What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-12 compared with 2023-02-13 · 59 added, 60 removed, 117 unchanged (50% of the section changed)

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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 New York City.

We compete with a large number of real estate investors, property owners and developers.

We have five properties in New York City.

We compete with a large number of real estate investors, property owners and developers, some of whom may be willing to accept lower returns on their investments.

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.

See “Item 1A.

Risk Factors” in this Annual Report on Form 10-K for additional information regarding these factors.

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.

Overview - continued

Year Ended December 31, 2023 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.

Net income for the year ended December 31, 2023 wa s $102,413,000 or $19.97 per diluted share, compared to $57,632,000 or $11.24 per diluted share for the year ended December 31, 2022.

Net income for the year ended December 31, 2023 included $53,952,000, or $10.52 per diluted share, of income as a result of a net gain on the sale of real estate.

Funds from operations (“FFO”) (non-GAAP) for the year ended December 31, 2023 wa s $81,067,000, or $15.80 p er diluted share, compared to $87,090,000, or $16.99 per diluted share for the year ended December 31, 2022.

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.

As of December 31, 2023, our portfolio was comprised of five properties aggregating 2,455,000 sq uare feet.

The commercial occupancy rate was 92.6% and the residential occupancy rate was 95.2%.

On December 3, 2022, IKEA closed its 112,000 square foot store at our Rego Park I property under a lease that was set to expire in December 2030.

The lease included a right to terminate effective no earlier than March 16, 2026, subject to payment of rent through the termination date and an additional termination payment equal to the lesser of $10,000,000 or the amount of rent due under the remaining term.

On September 27, 2023, we entered into a lease modification agreement with IKEA which accelerates its lease termination date to April 1, 2024.

Under the lease modification agreement, IKEA will pay its remaining rent due through March 16, 2026 and the $10,000,000 termination payment over the modified lease term.

On April 23, 2023, Bed Bath & Beyond ($1,533,000 of annual revenue) filed for Chapter 11 bankruptcy and its 46,000 square foot lease at our Rego Park I property was rejected in the bankruptcy proceedings on July 31, 2023.

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.

Bloomberg accounted for revenu e of $120,351,000, $115,129,000, and $113,140,000 in the years ended December 31, 2023, 2022 and 2021, respectively, representing approximately 54%, 56% and 55% of our rental revenues in each year, respectively.

No other tenant accounted for more than 10% of our rental revenues.

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

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.

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 currently bears interest at the Prime Rate (8.50% as of December 31, 2023) through loan maturity on June 11, 2024.

In June 2023, we purchased an interest rate cap for $11,258,000, which capped LIBOR at 6.00% through July 15, 2023 and caps the Prime Rate at 6.00% through loan maturity.

Critical Accounting Estimate

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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.

Our properties 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.

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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.

Rental revenues were $224,962,000 in the year ended December 31, 2023, compared to $205,814,000 in the prior year, an increase of $19,148,000.

This was primarily due to (i) $8,065,000 of higher straight-line rental revenue from IKEA’s lease modification, (ii) $4,184,000 of higher reimbursable operating expenses and capital expenditures, (iii) $3,750,000 of higher real estate tax reimbursements due to higher real estate tax expense, and (iv) $3,359,000 of higher revenue due to leasing activity, partially offset by (v) $1,467,000 of lower lease termination fee income.

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.

Operating expenses were $101,210,000 in the year ended December 31, 2023, compared to $90,446,000 in the prior year, an increase of $10,764,000.

This was primarily due to higher real estate tax expense and operating expenses, including the impact of lower capitalized expenses during the current year.

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.

Depreciation and amortization was $32,898,000 in the year ended December 31, 2023, compared to $29,797,000 in the prior year, an increase of $3,101,000.

This was primarily due to higher depreciation expense on capital projects placed into service during the current year.

General and Administrative Expenses

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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 Other Income

Interest and other income was $22,245,000 in the year ended December 31, 2023, compared to $6,769,000 in the prior year, an increase of $15,476,000.

