<PAGE> 1
EXHIBIT INDEX ON PAGE 24
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-11954
VORNADO REALTY L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3925979
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663
(Address of principal executive offices) (Zip Code)
(201) 587-1000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
<PAGE> 2
VORNADO REALTY L.P.
INDEX
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997............................................3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and September 30, 1997.......4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and September 30, 1997..............5
Notes to Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risks.20
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...........................................21
Item 6. Exhibits and Reports on Form 8-K............................22
Signatures ...................................................................23
Exhibit Index ................................................................24
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
VORNADO REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS:
Real estate, at cost:
Land $ 686,049 $ 436,274
Buildings and improvements 2,316,218 1,118,334
Leasehold improvements and
equipment 10,471 9,485
----------- -----------
Total 3,012,738 1,564,093
Less accumulated depreciation and
amortization (208,943) (173,434)
----------- -----------
Real estate, net 2,803,795 1,390,659
Cash and cash equivalents, including U.S.
government obligations under repurchase
agreements of $17,275 and $8,775 140,853 355,954
Restricted cash 37,412 27,079
Marketable securities 91,687 34,469
Investment in and advances to partially-owned
entities, including investments in and
advance to Alexander's of $103,456 and
$108,752 840,986 482,787
Due from officers 15,414 8,625
Accounts receivable, net of allowance for
doubtful accounts of $2,457 and $658 32,785 16,663
Mortgage loans receivable 10,625 88,663
Deposits in connection with real estate
acquisitions 19,996 47,275
Receivable arising from the straight-
lining of rents 41,847 24,127
Other assets 92,320 47,788
----------- -----------
TOTAL ASSETS $ 4,127,720 $ 2,524,089
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Notes and mortgages payable $ 1,234,314 $ 586,654
Revolving credit facility 683,250 370,000
Accounts payable and accrued expenses 76,213 36,538
Officer's deferred compensation payable 34,664 25,000
Deferred leasing fee income 9,868 9,927
Other liabilities 2,735 3,641
----------- -----------
2,041,044 1,031,760
----------- -----------
Minority interest 12,549 --
----------- -----------
Commitments and contingencies
Partners' capital:
Preferred units of beneficial interest:
no par value per unit; authorized,
20,000,000 units; liquidation
preference $50.00 per unit; issued
5,789,239 and 5,789,315 units 282,039 279,884
General partner units issued and
outstanding 84,222,096 and
72,164,654 units 1,627,246 1,149,272
Limited partnership units; issued
and outstanding 7,908,828 and
5,681,124 units 290,000 178,567
Partnership deficit (107,375) (109,561)
----------- -----------
2,091,910 1,498,162
Unrealized loss on securities
available for sale (2,429) (840)
Appreciation of securities held
in officer's deferred
compensation trust (10,464) --
Due from officers for purchase of
units of beneficial interest (4,890) (4,993)
----------- -----------
Total partners' capital 2,074,127 1,492,329
----------- -----------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL $ 4,127,720 $ 2,524,089
=========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 4
VORNADO REALTY L.P.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except per unit amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Property rentals $ 118,197 $ 49,882 $ 299,924 $ 113,353
Expense reimbursements 20,210 10,763 53,000 25,924
Other income (including fee income
from related parties of $450 and $592
and $1,635 and $1,236) 2,265 1,223 6,482 2,550
--------- --------- --------- ---------
Total revenues 140,672 61,868 359,406 141,827
--------- --------- --------- ---------
Expenses:
Operating 58,607 21,899 144,214 48,557
Depreciation and amortization 16,210 6,611 41,605 15,040
General and administrative 6,775 3,460 18,792 8,208
Amortization of officer's deferred
compensation expense -- 6,249 -- 18,747
--------- --------- --------- ---------
Total expenses 81,592 38,219 204,611 90,552
--------- --------- --------- ---------
Operating income 59,080 23,649 154,795 51,275
Income (loss) applicable to Alexander's (2,340) 1,344 806 4,186
Income from partially owned entities 11,195 669 20,871 1,471
Interest and other investment income 5,230 6,086 18,067 17,744
Interest and debt expense (34,034) (13,622) (80,536) (30,972)
Net gain from insurance settlement
and condemnation proceeding 9,649 -- 9,649 --
Minority interest (275) -- (275) --
--------- --------- --------- ---------
Net Income 48,505 18,126 123,377 43,704
Preferential allocations (3,423) (2,500) (10,492) (4,600)
Preferred unit distributions (including accretion
of issuance expenses of $719 and $719
and $2,157 and $1,198) (5,423) (5,241) (16,268) (10,096)
--------- --------- --------- ---------
Net Income applicable to Class A units $ 39,659 $ 10,385 $ 96,617 $ 29,008
========= ========= ========= =========
Net Income per Class A unit - basic $ .47 $ .20 $ 1.22 $ .56
========= ========= ========= =========
Net income per Class A unit - diluted $ .46 $ .19 $ 1.19 $ .54
========= ========= ========= =========
Dividends per Class A unit $ .40 $ .32 $ 1.20 $ .96
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 5
VORNADO REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 123,377 $ 43,704
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization (including debt issuance costs) 41,605 16,012
Amortization of officer's deferred compensation expense -- 18,747
Straight-lining of rental income (14,977) (4,947)
Minority interest 275 --
Equity in (income) loss of Alexander's,
including depreciation of $675 in each period (806) 497
Equity in net income of partially-owned entities (14,593) (553)
Gain on marketable securities (1,530) (911)
Net gain from insurance settlement and
condemnation proceeding (9,649) --
Changes in operating assets and liabilities (23,817) (8,532)
----------- -----------
Net cash provided by operating activities 99,885 64,017
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate and other (855,800) (548,790)
Investments in partially-owned entities (308,800) (19,215)
Investment in mortgage loans receivable (6,562) (67,663)
Repayment of mortgage loans receivable 67,663 --
Cash restricted for tenant improvements (6,133) (27,571)
Additions to real estate (67,392) (4,080)
Purchases of securities available for sale (73,773) (3,436)
Proceeds from sale or maturity of securities available for sale 14,903 --
Real estate deposits and other 51,135 --
----------- -----------
Net cash used in investing activities (1,184,759) (670,755)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,423,953 523,000
Repayments of borrowings (883,043) (151,177)
Debt issuance costs (6,533) (3,038)
Proceeds from issuance of Class A units 445,282 --
Proceeds from issuance of preferred units -- 276,000
Repayment of borrowings on U.S. Treasury obligations -- (9,636)
Distributions to Class A units (94,430) (50,091)
Distributions to preferred unitholders (16,268) (10,096)
Issuance of units 812 447
----------- -----------
Net cash provided by financing activities 869,773 575,409
----------- -----------
Net decrease in cash and cash equivalents (215,101) (31,329)
Cash and cash equivalents at beginning of period 355,954 89,696
----------- -----------
Cash and cash equivalents at end of period $ 140,853 $ 58,367
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest $ 75,305 $ 29,983
=========== ===========
NON-CASH TRANSACTIONS:
Financing assumed in acquisitions $ 497,300 $ 215,000
Issuance of Class A and B units in connection with acquisitions 140,000 177,000
Unrealized (loss) gain on securities available for sale (1,589) 2,019
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 6
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Vornado Realty L.P. (the "Operating Partnership"), a Delaware limited
partnership, commenced operations on April 15, 1997 when Vornado Realty Trust
("Vornado"), a fully-integrated real estate investment trust ("REIT"), converted
to an Umbrella Partnership REIT ("UPREIT") by transferring substantially all of
its interests in properties to the Operating Partnership in exchange for units.
