and restrictions imposed on our retail tenants during the onset of the pandemic have been lifted, economic conditions and other factors continue to adversely affect the financial health of our retail tenants. Quarter Ended June 30, 2022 Financial Results Summary Net income for the quarter ended June 30, 2022 was $14,814,000, or $2.89 per diluted share, compared to $25,898,000, or $5.05 per diluted share in the prior year’s quarter. Net income for the prior year’s quarter included $9,124,000, or $1.78 per diluted share, of income as a result of a net gain on the sale of a parcel of land in the Bronx, New York (“Bronx Land Parcel”). Funds from operations (“FFO”) (non-GAAP) for the quarter ended June 30, 2022 was $22,122,000, or $4.32 per diluted share, compared to $21,133,000 or $4.12 per diluted share in the prior year’s quarter. Six Months Ended June 30, 2022 Financial Results Summary Net income for the six months ended June 30, 2022 was $29,346,000, or $5.73 per diluted share, compared to $43,780,000, or $8.55 per diluted share in the prior year’s six months. Net income for the prior year’s six months included $9,124,000, or $1.78 per diluted share, of income as a result of a net gain on the sale of the Bronx Land Parcel. Funds from operations (“FFO”) (non-GAAP) for the six months ended June 30, 2022 was $43,907,000, or $8.57 per diluted share, compared to $46,914,000 or $9.16 per diluted share in the prior year’s six months. Square Footage, Occupancy and Leasing Activity As of June 30, 2022, our portfolio was comprised of six properties aggregating 2,454,000 square feet, of which 2,241,000 square feet was in service and 213,000 square feet (at our Rego Park I and Rego Park II properties) was out of service for redevelopment. Excluding residential, the in service square feet was 96% occupied as of June 30, 2022. The in service residential square feet was 99% occupied as of June 30, 2022. Significant Tenant Bloomberg L.P. (“Bloomberg”) accounted for revenue of $55,909,000 and $57,513,000 for the six months ended June 30, 2022 and 2021, respectively, representing approximately 56% and 53% of our total revenues in each period, 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. 16 Results of Operations – Three Months Ended June 30, 2022, compared to June 30, 2021 Rental Revenues Rental revenues were $49,824,000 in the quarter ended June 30, 2022, compared to $51,388,000 in the prior year’s quarter, a decrease of $1,564,000. This was primarily due to (i) $1,770,000 of lower revenue due to the sale of our Paramus property in October 2021 and (ii) $1,725,000 of lower real estate tax reimbursements due to lower real estate tax expense, partially offset by (iii) $964,000 of higher revenue due to leasing activity and (iv) $728,000 of higher revenue due to higher occupancy at The Alexander apartment tower. Operating Expenses Operating expenses were $21,372,000 in the quarter ended June 30, 2022, compared to $23,422,000 in the prior year’s quarter, a decrease of $2,050,000. This was primarily due to lower operating expenses subject to recovery, including lower real estate taxes resulting from reductions to assessed property values. Depreciation and Amortization Depreciation and amortization was $7,413,000 in the quarter ended June 30, 2022, compared to $8,132,000 in the prior year’s quarter, a decrease of $719,000. This was primarily due to the acceleration of amortization of the deferred leasing commission at our Paramus property in the prior year’s quarter. General and Administrative Expenses General and administrative expenses were $1,916,000 in the quarter ended June 30, 2022, compared to $1,823,000 in the prior year’s quarter, an increase of $93,000. This was primarily due to higher professional fees. Interest and Other Income, net Interest and other income, net was $1,173,000 in the quarter ended June 30, 2022, compared to $151,000 in the prior year’s quarter, an increase of $1,022,000. This was primarily due to $611,000 of higher interest income from our investments in U.S. Treasury bills and $358,000 of higher interest income primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt expense was $5,482,000 in the quarter ended June 30, 2022, compared to $5,086,000 in the prior year’s quarter, an increase of $396,000. This was primarily due to $1,196,000 of higher interest expense due to an increase in LIBOR, partially offset by $812,000 of lower interest expense resulting from the sale of our Paramus property and related debt payoff in October 2021. Change in Fair Value of Marketable Securities Change in fair value of marketable securities was income of $3,698,000 in the quarter ended June 30, 2021. This was due to the change in The Macerich Company’s (“Macerich”) common share price through the quarter ended June 30, 2021. We sold our Macerich common shares in December 2021. Net Gain on Sale of Real Estate Net gain on sale of real estate was $9,124,000 in the quarter ended June 30, 2021, resulting from the sale of the Bronx Land Parcel. 17 Results of Operations – Six Months Ended June 30, 2022, compared to June 30, 2021 Rental Revenues Rental revenues were $99,039,000 in the six months ended June 30, 2022, compared to $107,541,000 in the prior year’s six months, a decrease of $8,502,000. This was primarily due to (i) $3,922,000 of lower real estate tax reimbursements due to lower real estate tax expense, (ii) $3,531,000 of lower revenue due to the sale of our Paramus property in October 2021 and (iii) $2,750,000 of lease termination fee income received in the prior year from a retail tenant at our 731 Lexington Avenue property, partially offset by (iv) $1,192,000 of higher revenue due to higher occupancy at The Alexander apartment tower. Operating Expenses Operating expenses were $42,914,000 in the six months ended June 30, 2022, compared to $47,222,000 in the prior year’s six months, a decrease of $4,308,000. This was primarily due to lower operating expenses subject to recovery, including lower real estate taxes resulting from reductions to assessed property values. Depreciation and Amortization Depreciation and amortization was $14,764,000 in the six months ended June 30, 2022, compared to $16,674,000 in the prior year’s six months, a decrease of $1,910,000. This was primarily due to the acceleration of amortization of the deferred leasing commission at our Paramus property in the prior year’s six months. General and Administrative Expenses