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 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 the outcome of these and our other forward-looking statements 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, 2023. 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 our 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, 2024 and 2023. 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, 2024 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, 2023 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, 2024, there were no material changes to these estimates or 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 hav e 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. Additionally, 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. See “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding these and other factors that may materially affect our results. Three Months Ended June 30, 2024 Financial Results Summary Net income for the three months ended June 30, 2024 was $8,380,000, or $1.63 per diluted share, compared to $64,147,000 or $12.51 per diluted share in the prior year’s three months. Net income for the three 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. Funds from operations (“FFO”) (non-GAAP) for the three months ended June 30, 2024 was $17,009,000, or $3.31 per diluted share, compared to $18,208,000 or $3.55 per diluted share in the prior year’s three months. Six Months Ended June 30, 2024 Financial Results Summary Net income for the six months ended June 30, 2024 was $24,489,000, or $4.77 per diluted share, compared to $75,373,000 or $14.70 per diluted share in 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, 2024 was $42,541,000, or $8.29 per diluted share, compared to $36,841,000 or $7.18 per diluted share in the prior year’s six months. Financing On June 11, 2024, we entered into a four-month extension of the $500,000,000 interest-only mortgage loan on the office condominium of our 731 Lexington Avenue property and simultaneously paid down the principal balance by $10,000,000 to $490,000,000. The interest-only mortgage loan remains at the Prime rate (8.50% as of June 30, 2024) through the extended loan maturity of October 11, 2024. 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. 18 Overview - continued Square Footage, Occupancy and Leasing Activity Our portfolio is comprised of five properties aggregating 2,456,000 square feet. As of June 30, 2024, the commercial occupancy rate was 92.1% and the residential occupancy rate was 98.7%. 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 accelerated its lease termination date to April 1, 2024. During the fourth quarter of 2023 and the first quarter of 2024, IKEA paid its remaining rent obligation through March 16, 2026 and the $10,000,000 termination payment. Significant Tenant Bloomberg L.P. (“Bloomberg”) accounted for revenue of $60,946,000 and $59,177,000 for the six months ended June 30, 2024 and 2023, respectively, representing approximately 53% and 56% of our rental revenues in each period, 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. On May 3, 2024, Alexander’s and Bloomberg entered into an agreement to extend the leases covering approximately 947,000 square feet at our 731 Lexington Avenue property that were scheduled to expire in February 2029 for a term of eleven years to February 2040. 19 Results of Operations – Three Months Ended June 30, 2024, compared to June 30, 2023 Rental Revenues Rental revenues were $53,392,000 for the three months ended June 30, 2024, compared to $53,673,000 for the prior year’s three months, a decrease of $281,000. This was primarily due to (i) $1,081,000 of lower rental revenue from IKEA’s lease expiration at Rego Park I and (ii) $1,001,000 of lower lease termination fee income, partially offset by (iii) $1,163,000 of higher straight-line rental revenue from Bloomberg’s lease extension at 731 Lexington Avenue and (iv) $857,000 of higher reimbursable operating expenses and capital expenditures. Operating Expenses Operating expenses were $24,991,000 for the three months ended June 30, 2024, compared to $24,818,000 for the prior year’s three months, an increase of $173,000 . This was primarily due to higher non-reimbursable operating expenses. Depreciation and Amortization Depreciation and amortization was $8,697,000 for the three months ended June 30, 2024, compared to $8,081,000 for the prior year’s three months, an increase of $616,000. This was primarily due to $347,000 of higher amortization expense associated with leasing commissions paid in connection with Bloomberg’s lease extension at 731 Lexington Avenue and $336,000 of higher depreciation expense on capital projects placed into service . General and Administrative Expenses General and administrative expenses were $2,159,000 for the three months ended June 30, 2024, compared to $1,906,000 for the prior year’s three months, an increase of $253,000 . This was primarily due to higher professional fees. Interest and Other Income Interest and other income was $7,054 ,000 for the three months ended June 30, 2024, compared to $4,523,000 for the prior year’s three months, an increase of $2,531,000. This was primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt exp ense was $16,219,000 for the three months ended June 30, 2024, compared to $13,196,000 for the prior year’s three months, an increase of $3,023,000. This was primarily due to $1,990,000 of higher interest rate cap premium amortization and $876,000 of higher interest expense resulting from increases in rates. Net Gain on Sale of Real Estate Net gain on sale of real estate was $53,952,000 for the prior year’s three months, resulting from the sale of the Rego Park III land parcel in Queens, New York. 20 Results of Operations – Six Months Ended June 30, 2024, compared to June 30, 2023 Rental Revenues Rental revenues were $114,789,000 for