VNO

Vornado Realty Trust - 10-Q Summary (Period Ended September 30, 2008)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Vornado Realty Trust, a fully-integrated Real Estate Investment Trust (REIT) operating primarily in New York City and Washington, D.C. The report covers the three and nine months ended September 30, 2008. The company operates through segments including New York Office, Washington, DC Office, Retail, Merchandise Mart, and investments in partially owned entities such as Toys "R" Us and Alexander's.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline (Quarterly): Net income applicable to common shares dropped significantly from $116.5 million in Q3 2007 to $31.4 million in Q3 2008. This decrease was driven by non-cash impairment charges, losses from partially owned entities (specifically Alexander's and Toys "R" Us), and a reduction in investment income.
• Net Income Increase (Year-to-Date): Despite the quarterly drop, nine-month net income applicable to common shares increased to $554.7 million from $420.8 million in the prior year. This was primarily due to a $222.2 million non-cash income tax benefit from the reversal of deferred tax liabilities related to the H Street acquisition and significant gains from discontinued operations.
• Discontinued Operations: The company sold its 47.6% interest in Americold Realty Trust in March 2008 (gain of $112.7 million) and the Tysons Dulles Plaza office complex in June 2008 (gain of $56.8 million). These assets are now classified as discontinued operations.
• Impairment Charges: The company recognized non-cash impairment losses of $11.8 million on marketable equity securities and $7.2 million on its investment in Lexington MLP due to market deterioration.

Guidance, Outlook, Risks, and Unusual Items

• Market Conditions: Management notes that the "credit crisis" has spread to commercial credit markets, causing illiquidity and volatility. This has reduced real estate transaction volumes and increased capitalization rates. There is a risk of tenant bankruptcies and store closures (e.g., Circuit City) impacting occupancy and rents.
• Unusual Items:
  • Tax Benefit: A $222.2 million income tax benefit was recognized in Q1 2008 due to the reversal of deferred tax liabilities after H Street entities elected REIT status.
  • Accounting Changes: Adoption of new accounting standards (SFAS 157, 159, 160) is expected to impact future reporting, particularly regarding fair value measurements and convertible debt accounting, which will increase interest expense starting in 2009.
  • Investment Losses: Significant losses were recorded in partially owned entities, including a $14.6 million stock appreciation rights compensation expense from Alexander's and a $14.9 million non-cash tax charge related to Toys "R" Us.
• Liquidity: The company maintains $1.53 billion in cash and has access to revolving credit facilities. However, one syndicate bank (Lehman Brothers) filed for bankruptcy, though other banks funded their pro-rata share of draws.

Investor Verification Checklist

• Deferred Tax Reversal: Verify the sustainability of the $222.2 million tax benefit, as it is a one-time non-cash item significantly inflating YTD net income.
• Impairment Risks: Assess the potential for further impairment charges on marketable securities and joint ventures (Lexington MLP, Toys "R" Us) given the continued decline in market values post-September 30, 2008.
• Debt Maturity: Review the debt maturity schedule, noting that $380 million matures in 2009, and evaluate refinancing risks in the current credit environment.
• Discontinued Operations: Confirm that future earnings comparisons exclude the significant gains from the sale of Americold and Tysons Dulles Plaza.
• Lehman Brothers Exposure: Confirm the status of the revolving credit facility and ensure no further funding issues arise from the Lehman Brothers bankruptcy.