Vornado is the sole general partner of the Operating Partnership and owns a
91.5% limited partnership interest in the Operating Partnership at September 30,
1998. All references to "Vornado" in these financial statements refer to Vornado
Realty Trust; all references to the "Operating Partnership" refer to Vornado
Realty L.P. and all references to the "Company" refer to Vornado and its
consolidated subsidiaries, including the Operating Partnership.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1998, the
consolidated statements of income for the three and nine months ended September
30, 1998 and September 30, 1997 and the consolidated statements of changes in
cash flows for the nine months ended September 30, 1998 and September 30, 1997
are unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Operating Partnership's 1997 Form 10-K. The results of
operations for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the operating results for the full year.
The accompanying unaudited consolidated condensed financial statements
include the accounts of Vornado Realty L.P. All significant intercompany amounts
have been eliminated. Equity interests in partially-owned entities include
partnerships, joint ventures and preferred stock affiliates (corporations in
which the Company owns all of the preferred stock and none of the common equity)
and are accounted for under the equity method of accounting as the Company
exercises significant influence over such entities. These investments are
recorded initially at cost and subsequently adjusted for equity in net income
(loss) and cash contributions and distributions. Ownership of the preferred
stock entitles the Company to substantially all of the economic benefits in the
preferred stock affiliates. The common stock of the preferred stock affiliates
are owned by officers and trustees of Vornado.
Certain prior period amounts have been reclassified to conform to the
September 30, 1998 financial statement presentation.
3. ACQUISITIONS AND FINANCINGS:
ACQUISITIONS:
Westport
On January 29, 1998, the Company acquired the Westport Corporate Office
Park from a limited partnership that included members of the Mendik Group, a
related party. The purchase price was approximately $14 million consisting of $6
million of cash and an $8 million mortgage loan.
One Penn Plaza
On February 9, 1998, the Company acquired a long-term leasehold
interest in One Penn Plaza, a Manhattan office building. The purchase price was
approximately $410 million consisting of $317 million of cash and a $93 million
bridge mortgage loan.
Page 6
<PAGE> 7
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
150 East 58th Street
On March 9, 1998, the Company acquired 150 East 58th Street (the
"Architects and Design Center"), a Manhattan office building, for a cash
purchase price of approximately $118 million.
The Merchandise Mart Properties
On April 1, 1998, the Company acquired a real estate portfolio from the
Kennedy Family for approximately $630 million, consisting of $187 million in
cash, $116 million in Operating Partnership Units, $77 million in existing debt
and $250 million of newly issued debt.
The acquired real estate assets consist of a portfolio of properties
used for office, retail and trade showroom space which aggregate approximately
5.4 million square feet and include the Merchandise Mart in Chicago. The
transaction also includes the acquisition of Merchandise Mart Properties, Inc.
which manages the properties and trade shows.
Following is a summary of the notes and mortgages payable,
collateralized by the Merchandise Mart Properties (amounts in thousands):
<TABLE>
<S> <C>
Merchandise Mart mortgage payable, due in 1999, non-amortizing with
interest at LIBOR plus 1.35% (7.00% at September 30, 1998)
(prepayable without penalty) $250,000
Washington Office Center mortgage payable, due in 2004, amortization based
on a 25 year term, with interest at 6.80% (prepayable with yield
maintenance) 51,537
Washington Design Center mortgage payable, due in 2000, amortization based
on a 25 year term, with interest at LIBOR plus 3.00% (8.59% at
September 30, 1998) (prepayable without penalty) 24,335
----------
$325,872
==========
</TABLE>
888 Seventh Avenue and 40 Fulton Street
On June 2, 1998, the Company entered into an agreement to acquire the
leasehold interest in 888 Seventh Avenue, a 46 story office building containing
approximately 847,000 square feet located in midtown Manhattan, and
simultaneously acquired 40 Fulton Street, a 29 story office building containing
approximately 234,000 square feet located in downtown Manhattan. The aggregate
consideration for both buildings is approximately $154.5 million. The
acquisition of 888 Seventh Avenue is expected to be completed in the first
quarter of 1999 and is subject to customary closing conditions.
770 Broadway
On July 24, 1998, the Company acquired 770 Broadway, a 1,000,000 square
foot Manhattan office building, for approximately $149 million, including $18
million of Operating Partnership Units.
Page 7
<PAGE> 8
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Trust
On July 28, 1998, the Company purchased $50 million of Capital Trust's
8.25% Step Up Convertible Trust Preferred Securities. The preferred securities
are convertible at any time by the holder into common shares of Capital Trust at
a price of $11.70 per share. The preferred shares have a 20-year maturity and
are non-callable for five years. Capital Trust is a fully integrated,
self-managed specialty finance company focused on the commercial real estate
industry. Steven Roth, Chairman and Chief Executive Officer of Vornado joined
Capital Trust's Board of Trustees.
689 Fifth Avenue
On August 12, 1998, the Company acquired 689 Fifth Avenue, a 84,000
square foot Manhattan specialty building for approximately $33 million.
