ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to “we,” “us,” “our,” “Company” and “Alexander’s” refer to Alexander’s, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO). We have seven properties in the greater New York City metropolitan area.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends of the global, national and local economies, the financial condition and operating results of current and prospective tenants and customers, the availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population and employment trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Year Ended December 31, 2017 Financial Results Summary
Net income for the year ended
December 31, 2017
was $80,509,000, or $15.74 per diluted share, compared to $86,477,000, or $16.91 per diluted share for the year ended
December 31, 2016
. Funds from operations (“FFO”) (non-GAAP) for the year ended
December 31, 2017
was $114,908,000, or $22.46 per diluted share, compared to $119,780,000, or $23.42 per diluted share for the year ended
December 31, 2016
. Net income for the year ended December 31, 2017 included additional depreciation and amortization of tenant improvements and deferred leasing costs of $2,444,000, or $0.48 per diluted share, resulting from a tenant lease termination at our 731 Lexington Avenue property. Net income and FFO (non-GAAP) for the year ended December 31, 2016 included rental income of $2,257,000, or $0.44 per diluted share, resulting from a tenant lease termination at our Rego Park II property. Net income for the year ended December 31, 2016 also included additional depreciation and amortization of tenant improvements and deferred leasing costs of $1,077,000, or $0.21 per diluted share, related to the tenant lease termination at our Rego Park II property.
Quarter Ended December 31, 2017 Financial Results Summary
Net income for the quarter ended
December 31, 2017
was $17,883,000, or $3.50 per diluted share, compared to $21,655,000, or $4.23 per diluted share for the quarter ended
December 31, 2016
. FFO (non-GAAP) for the quarter ended
December 31, 2017
was $28,062,000, or $5.49 per diluted share, compared to $29,582,000, or $5.78 per diluted share for the quarter ended
December 31, 2016
. Net income for the quarter ended December 31, 2017 included additional depreciation and amortization of tenant improvements and deferred leasing costs of $2,184,000, or $0.43 per diluted share, resulting from a tenant lease termination at our 731 Lexington Avenue property.
Square Footage, Occupancy and Leasing Activity
As of
December 31, 2017
our portfolio was comprised of seven properties aggregating 2,437,000 square feet. As of
December 31, 2017
, our properties had an occupancy rate of 99.3%.
Tenant Matters
On April 4, 2017, Sears closed its 195,000 square foot store at our Rego Park I property. Annual revenue from Sears is approximately $10,600,000, under a lease which expires in March 2021. In its 2016 annual report on Form 10-K, Sears indicated that substantial doubt exists related to its ability to continue as a going concern. There are $3,865,000 of receivables arising from the straight-lining of rent and $406,000 of unamortized deferred leasing costs on our consolidated balance sheet related to the Sears lease as of
December 31, 2017
which we will continue to assess for recoverability.
On September 18, 2017, Toys, which leases 47,000 square feet of retail space at our Rego Park II shopping center ($2,600,000 of annual revenue) filed for Chapter 11 bankruptcy relief. There are $694,000 of tenant improvements, $257,000 of unamortized deferred leasing costs and $544,000 of receivables arising from the straight-lining of rent on our consolidated balance sheet related to the Toys lease as of December 31, 2017.
Overview - continued
On September 19, 2017, the bankruptcy court approved the terms of an order stipulation between Le Cirque, a restaurant operator which leases 13,000 square feet at our 731 Lexington Avenue property (approximately $1,200,000 of annual revenue), and the Company which terminated the lease on January 5, 2018 (original lease expiration was May 2021). As a result, we began accelerating depreciation and amortization of approximately $2,780,000 of tenant improvements and deferred leasing costs over the new lease term, of which approximately $2,650,000 was recognized in the year ended December 31, 2017 and approximately $130,000 will be recognized in the quarter ending March 31, 2018.
Rego Park II Loan Participation
On July 28, 2017, we entered into a participation and servicing agreement with the lender on our Rego Park II shopping center loan, which matures on November 30, 2018. We invested $200,000,000 to participate in the loan and are entitled to interest at LIBOR plus 1.60% (3.17% as of
December 31, 2017
).
Financing
On June 1, 2017, we completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% (2.38% as of December 31, 2017) and matures in June 2020, with four one-year extension options. In connection therewith, we purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6.0%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which was scheduled to mature in March 2021.
Significant Tenant
Bloomberg accounted for revenue of $105,224,000, $104,590,000 and $94,468,000 in the years ended December 31, 2017, 2016 and 2015, respectively, representing approximately 46%, 46% and 45% of our total revenues in each year, respectively. No other tenant accounted for more than 10% of our total 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.
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which 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. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our consolidated financial statements. This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 2 –
Summary of Significant
Accounting Policies,
to the consolidated financial statements in this Annual Report on Form 10-K.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. As of December 31, 2017 and 2016, the carrying amount of our real estate, net of accumulated depreciation and amortization, was $754,324,000 and $780,814,000, respectively. Maintenance and repairs are expensed as incurred. Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. We capitalize all property operating expenses directly associated with and attributable to, the development and construction of a project, including interest expense. The capitalization period begins when development activities are underway and ends when it is determined that the asset is substantially complete and ready for its intended use, which is typically evidenced by the receipt of a temporary certificate of occupancy. General and administrative costs are expensed as incurred.
Critical Accounting Policies and Estimates - continued
Our properties and related intangible assets, including properties to be developed in the future, are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. For our development properties, estimates of future cash flows also include all future expenditures necessary to develop the asset, including interest payments that will be capitalized as part of the cost of the asset. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
Allowance for Doubtful Accounts
We periodically evaluate the collectibility of amounts due from tenants, including the receivable arising from the straight-lining of rents, and maintain an allowance for doubtful accounts ($1,501,000 and $1,473,000 as of December 31, 2017 and 2016, respectively) for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.
Revenue Recognition
We have the following revenue sources and revenue recognition policies:
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Base Rent – revenue arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent steps and free rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease;
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Percentage Rent – revenue arising from retail tenant leases that is contingent upon the sales of tenants exceeding defined thresholds. These rents are recognized only after the contingency has been removed (i.e., when tenant sales thresholds have been achieved);
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Expense Reimbursements – revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective properties. This revenue is recognized in the same periods as the expenses are incurred;
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•
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Parking income – revenue arising from the rental of parking space at our properties. This income is recognized as the service is provided.
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Before we recognize revenue, we assess, among other things, its collectibility. If our assessment of the collectibility of revenue changes, the impact on our consolidated financial statements could be material.
Income Taxes
We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856 – 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to maintain our qualification as a REIT under the Code, we must distribute at least 90% of our taxable income to stockholders each year. We distribute to our stockholders 100% of our taxable income and therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our stockholders, or fail to meet other REIT requirements, we may fail to qualify as a REIT, which may result in substantial adverse tax consequences.
Results of Operations – Year Ended
December 31, 2017
compared to
December 31, 2016
Property Rentals
Property rentals were $152,857,000 in the year ended
December 31, 2017
, compared to $151,444,000 in the prior year, an increase of $1,413,000. This increase was primarily due to higher rental income of $3,730,000 from The Alexander apartment tower, which was placed in service in phases beginning July 2015 and leased up to stabilization in September 2016, partially offset by income of $2,257,000 in 2016 resulting from a tenant lease termination at our Rego Park II property.
Expense Reimbursements
Tenant expense reimbursements were $77,717,000 in the year ended
December 31, 2017
, compared to $75,492,000 in the prior year, an increase of $2,225,000. This increase was primarily due to higher reimbursable real estate taxes and higher reimbursable operating expenses.
Operating Expenses
Operating expenses were $85,127,000 in the year ended
December 31, 2017
, compared to $82,232,000 in the prior year, an increase of $2,895,000. This increase was primarily due to (i) higher real estate taxes of $3,267,000 and (ii) higher reimbursable operating expenses of $903,000, partially offset by (iii) lower marketing costs for The Alexander apartment tower of $1,098,000 and (iv) lower bad debt expense of $504,000.
Depreciation and Amortization
Depreciation and amortization was $34,925,000 in the year ended
December 31, 2017
, compared to $33,807,000 in the prior year, an increase of $1,118,000. This increase was primarily due to additional depreciation and amortization of tenant improvements and deferred leasing costs of $2,444,000 related to a tenant lease termination at our 731 Lexington Avenue property in September 2017, partially offset by additional depreciation and amortization of tenant improvements and deferred leasing costs of $1,077,000 in 2016 related to a tenant lease termination at our Rego Park II property.
General and Administrative Expenses
General and administrative expenses were $5,252,000 in the year ended
December 31, 2017
, compared to $5,436,000 in the prior year, a decrease of $184,000. This decrease was primarily due to lower director’s fees and stock-based compensation expense as a result of having one less member on our Board of Directors in 2017.
