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 represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. 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. Many of the factors that will determine these items are beyond our ability to control or predict. 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, 2022. Currently, some of these factors are the impacts of the increase in interest rates and inflation on our business, financial condition, results of operations, cash flows, operating performance and the effect that these factors have 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. 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, 2023 and 2022. 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, 2023 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, 2022 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, 2023, there were no material changes to these policies. 17 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 five properties in New York City. 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, and may continue to be, affected by the increase in inflation and interest rates, and other uncertainties including the potential for an economic downturn. These factors could have a material impact on our business, financial condition, results of operations and cash flows. Quarter Ended June 30, 2023 Financial Results Summary Net income for the quarter ended June 30, 2023 was $64,147,000 , or $12.51 pe r diluted share, compared to $14,814,000, or $2.89 per diluted share for the prior year’s quarter. Net income for the quarter ended June 30, 2023 included $53,952,000, or $10.52 per diluted share, of income as a result of a net gain from the sale of the Rego Park III land parcel. Funds from operations (“FFO”) (non-GAAP) for the quarter ended June 30, 2023 wa s $18,208,000, or $3.55 per diluted share, compared to $22,122,000 or $4.32 per diluted share for the prior year’s quarter. Six Months Ended June 30, 2023 Financial Results Summary Net income for the six months ended June 30, 2023 was $75,373,000, or $14.70 p er diluted share, compared to $29,346,000, or $5.73 per diluted share for the prior year’s six months. Net income for the six months ended June 30, 2023 included $53,952,000, or $10.52 per diluted share, of income as a result of a net gain from the sale of the Rego Park III land parcel. FFO (non-GAAP) for the six months ended June 30, 2023 was $3 6,841,000, or $7.18 per diluted share, compared to $43,907,000 or $8.57 per diluted share for the prior year’s six months. Real Estate Sale On May 19, 2023, we sold the Rego Park III land parcel in Queens, New York, for $71,060,000 inclusive of consideration for Brownfield tax benefits and reimbursement of costs for plans, specifications and improvements to date. Net proceeds from the sale were $67,821,000 after closing costs and the financial statement gain was $53,952,000. Financing On June 9, 2023 we exercised our remaining one-year extension option on the $500,000,000 interest-only mortgage loan on the office condominium of our 731 Lexington Avenue property. The interest rate on the loan remained at LIBOR plus 0.90% through July 15, 2023 and then is at the Prime Rate through loan maturity on June 11, 2024. In addition, in June 2023, we purchased an interest rate cap for $11,258,000, which capped LIBOR at 6.00% through July 15, 2023 and then the Prime Rate (8.25% as of June 30, 2023) at 6.00% through loan maturity. Square Footage, Occupancy and Leasing Activity As a result of the sale of our Rego Park III land parcel, our portfolio is now comprised of five properties aggregating 2,455,000 square feet. As of June 30, 2023, the commercial occupancy rate was 87.3 % and residential occupancy rate was 97.1%. 18 Overview - continued Significant Tenant Bloomberg L.P. (“Bloomberg”) accounted for revenue of $59,177,000 and $55,909,000 for the six months ended June 30, 2023 and 2022, respectively, representing approximately 56% of our rental revenues in each period. 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. 19 Results of Operations – Three Months Ended June 30, 2023, compared to June 30, 2022 Rental Revenues Rental revenues wer e $53,673,000 for t he three months ended June 30, 2023, compared to $49,824,000 for the prior year’s three months, an increase of $3,849,000. This was primarily due to (i) $1,756,000 of higher real estate tax reimbursements due to higher real estate tax expense, (ii) $1,099,000 of higher revenue due to leasing activity and (iii) $572,000 of higher lease termination fee income. Operating Expenses Operating expenses we re $24,818,000 for the three months ended June 30, 2023, compared to $21,372,000 for the prior year’s three months, an increase of $3,446,000. This was primarily due to higher real estate tax expense. Depreciation and Amortization Depreciation and amortization was $8,081,000 for the three months ended June 30, 2023, compared to $7,413,000 for the prior year’s three months, an increase of $668,000. This was primarily due to higher depreciation expense on capital projects at Rego Park I placed into service during the second quarter of 2023. General and Administrative Expenses General and administrative expenses were $1,906,000 for the three months ended June 30, 2023, compared to $1,916,000 for the prior year’s three months, a decrease of $10,000. Interest and Other Income Interest and other income was $4,523,000 for the three months ended June 30, 2023, compared to $1,173,000 for the prior year’s thr ee months, an increase of $3,350,000. This was primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt expense wa s $13,196,000 for the three months ended June 30, 2023, compared to $5,482,000 for the prior year’s three months, an increase of $7,714,000. This was primarily due to increases in LIBOR and SOFR rates. Net Gain on Sale of Real Estate Net gain on sale of real estate wa s $53,952,000 fo r the three months ended June 30, 2023, resulting from the sale of the Rego Park III land parcel in Queens, New York. 20 Results of Operations – Six Months Ended June 30, 2023, compared to June 30, 2022 Rental Revenues Rental revenues wer e $106,614,000 for the six months ended June 30, 2023, compared to $99,039,000 for the prior year’s six months, an increase of $7,575,000. This was primarily due to (i) $3,291,000 of higher real estate tax reimbursements due to higher real estate tax expense, (ii) $2,843,000 of higher revenue due to leasing activity, (iii) $572,000 of higher lease termination fee income and (iv) $242,000 of higher revenue due to an increase in average monthly rents at The Alexander apartment tower. Operating Expenses Operating expenses were $49,762,000 for the six months ended June 30, 2023, compared to $42,914,000 for the prior year’s six months, an increase of $6,848,000. This was primarily due to higher real estate tax expense. Depreciation and Amortization Depreciation and amortization w as $15,559,000 for the six months ended June 30, 2023, compared to $14,764,000 for the prior year’s six months, an increase of $795,000. This was primarily due to higher depreciation expense on capital projects at Rego Park I placed into service during the second quarter of 2023. General and Administrative Expenses General and administrati ve expenses were $3,265,000 for the six months ended June 30, 2023, compared to $3,385,000 for the prior year’s six months, a decrease of $120,000. This was primarily due to lower professional fees. Interest and Other Income Interest and other income wa s $8,842,000 for the six months ended June 30, 2023, compared to $1,267,000 for the prior year’s six months, an increase of $7,575,000. This was primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt expense was $25,449,000 for the six months ended June 30, 2023, compared to $9,897,000 for the prior year’s six month s, an increase of $15,552,000. This was primarily due to increases in LIBOR and SOFR rates. Net Gain on Sale of Real Estate Net gain on sale of real estate w as $53,952,000 for the s ix months ended June 30, 2023, resulting from the sale of the Rego Park III land parcel in Queens, New York. 21 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, 2023, we had $552,755,000 of l iquidity comprised of cash and cash equivalents and restricted cash. The ongoing challenges posed by the increase in interest rates and inflation 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. For the Six Months Ended June 30, 2023 Cash and cash equi valents and restricted cash were $552,755,000 as of June 30, 2023, compared to $214,478,000 as of December 31, 2022, an increase of $338,277,000. This increase resulted from (i) $318,550,000 of net cash provided by investing activities and (ii) $65,909,000 of net cash provided by operating activities, partially offset by (iii) $46,182,000 of net cash used in financing activities. Net cash provided by investing activities of $318,550,000 was comprised of (i) $264,881,000 of proceeds from maturities of U.S. Treasury bills and (ii) $67,821,000 of proceeds from sale of real estate, partially offset by (iii) the purchase of an interest rate cap of $11,258,000 and (iv) construction in progress and real estate additions of $2,894,000. Net cash provided by operating activities of $65,909,000 was comprised of (i) net income of $75,373,000, (ii) the net change in operating assets and liabilities of $19,039,000, partially offset by (iii) adjustments for non-cash items of $28,503,000. The adjustments for non-cash items were comprised of (i) net gain on sale of real estate of $53,952,000, partially offset by (ii) depreciation and amortization (including amortization of debt issuance costs) of $16,399,000, (iii) other non-cash adjustments of $4,431,000, (iv) straight-lining of rents of $4,169,000, and (v) stock-based compensation expense of $450,000. Net cash used in financing activities of $46,182,000 was comprised of dividends paid of $46,144,000 and debt issuance costs of $38,000. 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 rents of $3,948,000 and (iii) stock-based compensation expense of $450,000, partially offset by (iv) other non-cash adjustments of $611,000. 22 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 $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 June 30, 2023. Other 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. 23 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, 2023 and 2022 FFO (non-GAAP) for the three months ended June 30, 2023 was $18,208,000, or $3.55 per diluted share, compared to $22,122,000, or $4.32 per diluted share for the prior year’s three months. FFO (non-GAAP) for the six months ended June 30, 2023 was $36,841,000, or $7.18 per diluted share, compared to $43,907,000 or $8.57 per diluted share for 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) 2023 2022 2023 2022 Net income $ 64,147 $ 14,814 $ 75,373 $ 29,346 Depreciation and amortization of real property 8,013 7,308 15,420 14,561 Net gain on sale of real estate (53,952) — (53,952) — FFO (non-GAAP) $ 18,208 $ 22,122 $ 36,841 $ 43,907 FFO per diluted share (non-GAAP) $ 3.55 $ 4.32 $ 7.18 $ 8.57 Weighted average shares used in computing FFO per diluted share 5,128,823 5,125,710 5,127,959 5,125,098 24