OTHER FINANCINGS:
Sale of Common Shares
On April 15, 1998, Vornado completed the sale of 10,000,000 common
shares pursuant to an effective registration statement with net proceeds to the
Company of approximately $401,000,000. On April 29, 1998, Vornado sold 1,132,420
common shares to a unit investment trust, which were valued for the purpose of
the trust at $41.06 per share, resulting in net proceeds of approximately
$44,000,000.
One Penn Plaza
On June 15, 1998, the Company completed a $275,000,000 refinancing of
its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto.
In the third quarter of 1998, the Company borrowed the remaining $105,000,000.
The debt matures in June 2002, is prepayable at anytime, and bears interest at
LIBOR + 1.25% (currently 6.91%). This debt replaced the $93,000,000
bridge-mortgage loan financing put in place when the property was acquired.
See "Investments in and Advances to Partially Owned Entities" for other
acquisitions and financing activities of partially owned entities.
PRO FORMA INFORMATION
The unaudited pro forma condensed consolidated statements of income for the
Operating Partnership for the nine months ended September 30, 1998 and 1997 are
presented as if the acquisitions described above and those included in
Investments in and Advances to Partially Owned Entities and the financings
attributable thereto had occurred on January 1, 1997.
Condensed Consolidated Pro Forma Income Statements
<TABLE>
<CAPTION>
Pro Forma
-----------
Nine Months Ended
-------------------
September 30, 1998 September 30, 1997
------------------ ------------------
(amounts in thousands, except per share amounts)
<S> <C> <C>
Revenues $ 479,700 $ 449,500
========= =========
Net income $ 136,700 $ 98,300
Preferrential allocations (10,600) (4,600)
Preferred unit distributions (16,300) (15,200)
--------- ---------
Net income applicable to Class A units $ 109,800 $ 78,500
========= =========
Net income per Class A unit - basic $ 1.30 $ .93
========= =========
Net income per Class A unit - diluted $ 1.27 $ .91
========= =========
</TABLE>
Page 8
<PAGE> 9
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES:
The Company's investments in and advances to partially-owned entities
and income recognized from such investments is as follows:
INVESTMENTS AND ADVANCES:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(amounts in thousands)
<S> <C> <C>
Cold Storage Companies $445,901 $243,846
Alexander's 103,456 108,752
Charles E. Smith Commercial Realty L.P. 61,554 60,437
Hotel Pennsylvania 46,789 20,152
Newkirk Joint Ventures 55,913 --
Mendik Partially-Owned Office Buildings 79,391 37,209
Vornado Management Corp., Mendik
Management Company, Merchandise
Mart Properties, Inc. and other 47,982 12,391
-------- --------
$840,986 $482,787
======== ========
</TABLE>
INCOME:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Income Applicable to Alexander's $ (2,340) $ 1,344 $ 806 $ 4,186
======== ======== ======== ========
Other Partially-Owned Entities:
Cold Storage Companies $ 5,008 $ -- $ 8,172 $ --
Charles E. Smith Commercial
Realty L.P. 1,054 -- 3,405 --
Hotel Pennsylvania 1,361 -- 2,750 --
Newkirk Joint Ventures 1,006 -- 1,006 --
Mendik Partially-Owned Office
Buildings 959 271 2,181 553
Vornado Management Corp.,
Mendik Management Company,
Merchandise Mart Properties
Inc. and other 1,807 398 3,357 918
-------- -------- -------- --------
$ 11,195 $ 669 $ 20,871 $ 1,471
======== ======== ======== ========
</TABLE>
Alexander's
Alexander's is managed by and its properties are leased by the Company
pursuant to agreements with a one-year term which are automatically renewable.
Subject to the payments of rents by Alexander's tenants, the Company is due
$3,221,000 under its leasing agreement with Alexander's which amount is included
in Investments in and Advances to Alexander's. Included in Income from Vornado
Management Corp. is management fee income from Alexander's of $1,563,000 and
$4,688,000 in each of the three and nine months ended September 30, 1998 and
1997, respectively.
On June 18, 1998, Alexander's increased its interest in the Kings Plaza
Mall to 100% by acquiring Federated Department Store's ("Federated") 50%
interest. The purchase price was approximately $28,000,000, which was paid in
cash. In addition, Alexander's has agreed to pay Federated $15,000,000 to
renovate its Macy's store in the mall in exchange for certain modifications to
the Kings Plaza Operating Agreement. In connection with the acquisition,
Alexander's has completed a $90 million three-year mortgage loan with Union Bank
of Switzerland.
Page 9
<PAGE> 10
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cold Storage Companies
On April 23, 1998, the Cold Storage Companies completed a $550,000,000
non-recourse ten-year loan secured by 58 of its warehouses. The loan bears
interest at 6.89%. The net proceeds from the loan together with working capital
were used to repay $607,000,000 of bridge financing, which replaced high yield
debt assumed at the date of acquisition.
On June 15, 1998, a partnership in which Vornado owns a 60% interest
through a preferred stock affiliate acquired the assets of Freezer Services,
Inc., consisting of nine cold storage warehouses in the central United States
for approximately $133 million, including $107 million in cash and $26 million
in indebtedness. On July 1, 1998, the Carmar Group cold storage warehouse
business was similarly acquired for approximately $158 million, including $144
million in cash and $14 million in indebtedness. Carmar owns and operates five
cold storage distribution warehouses in the midwest and southeast United States.
Hotel Pennsylvania
On May 1, 1998, the Company acquired an additional 40% interest in the
Hotel Pennsylvania increasing its ownership to 80%. The Company purchased the
additional 40% interest from Hotel Properties Limited (one of its joint venture
partners) for approximately $70 million, including $48 million of existing debt.
Newkirk Joint Ventures
On July 8, 1998, the Company invested $47 million for a 30% share in
joint ventures with affiliates of Apollo Real Estate Investment Fund III, L.P.,
collectively Newkirk Joint Ventures ("Newkirk"). Newkirk owns various equity and
debt interests relating to 120 limited partnerships which own real estate
primarily net leased to credit rated tenants. An additional $9 million was
invested prior to September 30, 1998 and the Company has issued a $15.6 million
letter of credit in connection with these joint ventures.
Mendik Partially-Owned Office Buildings
On April 20, 1998, the Company increased its interest from 5.6% to
approximately 50% in 570 Lexington Avenue, a 49 story office building located in
midtown Manhattan containing approximately 435,000 square feet. The Company
purchased the additional interest for approximately $37.2 million, including
$4.9 million of existing debt.