Interest and Other Income, net
Interest and other income, net was $6,716,000 in the year ended
December 31, 2017
, compared to $3,305,000 in the prior year, an increase of $3,411,000. This increase was primarily due to higher interest income of (i) $2,453,000 from the Rego Park II loan participation, (ii) $1,418,000 from an increase in the average interest rates and (iii) $216,000 from an increase in the average investment balances, partially offset by (iv) lower income of $429,000 in connection with bankruptcy recoveries and (v) income of $367,000 in the prior year from a cost reimbursement settlement with a retail tenant at our 731 Lexington Avenue property.
Interest and Debt Expense
Interest and debt expense was $31,474,000 in the year ended
December 31, 2017
, compared to $22,241,000 in the prior year, an increase of $9,233,000. This increase was primarily due to higher interest expense of (i) $5,289,000 due to an increase in average LIBOR, (ii) $2,658,000 resulting from the refinancing of the office portion of 731 Lexington Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $1,188,000 of higher amortization of debt issuance costs.
Income Taxes
Income tax expense was $3,000 in the year ended
December 31, 2017
, compared to $48,000 in the prior year.
Results of Operations – Year Ended
December 31, 2016 compared to December 31, 2015
Property Rentals
Property rentals were $151,444,000 in the year ended December 31, 2016, compared to $138,688,000 in the prior year, an increase of $12,756,000. This increase was primarily due to (i) rental income of $7,271,000 from The Alexander apartment tower, which was placed in service in phases beginning July 2015 and leased up to stabilization in September 2016, (ii) higher rental income of $3,366,000 from the January 2016 lease amendment with Bloomberg at 731 Lexington Avenue and (iii) income of $2,257,000 resulting from a tenant lease termination at our Rego Park II property in June 2016.
Expense Reimbursements
Tenant expense reimbursements were $75,492,000 in the year ended December 31, 2016, compared to $69,227,000 in the prior year, an increase of $6,265,000. This increase was primarily due to (i) higher recoveries of real estate taxes and operating expenses from Bloomberg at 731 Lexington Avenue as a result of the January 2016 lease amendment, which converted 192,000 square feet from a gross basis to a net rent basis and (ii) higher reimbursable real estate taxes, partially offset by (iii) lower reimbursable operating expenses.
Operating Expenses
Operating expenses were $82,232,000 in the year ended December 31, 2016, compared to $76,218,000 in the prior year, an increase of $6,014,000. This increase was primarily due to (i) higher operating expenses of $2,494,000 related to The Alexander apartment tower, which was placed in service in phases beginning July 2015 and leased up to stabilization in September 2016, (ii) higher reimbursable real estate taxes of $3,703,000 and (iii) higher bad debt expense of $871,000, partially offset by (iv) lower reimbursable operating expenses of $1,068,000.
Depreciation and Amortization
Depreciation and amortization was $33,807,000 in the year ended December 31, 2016, compared to $31,086,000 in the prior year, an increase of $2,721,000. This increase was primarily due to additional depreciation related to The Alexander apartment tower, which was placed in service in phases beginning July 2015.
General and Administrative Expenses
General and administrative expenses were $5,436,000 in the year ended December 31, 2016, compared to $5,406,000 in the prior year, an increase of $30,000.
Interest and Other Income, net
Interest and other income, net was $3,305,000 in the year ended December 31, 2016, compared to $5,949,000 in the prior year, a decrease of $2,644,000. This decrease was primarily due to $2,141,000 from a special dividend from our investment in common shares of Macerich in 2015 and lower income of $1,275,000 in connection with bankruptcy recoveries.
Interest and Debt Expense
Interest and debt expense was $22,241,000 in the year ended December 31, 2016, compared to $24,239,000 in the prior year, a decrease of $1,998,000. This decrease was primarily due to savings of $5,631,000 resulting from the refinancing of the retail portion of 731 Lexington Avenue on August 5, 2015 at LIBOR plus 1.40%, or 2.05% as of December 31, 2016 (the prior loan had a fixed rate of 4.93%); partially offset by lower capitalized interest of $1,486,000 as a result of completing the development of The Alexander apartment tower, which was placed in service in phases beginning July 2015 and $2,066,000 due to an increase in average LIBOR.
Income Taxes
Income tax expense was $48,000 in the year ended December 31, 2016, compared to $8,000 in the prior year.
Related Party Transactions
Vornado
Steven Roth is the Chairman of our Board of Directors and Chief Executive Officer, the Managing General Partner of Interstate Properties (“Interstate”), a New Jersey general partnership, and the Chairman of the Board of Trustees and Chief Executive Officer of Vornado. As of
December 31, 2017
, Mr. Roth, Interstate and its other two general partners, David Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and trustees of Vornado) owned, in the aggregate, 26.2% of our outstanding common stock, in addition to the 2.3% they indirectly own through Vornado. Joseph Macnow, our Treasurer, is the Executive Vice President - Chief Financial Officer and Chief Administrative Officer of Vornado. Matthew Iocco, our Chief Financial Officer, is the Executive Vice President - Chief Accounting Officer of Vornado.
As of
December 31, 2017
, Vornado owned 32.4% of our outstanding common stock. We are managed by, and our properties are leased and developed by, Vornado, pursuant to various agreements, which expire in March of each year and are automatically renewable. These agreements are described in Note 4 –
Related Party Transactions
, to our consolidated financial statements in this Annual Report on Form 10-K.
Toys
Our affiliate, Vornado, owns 32.5% of Toys. Joseph Macnow, Vornado’s Executive Vice President - Chief Financial Officer and Chief Administrative Officer and Wendy A. Silverstein, a member of our Board of Directors, represent Vornado as members of Toys’ Board of Directors. Toys leases 47,000 square feet of retail space at our Rego Park II shopping center ($2,600,000 of annual revenue). On September 18, 2017, Toys filed for Chapter 11 bankruptcy relief. There are $694,000 of tenant improvements, $257,000 of unamortized deferred leasing costs and $544,000 of receivables arising from the straight-lining of rent on our consolidated balance sheet related to the Toys lease as of December 31, 2017.
Liquidity and Capital Resources
Property rental income is our primary source of cash flow and is dependent on a number of factors including the occupancy level and rental rates of our properties, as well as our tenants’ ability to pay their rents. Our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses, interest expense, recurring capital expenditures and cash dividends to stockholders. Other sources of liquidity to fund cash requirements include our existing cash, proceeds from financings, including mortgage or construction loans secured by our properties and proceeds from asset sales. We anticipate that cash flows 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 amortization and capital expenditures.
Dividends
On January 17, 2018, we increased our regular quarterly dividend to $4.50 per share (a new indicated annual rate of $18.00 per share). The new dividend, when declared by the Board of Directors for all of 2018, will require us to pay out approximately $92,100,000.
Rego Park II Loan Participation
On July 28, 2017, we entered into a participation and servicing agreement with the lender on our Rego Park II shopping center loan, which matures on November 30, 2018. We invested $200,000,000 to participate in the loan and are entitled to interest at LIBOR plus 1.60% (3.17% as of December 31, 2017).
Financing Activities and Contractual Obligations
On June 1, 2017, we completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% and matures in June 2020, with four one-year extension options. In connection therewith, we purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6.0%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which was scheduled to mature in March 2021.
Liquidity and Capital Resources - continued
Below is a summary of our outstanding debt and maturities as of
December 31, 2017
. We may refinance our maturing debt as it comes due or choose to repay it.
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Balance
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Interest Rate
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Maturity
(1)
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(Amounts in thousands)
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Rego Park I shopping center (100% cash collateralized)
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$
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78,246
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0.35
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%
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Mar. 2018
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Paramus
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68,000
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2.90
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%
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Oct. 2018
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Rego Park II shopping center
(2)
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256,194
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3.42
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%
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Nov. 2018
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731 Lexington Avenue, retail space
(3)
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350,000
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2.78
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%
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Aug. 2022
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731 Lexington Avenue, office space
(4)
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500,000
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2.38
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%
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Jun. 2024
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Total
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1,252,440
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Deferred debt issuance costs, net of accumulated amortization of $6,315
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(12,218
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)
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Total, net
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$
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1,240,222
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(1) Represents the extended maturity where we have the unilateral right to extend.
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(2) This loan bears interest at LIBOR plus 1.85%. See page
29
for details of our Rego Park II loan participation.
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(3) This loan bears interest at LIBOR plus 1.40%.
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(4) This loan bears interest at LIBOR plus 0.90%.