This was primarily due to an increase in average interest rates.

Interest and Debt Expense

Interest and debt expense was $58,297,000 in the year ended December 31, 2023, compared to $28,602,000 in the prior year, an increase of $29,695,000.

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.

This was primarily due to $21,614,000 of higher interest expense resulting from increases in rates and $7,770,000 of higher interest rate cap premium amortization.

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.

Net gains on the sale of real estate were $53,952,000 in the year ended December 31, 2023, resulting from the sale of the Rego Park III land parcel in Queens, New York in May 2023.

Related Party Transactions

As of December 31, 2022, Vornado owned 32.4% of our outstanding common stock.

As of December 31, 2023, Vornado owne d 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.

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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, 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.

As of December 31, 2023, we had $552,977,000 of liquidity comprised of cash and cash equivalents and restricted cash.

Recent increases 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.

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Cash Flows for the Year Ended December 31, 2023

Cash and cash equivalents and restricted cash were $552,977,000 at December 31, 2023, compared to $214,478,000 at December 31, 2022, an increase of $338,499,000.

This resulted from (i) $321,812,000 of net cash provided by investing activities and (ii) $109,111,000 of net cash provided by operating activities, partially offset by (iii) $92,424,000 of net cash used in financing activities.

Net cash provided by investing activities of $321,812,000 was comprised of (i) proceeds from maturities of U.S.

Treasury bills of $264,881,000, (ii) proceeds from sale of real estate of $67,821,000 and (iii) proceeds from interest rate cap of $5,049,000, partially offset by (iv) the purchase of interest rate cap of $11,258,000 and (v) construction in progress and real estate additions of $4,681,000.

Net cash provided by operating activities of $109,111,000 was comprised of (i) net income of $102,413,000 and (ii) the net change in operating assets and liabilities of $16,753,000, partially offset by (iii) adjustments for non-cash items of $10,055,000.

The adjustments for non-cash items were comprised of (i) net gain on sale of real estate of $53,952,000 and (ii) other non-cash adjustments of $1,559,000, partially offset by (iii) depreciation and amortization (including amortization of debt issuance costs) of $34,605,000, (iv) interest rate cap premium amortization of $7,770,000, (v) straight-lining of rents of $2,631,000 and (vi) stock-based compensation expense of $450,000.

Net cash used in financing activities of $92,424,000 was comprised of dividends paid of $92,320,000 and debt issuance costs of $104,000.

Liquidity and Capital Resources - continued

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.

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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.

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 expense 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.

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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 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.

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).

On February 7, 2024, our Board of Directors declared a regular quarterly dividend of $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 2024, would require us to pay out approximately $92,350,000 in 2024.

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Total, net $ 1,092,551

(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.

(1) Interest at the Prime Rate (capped at 6.00% through loan maturity).

(2) Interest rate listed represents the rate in effect as of December 31, 2023 based on SOFR as of contractual reset date plus contractual

spread, adjusted for hedging instruments as applicable.

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

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$ 1,157,131 $ 533,204 $ 527,839 $ 96,088 $ —

(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.

(1) Interest on variable rate debt is computed using rates in effect as of December 31, 2023 adjusted for hedging instruments as applicable.

Liquidity and Capital Resources - continued

Capital Expenditures

Capital expenditures consist of expenditures to maintain and improve assets, tenant improvement allowances and leasing commissions.

During 2024, we expect to incur approximately $29,000,000 of capital expenditures at our properties.

We plan to fund these capital expenditures from operating cash flow, existing liquidity, and/or borrowings.

Commitments and Contingencies

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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.

Our 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.

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Approximately $900,000 of standby letters of credit were issued and outstanding as of December 31, 2023.

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.

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Depreciation and amortization of real property 32,606 29,458

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)

Net gain on sale of real estate (53,952) —

FFO (non-GAAP) $ 81,067 $ 87,090

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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