On August 4, 1998, the Company sold a 40% interest in a $27,000,000
mortgage on 20 Broad Street to one of the owners of the property for
$10,800,000. On August 5, 1998, as part of a related transaction, the Company
acquired the Mendik Group's 60% interest in the property for approximately
$600,000 of Operating Partnership Units.
5. OTHER RELATED PARTY TRANSACTIONS
The Company lent Mr. Fascitelli, the President of the Company,
$3,500,000 on March 2, 1998 and $2,600,000 on April 30, 1998, in accordance with
the terms of his employment agreement. The loans have a five-year term and bear
interest, payable quarterly, at a rate of 5.47% and 5.58%, respectively (based
on the mid-term applicable federal rate provided under the Internal Revenue
Code).
The Company currently manages and leases the real estate assets of
Interstate Properties pursuant to a management agreement. Management fees earned
by the Company pursuant to the management agreement were $184,000 and $470,000
for the three months ended September 30, 1998 and 1997 and $956,000 and $847,000
for the nine months ended September 30, 1998 and 1997.
Page 10
<PAGE> 11
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Mendik Group owns an entity which provides cleaning and related
services and security services to office properties including the Company's
Manhattan office properties acquired subsequent to September 30, 1997. The
Company was charged fees for these services of $7,356,000 and $18,580,253 for
the three and nine months ended September 30, 1998 and $3,292,000 for the three
months ended September 30, 1997 and $5,899,000 for the period from April 15,
1997 to September 30, 1997. A portion of these fees is expected to be reimbursed
to the Company by its tenants.
6. NET GAIN FROM INSURANCE SETTLEMENT AND CONDEMNATION PROCEEDINGS
In April 1997, the Company's Lodi shopping center was destroyed by a
fire. In the third quarter of 1998, the Company and its insurer agreed that the
estimated cost to reconstruct the shopping center is approximately $9,012,000
and the Company recorded a gain of $7,955,000 (the agreed upon amount, net of
the carrying value of the shopping center of $1,057,000). The insurance carrier
had previously advanced $5,550,000 to the Company. The reconstruction of the
shopping center is expected to be completed in 1999.
On September 1, 1998, Atlantic City condemned the Company's vacant
property. In the third quarter of 1998, the Company recorded a gain of
$1,694,000, (which reflects the condemnation award of $3,100,000, net of the
carrying value of the building of $1,406,000). The Company is contesting the
amount of the award.
7. COMMITMENTS AND CONTINGENCIES
At September 30, 1998, in addition to the $683,250,000 balance
outstanding under the Company's revolving credit facility, the Company had
utilized approximately $100,218,000 of availability under the facility for
letters of credit and guarantees primarily related to pending acquisitions.
In January 1997, two individual investors in Mendik Real Estate Limited
Partnership ("RELP"), the publicly held limited partnership that indirectly owns
a 60% interest in the Two Park Avenue Property, filed a purported class action
against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp.,
B&B Park Avenue, L.P. (an indirect subsidiary of the Company which acquired the
remaining 40% interest in Two Park Avenue) and Bernard H. Mendik in the Supreme
Court of the State of New York, County of New York, on behalf of all persons
holding limited partnership interests in RELP. The complaint alleges that, for
reasons which include purported conflicts of interest, the defendants breached
their fiduciary duty to the limited partners, that the then proposed transfer of
the 40% interest in Two Park Avenue would result in a burden on the operation
and management of Two Park Avenue and that the transfer of the 40% interest
violates RELP's right of first refusal to purchase the interest being
transferred and fails to provide limited partners in RELP with a comparable
transfer opportunity. Shortly after the filing of the complaint, another limited
partner represented by the same attorneys filed an essentially identical
complaint in the same court. Both complaints seek unspecified damages, an
accounting and a judgment requiring either the liquidation of RELP and the
appointment of a receiver or an auction of Two Park Avenue. In August 1997, a
fourth limited partner, represented by separate counsel, commenced another
purported class action in the same court by serving a complaint essentially
identical to the complaints in the two previously commenced actions. These
lawsuits have since been consolidated. On June 2, 1998, the parties entered into
a Stipulation and Agreement of Compromise, Settlement and Release (the
"Settlement"). The Settlement provides, among other things: (i) for Vornado to
purchase the Partnership's interest in Two Park Avenue for approximately $34.6
million, which will be paid in cash, or at Vornado's election, in any
combination of cash or shares of Vornado stock, plus the assumption of $39
million in existing debt; and (ii) for Vornado to purchase the Partnership's
interest in 550-600 Mamaroneck Avenue, Harrison, New York and 330 West 34th
Street, New York, NY for an aggregate price of $30 million in cash. On October
14, 1998, the Supreme Court of the State of New York for New York County
approved the proposed settlement. On November 6, 1998, the Court's judgment
became final. It is expected that the transaction will close within the
next 30 days.
Page 11
<PAGE> 12
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
(amounts in thousands except per unit amounts)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 48,505 $ 18,126 $ 123,377 $ 43,704
Preferential allocations (3,423) (2,500) (10,492) (4,600)
Preferred unit distributions (5,423) (5,241) (16,268) (10,096)
--------- --------- --------- ---------
Numerator for basic and
diluted earnings per Class A unit -
income applicable to
Class A units $ 39,659 $ 10,385 $ 96,617 $ 29,008
========= ========= ========= =========
Denominator:
Denominator for basic
earnings per Class A unit
-- weighted average
units 83,755 52,195 79,407 52,194
Effect of dilutive securities:
Employee stock options 1,673 1,768 2,075 1,454
--------- --------- --------- ---------
Denominator for diluted
earnings per Class A unit -
adjusted weighted
average units and
assumed conversions 85,428 53,963 81,482 53,648
========= ========= ========= =========
Net income per Class A
unit - basic $ .47 $ .20 $ 1. 22 $ .56
========= ========= ========= =========
Net income per Class A
unit - diluted $ .46 $ .19 $ 1.19 $ .54
========= ========= ========= =========
</TABLE>
9. COMPREHENSIVE INCOME AND ACCOUNTING FOR DEFERRED COMPENSATION
ARRANGEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components.
The statement, which requires disclosure of net income including unrealized
gains and losses recognized in the equity section of the balance sheet, was
adopted by the Company in the first quarter of 1998.