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Below is a summary of our contractual obligations and commitments as of
December 31, 2017
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Less than
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One to
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Three to
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More than
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(Amounts in thousands)
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Total
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One Year
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Three Years
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Five Years
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Five Years
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Contractual obligations (principal and interest)
(1)
:
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Long-term debt obligations
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$
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1,385,231
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$
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433,997
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$
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43,921
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$
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389,861
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$
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517,452
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Operating lease obligations
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7,267
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800
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1,600
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1,600
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3,267
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$
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1,392,498
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$
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434,797
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$
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45,521
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$
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391,461
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$
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520,719
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Commitments:
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Standby letters of credit
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$
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1,474
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$
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1,474
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$
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—
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$
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—
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$
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—
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(1)
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Interest on variable rate debt is computed using rates in effect as of December 31, 2017.
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Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, 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.
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 Program Reauthorization Act, which expires in December 2020. 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 $293,000 deductible ($306,000 effective January 1, 2018) and 17% of the balance (18% effective January 1, 2018) of a covered loss, and the Federal government is responsible for the remaining 83% (82% effective January 1, 2018) of a covered loss. We are ultimately responsible for any loss incurred by FNSIC.
Liquidity and Capital Resources - continued
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of our insurance coverage, which could be material.
Our mortgage loans are non-recourse to us and 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. Further, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance our properties.
Rego Park I Litigation
In June 2014, Sears filed a lawsuit in the Supreme Court of the State of New York against Vornado and us (and certain of our subsidiaries) with regard to space that Sears leases at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises, (b) two fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises’ parking garage. Sears asserted various causes of actions for damages and sought to compel compliance with landlord’s obligations to repair the premises and to provide security, and to compel us to abate a nuisance that Sears claims was a cause of the water intrusions into its premises. In addition to injunctive relief, Sears sought, among other things, damages of not less than $4 million and future damages it estimated would not be less than $25 million. In March 2016, Sears withdrew its claim for future damages leaving a remaining claim for property damages, which we estimate to be approximately $650,000 based on information provided by Sears. We intend to defend the remaining claim vigorously. The amount or range of reasonable possible losses, if any, is not expected to be greater than $650,000.
Paramus
In 2001, we leased 30.3 acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a purchase option in 2021 for $75,000,000. The property is encumbered by a $68,000,000 interest-only mortgage loan with a fixed rate of 2.90%, which matures on October 5, 2018. The annual triple-net rent is the sum of $700,000 plus the amount of debt service on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately $7,000,000 and recognize a gain on sale of land of approximately $60,000,000. If the purchase option is not exercised, the triple-net rent for the last 20 years would include debt service sufficient to fully amortize $68,000,000 over the remaining 20-year lease term.
Letters of Credit
Approximately $1,474,000 of standby letters of credit were outstanding as of
December 31, 2017
.
Other
In October 2015, the New York City Department of Finance (“NYC DOF”) issued a Notice of Determination to us assessing an additional $22,910,000 of transfer taxes (including interest and penalties as of December 31, 2017) in connection with the sale of Kings Plaza Regional Shopping Center in November 2012. We believe that the NYC DOF’s claim is without merit and intend to vigorously contest this assessment. We have determined that the likelihood of a loss related to this issue is not probable and, after consultation with legal counsel, that the outcome of this assessment is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
We received approximately $396,000, $825,000 and $2,100,000 from bankruptcy recoveries during the years ended December 31, 2017, 2016 and 2015, respectively, which is included as “interest and other income, net” in our consolidated statements of income.
There are various other legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters in the aggregate will not have a material effect on our financial position, results of operations or cash flows.
Liquidity and Capital Resources - continued
Cash Flows for the Year Ended
December 31, 2017
Cash and cash equivalents and restricted cash were $393,279,000 at
December 31, 2017
, compared to $374,678,000 at
December 31, 2016
, an increase of $18,601,000. This increase resulted from (i) $123,426,000 of net cash provided by operating activities, and (ii) $97,146,000 of net cash provided by financing activities, partially offset by (iii) $201,971,000 of net cash used in investing activities.
Net cash provided by operating activities of $123,426,000 was comprised of net income of $80,509,000 and adjustments for non-cash items of $43,372,000, partially offset by the net change in operating assets and liabilities of $455,000. The adjustments for non-cash items were primarily comprised of depreciation and amortization (including amortization of debt issuance costs) of $38,681,000 and straight-lining of rental income of $4,297,000.
Net cash provided by financing activities of $97,146,000 was primarily comprised of (i) $500,000,000 of proceeds from the refinancing of the office portion of 731 Lexington Avenue, partially offset by (ii) debt repayments of $303,707,000 (primarily the repayment of the former loan on the office portion of 731 Lexington Avenue) and (iii) dividends paid of $86,961,000.
Net cash used in investing activities of $201,971,000 was primarily comprised of the Rego Park II loan participation payment of $200,000,000 and construction in progress and real estate additions of $3,434,000.
Cash Flows for the Year Ended
December 31, 2016
Cash and cash equivalents and restricted cash were $374,678,000 at December 31, 2016, compared to $344,656,000 at December 31, 2015, an increase of $30,022,000. This increase resulted from (i) $130,820,000 of net cash provided by operating activities, partially offset by (ii) $85,292,000 of net cash used in financing activities and (iii) $15,506,000 of net cash used in investing activities.
Net cash provided by operating activities of $130,820,000 was comprised of net income of $86,477,000, adjustments for non-cash items of $39,171,000, and the net change in operating assets and liabilities of $5,172,000. The adjustments for non-cash items were primarily comprised of depreciation and amortization (including amortization of debt issuance costs) of $36,374,000 and straight-lining of rental income of $2,347,000.
Net cash used in financing activities of $85,292,000 was primarily comprised of dividends paid of $81,822,000.
Net cash used in investing activities of $15,506,000 was comprised of construction in progress and real estate additions of $15,506,000 (primarily related to The Alexander apartment tower), including the payment of a development fee to Vornado of $5,784,000.
Cash Flows for the Year Ended
December 31, 2015
Cash and cash equivalents and restricted cash were $344,656,000 at December 31, 2015, compared to $312,417,000 at December 31, 2014, an increase of $32,239,000. This increase resulted from (i) $106,201,000 of net cash provided by operating activities, partially offset by (ii) $48,839,000 of net cash used in financing activities and (iii) $25,123,000 of net cash used in investing activities.
Net cash provided by operating activities of $106,201,000 was comprised of net income of $76,907,000 and adjustments for non-cash items of $32,853,000, partially offset by the net change in operating assets and liabilities of $3,559,000. The adjustments for non-cash items were primarily comprised of depreciation and amortization of $33,671,000, partially offset by straight-lining of rental income of $1,418,000.
Net cash used in financing activities of $48,839,000 was primarily comprised of (i) debt repayments of $323,193,000 (primarily repayment of the prior loan on the retail portion of 731 Lexington Avenue) and (ii) dividends paid of $71,571,000, partially offset by (iii) $350,000,000 of proceeds from the refinancing of the retail portion of 731 Lexington Avenue in August 2015.
Net cash used in investing activities of $25,123,000 was comprised of construction in progress and real estate additions of $50,121,000 (primarily related to The Alexander apartment tower) partially offset by proceeds of $24,998,000 from short-term investments that matured during the second quarter of 2015.
Funds from Operations (“FFO”) (non-GAAP)
FFO is computed in accordance with the definition adopted by the Board of Governors of NAREIT. NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies.
The following table reconciles our net income to FFO (non-GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
For the Three Months Ended
|
(Amounts in thousands, except share and per share amounts)
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
17,883
|
|
|
$
|
21,655
|
|
Depreciation and amortization of real property
|
|
34,399
|
|
|
33,303
|
|
|
10,179
|
|
|
7,927
|
|
FFO (non-GAAP)
|
|
$
|
114,908
|
|
|
$
|
119,780
|
|
|
$
|
28,062
|
|
|
$
|
29,582
|
|
|
|
|
|
|
|
|
|
|
FFO per diluted share (non-GAAP)
|
|
$
|
22.46
|
|
|
$
|
23.42
|
|
|
$
|
5.49
|
|
|
$
|
5.78
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing FFO per diluted share
|
|
5,115,501
|
|
|
5,114,084
|
|
|
5,115,982
|
|
|
5,114,701
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
Index to Consolidated Financial Statements
|
Page
Number
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2017 and 2016
|
|
|
|
|
|
Consolidated Statements of Income for the
|
|
|
Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income for the
|
|
|
Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
Consolidated Statements of Changes in Equity for the
|
|
|
Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the
|
|
|
Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Alexander’s, Inc.
