VNO

Business Context and Reporting Period

Company: Vornado Realty Trust (REIT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Key Event: The quarter reflects the consolidation of Charles E. Smith Commercial Realty L.P. (CESCR) following the acquisition of the remaining 66% interest on January 1, 2002. This transaction significantly expanded the Company's portfolio, particularly in the Crystal City, Virginia area.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $103.7 million (42.7%) primarily due to the consolidation of CESCR operations ($99.7 million impact).
• Net Income Decline: Net income decreased by $7.1 million. This was driven by a $30.1 million non-cash charge for the cumulative effect of a change in accounting principle (SFAS No. 142 goodwill write-off) and increased interest expense ($8.6 million) from the CESCR acquisition.
• Debt Expansion: Total debt increased by approximately $1.49 billion, largely due to assuming $992 million of debt in the CESCR acquisition.
• EBITDA Increase: EBITDA rose by $49.4 million to $239.0 million, reflecting the operational scale of the new portfolio.
• Dividends: Dividends per common share increased to $0.66 from $0.53 in the prior year.

Outlook, Risks, and Unusual Items

Unusual Items

• Goodwill Write-off: A $30.1 million charge was recorded as a cumulative effect of a change in accounting principle due to the adoption of SFAS No. 142. This included $15.5 million related to Temperature Controlled Logistics and $14.6 million related to the Hotel Pennsylvania.
• Accounting Change (SFAS 133): Reclassification of $4.1 million from accumulated other comprehensive loss to earnings regarding derivative instruments (stock purchase warrants).
• Disposition Gain: A $1.5 million gain was recognized from the sale of residential condominiums in Chicago.

Risks and Contingencies

• Terrorism Insurance: The Company faces a risk of financial loss in excess of $200 million for terrorist acts regarding its New York City Office portfolio, as it has been unable to obtain all-risk insurance covering such acts for renewed policies. Lenders may view the lack of coverage as a breach of debt covenants.
• Primestone/Prime Group Realty: The Company acquired 7.9 million partnership units of Prime Group Realty, L.P. at a foreclosure auction on April 30, 2002, following Primestone's failure to post a bond to stay the foreclosure. Primestone remains liable for loan deficiencies.
• AmeriCold Logistics: The Company did not recognize $1.8 million of rent due from AmeriCold Logistics for the quarter due to collection uncertainty, adding to previously deferred rent of $6.8 million.

Management Commentary

Management anticipates cash from continuing operations will be adequate to fund operations and dividends for the next twelve months. However, significant capital outlays for acquisitions will require additional funding through borrowings or equity offerings. Leasing activity showed strong rent increases, with initial rents for new leases in the New York City Office portfolio up 49% compared to prior escalated rents.

Investor Verification Checklist

• Goodwill Impairment: Verify the long-term impact of the $30.1 million goodwill write-off on future earnings and asset valuations.
• Terrorism Coverage: Assess the potential for debt acceleration or refinancing difficulties due to the lack of terrorism insurance coverage for the NYC portfolio.
• Primestone Exposure: Monitor the status of the Primestone bankruptcy appeal and the potential for deficiency claims or further litigation.
• AmeriCold Rent Deferral: Track the collection status of the $6.8 million in deferred rent from AmeriCold Logistics.
• Debt Covenants: Review debt agreements to ensure the current insurance status does not trigger technical defaults.