Page 12
<PAGE> 13
VORNADO REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, at September 30, 1998, the Company adopted Emerging Issues
Task Force (EITF) Issue No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". This
EITF provides the framework for the accounting for changes in the value of
investments held in a Rabbi Trust and the effects of such changes on
compensation expense.
The Company's comprehensive income was $34,766,000 and $11,408,000 for
the three months ended September 30, 1998 and 1997 and $95,028,000 and
$31,027,000 for the nine months ended September 30, 1998 and 1997.
10. SUBSEQUENT EVENTS
Vornado Operating Company
On October 16, 1998, the Company completed its spin-off of Vornado
Operating Company. Holders of Vornado Realty Trust common shares and the
Operating Partnership's Class A, Class C and Class D units ("Units") received
one share of common stock, par value $.01 per share of Vornado Operating Company
("Common Stock") for every 20 common shares or units held of record on October
9, 1998. The conversion price of the Company's $3.25 Series A Convertible
Preferred Shares was adjusted from $36.38 to $36.10 to reflect the distribution.
The Company has capitalized Vornado Operating Company with an equity
contribution of $25 million. In addition, the Company has agreed to enter into a
$75 million revolving credit agreement with Vornado Operating Company.
Las Catalinas Mall
On October 29, 1998, Vornado completed its acquisition of K Mart's 50%
interest in the Las Catalinas Mall located in Caguas, Puerto Rico (adjacent to
San Juan). In addition, Vornado acquired 75% and Vornado's partner in the Mall
acquired 25% of K Mart's anchor store. Vornado's purchase price of $38 million
was fully financed with 15 year non-recourse debt. The Las Catalinas Mall, which
opened in 1997 contains 485,000 square feet, including a 123,000 square foot K
Mart and a 146,000 square foot Sears.
Page 13
<PAGE> 14
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking
statements as such term is defined in Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Certain factors could
cause actual results to differ materially from those in the forward-looking
statements. Factors that might cause such a material difference include, but are
not limited to, (a) changes in the general economic climate, (b) local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area, (c) conditions of tenants, (d) competition from other
available space, (e) increased operating costs and interest expense, (f) the
timing of and costs associated with property improvements, (g) changes in
taxation or zoning laws, (h) government regulations, (i) failure of Vornado to
continue to qualify as a REIT, (j) availability of financing on acceptable
terms, (k) potential liability under environmental or other laws or regulations,
(l) general competitive factors and (m) the impact of the Year 2000 issue,
including the effect of third parties' failure to address the Year 2000 issue as
well as the Company's own readiness.
RESULTS OF OPERATIONS
The Company's revenues, which consist of property rentals, tenant
expense reimbursements and other income were $140,672,000 in the quarter ended
September 30, 1998, compared to $61,868,000 in the prior year's quarter, an
increase of $78,804,000. Revenues were $359,406,000 for the nine months ended
September 30, 1998, compared to $141,827,000 in the prior year's nine months, an
increase of $217,579,000. These increases included $70,522,000 and $201,586,000
of revenues from properties acquired which are not reflected in operations for
all or a portion of the prior year's periods presented.
Property rentals were $118,197,000 in the quarter ended September 30,
1998, compared to $49,882,000 in the prior year's quarter, an increase of
$68,315,000. Property rentals were $299,924,000 for the nine months ended
September 30, 1998, compared to $113,353,000 in the prior year's nine months, an
increase of $186,571,000. These increases resulted from:
<TABLE>
<CAPTION>
Three Months Nine Months
Date of Ended Ended
Acquisitions: Acquisition September 30, 1998 September 30, 1998
----------- ------------------ ------------------
<S> <C> <C> <C>
20 Broad Street August 1998 $ 1,800,000 $ 1,800,000
689 Fifth Avenue August 1998 472,000 472,000
770 Broadway July 1998 2,935,000 2,935,000
40 Fulton Street June 1998 1,504,000 1,993,000
Merchandise Mart Properties April 1998 27,477,000 54,364,000
150 E.58th Street March 1998 3,978,000 9,128,000
One Penn Plaza February 1998 14,859,000 39,468,000
Westport January 1998 661,000 1,778,000
Green Acres Mall December 1997 5,404,000 16,367,000
640 Fifth Avenue December 1997 1,796,000 4,407,000
Riese June 1997 -- 486,000
90 Park Avenue May 1997 -- 13,889,000
Mendik April 1997 -- 24,949,000
Montehiedra Shopping Center April 1997 -- 2,203,000
------------- -------------
60,886,000 174,239,000
Leasing Activity and Step-Ups in Leases:
Shopping centers 1,656,000 4,736,000
Office buildings 5,773,000 7,596,000
------------- -------------
$ 68,315,000 $ 186,571,000
============= =============
</TABLE>
Page 14
<PAGE> 15
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Tenant expense reimbursements were $20,210,000 in the quarter ended
September 30, 1998, compared to $10,763,000 in the prior year's quarter, an
increase of $9,447,000. Tenant expense reimbursements were $53,000,000 for the
nine months ended September 30, 1998, compared to $25,924,000 in the prior
year's nine months, an increase of $27,076,000. These increases included
$9,450,000 and $27,590,000 from tenants at properties acquired which are not
reflected in operations for all or a portion of the prior year's periods
presented.
Operating expenses were $58,607,000 in the quarter ended September 30,
1998, as compared to $21,899,000 in the prior year's quarter, an increase of
$36,708,000. Operating expenses were $144,214,000 for the nine months ended
September 30, 1998, compared to $48,557,000 in the prior year's nine months, an
increase of $95,657,000. These increases included (i) $35,393,000 and
$93,078,000 from properties acquired which are not reflected in operations for
all or a portion of the prior year's periods presented and (ii) $1,315,000 and
$2,579,000 primarily for building maintenance at the Company's other properties.
Depreciation and amortization was $16,210,000 in the quarter ended
September 30, 1998, as compared to $6,611,000 in the prior year's quarter, an
increase of $9,599,000. Depreciation and amortization was $41,605,000 for the
nine months ended September 30, 1998, compared to $15,040,000 in the prior
year's nine months, an increase of $26,565,000. These increases were primarily a
result of acquisitions.