the six months ended June 30, 2024, compared to $106,614,000 for the prior year’s six months, an increase of $8,175,000. This was primarily due to (i) $6,641,000 of higher rental revenue from IKEA’s lease modification at Rego Park I, (ii) $1,163,000 of higher straight-line rental revenue from Bloomberg’s lease extension at 731 Lexington Avenue and (iii) $1,620,000 of higher reimbursable operating expenses and capital expenditures, partially offset by (iv) $651,000 of lower lease termination fee income. Operating Expenses Operating expenses were $50,254,000 for the six months ended June 30, 2024, compared to $49,762,000 for the prior year’s six months, an increase of $492,000 . This was primarily due to higher non-reimbursable operating expenses. Depreciation and Amortization Depreciation and amortization was $18,174,000 for the six months ended June 30, 2024, compared to $15,559,000 for the prior year’s six months, an increase of $2,615,000. This was due to (i) $1,304,000 of higher depreciation expense on capital projects placed into service, (ii) $964,000 of accelerated depreciation and amortization related to IKEA’s lease modification at Rego Park I and (iii) $347,000 of higher amortization expense associated with leasing commissions paid in connection with Bloomberg’s lease extension at 731 Lexington Avenue. General and Administrative Expenses General and administrative expenses were $3,635,000 for the six months ended June 30, 2024, compared to $3,265,000 for the prior year’s six months, an increase of $370,000 . This was primarily due to higher professional fees. Interest and Other Income Interest and other income was $14,216 ,000 for the six months ended June 30, 2024, compared to $8,842,000 for the prior year’s six months, an increase of $5,374,000. This was primarily due to an increase in average interest rates. Interest and Debt Expense Interest and debt exp ense was $32,453,000 for the six months ended June 30, 2024, compared to $25,449,000 for the prior year’s six months, an increase of $7,004,000. This was primarily due to $5,086,000 of higher interest rate cap premium amortization and $1,746,000 of higher interest expense resulting from increases in rates. Net Gain on Sale of Real Estate Net gain on sale of real estate was $53,952,000 for the prior year’s six months, resulting from the sale of the Rego Park III land parcel in Queens, New York. 21 Liquidity and Capital Resources Cash Flows 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 June 30, 2024, we had $524,377,000 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. 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, 2024 Cash and cash equivalents and restricted cash were $524,377,000 as of June 30, 2024, compared to $552,977,000 as of December 31, 2023, a decr ease of $28,600,000. This decrease resulted from (i) $57,308,000 of net cash used in financing activities, partially offset by (ii) $28,327,000 of net cash provided by operating activities and (iii) $381,000 of net cash provided by investing activities. Net cash used in financing activities of $57,308,000 was comprised of (i) $46,176,000 of dividends paid, (ii) $10,000,000 of debt repayments and (iii) $1,132,000 of debt issuance costs. Net cash provided by operating activit ies of $28,327,000 was comprised of (i) net income of $24,489,000 and (ii) adjustments for non-cash items of $32,748,000, partially offset by (iii) the net change in operating assets and liabilities of $28,910,000 . The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $19,118,000, (ii) straight-lining of rents of $11,076,000, (iii) interest rate cap premium amortization of $5,908,000 and (iv) stock-based compensation expense of $450,000, partially offset by (v) other non-cash adjustments of $3,804,000. Net cash provided by investing activities of $381,000 was comprised of $6,563,000 of proceeds from an interest rate cap, partially offset by construction in progress and real estate additions of $6,182,000. For the Six Months Ended June 30, 2023 Cash and cash equivalents and restricted cash were $552,755,000 as of June 30, 2023, compared to $214,478,000 as of December 31, 2022, an incr ease 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. 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 $316,000 deductible and 20% of the balance of a covered loss, and the Federal government is responsible for the remaining 80% of a covered loss. We are ultimately responsible for any loss incurred by FNSIC. We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism or other events. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for uninsured losses and for deductibles and losses in excess of our insurance coverage, which could be material. Our 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, 2024. 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 non-GAAP financial measures 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, 2024 and 2023 FFO (non-GAAP) for the three months ended June 30, 2024 was $17,009,000, or $3.31 per diluted share, compared to $18,208,000, or $3.55 per diluted share in the prior year’s three months. FFO (non-GAAP) for the six months ended June 30, 2024 was $42,541,000, or $8.29 per diluted share, compared to $36,841,000, or $7.18 per diluted share in the prior year’s six months. The following table reconciles our net income to FFO (non-GAAP): For the Three Months Ended June 30, For the Six Months Ended June 30, (Amounts in thousands, except share and per share amounts) 2024 2023 2024 2023 Net income $ 8,380 $ 64,147 $ 24,489 $ 75,373 Depreciation and amortization of real property 8,629 8,013 18,052 15,420 Net gain on sale of real estate — (53,952) — (53,952) FFO (non-GAAP) $ 17,009 $ 18,208 $ 42,541 $ 36,841 FFO per diluted share (non-GAAP) $ 3.31 $ 3.55 $ 8.29 $ 7.18 Weighted average shares used in computing FFO per diluted share 5,131,902 5,128,823 5,131,290 5,127,959 24