ALX

Business Context and Reporting Period

Alexander's, Inc. is a real estate investment trust (REIT) incorporated in Delaware, managed by Vornado Realty Trust. The company owns and operates properties in the greater New York City metropolitan area, including the 731 Lexington Avenue multi-use building and the Kings Plaza Regional Shopping Center. This Form 10-Q covers the quarterly period ended September 30, 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: The company reported a net loss of $18.6 million for the quarter ended September 30, 2006, compared to a net loss of $6.8 million in the same period in 2005. For the nine months, the company reported a net loss of $0.6 million, a significant decrease from net income of $41.9 million in the prior year.
• Stock Appreciation Rights (SARs): The primary driver of the loss was a non-cash accrual for SARs compensation expense of $32.7 million for the quarter and $55.6 million for the nine months, compared to $18.1 million and $46.8 million, respectively, in 2005. This was due to an increase in the company's stock price.
• Condominium Sales: In the prior year (2005), the company recognized significant gains from the sale of residential condominiums at 731 Lexington Avenue ($54.5 million after-tax for the nine months). In 2006, all 105 units were sold, with only $13.3 million of after-tax gain recognized in the nine-month period.
• Revenue Growth: Total revenues increased to $50.8 million for the quarter (from $47.4 million in 2005) and $148.5 million for the nine months (from $136.8 million in 2005), driven by new tenants at 731 Lexington Avenue.
• Interest Income: Interest and other income increased significantly to $7.5 million for the quarter and $20.4 million for the nine months, attributed to higher average cash balances and increased investment yields.

Outlook, Risks, and Contingencies

• Development Projects: The company is developing the Rego Park II mixed-use project and has modified an agreement with Lowe's at Kings Plaza, where Lowe's will now construct the building on leased land. There is no assurance these projects will be completed on time or within budget.
• Environmental Remediation: A new oil spill was discovered at the Kings Plaza site in July 2006. Estimated cleanup costs are approximately $2.5 million, with $500,000 accrued as a deductible. The company intends to pursue remedies against responsible parties.
• Legal Proceedings: The company is defending against a lawsuit from an independent contractor regarding environmental remediation costs (seeking ~$1.8 million) and a dispute over a deposit for the Flushing property. Management believes these will not have a material effect on financial condition.
• Insurance: The company relies on the Terrorism Risk Insurance Extension Act of 2005, which expires in 2007. Failure to extend this act could adversely affect financing and portfolio expansion.
• Debt Structure: As of September 30, 2006, all outstanding debt ($1.07 billion) is fixed-rate, eliminating exposure to interest rate changes for the remaining terms.

Investor Verification Checklist

• SARs Expense Volatility: Verify the impact of stock price fluctuations on future non-cash compensation expenses, which significantly distort GAAP net income.
• Condominium Sales Completion: Confirm that all 105 units at 731 Lexington Avenue are fully sold and closed, meaning future gains from this specific asset are exhausted.
• Development Timelines: Monitor the progress and cost overruns of the Rego Park II and Kings Plaza (Lowe's) development projects.
• Environmental Liabilities: Track the resolution of the Kings Plaza oil spill and the associated legal disputes regarding remediation costs.
• Liquidity Position: Note the substantial cash balance of $622 million relative to total debt of $1.07 billion and assess the company's strategy for deploying this capital.