ALX

Business Context and Reporting Period

Alexander's, Inc. (NYSE: ALX) is a real estate investment trust (REIT) incorporated in Delaware, engaged in leasing, managing, developing, and redeveloping properties in the greater New York City metropolitan area. The company is managed by Vornado Realty Trust. This Form 10-Q covers the quarterly period ended September 30, 2008.

Key Financial Metrics

Note: All amounts in millions unless otherwise specified. Net loss for the quarter was significantly impacted by non-cash Stock Appreciation Rights (SARs) expense.

Material Changes vs. Prior Period

• Profitability: The company reported a net loss of $31.44 million for the quarter ended September 30, 2008, compared to net income of $28.63 million in the same period in 2007. For the nine-month period, net income decreased to $22.16 million from $80.41 million in 2007.
• Primary Driver of Variance: The decline in net income is primarily attributable to a $44.66 million accrual for SARs compensation expense in the current quarter, compared to a $9.38 million reversal of SARs expense in the prior year quarter. Excluding SARs, operating results remained relatively stable.
• Revenues: Total revenues increased slightly to $52.95 million for the quarter (from $52.42 million) and $156.20 million for the nine months (from $155.69 million), driven by the commencement of the Lowe's ground lease at Kings Plaza.
• Expenses: Operating expenses increased by $1.55 million for the quarter, primarily due to higher real estate taxes. General and administrative expenses increased significantly due to the SARs accrual.
• Interest Income: Interest and other income decreased by $3.45 million for the quarter due to lower average yields on cash balances.

Guidance, Outlook, and Risks

• Development Project: The company is developing the Rego Park II project, a 600,000 square foot shopping center with an estimated total cost of $410 million. As of September 30, 2008, $263 million had been expended. Completion is expected in 2009. There is no assurance the project will be completed on time or within budget.
• Market Conditions: Management notes that the "credit crisis" and economic slowdown have reduced real estate transaction volumes and increased capitalization rates. Tenant bankruptcies or store closures (e.g., Circuit City) could negatively impact occupancy and effective rents.
• Dividends: A special dividend of $7.00 per share ($35.6 million aggregate) was declared on September 9, 2008, payable October 30, 2008, attributable to the liquidation of a taxable REIT subsidiary.
• Stock Appreciation Rights (SARs): The company has significant exposure to stock price fluctuations regarding SARs. As of September 30, 2008, 400,000 SARs were outstanding. If exercised at the closing price of $400.00, the cash payout would have been approximately $98.9 million.
• Legal and Environmental: The company is defending against a lawsuit regarding a deposit on the Flushing Property. Additionally, an oil spill at Kings Plaza is being remediated at an estimated cost of $2.5 million, largely covered by insurance.

Investor Verification Checklist

• SARs Liability: Verify the impact of the $44.66 million non-cash SARs expense on the reported net loss and the potential cash outflow if remaining SARs are exercised.
• Rego Park II Funding: Confirm the status of the $350 million construction loan and the remaining capital required to complete the $410 million project.
• Tenant Concentration: Note that Bloomberg L.P. accounts for approximately 33% of consolidated revenues; monitor the stability of this key tenant.
• Debt Maturities: Review the debt schedule, noting the Rego Park I mortgage matures in June 2009 and the construction loan matures in December 2010.
• Special Dividend: Confirm the payment of the $7.00 per share special dividend and its impact on cash reserves.