General and administrative expenses were $6,775,000 in the quarter
ended September 30, 1998 compared to $3,460,000 in the prior year's quarter, an
increase of $3,315,000. General and administrative expenses were $18,792,000 for
the nine months ended September 30, 1998, compared to $8,208,000 in the prior
year's nine months, an increase of $10,584,000. Of these increases: (i) $921,000
and $4,237,000 is attributable to acquisitions, (ii) $1,660,000 and $3,703,000
resulted from payroll, primarily for additional employees, and corporate office
expenses and (iii) $734,000 and $2,644,000 resulted from professional fees.
The Company recognized an expense of $6,249,000 and $18,747,000 in the
prior year's quarter and nine months representing the amortization of the
deferred payment due to the Company's President, which was fully amortized at
December 31, 1997.
Income (loss) applicable to Alexander's (loan interest income, equity
in income (loss) and depreciation) was $(2,340,000) in the quarter ended
September 30, 1998, compared to $1,344,000 in the prior year's quarter, a
decrease of $3,684,000. Income applicable to Alexander's was $806,000 for the
nine months ended September 30, 1998, compared to $4,186,000 in the prior year's
nine months, a decrease of $3,380,000. These decreases resulted primarily from
(i) the Company's equity in Alexander's loss of $4,423,000 from the write-off of
the carrying value of Alexander's Lexington Avenue building and predevelopment
costs, partially offset by (ii) income from the commencement of leases at
Alexander's Rego Park and Kings Plaza store properties and (iii) income from
Alexander's acquisition of the remaining 50% interest in the Kings Plaza Mall.
Income from partially-owned entities was $11,195,000 in the quarter
ended September 30, 1998, compared to $669,000 in the prior year's quarter, an
increase of $10,526,000. Income from partially-owned entities was $20,871,000
for the nine months ended September 30, 1998, compared to $1,471,000 in the
prior year's nine months, an increase of $19,400,000. These increases resulted
from:
<TABLE>
<CAPTION>
Three Months Nine Months
Date of Ended Ended
Acquisitions: Acquisition September 30, 1998 September 30, 1998
------------- ------------------ ------------------
<S> <C> <C> <C>
Cold Storage Companies October 1997 $ 5,008,000 $ 8,172,000
Charles E. Smith
Commercial Realty L.P. October 1997 1,054,000 3,405,000
Hotel Pennsylvania September 1997 1,361,000 2,750,000
Newkirk Joint Ventures July 1998 1,006,000 1,006,000
Mendik partially-owned office buildings April 1997 688,000 1,728,000
Merchandise Mart Management
Company April 1998 324,000 1,272,000
-------------- --------------
9,441,000 18,333,000
Other 1,085,000 1,067,000
-------------- --------------
$ 10,526,000 $ 19,400,000
============== ==============
</TABLE>
Page 15
<PAGE> 16
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and other investment income (interest income on mortgage loans
receivable, other interest income, dividend income and net gains on marketable
securities) was $5,230,000 for the quarter ended September 30, 1998, compared to
$6,086,000 in the prior year's quarter, a decrease of $856,000. This decrease
resulted primarily from lower average investments this year. Interest and other
investment income was $18,067,000 for the nine months ended September 30, 1998,
compared to $17,744,000 in the prior year's nine months, an increase of
$323,000.
Interest and debt expense was $34,034,000 for the quarter ended
September 30, 1998, compared to $13,622,000 in the prior year's quarter, an
increase of $20,412,000. Interest and debt expense was $80,536,000 for the nine
months ended September 30, 1998, compared to $30,972,000 in the prior year's
nine months, an increase of $49,564,000. These increases resulted primarily from
debt in connection with acquisitions.
In the third quarter of 1998, the Company recorded a net gain of
$9,649,000, in connection with an insurance settlement and condemnation
proceeding (see Note 6 to the Consolidated Financial Statements).
The preferential allocations to certain Class A unitholders and Class
B, C, D and E unitholders in the Operating Partnership were $3,423,000 for the
quarter ended September 30, 1998, compared to $2,500,000 in the prior year's
quarter, an increase of $923,000. Preferential allocations were $10,492,000 for
the nine months ended September 30, 1998, compared to $4,600,000 in the prior
year's nine months, an increase of $5,892,000. These increases resulted
primarily from units issued in connection with acqusitions.
The preferred unit distributions of $5,423,000 and $16,268,000 for the
three and nine months ended September 30, 1998 and $5,241,000 for the three
months ended September 30, 1997 and $10,096,000 for the period from April 15,
1997 to September 30, 1997 apply to the Company's $3.25 Series A Convertible
Preferred Units issued in April and December 1997 and include accretion of
expenses of issuing them.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1998
Cash flows provided by operating activities of $99,885,000 was
primarily comprised of (i) income of $113,728,000 (net income of $123,377,000
less net gain from insurance settlement and condemnation proceeding of
$9,649,000) and (ii) adjustments for non-cash items of $11,504,000, offset by
(iii) the net change in operating assets and liabilities of $23,817,000. The
adjustments for non-cash items are primarily comprised of (i) depreciation and
amortization of $41,605,000 and (ii) minority interest of $10,767,000, partially
offset by (iii) the effect of straight-lining of rental income of $14,977,000
and (iv) equity in net income of partially-owned entities of $14,593,000. The
net change in operating assets and liabilities reflects an increase in prepaid
real estate taxes of $15,792,000.