Paramus, New Jersey
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alexander’s, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 12, 2018
We have served as the Company’s auditor since 1969.
|
|
|
|
|
|
|
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
(Amounts in thousands, except share and per share amounts)
|
|
|
|
December 31,
|
ASSETS
|
2017
|
|
2016
|
Real estate, at cost:
|
|
|
|
|
Land
|
$
|
44,971
|
|
|
$
|
44,971
|
|
Buildings and leasehold improvements
|
988,846
|
|
|
985,800
|
|
Development and construction in progress
|
3,551
|
|
|
2,780
|
|
Total
|
1,037,368
|
|
|
1,033,551
|
|
Accumulated depreciation and amortization
|
(283,044
|
)
|
|
(252,737
|
)
|
Real estate, net
|
754,324
|
|
|
780,814
|
|
Cash and cash equivalents
|
307,536
|
|
|
288,926
|
|
Restricted cash
|
85,743
|
|
|
85,752
|
|
Rego Park II loan participation
|
198,537
|
|
|
—
|
|
Marketable securities
|
35,156
|
|
|
37,918
|
|
Tenant and other receivables, net of allowance for doubtful accounts of $1,501 and $1,473, respectively
|
2,693
|
|
|
3,056
|
|
Receivable arising from the straight-lining of rents
|
174,713
|
|
|
179,010
|
|
Deferred lease and other property costs, net, including unamortized leasing fees to Vornado of
|
|
|
|
$35,152 and $36,960, respectively
|
45,790
|
|
|
48,387
|
|
Other assets
|
27,903
|
|
|
27,367
|
|
|
$
|
1,632,395
|
|
|
$
|
1,451,230
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Mortgages payable, net of deferred debt issuance costs
|
$
|
1,240,222
|
|
|
$
|
1,052,359
|
|
Amounts due to Vornado
|
2,490
|
|
|
897
|
|
Accounts payable and accrued expenses
|
42,827
|
|
|
42,200
|
|
Other liabilities
|
2,901
|
|
|
2,929
|
|
Total liabilities
|
1,288,440
|
|
|
1,098,385
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Preferred stock: $1.00 par value per share; authorized, 3,000,000 shares;
|
|
|
|
issued and outstanding, none
|
—
|
|
|
—
|
|
Common stock: $1.00 par value per share; authorized, 10,000,000 shares; issued, 5,173,450 shares;
|
|
|
|
outstanding, 5,107,290 and 5,106,196 shares, respectively
|
5,173
|
|
|
5,173
|
|
Additional capital
|
31,577
|
|
|
31,189
|
|
Retained earnings
|
302,543
|
|
|
308,995
|
|
Accumulated other comprehensive income
|
5,030
|
|
|
7,862
|
|
|
344,323
|
|
|
353,219
|
|
Treasury stock: 66,160 and 67,254 shares, respectively, at cost
|
(368
|
)
|
|
(374
|
)
|
Total equity
|
343,955
|
|
|
352,845
|
|
|
$
|
1,632,395
|
|
|
$
|
1,451,230
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF INCOME
|
(Amounts in thousands, except share and per share amounts)
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
REVENUES
|
|
|
|
|
|
|
Property rentals
|
$
|
152,857
|
|
|
$
|
151,444
|
|
|
$
|
138,688
|
|
Expense reimbursements
|
77,717
|
|
|
75,492
|
|
|
69,227
|
|
Total revenues
|
230,574
|
|
|
226,936
|
|
|
207,915
|
|
EXPENSES
|
|
|
|
|
|
Operating, including fees to Vornado of $4,671, $4,590, and $4,476, respectively
|
85,127
|
|
|
82,232
|
|
|
76,218
|
|
Depreciation and amortization
|
34,925
|
|
|
33,807
|
|
|
31,086
|
|
General and administrative, including management fees to Vornado of $2,380
|
|
|
|
|
|
in each year
|
5,252
|
|
|
5,436
|
|
|
5,406
|
|
Total expenses
|
125,304
|
|
|
121,475
|
|
|
112,710
|
|
|
|
|
|
|
|
OPERATING INCOME
|
105,270
|
|
|
105,461
|
|
|
95,205
|
|
|
|
|
|
|
|
Interest and other income, net
|
6,716
|
|
|
3,305
|
|
|
5,949
|
|
Interest and debt expense
|
(31,474
|
)
|
|
(22,241
|
)
|
|
(24,239
|
)
|
Income before income taxes
|
80,512
|
|
|
86,525
|
|
|
76,915
|
|
Income tax expense
|
(3
|
)
|
|
(48
|
)
|
|
(8
|
)
|
Net income
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
76,907
|
|
|
|
|
|
|
|
Net income per common share - basic and diluted
|
$
|
15.74
|
|
|
$
|
16.91
|
|
|
$
|
15.04
|
|
|
|
|
|
|
|
Weighted average shares outstanding- basic and diluted
|
5,115,501
|
|
|
5,114,084
|
|
|
5,112,352
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
(Amounts in thousands)
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
76,907
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
Change in unrealized net gain on available-for-sale securities
|
(2,762
|
)
|
|
(5,273
|
)
|
|
(1,455
|
)
|
Change in value of interest rate cap
|
(70
|
)
|
|
133
|
|
|
—
|
|
Comprehensive income
|
$
|
77,677
|
|
|
$
|
81,337
|
|
|
$
|
75,452
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
Common Stock
|
|
Additional
Capital
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance, December 31, 2014
|
5,173
|
|
|
$
|
5,173
|
|
|
$
|
30,139
|
|
|
$
|
299,004
|
|
|
$
|
14,457
|
|
|
$
|
(374
|
)
|
|
$
|
348,399
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
76,907
|
|
|
—
|
|
|
—
|
|
|
76,907
|
|
Dividends paid
|
—
|
|
|
—
|
|
|
—
|
|
|
(71,571
|
)
|
|
—
|
|
|
—
|
|
|
(71,571
|
)
|
Change in unrealized net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,455
|
)
|
|
—
|
|
|
(1,455
|
)
|
Deferred stock unit grant
|
—
|
|
|
—
|
|
|
600
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
600
|
|
Balance, December 31, 2015
|
5,173
|
|
|
5,173
|
|
|
30,739
|
|
|
304,340
|
|
|
13,002
|
|
|
(374
|
)
|
|
352,880
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
86,477
|
|
|
—
|
|
|
—
|
|
|
86,477
|
|
Dividends paid
|
—
|
|
|
—
|
|
|
—
|
|
|
(81,822
|
)
|
|
—
|
|
|
—
|
|
|
(81,822
|
)
|
Change in unrealized net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,273
|
)
|
|
—
|
|
|
(5,273
|
)
|
Change in value of interest rate cap
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
133
|
|
|
|
|
133
|
|
Deferred stock unit grant
|
—
|
|
|
—
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
450
|
|
Balance, December 31, 2016
|
5,173
|
|
|
5,173
|
|
|
31,189
|
|
|
308,995
|
|
|
7,862
|
|
|
(374
|
)
|
|
352,845
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
80,509
|
|
|
—
|
|
|
—
|
|
|
80,509
|
|
Dividends paid
|
—
|
|
|
—
|
|
|
—
|
|
|
(86,961
|
)
|
|
—
|
|
|
—
|
|
|
(86,961
|
)
|
Change in unrealized net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on available-for-sale securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,762
|
)
|
|
—
|
|
|
(2,762
|
)
|
Change in value of interest rate cap
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70
|
)
|
|
—
|
|
|
(70
|
)
|
Deferred stock unit grant
|
—
|
|
|
—
|
|
|
394
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
394
|
|
Other
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
Balance, December 31, 2017
|
5,173
|
|
|
$
|
5,173
|
|
|
$
|
31,577
|
|
|
$
|
302,543
|
|
|
$
|
5,030
|
|
|
$
|
(368
|
)
|
|
$
|
343,955
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Amounts in thousands)
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
76,907
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization, including amortization of debt issuance costs
|
38,681
|
|
|
36,374
|
|
|
33,671
|
|
Straight-lining of rental income
|
4,297
|
|
|
2,347
|
|
|
(1,418
|
)
|
Stock-based compensation expense
|
394
|
|
|
450
|
|
|
600
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Tenant and other receivables, net
|
363
|
|
|
958
|
|
|
(1,801
|
)
|
Other assets
|
(2,627
|
)
|
|
(9,894
|
)
|
|
(4,777
|
)
|
Amounts due to Vornado
|
1,626
|
|
|
(1,913
|
)
|
|
2,228
|
|
Accounts payable and accrued expenses
|
211
|
|
|
16,049
|
|
|
822
|
|
Other liabilities
|
(28
|
)
|
|
(28
|
)
|
|
(31
|
)
|
Net cash provided by operating activities
|
123,426
|
|
|
130,820
|
|
|
106,201
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Construction in progress and real estate additions
|
(3,434
|
)
|
|
(15,506
|
)
|
|
(50,121
|
)
|
Rego Park II loan participation payment
|
(200,000
|
)
|
|
—
|
|
|
—
|
|
Proceeds from maturing short-term investments
|
—
|
|
|
—
|
|
|
24,998
|
|
Principal repayment proceeds from Rego Park II loan participation
|
1,463
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(201,971
|
)
|
|
(15,506
|
)
|
|
(25,123
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Debt repayments
|
(303,707
|
)
|
|
(3,440
|
)
|
|
(323,193
|
)
|
Proceeds from borrowing
|
500,000
|
|
|
—
|
|
|
350,000
|
|
Dividends paid
|
(86,961
|
)
|
|
(81,822
|
)
|
|
(71,571
|
)
|
Debt issuance costs
|
(12,186
|
)
|
|
(30
|
)
|
|
(4,075
|
)
|
Net cash provided by (used in) financing activities
|
97,146
|
|
|
(85,292
|
)
|
|
(48,839
|
)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents and restricted cash
|
18,601
|
|
|
30,022
|
|
|
32,239
|
|
Cash and cash equivalents and restricted cash at beginning of year
|
374,678
|
|
|
344,656
|
|
|
312,417
|
|
Cash and cash equivalents and restricted cash at end of year
|
$
|
393,279
|
|
|
$
|
374,678
|
|
|
$
|
344,656
|
|
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
288,926
|
|
|
259,349
|
|
|
227,815
|
|
Restricted cash at beginning of year
|
85,752
|
|
|
85,307
|
|
|
84,602
|
|
Cash and cash equivalents and restricted cash at beginning of year
|
374,678
|
|
|
344,656
|
|
|
312,417
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
307,536
|
|
|
288,926
|
|
|
259,349
|
|
Restricted cash at end of year
|
85,743
|
|
|
85,752
|
|
|
85,307
|
|
Cash and cash equivalents and restricted cash at end of year
|
393,279
|
|
|
374,678
|
|
|
344,656
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash payments for interest, excluding capitalized interest of $1,486 in 2015
|
$
|
26,994
|
|
|
$
|
19,517
|
|
|
$
|
22,354
|
|
|
|
|
|
|
|
NON-CASH TRANSACTIONS
|
|
|
|
|
|
Liability for real estate additions, including $21, $54 and $5,795 due to Vornado
|
|
|
|
|
|
in 2017, 2016 and 2015, respectively
|
$
|
705
|
|
|
$
|
322
|
|
|
$
|
10,139
|
|
Write-off of fully amortized and/or depreciated assets
|
4,265
|
|
|
1,691
|
|
|
20,786
|
|
Change in unrealized net gain on available-for-sale securities
|
(2,762
|
)
|
|
(5,273
|
)
|
|
(1,455
|
)
|
See notes to consolidated financial statements.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to “we,” “us,” “our,” “Company” and “Alexander’s” refer to Alexander’s, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO).
