Vornado(VNO) - 2018 Q4 - Annual Report

FORM 10-K Cover Page Registrant Information Vornado Realty Trust and Vornado Realty L.P. are identified as registrants for the 2018 Form 10-K, detailing their corporate information and NYSE-registered securities - Vornado Realty Trust (Maryland) and Vornado Realty L.P. (Delaware) are the registrants for the fiscal year ended December 31, 2018[2] - Vornado Realty Trust is a well-known seasoned issuer and a large accelerated filer, while Vornado Realty L.P. is a non-accelerated filer[3][4][8] Registrant Information Table | Registrant | Title of Each Class | Name of Exchange on Which Registered | | :--- | :--- | :--- | | Vornado Realty Trust | Common Shares of beneficial interest, $.04 par value per share | New York Stock Exchange | | Vornado Realty Trust | Cumulative Redeemable Preferred Shares of beneficial interest, no par value: 5.70% Series K | New York Stock Exchange | | Vornado Realty Trust | 5.40% Series L | New York Stock Exchange | | Vornado Realty Trust | 5.25% Series M | New York Stock Exchange | | Vornado Realty L.P. | Class A Units of Limited Partnership Interest | N/A (no public market) | - The aggregate market value of voting and non-voting common shares held by non-affiliates of Vornado Realty Trust was $12.88 billion at June 30, 2018, with 190,535,499 common shares outstanding as of December 31, 2018[9][10] EXPLANATORY NOTE Report Combination and Company Structure The report combines Vornado Realty Trust and Vornado Realty L.P. filings, detailing the UPREIT structure and Vornado's 93.4% ownership in the Operating Partnership - The report combines the 10-K filings for Vornado Realty Trust (REIT) and Vornado Realty L.P. (Operating Partnership) to enhance investor understanding, eliminate duplicative disclosure, and improve efficiency[14][17][18] - Vornado is the sole general partner and approximately 93.4% limited partner of the Operating Partnership, which conducts substantially all business and holds assets[15] - The company operates under an UPREIT structure, allowing Class A unitholders to redeem units for cash or Vornado common shares on a one-for-one basis, with Vornado typically electing to issue common shares[16] - Specific financial disclosures for Vornado Realty Trust and Vornado Realty L.P. are separated in certain items (5, 6, 7, 8) to highlight differences within the consolidated company[19][20] INDEX Report Contents The comprehensive index outlines the Form 10-K report's structure, listing all parts and items with corresponding page numbers - The index outlines the report's structure, including Part I (Business, Risk Factors, Properties, Legal Proceedings), Part II (Market for Common Equity, Financial Data, MD&A, Financial Statements), Part III (Directors, Executive Compensation, Security Ownership), and Part IV (Exhibits, Schedules)[22] FORWARD-LOOKING STATEMENTS Disclaimer and Safe Harbor This section disclaims forward-looking statements on future performance, financial condition, and business, noting inherent risks and no commitment to updates - The report contains forward-looking statements about future performance, financial condition, and business, including estimates for development projects, capital expenditures, and dividends[24] - These statements are not guarantees of future performance and are subject to numerous assumptions, risks, and uncertainties, which could cause actual results to differ materially[24] - The company claims the protection of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 and does not commit to publicly release revisions to these statements[25] PART I ITEM 1. BUSINESS Vornado, a fully-integrated REIT, focuses on maximizing shareholder value through strategic investments, acquisitions, and redevelopments, primarily in New York City - Vornado is a fully-integrated REIT, with approximately 93.4% ownership in its Operating Partnership as of December 31, 2018, which holds substantially all property interests[27] - The company's primary business objective is to maximize shareholder value through a strategy of investing in select markets (e.g., New York City), acquiring quality properties at a discount, developing/redeveloping existing assets, and investing in operating companies with significant real estate components[30][31] - Financing for growth, acquisitions, and investments is expected from internally generated funds, asset sales, and public/private capital markets[30] Current Property Holdings Vornado's portfolio includes significant Manhattan office, retail, and residential properties, plus major assets in Chicago and San Francisco - - New York Portfolio: - 19.9 million sq ft of Manhattan office in 36 properties - 2.6 million sq ft of Manhattan street retail in 71 properties - 1,999 units in eleven residential properties - The 1,700-room Hotel Pennsylvania - 32.4% interest in Alexander's, Inc. (seven properties in greater New York metropolitan area, including Bloomberg L.P. headquarters) - Other Real Estate and Related Investments: - 3.7 million sq ft theMART in Chicago - 70% controlling interest in 555 California Street (1.8 million sq ft office complex in San Francisco) - 25.0% interest in Vornado Capital Partners[28][29][31] ACQUISITIONS In 2018, Vornado acquired the 1535 Broadway retail condominium for $442 million, 537 West 26th Street for $44 million, and increased its Farley joint venture ownership to 95.0% for $42 million - - $442 million acquisition of the retail condominium at 1535 Broadway - $44 million acquisition of 537 West 26th Street and 55,000 sq ft of additional zoning