Page 16
<PAGE> 17
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used in investing activities of $1,184,759,000 was primarily
comprised of (i) acquisitions of real estate of $855,800,000 (see detail below),
(ii) investments in partially-owned entities of $308,000,000 (see detail below),
(iii) capital expenditures of $67,392,000 and investments in securities of
$73,773,000 (including $48,500,000 purchase of Capital Trust Preferred Stock),
partially offset by (v) proceeds from the repayment of mortgage loans receivable
of $67,663,000. Acquisitions of real estate and investments in partially-owned
entities are comprised of (amounts in thousands):
<TABLE>
<CAPTION>
Debt Value of Total
Cash Assumed Units Issued Consideration
<S> <C> <C> <C> <C>
Real Estate:
Merchandise Mart Properties $ 187,000 $ 327,000 $ 116,000 $ 630,000
One Penn Plaza Office Building 317,000 93,000 -- 410,000
770 Broadway Office Building 131,000 -- 18,000 149,000
150 East 58th Street Office Building 118,000 -- -- 118,000
40 Fulton Street Office Building 54,000 -- -- 54,000
689 Fifth Avenue Office Building 33,000 -- -- 33,000
Other 15,800 -- -- 15,800
---------- ---------- ---------- ----------
$ 855,800 $ 420,000 $ 134,000 $1,409,800
========== ========== ========== ==========
Investments in Partially Owned Entities:
Hotel Pennsylvania (acquisition of additional
40% interest increasing ownership to 80%) $ 22,000 $ 48,000 $ -- $ 70,000
570 Lexington Avenue Office Building
(increased interest from 5.6% to
approximately 50%) 32,300 4,900 -- 37,200
Acquisition of Freezer Services, Inc. (60%
interest) 58,000 16,000 6,000 80,000
Reduction in Cold Storage Companies
debt (60% interest) 44,000 -- -- 44,000
Acquisition of Carmar Group (60% interest) 86,400 8,400 -- 94,800
Investment in Newkirk Joint Ventures 56,000 -- -- 56,000
Other 9,300 -- -- 9,300
---------- ---------- ---------- ----------
$ 308,000 $ 77,300 $ 6,000 $ 391,300
========== ========== ========== ==========
</TABLE>
Net cash provided by financing activities of $869,773,000 was primarily
comprised of (i) proceeds from borrowings of $1,423,953,000, and (ii) proceeds
from the issuance of Class A units of $445,282,000, partially offset by (iii)
repayment of borrowings of $883,043,000, (iv) distributions to Class A
unitholders of $94,430,000 and (v) distributions to preferred unitholders of
$16,268,000.
Page 17
<PAGE> 18
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997
Cash flows provided by operating activities of $64,017,000 was
comprised of (i) net income of $43,704,000 and (ii) adjustments for non-cash
items of $28,845,000, partially offset by (iii) the net change in operating
assets and liabilities of $8,532,000. The adjustments for non-cash items are
primarily comprised of (i) amortization of deferred officer's compensation
expense of $18,747,000, (ii) depreciation and amortization of $16,012,000, (iii)
equity in loss of Alexander's of $497,000, and (iv) minority interest of
$4,600,000, partially offset by (v) the effect of straight-lining of rental
income of $4,947,000 and (vi) equity in net income of investees of $553,000.
Net cash used in investing activities of $670,755,000 was primarily
comprised of (i) expenditures of $263,790,000 in connection with the Mendik
Transaction, (ii) investments in mortgage loans receivable of $67,663,000, (iii)
capital expenditures and investments in partnerships and joint ventures of
$308,295,000 and (iv) restricted cash for tenant improvements of $27,571,000.
Investments in mortgage loans receivable are comprised of (a) a loan of
$41,000,000 to affiliates of the Riese Organization cross collateralized by ten
Manhattan properties and (b) a mortgage on a 460,000 square foot office building
at 20 Broad Street in Manhattan, New York, purchased at a discount from a bank
for $27,000,000.
Net cash provided by financing activities of $575,409,000 was primarily
comprised of proceeds from (i) borrowings of $523,000,000, and (ii) issuance of
preferred units of $276,000,000, partially offset by (iii) repayment of
borrowings of $151,177,000, (iv) distributions to Class A unitholders of
$50,091,000, (v) distributions to preferred unitholders of $10,096,000 and (vi)
the repayment of borrowings on U.S. Treasury obligations of $9,636,000.
Certain Cash Requirements Affecting the Company's Liquidity at September 30,
1998:
Pending Acquisitions and Investments
On June 2, 1998, the Company entered into an agreement to acquire the
leasehold interest in 888 Seventh Avenue, a 46 story office building containing
approximately 847,000 square feet located in midtown Manhattan, for
approximately $100 million. The acquisition of 888 Seventh Avenue is expected to
be completed not later than the third quarter of 1999 in conjunction with other
unrelated transactions to be effected by the seller, and is subject to customary
closing conditions.
On June 2, 1998, the Company entered into an agreement to settle
existing litigation - see Legal Proceedings. The Settlement provides, among
other things: (i) for Vornado to purchase the remaining 60% interest in Two Park
Avenue for approximately $34.6 million, which will be paid in cash, or at the
Company's election, in any combination of cash or shares of Vornado stock, plus
the assumption of $39 million in existing debt; and (ii) for Vornado to purchase
the Partnership's interest in 550-600 Mamaroneck Avenue, Harrison, New York and
330 West 34th Street, New York, New York for an aggregate price of $30 million
in cash. On October 14, 1998, the Supreme Court of the State of New York for New
York County approved the proposed settlement. On November 6, 1998, the Court's
judgment became final. It is expected that the transaction will close within
the next 30 days.
On October 29, 1998, Vornado completed its acquisition of K Mart's 50%
interest in the Las Catalinas Mall located in Caguas, Puerto Rico (adjacent to
San Juan). In addition, Vornado acquired 75% and Vornado's partner in the Mall
acquired 25% of K Mart's anchor store. Vornado's purchase price of $38 million
was fully financed with 15 year non-recourse debt.
Page 18
<PAGE> 19
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company entered into an agreement to acquire the 1,050,000 square
foot Market Square Complex of showrooms in High Point, NC, for approximately $95
million consisting of $6 million of cash, $44 million of debt and $45 million of
Operating Partnership Units and Convertible Preferred Operating Partnership
Units. This transaction is currently expected to close in the fourth quarter;
however there can be no assurance it will ultimately be consummated.
Financings:
On April 15, 1998, Vornado completed the sale of 10,000,000 common
shares pursuant to an effective registration statement with net proceeds to the
Company of approximately $401,000,000. On April 29, 1998, Vornado sold 1,132,420
common shares to a unit investment trust, which were valued for purposes of the
trust at $41.06 per share, resulting in net proceeds of approximately
$44,000,000.
On September 30, 1998, the Company had $683,250,000 outstanding under
its $1,000,000,000 revolving credit facility at a blended interest rate of
6.49%.
Also, in February 1998, the Company completed a $160,000,000
refinancing of the Green Acres Mall and prepaid the then existing $118,000,000
debt on the property. The new 10-year debt matures in March 2008 and bears
interest at 6.75%.
On April 23, 1998, the Cold Storage Companies completed a $550,000,000
non-recourse ten-year loan secured by 58 of its warehouses. The loan bears
interest at 6.89%. The net proceeds from the loan together with working capital
were used to repay $607,000,000 of bridge financing, which replaced high yield
debt assumed at the date of acquisition.
On June 15, 1998, the Company completed a $275,000,000 refinancing of
its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto.
