VNO

Business Context and Reporting Period

Company: Vornado Realty Trust (Vornado)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Vornado is a fully-integrated Real Estate Investment Trust (REIT) operating primarily in New York City and Washington, D.C. Its portfolio includes office, retail, and merchandise mart properties, as well as significant investments in partially owned entities such as Toys "R" Us, Alexander's, and Lexington Realty Trust. The company operates through Vornado Realty L.P., in which it holds approximately 91.9% of the common limited partnership interest.

Key Financial Metrics

Material Changes Versus Prior Comparable Period

• Net Income Decline: Net loss attributable to common shareholders for the quarter ended June 30, 2009, was $51.9 million, compared to net income of $116.9 million in the same period in 2008. The six-month period showed net income of $73.9 million versus $506.4 million in 2008.
• Mezzanine Loan Impairment: A significant non-cash charge of $122.7 million was recorded in the second quarter of 2009 for a valuation allowance on mezzanine loans receivable, driven by the economic recession and declining real estate values.
• Discontinued Operations: The prior year's results included significant gains from discontinued operations, including a $112.7 million gain on the sale of Americold Realty Trust and a $56.8 million gain on the sale of Tysons Dulles Plaza. No such gains were recorded in the current period.
• Revenue Growth: Total revenues increased slightly by $4.0 million (0.6%) for the quarter and $36.8 million (2.8%) for the six months compared to the prior year, driven by leasing activity and development, partially offset by lower trade show revenues and hotel performance.
• Equity Issuance: In April 2009, Vornado sold 17.25 million common shares, raising approximately $710.2 million in net proceeds to strengthen its liquidity position.

Guidance, Outlook, and Management Commentary

• Economic Environment: Management notes that the ongoing economic recession has negatively affected the commercial real estate industry, leading to diminished transactions, rising capitalization rates, and potential declines in occupancy and effective rents.
• Investment Valuations: As of June 30, 2009, the market values of investments in Lexington Realty Trust and the marketable securities portfolio were below their adjusted cost bases. However, management concluded these declines were not "other-than-temporary." Subsequent events noted a recovery in these values by July 31, 2009.
• Liquidity: The company maintains a strong liquidity position with over $2 billion in cash and cash equivalents. Management anticipates cash flow from operations will be adequate to fund operations, dividends, and debt service for the next twelve months.
• Debt Management: Vornado actively managed its debt load, repurchasing convertible senior debentures and senior unsecured notes at a discount, resulting in net gains on early extinguishment of debt totaling $23.6 million for the six months ended June 30, 2009.
• Management Succession: On May 14, 2009, Michael D. Fascitelli was elected Chief Executive Officer, succeeding Steven Roth, who continues as Chairman of the Board.

Important Facts for Investor Verification

• Mezzanine Loan Exposure: Verify the recoverability of the remaining mezzanine loan portfolio ($291.3 million carrying value) given the $122.7 million impairment charge taken in Q2 2009.
• Partially Owned Entities: Monitor the performance of Toys "R" Us (32.7% interest), which contributed $96.8 million to income for the six months ended June 30, 2009, and Alexander's (32.4% interest), which contributed $24.7 million.
• Debt Maturities: Review the schedule of debt maturities, with $214.2 million due in the remainder of 2009 and over $1 billion due in 2010, to assess refinancing risks in the current credit environment.
• Legal Proceedings: Track the status of the Stop & Shop litigation regarding $5 million in annual rent and the H Street "Pentagon Row" right of first offer claim, which alleges damages in excess of $75 million.
• Occupancy Trends: Verify occupancy rates across key segments (New York Office at 96.1%, Washington DC Office at 95.4%, Retail at 91.5%) to gauge the impact of the recession on core operations.