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Item 7. Management’s Discussion and Analysis

2023-02-13 compared with 2022-02-14 · 53 added, 73 removed, 124 unchanged (50% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

The following discussion should be read in conjunction with the consolidated 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, 2022 and 2021, including year-to-year comparisons between these years.

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We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE:

We have six properties in the New York City metropolitan area.

We compete with a large number of property owners and developers.

We have six properties in New York City.

We compete with a large number of real estate investors, 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.

While substantially all of the limitations and restrictions imposed on our retail tenants during the onset of the COVID-19 pandemic have been lifted, economic conditions, including heightened inflation and interest rates, and other factors continue to adversely affect the financial health of our retail tenants.

Overview - continued

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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.

As of December 31, 2022, our portfolio was comprised of six properties aggregating 2,454,000 sq uare 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 96.4% occupied as of December 31, 2022.

The in service residential square feet was 98.7% occupied as of December 31, 2022.

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

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

Critical Accounting Estimates

Critical Accounting Estimate

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.

Below is the critical accounting estimate 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.

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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

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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.

Rental revenues were $205,814,000 in the year ended December 31, 2022, compared to $206,148,000 in the prior year, a decrease of $334,000.

This was primarily due to (i) $5,440,000 of lower revenue due to the sale of our Paramus property in October 2021 and (ii) $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 (iii) $3,130,000 of higher revenue due to leasing activity, (iv) $2,039,000 of bankruptcy proceeds received from Century 21, a former tenant at our Rego Park II property and (v) $2,203,000 of higher revenue due to higher occupancy at The Alexander apartment tower.

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.

Operating expenses were $90,446,000 in the year ended December 31, 2022, compared to $91,089,000 in the prior year, a decrease of $643,000.

This was primarily due to $2,434,000 of lower expenses due to the sale of our Paramus property in October 2021, partially offset by $1,415,000 of higher straight-line rent expense as the result of the remeasurement of our estimated ground lease liability related to our Flushing property during the first quarter of 2022.

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.

Depreciation and amortization was $29,797,000 in the year ended December 31, 2022, compared to $32,938,000 in the prior year, a decrease of $3,141,000.

This was primarily due to the sale of our Paramus property in October 2021.

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.

General and administrative expenses were $6,106,000 in the year ended December 31, 2022, compared to $5,924,000 in the prior year, an increase of $182,000.

This was primarily due to higher professional fees.

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 other income, net was $6,769,000 in the year ended December 31, 2022, compared to $639,000 in the prior year, an increase of $6,130,000.

This was primarily due to $3,570,000 of higher interest income from our investments in U.S.

Treasury bills and $2,744,000 of higher interest income primarily due to an increase in average interest rates.

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.

Interest and debt expense was $28,602,000 in the year ended December 31, 2022, compared to $19,686,000 in the prior year, an increase of $8,916,000.

This was primarily due to $11,474,000 of higher interest expense due to increases in LIBOR and SOFR, partially offset by $2,470,000 of lower interest expense resulting from the sale of our Paramus property in October 2021.

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.

Change in fair value of marketable securities was income of $3,482,000 in the year ended December 31, 2021.

This was due to the change in the Macerich Company’s (“ Macerich”) common 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.

This was due to $60,826,000 from the sale of our Paramus property in October 2021 and $9,124,000 from the sale of a parcel of land in the Bronx, New York in June 2021.

Income from Discontinued Operations

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Roth, Interstate and its other two general partners, David Mandelbaum and Russell B.

(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.

(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 2.3% they indirectly own through Vornado.

Liquidity and Capital Resources

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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.

As of December 31, 2022, we had $481,441,000 of liquidity comprised of $214,478,000 cash and cash equivalents and restricted cash and $266,963,000 of investments in U.S.

Treasury bills.

The ongoing challenges posed by the COVID-19 pandemic could adversely affect our cash flow from continuing operations but we anticipate that cash flow 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 service 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, 2022

Cash and cash equivalents and restricted cash were $214,478,000 at December 31, 2022, compared to $483,505,000 at December 31, 2021, a decrease of $269,027,000.

This resulted from (i) $279,266,000 of net cash used in investing activities and (ii) $92,310,000 of net cash used in financing activities, partially offset by (iii) $102,549,000 of net cash provided by operating activities.

Net cash provided by operating activities of $102,549,000 was comprised of (i) net income of $57,632,000, (ii) adjustments for non-cash items of $36,936,000 and (iii) the net change in operating assets and liabilities of $7,981,000.

The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $31,454,000, (ii) straight-lining of rental income of $7,960,000 and (iii) stock-based compensation of $450,000, partially offset by (iv) other non-cash adjustments of $2,928,000.

Net cash used in investing activities of $279,266,000 was comprised of (i) the purchase of U.S.

Treasury bills of $364,238,000 and (ii) $14,386,000 of construction in progress and real estate additions, partially offset by (iii) $99,358,000 of proceeds from maturities of U.S.

Treasury bills.

Net cash used in financing activities of $92,310,000 was primarily comprised of dividends paid of $92,264,000.

Liquidity and Capital Resources - continued

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.

This resulted from (i) $118,465,000 of net cash provided by operating activities and (ii) $75,457,000 of net cash provided by 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.

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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.

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.

On January 18, 2023, 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 2023, would require us to pay out approximately $92,300,000 in 2023.

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.

Liquidity and Capital Resources - continued

Below is a summary of our outstanding debt and maturities as of December 31, 2022.

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Total, net $ 1,091,051

(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%.

(1) Interest rate listed represents the rate in effect as of December 31, 2022 based on LIBOR or SOFR as of contractual reset date plus

contractual spread, adjusted for hedging instruments as applicable.

(2) Interest at LIBOR plus 0.90% (LIBOR is capped at a rate of 6.00% through June 2023).

Maturity date represents the

extended maturity based on our as-of right to extend.

(3) Interest at SOFR plus 1.51% which was swapped to a fixed rate of 1.76% through May 2025.

(4) Interest at SOFR plus 1.45% (SOFR is capped at a rate of 4.15% through November 2024).

Below is a summary of our principal and interest repayments scheduled as of December 31, 2022.

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(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.

Interest on variable rate debt is computed using rates in effect as of

December 31, 2022.

Commitments and Contingencies

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

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 $900,000 of standby letters of credit were issued and outstanding as of December 31, 2022.

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.

In January 2022, New World Mall LLC, the sub-tenant at the property, exercised its one remaining 10-year extension option through January 2037.

As a result of the sub-tenant exercising its extension option, we were required by GAAP to remeasure our ground lease liability based upon an estimate of lease payments to be made during the 10-year extension period of our ground lease resulting in an incremental right-of-use asset and lease liability of approximately $16,000,000.

As of December 31, 2022, the remaining right-of-use asset of $18,497,000 and lease liability of $20,066,000, are included in “other assets” and “other liabilities,” respectively, on our consolidated balance sheet.

There are various legal actions brought against us from time-to-time in the ordinary course of business.

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

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

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Depreciation and amortization of real property 29,458 32,607

Net gains on the sale of real estate (including $2,348 from discontinued operations) (72,298) —

Net gains on the sale of real estate (2021 includes $2,348 from discontinued operations) — (72,298)

Change in fair value of marketable securities — (3,482)

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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