In the third quarter, the Company borrowed the remaining $105,000,000. The debt
matures in June 2002, is prepayable at anytime, and bears interest at LIBOR +
1.25%; (currently 6.91%). This debt replaced the $93,000,000 bridge-mortgage
loan financing put in place when the property was acquired.
On October 16, 1998, the Company completed its spin-off of Vornado
Operating Company, which the Company capitalized with an equity contribution of
$25 million of cash. In addition, Vornado has agreed to enter into a $75 million
revolving credit agreement with Vornado Operating Company.
The Company anticipates that cash from continuing operations will be
adequate to fund business operations and the payment of dividends and
distributions on an ongoing basis for more than the next twelve months; however,
capital outlays for significant acquisitions may require funding from borrowings
or equity offerings.
Page 19
<PAGE> 20
VORNADO REALTY L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Issues
Year 2000 compliance programs and information systems modifications
were initiated by Vornado in early 1998 in an attempt to ensure that these
systems and key processes will remain functional. This objective is expected to
be achieved either by modifying present systems using existing internal and
external programming resources or by installing new systems, and by monitoring
supplier and other third-party interfaces. In many cases, Vornado will be
relying on statements from outside vendors as to the Year 2000 readiness of
their systems, and will not, in many circumstances, attempt any independent
verification. Review of the systems affecting Vornado and its properties is
progressing. The costs of Vornado's Year 2000 program to date have not been
material, and Vornado does not anticipate that the costs of any required
modifications to its information technology or embedded technology systems will
have a material adverse effect on its financial position, results of operations
or liquidity. Vornado has contingency plans for its own day-to-day operational
systems and management is in the process of updating these plans for possible
Year 2000 specific operational requirements.
Recently Issued Accounting Standards
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Because the Company does not currently utilize derivatives or engage in
significant hedging activities, management does not anticipate that
implementation of this statement will have a material effect on the Company's
financial statements.
Quantitative and Qualitative Disclosures About Market Risks
The Company has no material exposure to market risk sensitive
investments.
Page 20
<PAGE> 21
VORNADO REALTY L.P.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1997, two individual investors in Mendik Real
Estate Limited Partnership ("RELP"), the publicly held limited
partnership that indirectly owns a 60% interest in the Two Park Avenue
Property, filed a purported class action against NY Real Estate
Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park
Avenue, L.P. (an indirect subsidiary of the Company which acquired the
remaining 40% interest in Two Park Avenue) and Bernard H. Mendik in the
Supreme Court of the State of New York, County of New York, on behalf
of all persons holding limited partnership interests in RELP. The
complaint alleges that, for reasons which include purported conflicts
of interest, the defendants breached their fiduciary duty to the
limited partners, that the then proposed transfer of the 40% interest
in Two Park Avenue would result in a burden on the operation and
management of Two Park Avenue and that the transfer of the 40% interest
violates RELP's right of first refusal to purchase the interest being
transferred and fails to provide limited partners in RELP with a
comparable transfer opportunity. Shortly after the filing of the
complaint, another limited partner represented by the same attorneys
filed an essentially identical complaint in the same court. Both
complaints seek unspecified damages, an accounting and a judgment
requiring either the liquidation of RELP and the appointment of a
receiver or an auction of Two Park Avenue. In August 1997, a fourth
limited partner, represented by separate counsel, commenced another
purported class action in the same court by serving a complaint
essentially identical to the complaints in the two previously commenced
actions. These lawsuits have since been consolidated. On June 2, 1998,
the parties entered into a Stipulation and Agreement of Compromise,
Settlement and Release (the "Settlement"). By Order dated July 9, 1998,
the Court granted preliminary approval of the Settlement and certified
a class pursuant to CPLR 902, for settlement purposes. The Settlement
provides, among other things: (i) for Vornado to purchase the
Partnership's interest in Two Park Avenue for approximately $34.6
million, which will be paid in cash, or at Vornado's election, in any
combination of cash or shares of Vornado stock (which will be freely
tradable pursuant to a Section 3(a)(10) exemption under the Securities
Act of 1933), plus the assumption of $39 million in existing debt; and
(ii) for Vornado Realty to purchase the Partnership's interest in
550-600 Mamaroneck Avenue, Harrison, New York and 330 West 34th Street,
New York, NY for an aggregate price of $30 million in cash. On October
14, 1998, the Supreme Court of New York for New York County approved
the proposed settlement. On November 6, 1998, the Court's judgment
became final. It is expected that the transaction will close within
the next 30 days.
Page 21
<PAGE> 22
VORNADO REALTY L.P.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The following exhibits are filed with this Quarterly Report
on Form 10-Q.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, Vornado Realty
Trust filed the reports on Form 8-K described below:
Date of Report
(Date of Earliest
Event Reported) Item Reported Date Filed
- --------------- ------------- -----------
April 26,1998 Financial Statements and pro forma July 15, 1998
in connection with the acquisition of
additional interest in 570 Lexington
Avenue, the acquisition of 40 Fulton
Street and 770 Broadway and the pending
acquisition of 888 Seventh Avenue
June 2, 1998 Proposed settlement agreement to August 12, 1998
purchase the properties of the Mendik Real
Estate Limited Partnership with the
financial statements and pro forma in
connection therewith
Page 22
<PAGE> 23
VORNADO REALTY L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VORNADO REALTY L.P.
-------------------
(Registrant)
Date: November 6, 1998
/s/ Irwin Goldberg
------------------
IRWIN GOLDBERG
Vice President - Chief Financial
Officer and Chief Accounting Officer
Page 23
<PAGE> 24
VORNADO REALTY L.P.
EXHIBIT INDEX
EXHIBIT NO.
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the nine months ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 140,853
<SECURITIES> 91,687
<RECEIVABLES> 35,242
<ALLOWANCES> 2,457
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,012,738
<DEPRECIATION> 208,943
<TOTAL-ASSETS> 4,127,720
<CURRENT-LIABILITIES> 0
<BONDS> 1,917,564
282,039
0
<COMMON> 0
<OTHER-SE> 1,792,088
<TOTAL-LIABILITY-AND-EQUITY> 4,127,720
<SALES> 0
<TOTAL-REVENUES> 359,406
<CGS> 0
<TOTAL-COSTS> 144,214
<OTHER-EXPENSES> 60,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,536
<INCOME-PRETAX> 123,377
<INCOME-TAX> 0
<INCOME-CONTINUING> 123,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,617
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.19
</TABLE>