We have
seven
properties in the greater New York City metropolitan area consisting of:
Operating properties
|
|
•
|
731 Lexington Avenue, a
1,311,000
square foot multi-use building, comprising the entire block bounded by Lexington Avenue, East 59
th
Street, Third Avenue and East 58
th
Street in Manhattan. The building contains
889,000
and
174,000
of net rentable square feet of office and retail space, respectively, which we own, and
248,000
square feet of residential space consisting of
105
condominium units, which we sold. Bloomberg L.P. (“Bloomberg”) occupies all of the office space. The Home Depot (
83,000
square feet), The Container Store (
34,000
square feet) and Hennes & Mauritz (
27,000
square feet) are the principal retail tenants;
|
|
|
•
|
Rego Park I, a
343,000
square foot shopping center, located on Queens Boulevard and 63
rd
Road in Queens. The center is anchored by a
195,000
square foot Sears department store, a
50,000
square foot Burlington, a
46,000
square foot Bed Bath & Beyond and a
36,000
square foot Marshalls. On April 4, 2017, Sears closed its store at the property. Annual revenue from Sears is approximately
$10,600,000
, under a lease which expires in March 2021. In its 2016 annual report on Form 10-K, Sears indicated that substantial doubt exists related to its ability to continue as a going concern;
|
|
|
•
|
Rego Park II, a
609,000
square foot shopping center, adjacent to the Rego Park I shopping center in Queens. The center is anchored by a
145,000
square foot Costco, a
135,000
square foot Century 21 and a
133,000
square foot Kohl’s. In addition,
47,000
square feet is leased to Toys “R” Us/Babies “R” Us (“Toys”), a one-third owned affiliate of Vornado. On September 18, 2017, Toys filed for Chapter 11 bankruptcy relief;
|
|
|
•
|
The Alexander apartment tower, located above our Rego Park II shopping center, contains
312
units aggregating
255,000
square feet and is
94.6%
leased as of
December 31, 2017
;
|
|
|
•
|
Paramus, located at the intersection of Routes 4 and 17 in Paramus, New Jersey, consists of
30.3
acres of land that is leased to IKEA Property, Inc.; and
|
|
|
•
|
Flushing, a
167,000
square foot building, located at Roosevelt Avenue and Main Street in Queens, that is sub-leased to New World Mall LLC for the remainder of our ground lease term.
|
Property to be developed
|
|
•
|
Rego Park III, a
140,000
square foot land parcel adjacent to the Rego Park II shopping center in Queens, at the intersection of Junction Boulevard and the Horace Harding Service Road.
|
We have determined that our properties have similar economic characteristics and meet the criteria that permit the properties to be aggregated into
one
reportable segment (the leasing, management, development and redeveloping of properties in the greater New York City metropolitan area). Our chief operating decision-maker assesses and measures segment operating results based on a performance measure referred to as net operating income at the individual operating segment. Net operating income for each property represents net rental revenues less operating expenses.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
– The accompanying consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which 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. Certain prior year balances have been reclassified in order to conform to current year presentation.
Recently Issued Accounting Literature
– In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this standard effective January 1, 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We have completed our evaluation of the standard’s impact on our revenue streams. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
In January 2016, the FASB issued an update (“ASU 2016-01”)
Recognition and Measurement of Financial Assets and Financial Liabilities
to ASC Topic 825,
Financial Instruments
(“ASC 825”). ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We adopted this standard effective January 1, 2018 using the modified retrospective approach. While the adoption of this standard requires us to continue to measure “marketable securities” at fair value at each reporting date, the changes in fair value will be recognized in current period earnings as opposed to “other comprehensive (loss) income.” As a result, on January 1, 2018 we recorded an increase to retained earnings of
$5,156,000
to recognize the unrealized gains previously recorded within “accumulated other comprehensive income.” Subsequent changes in the fair value of our marketable securities will be recorded to “interest and other income, net.”
In February 2016, the FASB issued an update (“ASU 2016-02”) establishing ASC Topic 842,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. We are currently evaluating the overall impact of the adoption of ASU 2016-02 on our consolidated financial statements and believe that the standard will more significantly impact the accounting for leases in which we are a lessee. We will be required to record a right-of-use asset and lease liability for our Flushing property ground lease, equal to the present value of the remaining minimum lease payments, and will continue to recognize expense on a straight-line basis upon adoption of this standard. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2018, with early adoption permitted. We will adopt this standard effective January 1, 2019 using the modified retrospective approach and will elect to use the practical expedients provided by this standard.
In March 2016, the FASB issued an update (“ASU 2016-09”)
Improvements to Employee Share-Based Payment Accounting
to ASC Topic 718,
Compensation - Stock Compensation
(“ASC 718”). ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The adoption of this update as of January 1, 2017 did not have a material impact on our consolidated financial statements.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In August 2016, the FASB issued an update (“ASU 2016-15”)
Classification of Certain Cash Receipts and Cash Payments
to ASC Topic 230,
Statement of Cash Flows
. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. We elected to early adopt ASU 2016-15 effective January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued an update (“ASU 2016-18”)
Restricted Cash
to ASC Topic 230,
Statement of Cash Flows
. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. ASU 2016-18 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. We elected to early adopt ASU 2016-18 effective January 1, 2017, with retrospective application to our consolidated statements of cash flows. Accordingly, the consolidated statements of cash flows present a reconciliation of the changes in cash and cash equivalents and restricted cash. Restricted cash primarily consists of cash held in a non-interest bearing escrow account in connection with our Rego Park I 100% cash collateralized mortgage, as well as security deposits and other cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.
In February 2017, the FASB issued an update (“ASU 2017-05”)
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
to ASC Subtopic 610-20,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
. ASU 2017-05 clarifies the scope of recently established guidance on nonfinancial asset derecognition, as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The adoption of this standard on January 1, 2018 is not expected to have an impact on our consolidated financial statements.
In August 2017, the FASB issued an update (“ASU 2017-12”)
Targeted Improvements to Accounting for Hedging Activities
to ASC Topic 815,
Derivatives and Hedging
(“ASC 815”). ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815. The update is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedge programs. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this standard on January 1, 2019 is not expected to have a material impact on our consolidated financial statements.
