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 is engaged in leasing, managing, developing, and redeveloping properties in the greater New York City metropolitan area, including the 731 Lexington Avenue property and Kings Plaza Regional Shopping Center. This Form 10-Q covers the quarterly period ended March 31, 2006.

Key Financial Metrics

Per Share Data (Diluted): Net Loss of $(3.75) for Q1 2006 compared to Net Income of $6.15 for Q1 2005. FFO per diluted share was $(2.70) for Q1 2006 compared to $7.06 for Q1 2005.

Material Changes vs. Prior Period

• Net Income Decline: The company reported a net loss of $18.9 million in Q1 2006, a decrease of $50.1 million from the $31.2 million net income in Q1 2005.
• Stock Appreciation Rights (SARs): A primary driver of the loss was a $37.6 million accrual for SARs compensation expense in Q1 2006, compared to $22.5 million in Q1 2005. This increase was due to the rise in the company's stock price to $289.00 at the end of Q1 2006 from $241.50 in Q1 2005.
• Condominium Sales: After-tax net gains from the sale of residential condominiums at 731 Lexington Avenue dropped significantly to $5.0 million in Q1 2006 from $40.0 million in Q1 2005, as the project neared completion (102 of 105 units sold/closed).
• Operating Expenses: General and administrative expenses increased by $15.2 million, primarily due to the higher SARs accrual. Operating expenses increased by $3.4 million due to the 731 Lexington Avenue property becoming fully operational.
• Interest Expense: Interest and debt expense increased by $5.7 million, largely because $5.7 million of interest was capitalized in Q1 2005 but none was capitalized in Q1 2006.

Outlook, Risks, and Contingencies

• Development Projects:
  • Kings Plaza: Plans to construct a 120,000 sq. ft. building for Lowe's (expected lease commencement 2007) with a net cost of approximately $11.5 million. An energy plant joint venture is being rebuilt at a total cost of ~$18 million.
  • Rego Park II: Governmental approvals received for a mixed-use development (600,000 sq. ft. retail, parking, and potential apartments). Long-term leases signed with Century 21 and Home Depot.
• Legal Proceedings:
  • Environmental Remediation: A third-party contractor filed a complaint seeking ~$1.8 million in costs; the company has accrued $500,000 and filed a counterclaim.
  • Flushing Property: A former buyer is seeking specific performance or return of a $1.875 million deposit. The company is defending the action and does not believe the party is entitled to the deposit.
• Insurance Risk: The Terrorism Risk Insurance Extension Act of 2005 expires in 2007. Failure to extend this act or inability to obtain equivalent coverage could adversely affect financing and portfolio expansion.
• Debt Structure: All outstanding debt ($1.08 billion) is fixed-rate with a weighted average interest rate of 5.81%, eliminating exposure to interest rate changes for existing debt.

Investor Verification Checklist

• SARs Liability: Verify the sensitivity of future earnings to stock price fluctuations, given the $125.1 million liability for stock appreciation rights on the balance sheet.
• Condominium Sales Run-rate: Confirm the remaining unsold inventory at 731 Lexington Avenue and the timeline for recognizing the final gains, as this revenue stream is diminishing.
• Development Costs: Monitor the budget adherence for the Kings Plaza (Lowe's) and Rego Park II projects, noting the company's disclaimer that there is no assurance projects will be completed on time or within budget.
• Legal Accruals: Track the resolution of the environmental remediation dispute and the Flushing property litigation to ensure the accrued amounts ($500,000 and the deposit defense) are sufficient.
• Insurance Renewal: Assess the status of the Terrorism Risk Insurance Act extension prior to its 2007 expiration and its impact on debt covenants.