ALX

Business Context and Reporting Period

Alexander's, Inc. 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 filing covers the quarterly period ended June 30, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $8.6 million (8.8%) year-over-year, driven by higher property rentals ($2.3M increase) and expense reimbursements ($6.3M increase). Rental growth was attributed to the lease-up of vacant space at 731 Lexington Avenue and the commencement of a ground lease with Lowe's at Kings Plaza.
• Profitability Surge: Net income increased significantly to $51.8 million from $18.0 million. This was primarily due to a $18.0 million reversal of previously recognized Stock Appreciation Rights (SARs) compensation expense in 2007, compared to a $22.9 million accrual of SARs expense in 2006. Additionally, 2006 included a $13.3 million after-tax gain on the sale of condominiums, which did not recur in 2007.
• Cash Flow Shift: Operating cash flow turned negative ($9.7M used) compared to positive ($20.8M provided) in the prior year. The primary driver was a $50.5 million cash payment for SARs liabilities in 2007.
• Investing Activities: Net cash used in investing activities increased to $57.1 million (from $19.3M provided in 2006) due to $56.5 million in capital expenditures for real estate additions, offset by the absence of condominium sale proceeds which were present in 2006.

Guidance, Outlook, and Risks

• Development Projects: Construction has commenced on the Rego Park II mixed-use project (600,000 sq ft retail, parking deck, potential apartments). Estimated costs are $400 million for retail and up to $200 million for apartments, with completion expected in 2009. Financing alternatives are currently being explored.
• Stock Appreciation Rights (SARs): As of June 30, 2007, 500,000 SARs were outstanding. If exercised at the closing stock price of $404.25, the company would owe approximately $167 million. Future cash outflows will fluctuate with stock price movements.
• Insurance and Terrorism Risk: The Terrorism Risk Insurance Extension Act of 2005 expires in 2007. Failure to extend this act or inability to obtain equivalent coverage at reasonable costs could adversely affect the company's ability to finance or refinance properties.
• Environmental Contingencies: An oil spill was discovered at the Kings Plaza site in July 2006. Estimated cleanup costs are $2.5 million, expected to be covered by insurance subject to a $500,000 deductible (already accrued).
• Legal Proceedings: The company is defending against a lawsuit regarding a non-refundable deposit for the Flushing Property. Management does not believe the outcome will have a material effect on financial condition.

Investor Verification Checklist

• SARs Liability Impact: Verify the cash impact of the $50.5 million SARs payment and the remaining $167 million liability exposure based on current stock prices.
• Rego Park II Financing: Confirm the status of financing arrangements for the $400M+ Rego Park II development project.
• Terrorism Insurance Renewal: Monitor the status of the Terrorism Risk Insurance Extension Act and the company's ability to secure replacement coverage.
• Tenant Concentration: Note that Bloomberg L.P. accounted for approximately 31% of consolidated revenues in the first six months of 2007.
• Debt Maturities: Review the debt schedule, noting the Kings Plaza mortgage matures in June 2011 and the Rego Park I mortgage in June 2009.