Real Estate
– Real estate is carried at cost, net of accumulated depreciation and amortization. As of December 31, 2017 and 2016, the carrying amount of our real estate, net of accumulated depreciation and amortization, was
$754,324,000
and
$780,814,000
, respectively. Maintenance and repairs are expensed as incurred. Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. We capitalize all property operating expenses directly associated with and attributable to, the development and construction of a project, including interest expense. The capitalization period begins when development activities are underway and ends when it is determined that the asset is substantially complete and ready for its intended use, which is typically evidenced by the receipt of a temporary certificate of occupancy. General and administrative costs are expensed as incurred.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Our properties and related intangible assets, including properties to be developed in the future, are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Estimates of future cash flows are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. For our development properties, estimates of future cash flows also include all future expenditures necessary to develop the asset, including interest payments that will be capitalized as part of the cost of the asset. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and is measured based on the excess of the property’s carrying amount over its estimated fair value. If our estimates of future cash flows, anticipated holding periods, or fair values change, based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. Estimates of future cash flows are subjective and are based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
Cash and Cash Equivalents
– Cash and cash equivalents consist of highly liquid investments with original maturities of
three months
or less and are carried at cost, which approximates fair value, due to their short-term maturities. The majority of our cash and cash equivalents consist of (i) deposits at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation limit, (ii) United States Treasury Bills, (iii) money market funds, which invest in United States Treasury Bills and (iv) certificates of deposit placed through an account registry service (“CDARS”). To date we have not experienced any losses on our invested cash.
Short-term Investments
– Short-term investments consist of United States Treasury Bills with original maturities greater than three but less than six months. These highly liquid investments are classified as available-for-sale and are presented at fair value on our consolidated balance sheets. Prior to January 1, 2018, unrealized gains and losses resulting from these investments were included in “other comprehensive (loss) income.” Effective January 1, 2018, changes in the fair value of these investments are recognized in current period earnings in accordance with ASC 825.
Restricted Cash
–
Restricted cash primarily consists of cash held in a non-interest bearing escrow account in connection with our Rego Park I
100%
cash collateralized mortgage, as well as security deposits and other cash escrowed under loan agreements for debt service, real estate taxes, property insurance and capital improvements.
Marketable Securities
– Our marketable securities consist of common shares of The Macerich Company (NYSE: MAC) (“Macerich”), which are classified as available-for-sale. Available-for-sale securities are presented at fair value on our consolidated balance sheets. Prior to January 1, 2018, unrealized gains and losses resulting from the mark-to-market of these securities were included in “other comprehensive (loss) income.” Effective January 1, 2018, changes in the fair value of these securities are recognized in current period earnings in accordance with ASC 825. We evaluate our marketable securities for impairment at the end of each reporting period. If investments have unrealized losses, we evaluate the underlying cause of the decline in value and the estimated recovery period, as well as the severity and duration of the decline. In our evaluation, we consider our ability and intent to hold our investment for a reasonable period of time sufficient for us to recover our cost basis, as well as the near-term prospects for the investment in relation to the severity and duration of the decline.
Allowance for Doubtful Accounts
– We periodically evaluate the collectibility of amounts due from tenants, including the receivable arising from the straight-lining of rents, and maintain an allowance for doubtful accounts (
$1,501,000
and
$1,473,000
as of December 31, 2017 and 2016, respectively) for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Deferred Charges
– Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest and debt expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis, which approximates the effective interest rate method, in accordance with the terms of the agreements to which they relate.
Revenue Recognition
– We have the following revenue sources and revenue recognition policies:
Base Rent
– revenue arising from tenant leases. These rents are recognized over the non-cancelable term of the related leases on a straight-line basis, which includes the effects of rent steps and free rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line basis over the term of the lease.
Percentage Rent
– revenue arising from retail tenant leases that is contingent upon the sales of tenants exceeding defined thresholds. These rents are recognized only after the contingency has been removed (i.e., when tenant sales thresholds have been achieved).
Expense Reimbursements
– revenue arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes of the respective properties. This revenue is recognized in the same periods as the expenses are incurred.
Parking Income
– revenue arising from the rental of parking space at our properties. This income is recognized as the service is provided.
Income Taxes
– We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856 – 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to maintain our qualification as a REIT under the Code, we must distribute at least
90%
of our taxable income to stockholders each year. We distribute to our stockholders
100%
of our taxable income and therefore,
no
provision for Federal income taxes is required. Dividends distributed for the year ended
December 31, 2017
were characterized, for federal income taxes, as
99.5%
ordinary income and
0.5%
long-term capital gain income. Dividends distributed for the year ended
December 31, 2016
were characterized, for federal income taxes, as
97.7%
ordinary income and
2.3%
long-term capital gain income. Dividends distributed for the year ended
December 31, 2015
were categorized, for federal income tax purposes, as
97.3%
ordinary income and
2.7%
long-term capital gain income.
The following table reconciles our net income to estimated taxable income for the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited and in thousands)
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
76,907
|
|
Straight-line rent adjustments
|
4,250
|
|
|
2,347
|
|
|
(1,418
|
)
|
Depreciation and amortization timing differences
|
3,084
|
|
|
(14,534
|
)
|
|
2,477
|
|
Other
|
(343
|
)
|
|
2,975
|
|
|
751
|
|
Estimated taxable income
|
$
|
87,500
|
|
|
$
|
77,265
|
|
|
$
|
78,717
|
|
As of
December 31, 2017
, the net basis of our assets and liabilities for tax purposes are approximately
$199,268,000
lower than the amount reported for financial statement purposes.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REGO PARK II LOAN PARTICIPATION
On July 28, 2017, we entered into a participation and servicing agreement with the lender on our Rego Park II shopping center loan, which matures on November 30, 2018. We invested
$200,000,000
to participate in the loan and are entitled to interest at LIBOR plus
1.60%
(
3.17%
as of December 31, 2017). The investment is presented as “Rego Park II loan participation” on our consolidated balance sheet as of December 31, 2017 and interest earned is recognized as “interest and other income, net” in our consolidated statement of income for the year ended December 31, 2017.
4. RELATED PARTY TRANSACTIONS
Vornado
As of
December 31, 2017
, Vornado owned
32.4%
of our outstanding common stock. We are managed by, and our properties are leased and developed by, Vornado, pursuant to the agreements described below, which expire in March of each year and are automatically renewable.
Steven Roth is the Chairman of our Board of Directors and Chief Executive Officer, the Managing General Partner of Interstate Properties (“Interstate”), a New Jersey general partnership, and the Chairman of the Board of Trustees and Chief Executive Officer of Vornado. As of
December 31, 2017
, Mr. Roth, Interstate and its other two general partners, David Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and trustees of Vornado) owned, in the aggregate,
26.2%
of our outstanding common stock, in addition to the
2.3%
they indirectly own through Vornado. Joseph Macnow, our Treasurer, is the Executive Vice President - Chief Financial Officer and Chief Administrative Officer of Vornado. Matthew Iocco, our Chief Financial Officer, is the Executive Vice President - Chief Accounting Officer of Vornado.
Management and Development Agreements
We pay Vornado an annual management fee equal to the sum of (i)
$2,800,000
, (ii)
2%
of gross revenue from the Rego Park II shopping center, (iii)
$0.50
per square foot of the tenant-occupied office and retail space at
731
Lexington Avenue, and (iv)
$306,000
, escalating at
3%
per annum, for managing the common area of
731
Lexington Avenue. Vornado is also entitled to a development fee equal to
6%
of development costs, as defined.
Leasing and Other Agreements
Vornado also provides us with leasing services for a fee of
3%
of rent for the first ten years of a lease term,
2%
of rent for the eleventh through the twentieth year of a lease term, and
1%
of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by tenants. In the event third-party real estate brokers are used, the fees to Vornado increase by
1%
and Vornado is responsible for the fees to the third-party real estate brokers.
Vornado is also entitled to a commission upon the sale of any of our assets equal to
3%
of gross proceeds, as defined, for asset sales less than
$50,000,000
and
1%
of gross proceeds, as defined, for asset sales of
$50,000,000
or more.
We also have agreements with Building Maintenance Services, a wholly owned subsidiary of Vornado, to supervise (i) cleaning, engineering and security services at our Lexington Avenue property and (ii) security services at our Rego Park I and Rego Park II properties and The Alexander apartment tower.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS - continued
The following is a summary of fees to Vornado under the various agreements discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Amounts in thousands)
|
2017
|
|
2016
|
|
2015
|
Company management fees
|
$
|
2,800
|
|
|
$
|
2,800
|
|
|
$
|
2,800
|
|
Development fees
|
29
|
|
|
194
|
|
|
2,435
|
|
Leasing fees
|
1,829
|
|
|
7,401
|
|
|
2,950
|
|
Property management, cleaning, engineering
|
|
|
|
|
|
and security fees
|
4,114
|
|
|
4,033
|
|
|
3,614
|
|
|
$
|
8,772
|
|
|
$
|
14,428
|
|
|
$
|
11,799
|
|
As of
December 31, 2017
, the amounts due to Vornado were
$1,811,000
for leasing fees;
$658,000
for management, property management, cleaning, engineering and security fees; and
$21,000
for development fees. As of
December 31, 2016
, the amounts due to Vornado were
$428,000
for management, property management, cleaning, engineering and security fees;
$415,000
for leasing fees; and
$54,000
for development fees. In January 2016, we paid an
$8,916,000
leasing commission related to a lease amendment signed with Bloomberg, of which
$7,200,000
was to a third party broker and
$1,716,000
was to Vornado. In March 2016, we paid Vornado a development fee of
$5,784,000
related to The Alexander apartment tower.
