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 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. Our MD&A for the year ended December 31, 2020, including year-to-year comparisons between 2021 and 2020, 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, 2021. 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 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. 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. 28 Overview - continued Year Ended December 31, 2022 Financial Results Summary Net income for the year ended December 31, 2022 was $57,632,000 or $11.24 per diluted share, compared to $132,930,000 or $25.94 per diluted share for the year ended December 31, 2021. 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, 2022 was $87,090,000, or $16.99 per diluted share, compared to $89,757,000, or $17.52 per diluted share for the year ended December 31, 2021. Square Footage, Occupancy and Leasing Activity 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. Significant Tenant Bloomberg accounted for revenue of $115,129,000, $113,140,000, and $109,066,000 in the years ended December 31, 2022, 2021 and 2020, respectively, representing approximately 56%, 55% and 55% 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 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 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. 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. 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, 2022 compared to December 31, 2021 Rental Revenues 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 $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 $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 $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 $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 $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. 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 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 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, 2022, 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, 2022, 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 2.3% they 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, 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. 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. 32 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 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. 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. Dividends 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. Debt Below is a summary of our outstanding debt and maturities as of December 31, 2022. 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)(2) $ 500,000 5.22 % Jun. 11, 2024 731 Lexington Avenue, retail condominium (1)(3) 300,000 1.76 % Aug. 05, 2025 Rego Park II shopping center (1)(4) 202,544 5.60 % Dec. 12, 2025 The Alexander apartment tower 94,000 2.63 % Nov. 01, 2027 Total 1,096,544 Deferred debt issuance costs, net of accumulated amortization of $16,071 (5,493) Total, net $ 1,091,051 (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. Less than One to Three to More than (Amounts in thousands) Total One Year Three Years Five Years Five Years Long-term debt obligations $ 1,194,591 $ 45,811 $ 1,050,186 $ 98,594 $ — Total principal and interest repayments (1) $ 1,194,591 $ 45,811 $ 1,050,186 $ 98,594 $ — (1) Principal repayments based on extended loan maturity dates. Interest on variable rate debt is computed using rates in effect as of December 31, 2022. 33 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 $298,000 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. Letters of Credit Approximately $900,000 of standby letters of credit were issued and outstanding as of December 31, 2022. Other 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. 34 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, 2022 and 2021 FFO (non-GAAP) for the year ended December 31, 2022 was $87,090,000, or $16.99 per diluted share, compared to $89,757,000, or $17.52 per diluted share for the year ended December 31, 2021. 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, 2022 2021 Net income $ 57,632 $ 132,930 Depreciation and amortization of real property 29,458 32,607 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) FFO (non-GAAP) $ 87,090 $ 89,757 FFO per diluted share (non-GAAP) $ 16.99 $ 17.52 Weighted average shares used in computing FFO per diluted share 5,126,100 5,123,613 35