ALX

Business Context and Reporting Period

Alexander's, Inc. is a Real Estate Investment Trust (REIT) engaged in leasing, managing, developing, and redeveloping properties in the New York metropolitan area. The company is managed by Vornado Realty Trust, which owns 33.1% of Alexander's common stock. This filing covers the fiscal year ended December 31, 2002.

The portfolio consists of operating properties (Kings Plaza, Rego Park I, Paramus), a property under development (Lexington Avenue), an asset held for sale (Flushing), and land to be developed (Rego Park II).

Key Financial Metrics

Dividends: No dividends were paid in 2002 or 2001. The company has Net Operating Loss (NOL) carryovers of approximately $94,000,000.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $8,951,000 (13.3%) primarily due to the commencement of the IKEA ground lease at the Paramus property and increased occupancy at Kings Plaza.
• Net Income Decline: Net income decreased by $3,802,000. This decline is largely attributed to the absence of significant one-time gains recorded in 2001, specifically a $19,026,000 gain on the sale of the Fordham Road property and a $3,534,000 gain from early debt extinguishment.
• Discontinued Operations: The 2002 net income includes a $10,366,000 gain from the sale of the Third Avenue property, classified as discontinued operations under new accounting standards (SFAS 144).
• Debt Increase: Total debt increased by $27,976,000, driven by a $55,500,000 initial draw on the Lexington Avenue construction loan, partially offset by repayments of prior term loans.
• Cash Position: Cash and cash equivalents decreased by $90,019,000 due to significant capital expenditures ($133,250,000) for the Lexington Avenue development.

Outlook, Risks, and Management Commentary

• Liquidity Status: Management states that operating properties currently do not generate sufficient cash flow to cover all expenses. Positive cash flow is not expected until the completion of the Lexington Avenue property (anticipated in 2005).
• Lexington Avenue Development: A major 1.3 million sq. ft. mixed-use project in Manhattan. A $490,000,000 construction loan was finalized with HVB Real Estate Capital. Vornado Realty Trust has provided a "Completion Guarantee" for the project. Significant pre-leasing has been secured with Bloomberg L.P. (695,000 sq. ft.) and Hennes & Mauritz.
• Asset Disposition Risks: The sale of the Flushing property (agreed at $18,800,000) failed to close in September 2002 due to purchaser default and landlord disputes. The $1,875,000 deposit is at risk, and the sale is not assured.
• Environmental Contingency: Ongoing remediation is required at Kings Plaza for petroleum and phthalate contamination. An accrual of $2,675,000 exists, with $2,087,000 paid to date. Additional costs may be incurred if regulators require more extensive remediation.
• Terrorism Risk: While the Terrorism Risk Insurance Act of 2002 provides some coverage, lenders may view exclusions for terrorist acts in standard policies as a breach of debt covenants, potentially affecting refinancing.

Investor Verification Checklist

• Lexington Avenue Completion: Verify the timeline and budget adherence for the Lexington Avenue project, as delays could trigger lease cancellations with Bloomberg L.P. and penalties.
• Flushing Property Resolution: Monitor the status of the Flushing property sale and the potential loss of the $1,875,000 deposit.
• Cash Flow Sufficiency: Assess the company's ability to service $543.8 million in debt and fund development costs without positive operating cash flow until 2005.
• Vornado Dependency: Review the terms of the management agreements and the $119 million debt owed to Vornado, noting the high interest rate (12.48%) and the manager's significant ownership stake.
• Environmental Costs: Confirm if the $2.675 million accrual for Kings Plaza remediation remains sufficient or if NYDEC has mandated additional cleanup.