Toys
Our affiliate, Vornado, owns
32.5%
of Toys. Joseph Macnow, Vornado’s Executive Vice President - Chief Financial Officer and Chief Administrative Officer and Wendy A. Silverstein, a member of our Board of Directors, represent Vornado as members of Toys’ Board of Directors. Toys leases
47,000
square feet of retail space at our Rego Park II shopping center (
$2,600,000
of annual revenue). On September 18, 2017, Toys filed for Chapter 11 bankruptcy relief. There are
$694,000
of tenant improvements,
$257,000
of unamortized deferred leasing costs and
$544,000
of receivables arising from the straight-lining of rent on our consolidated balance sheet related to the Toys lease as of December 31, 2017.
5. MARKETABLE SECURITIES
As of
December 31, 2017
and
2016
, we owned
535,265
common shares of Macerich. These shares have an economic cost of
$56.05
per share, or
$30,000,000
in the aggregate. As of
December 31, 2017
and
2016
, the fair value of these shares was
$35,156,000
and
$37,918,000
, respectively, based on Macerich’s closing share price of
$65.68
per share and
$70.84
per share, respectively. These shares are included in “marketable securities” on our consolidated balance sheets and are classified as available-for-sale. Available-for-sale securities are presented at fair value on our consolidated balance sheets. Prior to January 1, 2018, unrealized gains and losses resulting from the mark-to-market of these securities were included in “other comprehensive (loss) income.” Effective January 1, 2018, changes in the fair value of these securities are recognized in current period earnings in accordance with ASC 825. Other comprehensive (loss) income includes unrealized losses of
$2,762,000
,
$5,273,000
and
$1,455,000
for the years ended
December 31, 2017
,
2016
and 2015, respectively.
In October 2015, we recognized
$2,141,000
of dividend income as a result of a special dividend declared by Macerich, which is included as a component of “interest and other income, net,” in our consolidated statement of income for the year ended December 31, 2015.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MORTGAGES PAYABLE
On June 1, 2017, we completed a
$500,000,000
refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus
0.90%
and matures in June 2020, with
four
one
-year extension options. In connection therewith, we purchased an interest rate cap with a notional amount of
$500,000,000
that caps LIBOR at a rate of
6.0%
. The property was previously encumbered by a
$300,000,000
interest-only mortgage at LIBOR plus
0.95%
which was scheduled to mature in March 2021.
The following is a summary of our outstanding mortgages payable. We may refinance our maturing debt as it comes due or choose to repay it.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate at December 31, 2017
|
|
Balance at December 31,
|
(Amounts in thousands)
|
Maturity
(1)
|
|
|
2017
|
|
2016
|
First mortgages secured by:
|
|
|
|
|
|
|
|
|
|
Rego Park I shopping center (100% cash
|
Mar. 2018
|
|
0.35%
|
|
$
|
78,246
|
|
|
$
|
78,246
|
|
|
|
collateralized)
|
|
|
|
|
|
|
|
|
|
Paramus
|
Oct. 2018
|
|
2.90%
|
|
68,000
|
|
|
68,000
|
|
|
|
Rego Park II shopping center
(2)
|
Nov. 2018
|
|
3.42%
|
|
256,194
|
|
|
259,901
|
|
|
|
731 Lexington Avenue, retail space
(3)
|
Aug. 2022
|
|
2.78%
|
|
350,000
|
|
|
350,000
|
|
|
|
731 Lexington Avenue, office space
(4)
|
Jun. 2024
|
|
2.38%
|
|
500,000
|
|
|
300,000
|
|
|
|
Total
|
|
|
|
|
1,252,440
|
|
|
1,056,147
|
|
|
|
Deferred debt issuance costs, net of accumulated
|
|
|
|
|
|
|
|
|
|
amortization of $6,315 and $6,824, respectively
|
|
|
|
|
(12,218
|
)
|
|
(3,788
|
)
|
|
|
|
|
|
|
|
$
|
1,240,222
|
|
|
$
|
1,052,359
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the extended maturity where we have the unilateral right to extend.
|
(2)
|
|
This loan bears interest at LIBOR plus 1.85%. See page
47
for details of our Rego Park II loan participation.
|
(3)
|
|
This loan bears interest at LIBOR plus 1.40%.
|
(4)
|
|
This loan bears interest at LIBOR plus 0.90%.
|
|
|
|
|
|
|
|
All of our debt is secured by mortgages and/or pledges of the stock of the subsidiaries holding the properties. The net carrying value of real estate collateralizing the debt amounted to
$640,025,000
as of
December 31, 2017
. Our existing financing documents contain covenants that limit our ability to incur additional indebtedness on these properties, and in certain circumstances, provide for lender approval of tenants’ leases and yield maintenance to prepay them. As of
December 31, 2017
, the principal repayments for the next five years and thereafter are as follows:
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
Year Ending December 31,
|
|
Amount
|
2018
|
|
$
|
402,440
|
|
2019
|
|
—
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
2022
|
|
350,000
|
|
Thereafter
|
|
500,000
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE MEASUREMENTS
ASC 820,
Fair Value Measurement and Disclosures
defines fair value and establishes a framework for measuring fair value.
ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Financial Assets and Liabilities Measured at Fair Value
Financial assets measured at fair value on our consolidated balance sheets as of
December 31, 2017
and
2016
consist of marketable securities, which are presented in the table below based on their level in the fair value hierarchy, and an interest rate cap, which fair value was insignificant as of
December 31, 2017
and
2016
. There were no financial liabilities measured at fair value as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(Amounts in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Marketable securities
|
$
|
35,156
|
|
|
$
|
35,156
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
(Amounts in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Marketable securities
|
$
|
37,918
|
|
|
$
|
37,918
|
|
|
—
|
|
|
—
|
|
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents, the Rego Park II loan participation and mortgages payable. Cash equivalents are carried at cost, which approximates fair value due to their short-term maturities and are classified as Level 1. The fair values of the Rego Park II loan participation and our mortgages payable are calculated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist, and are classified as Level 2. The table below summarizes the carrying amount and fair value of these financial instruments as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Amounts in thousands)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
273,914
|
|
|
$
|
273,914
|
|
|
$
|
256,370
|
|
|
$
|
256,370
|
|
Rego Park II loan participation
|
198,537
|
|
|
198,000
|
|
|
—
|
|
|
—
|
|
|
472,451
|
|
|
471,914
|
|
|
256,370
|
|
|
256,370
|
|
Liabilities:
|
|
|
|
|
|
|
|
Mortgages payable (excluding deferred debt issuance costs, net)
|
$
|
1,252,440
|
|
|
$
|
1,239,000
|
|
|
$
|
1,056,147
|
|
|
$
|
1,045,000
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES
As Lessor
We lease space to tenants in an office building and in retail centers. The rental terms range from approximately
5
to
25 years
. The leases provide for the payment of fixed base rents payable monthly in advance as well as reimbursements of real estate taxes, insurance and maintenance costs. Retail leases may also provide for the payment by the lessee of additional rents based on a percentage of their sales. We also lease residential space at The Alexander apartment tower with
1
or
2
year lease terms.
Future base rental revenue under these non-cancelable operating leases is as follows:
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
2018
|
|
$
|
144,712
|
|
2019
|
|
138,649
|
|
2020
|
|
136,536
|
|
2021
|
|
119,962
|
|
2022
|
|
111,533
|
|
Thereafter
|
|
783,019
|
|
These future minimum amounts do not include additional rents based on a percentage of retail tenants’ sales. These rents were
$174,000
,
$182,000
and
$94,000
, respectively, for the years ended
December 31, 2017
,
2016
and
2015
.
Bloomberg accounted for revenue of
$105,224,000
,
$104,590,000
and
$94,468,000
, in the years ended December 31, 2017, 2016 and 2015, respectively, representing approximately
46%
,
46%
and
45%
of our total revenues in each year, respectively. No other tenant accounted for more than
10%
of our total 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.