General and administrative expenses were $3,385,000 in the six months ended June 30, 2022, compared to $3,366,000 in the prior year’s six months, an increase of $19,000. Interest and Other Income, net Interest and other income, net was $1,267,000 in the six months ended June 30, 2022, compared to $323,000 in the prior year’s six months, an increase of $944,000. This was primarily due to $611,000 of higher interest income from our investments in U.S. Treasury bills and $345,000 of higher interest income primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt expense was $9,897,000 in the six months ended June 30, 2022, compared to $10,226,000 in the prior year’s six months, a decrease of $329,000. This was primarily due $1,614,000 of lower interest expense resulting from the sale of our Paramus property and related debt payoff in October 2021, partially offset by $1,282,000 of higher interest expense due to an increase in LIBOR. Change in Fair Value of Marketable Securities Change in fair value of marketable securities was income of $4,280,000 in the six months ended June 30, 2021. This was due to the change in Macerich’s common share price through the six months ended June 30, 2021. We sold our Macerich common shares in December 2021. Net Gain on Sale of Real Estate Net gain on sale of real estate was $9,124,000 in the six months ended June 30, 2021, resulting from the sale of the Bronx Land Parcel. 18 Liquidity and Capital Resources Cash Flows 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. 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 June 30, 2022, we had $526,867,000 of liquidity comprised of $329,498,000 of cash and cash equivalents and restricted cash and $197,369,000 of investments in U.S. Treasury bills. 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. For the Six Months Ended June 30, 2022 Cash and cash equivalents and restricted cash were $329,498,000 as of June 30, 2022, compared to $483,505,000 as of December 31, 2021, a decrease of $154,007,000. This decrease resulted from (i) $201,207,000 of net cash used in investing activities, (ii) $46,128,000 of net cash used in financing activities, partially offset by (iii) $93,328,000 of net cash provided by operating activities. Net cash used in investing activities was comprised of the purchase of U.S. Treasury bills of $197,407,000 and construction in progress and real estate additions of $3,800,000. Net cash used in financing activities was primarily comprised of dividends paid of $46,120,000. Net cash provided by operating activities of $93,328,000 was comprised of (i) net income of $29,346,000, (ii) adjustments for non-cash items of $19,374,000 and (iii) the net change in operating assets and liabilities of $44,608,000. The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $15,587,000, (ii) straight-lining of rental income of $3,948,000 and (iii) stock-based compensation of $450,000, partially offset by (iv) other non-cash adjustments of $611,000. For the Six Months Ended June 30, 2021 Cash and cash equivalents and restricted cash were $469,056,000 as of June 30, 2021, compared to $449,877,000 as of December 31, 2020, an increase of $19,179,000. This increase resulted from (i) $62,519,000 of net cash provided by operating activities and (ii) $2,805,000 of net cash provided by investing activities, partially offset by (iii) $46,145,000 of net cash used in financing activities. Net cash provided by operating activities of $62,519,000 was comprised of (i) net income of $43,780,000, (ii) adjustments for non-cash items of $9,568,000 and (iii) the net change in operating assets and liabilities of $9,171,000. The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $17,503,000, (ii) straight-lining of rental income of $5,019,000 and (iii) stock-based compensation of $450,000, partially offset by (iv) net gain on sale of real estate of $9,124,000 and (v) the change in fair value of marketable securities of $4,280,000. Net cash provided by investing activities was comprised of (i) proceeds from the sale of real estate of $9,291,000 and (ii) the return of short-term investments of $3,600,000, partially offset by (iii) construction in progress and real estate additions of $10,086,000. Net cash used in financing activities of $46,145,000 was primarily comprised of dividends paid of $46,100,000. 19 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 $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 $294,000 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. Our mortgage loans are non-recourse to us and 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. Letters of Credit Approximately $900,000 of standby letters of credit were issued and outstanding as of June 30, 2022. Other In January 2022, New World Mall LLC, the sub-tenant at our Flushing property, exercised its one remaining 10-year extension option through January 2037. As a result, we remeasured our related ground lease liability to include our 10-year extension option and recorded an estimated incremental right-of-use asset and lease liability of approximately $17,000,000 which is included in “other assets” and “other liabilities,” respectively, on our consolidated balance sheet as of June 30, 2022. There are various legal actions pending 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. 20 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 three and six months ended June 30, 2022 and 2021 FFO (non-GAAP) for the quarter ended June 30, 2022 was $22,122,000, or $4.32 per diluted share, compared to $21,133,000, or $4.12 per diluted share in the prior year’s quarter. FFO (non-GAAP) for the six months ended June 30, 2022 was $43,907,000, or $8.57 per diluted share, compared to $46,914,000 or $9.16 per diluted share in the prior year’s six months. The following table reconciles our net income to FFO (non-GAAP): For the Three Months Ended June 30, For the Six Months Ended June 30, (Amounts in thousands, except share and per share amounts) 2022 2021 2022 2021 Net income $ 14,814 $ 25,898 $ 29,346 $ 43,780 Depreciation and amortization of real property 7,308 8,057 14,561 16,538 Net gain on sale of real estate — (9,124) — (9,124) Change in fair value of marketable securities — (3,698) — (4,280) FFO (non-GAAP) $ 22,122 $ 21,133 $ 43,907 $ 46,914 FFO per diluted share (non-GAAP) $ 4.32 $ 4.12 $ 8.57 $ 9.16 Weighted average shares used in computing FFO per diluted share 5,125,710 5,123,255 5,125,098 5,122,733 21