VNO

Vornado Realty Trust - 10-Q Summary (Period Ended June 30, 2005)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Vornado Realty Trust, a fully-integrated Real Estate Investment Trust (REIT), for the period ended June 30, 2005. The company operates office, retail, and showroom properties, with significant concentrations in New York City and the Washington, D.C. metropolitan area. It also holds a 47.6% interest in an entity owning 85 cold storage warehouses (Americold), which was consolidated into the company's accounts effective November 18, 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $402 million (51%) compared to the prior year. This was primarily driven by the consolidation of Americold Realty Trust (adding $360 million in logistics revenue) and significant non-recurring investment income.
• Investment Income: Interest and other investment income surged to $171 million from $19 million. This increase is largely attributable to a $86 million net gain on the conversion of Sears common shares and derivative positions following the Sears-Kmart merger, and $46 million in mark-to-market income on Sears Holdings derivatives.
• Discontinued Operations: Income from discontinued operations decreased to $32.5 million from $67.2 million. The prior year included a $65.9 million gain on the sale of the Palisades Residential Complex, whereas the current period included a $31.6 million gain on the sale of 400 North LaSalle.
• Debt Levels: Total consolidated debt increased by approximately $679 million, reflecting new borrowings to fund acquisitions and the consolidation of Americold's debt.

Guidance, Outlook, and Significant Events

• Major Acquisitions:
  • Toys "R" Us: On July 21, 2005, Vornado joined a joint venture (with Bain Capital and KKR) to acquire Toys "R" Us for approximately $6.6 billion. Vornado contributed $428 million in equity.
  • H Street Building Corp: Acquired on July 20, 2005, for approximately $246.6 million. This deal is currently subject to litigation filed by two corporations owned 50% by the company, alleging breach of fiduciary duty.
  • Real Estate Portfolio: Acquired the Westbury Retail Condominium ($113 million), Bowen Building ($119 million), and East 66th Street property ($158 million) during the period.
• Financing Activity: Issued $500 million of 3.875% exchangeable senior debentures due 2025 in March 2005. Issued $109 million of Series H Preferred Shares in June 2005 to redeem higher-cost preferred units.
• Legal Proceedings:
  • Stop & Shop: Ongoing litigation regarding the reallocation of $5 million in annual rent. The company intends to pursue claims vigorously.
  • H Street Litigation: As noted above, a complaint was filed seeking rescission of the H Street acquisition.
• Restatement: The company restated its 2004 cash flow statement to reclassify $7.7 million from investing to operating activities regarding distributions from partially-owned entities.

Investor Verification Checklist

• Non-Recurring Income: Verify the sustainability of earnings by excluding the $132 million in gains related to Sears Holdings derivatives and conversions, which significantly inflated Net Income and FFO for the period.
• Americold Consolidation: Assess the impact of consolidating Americold (previously equity method) on leverage ratios, interest expense, and operating margins.
• Toys "R" Us Exposure: Review the terms of the joint venture and the company's $428 million equity commitment to understand future capital requirements and risk exposure.
• Legal Risks: Monitor the status of the H Street acquisition litigation and the Stop & Shop rent dispute for potential financial impact.
• Debt Maturities: Review the schedule of debt maturities, noting approximately $51 million due in 2005 and $423 million due in 2006.