As Lessee
We are a tenant under a long-term ground lease at our Flushing property, which expires in
2027
and has
one
10
-year extension option. Future lease payments under this operating lease, excluding the extension option, are as follows:
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
2018
|
|
$
|
800
|
|
2019
|
|
800
|
|
2020
|
|
800
|
|
2021
|
|
800
|
|
2022
|
|
800
|
|
Thereafter
|
|
3,267
|
|
Rent expense was
$746,000
in each of the years ended
December 31, 2017
,
2016
and
2015
.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with ASC 718. Our 2016 Omnibus Stock Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights, deferred stock units (“DSUs”) and performance shares, as defined, to the directors, officers and employees of the Company and Vornado.
On May 18, 2017, we granted each of the members of our Board of Directors
183
DSUs with a grant date fair value of
$56,250
per grant, or
$394,000
in the aggregate. The DSUs entitle the holders to receive shares of the Company’s common stock without the payment of any consideration. The DSUs vested immediately and accordingly, were expensed on the date of grant, but the shares of common stock underlying the DSUs are not deliverable to the grantee until the grantee is no longer serving on the Company’s Board of Directors. As of December 31, 2017, there were
8,692
DSUs outstanding and
497,095
shares were available for future grant under the Plan.
10. COMMITMENTS AND CONTINGENCIES
Insurance
We maintain general liability insurance with limits of
$300,000,000
per occurrence and per property, 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.
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 Program Reauthorization Act, which expires in
December 2020
. 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
$293,000
deductible (
$306,000
effective January 1, 2018) and
17%
of the balance (
18%
effective January 1, 2018) of a covered loss, and the Federal government is responsible for the remaining
83%
(
82%
effective January 1, 2018) 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. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of our insurance coverage, which could be material.
Our mortgage loans are non-recourse to us and 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. Further, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance our properties.
Tenant Matters
On April 4, 2017, Sears closed its
195,000
square foot store at our Rego Park I property. Annual revenue from Sears is approximately
$10,600,000
, under a lease which expires in March 2021. In its 2016 annual report on Form 10-K, Sears indicated that substantial doubt exists related to its ability to continue as a going concern. There are
$3,865,000
of receivables arising from the straight-lining of rent and
$406,000
of unamortized deferred leasing costs on our consolidated balance sheet related to the Sears lease as of
December 31, 2017
which we will continue to assess for recoverability.
On September 19, 2017, the bankruptcy court approved the terms of an order stipulation between Le Cirque, a restaurant operator which leases
13,000
square feet at our 731 Lexington Avenue property (approximately
$1,200,000
of annual revenue), and the Company which terminated the lease on January 5, 2018 (original lease expiration was May 2021). As a result, we began accelerating depreciation and amortization of approximately
$2,780,000
of tenant improvements and deferred leasing costs over the new lease term, of which approximately
$2,650,000
was recognized in the year ended December 31, 2017 and approximately
$130,000
will be recognized in the quarter ending March 31, 2018.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES - continued
Rego Park I Litigation
In June 2014, Sears Roebuck and Co. (“Sears”) filed a lawsuit in the Supreme Court of the State of New York against Vornado and us (and certain of our subsidiaries) with regard to space that Sears leases at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises, (b)
two
fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises’ parking garage. Sears asserted various causes of actions for damages and sought to compel compliance with landlord’s obligations to repair the premises and to provide security, and to compel us to abate a nuisance that Sears claims was a cause of the water intrusions into its premises. In addition to injunctive relief, Sears sought, among other things, damages of not less than
$4 million
and future damages it estimated would not be less than
$25 million
. In March 2016, Sears withdrew its claim for future damages leaving a remaining claim for property damages, which we estimate to be approximately
$650,000
based on information provided by Sears. We intend to defend the remaining claim vigorously. The amount or range of reasonably possible losses, if any, is not expected to be greater than
$650,000
.
Paramus
In 2001, we leased
30.3
acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a purchase option in
2021
for
$75,000,000
. The property is encumbered by a
$68,000,000
interest-only mortgage loan with a fixed rate of
2.90%
, which matures on October 5, 2018. The annual triple-net rent is the sum of
$700,000
plus the amount of debt service on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately
$7,000,000
and recognize a gain on sale of land of approximately
$60,000,000
. If the purchase option is not exercised, the triple-net rent for the last
20 years
would include debt service sufficient to fully amortize
$68,000,000
over the remaining
20 years
lease term.
Letters of Credit
Approximately
$1,474,000
of standby letters of credit were issued and outstanding as of
December 31, 2017
.
Other
In October 2015, the New York City Department of Finance (“NYC DOF”) issued a Notice of Determination to us assessing an additional
$22,910,000
of transfer taxes (including interest and penalties as of
December 31, 2017
) in connection with the sale of Kings Plaza Regional Shopping Center in November 2012. We believe that the NYC DOF’s claim is without merit and intend to vigorously contest this assessment. We have determined that the likelihood of a loss related to this issue is not probable and, after consultation with legal counsel, that the outcome of this assessment is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
We received approximately
$396,000
,
$825,000
and
$2,100,000
from bankruptcy recoveries during the years ended
December 31, 2017
, 2016 and 2015, respectively, which is included as “interest and other income, net” in our consolidated statements of income.
There are various other legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters in the aggregate will not have a material effect on our financial position, results of operations or cash flows.
11. MULTIEMPLOYER BENEFIT PLANS
Our subsidiaries make contributions to certain multiemployer defined benefit plans (“Multiemployer Pension Plans”) and health plans (“Multiemployer Health Plans”) for our union represented employees, pursuant to the respective collective bargaining agreements.
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MULTIEMPLOYER BENEFIT PLANS - continued
Multiemployer Pension Plans
Multiemployer Pension Plans differ from single-employer pension plans in that (i) contributions to multiemployer plans may be used to provide benefits to employees of other participating employers and (ii) if other participating employers fail to make their contributions, each of our subsidiaries may be required to bear their pro rata share of unfunded obligations. If a participating subsidiary withdraws from a plan in which it participates, it may be subject to a withdrawal liability. As of
December 31, 2017
, our subsidiaries’ participation in these plans were not significant to our consolidated financial statements.
In the years ended
December 31, 2017
,
2016
and
2015
our subsidiaries contributed
$162,000
,
$147,000
and
$144,000
, respectively, towards Multiemployer Pension Plans. Our subsidiaries’ contributions did not represent more than
5%
of total employer contributions in any of these plans for the years ended
December 31, 2017
,
2016
and
2015
.
Multiemployer Health Plans
Multiemployer Health Plans in which our subsidiaries participate provide health benefits to eligible active and retired employees. In the years ended
December 31, 2017
,
2016
and
2015
our subsidiaries contributed
$619,000
,
$539,000
and
$554,000
, respectively, towards these plans.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income per share, including a reconciliation of net income and the number of shares used in computing basic and diluted income per share. Basic income per share is determined using the weighted average shares of common stock (including DSUs) outstanding during the period. Diluted income per share is determined using the weighted average shares of common stock (including DSUs) outstanding during the period, and assumes all potentially dilutive securities were converted into common shares at the earliest date possible. There were
no
potentially dilutive securities outstanding during the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Amounts in thousands, except share and per share amounts)
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
80,509
|
|
|
$
|
86,477
|
|
|
$
|
76,907
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
5,115,501
|
|
|
5,114,084
|
|
|
5,112,352
|
|
|
|
|
|
|
|
Net income per common share – basic and diluted
|
$
|
15.74
|
|
|
$
|
16.91
|
|
|
$
|
15.04
|
|
ALEXANDER’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per
Common Share
(1)
|
|
(Amounts in thousands, except per share amounts)
|
Revenues
|
|
Net Income
|
|
Basic
|
|
Diluted
|
|
2017
|
|
|
|
|
|
|
|
|
December 31
|
$
|
58,061
|
|
|
$
|
17,883
|
|
|
$
|
3.50
|
|
|
$
|
3.50
|
|
|
September 30
|
58,094
|
|
|
20,299
|
|
|
3.97
|
|
|
3.97
|
|
|
June 30
|
57,190
|
|
|
20,660
|
|
|
4.04
|
|
|
4.04
|
|
|
March 31
|
57,229
|
|
|
21,667
|
|
|
4.24
|
|
|
4.24
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
December 31
|
$
|
57,253
|
|
|
$
|
21,655
|
|
|
$
|
4.23
|
|
|
$
|
4.23
|
|
|
September 30
|
57,120
|
|
|
21,036
|
|
|
4.11
|
|
|
4.11
|
|
|
June 30
|
57,005
|
|
|
21,767
|
|
|
4.26
|
|
|
4.26
|
|
|
March 31
|
55,558
|
|
|
22,019
|
|
|
4.31
|
|
|
4.31
|
|
_______________________
|
|
|
|
|
|
|
|
(1)
|
The total for the year may differ from the sum of the quarters as a result of weighting.
|