air rights - $42 million purchase to increase ownership in the Farley Office and Retail Building joint venture to 95.0% from 50.1%[32] DISPOSITIONS Vornado completed several 2018 dispositions, including the $120 million sale of 666 Fifth Office Condominium interest, $82 million retail condominium sale, and $45 million sale of 27 Washington Square North, plus $215 million from 220 Central Park South units - - $120 million sale of 49.5% interests in the 666 Fifth Office Condominium, yielding $55.2 million net proceeds from mortgage loan participation - $82 million sale of the retail condominium at 11 East 68th Street by the Fund (25% interest) - $45 million sale of 27 Washington Square North - $215 million net proceeds from the sale of 11 condominium units at 220 Central Park South[32][33] FINANCINGS In 2018, Vornado extended a $750 million term loan, refinanced Independence Plaza for $675 million, redeemed $470 million in preferred shares, and completed other property refinancings - - $750 million unsecured term loan extended to February 2024, with interest rate lowered from LIBOR + 1.15% to LIBOR + 1.00% - $675 million refinancing of Independence Plaza ($338 million at 50.1% interest) - $470 million redemption of all outstanding 6.625% Series G and Series I cumulative redeemable preferred shares/units - $255 million refinancing of the Crowne Plaza Times Square Hotel ($84 million at 32.9% interest) - $205 million refinancing of 150 West 34th Street, with a $105 million participation investment in the loan - $120 million refinancing of 4 Union Square South - $100 million refinancing of 33-00 Northern Boulevard (Center Building)[34] DEVELOPMENT AND REDEVELOPMENT EXPENDITURES Vornado is developing major projects like the $1.4 billion 220 Central Park South tower and the $800 million Farley Office and Retail Building, alongside other redevelopments - - 220 Central Park South (220 CPS): Residential condominium tower (397,000 salable sq ft) with an estimated development cost of ~$1.4 billion; $1.2 billion expended as of Dec 31, 2018 - 512 West 22nd Street: Class A office building (173,000 sq ft) with an estimated development cost of ~$130 million; $95.46 million expended ($52.51 million share) as of Dec 31, 2018 - 606 Broadway: Office and retail building (34,000 sq ft) with an estimated development cost of ~$60 million; $51.20 million expended ($25.60 million share) as of Dec 31, 2018 - 345 Montgomery Street: Redevelopment of Class A office building (78,000 sq ft) with an estimated cost of ~$46 million; $21.83 million expended ($15.28 million share) as of Dec 31, 2018 - 825 Seventh Avenue: Redevelopment of office building (165,000 sq ft) with an estimated cost of ~$30 million; $8.97 million expended ($4.48 million share) as of Dec 31, 2018 - PENN1: Redevelopment of office building (2,545,000 sq ft) with an estimated cost of over $200 million; $9.73 million expended as of Dec 31, 2018 - Farley Office and Retail Building: 95.0% joint venture developing 850,000 rentable sq ft commercial space, estimated total development cost ~$800 million (exclusive of $230 million upfront contribution and net of tax credits); $144.49 million expended as of Dec 31, 2018 - Moynihan Train Hall: Adjacent development with estimated expenditures of ~$1.6 billion, funded by governmental agencies; $445.69 million expended by Dec 31, 2018, recorded as 'Moynihan Train Hall development expenditures' and 'Moynihan Train Hall obligation' on balance sheets[35][36][37][38][39][40][43][44] Operational Details Vornado operates in New York and Other segments, facing seasonal expenses, with no single tenant exceeding 10% of revenues, and 3,928 employees as of 2018 - Vornado operates in two reportable segments: New York and Other, with financial information detailed in Note 25[47] - Revenues and expenses are subject to seasonality, with higher utility costs in the New York segment during the first and third quarters[48] - No single tenant accounted for more than 10% of total revenues in 2016, 2017, or 2018[49] - The company does not base acquisitions on specific property type allocations and historically holds properties for long-term investment, with policies reviewed by the Board of Trustees[50] - As of December 31, 2018, Vornado had approximately 3,928 employees, including 275 corporate staff and 3,476 in the New York segment (2,838 in Building Maintenance Services LLC and 460 at Hotel Pennsylvania)[51] ITEM 1A. RISK FACTORS This section details material risks, including high concentration in New York City, real estate market fluctuations, capital market access, tax changes, environmental issues, cyber threats, and substantial indebtedness - Vornado's investments are highly concentrated in the New York City metropolitan area (89% of 2018 NOI), making it vulnerable to regional economic downturns, retail environment changes, and potential terrorist attacks[56][58][59] - Real estate values and income are subject to fluctuations due to general economic conditions, competition, local market dynamics, tenant financial health, and changes in consumer preferences, which can impact cash flow and debt servicing ability[62][63][70] - Risks include the inability to obtain capital, dependence on subsidiary distributions, substantial indebtedness ($9.9 billion as of Dec 31, 2018), potential credit rating downgrades, and non-compliance with debt covenants[103][104][107][109][110][111] - The company faces risks from environmental laws, natural disasters, climate change, cyber incidents, and potential losses not covered by insurance, which could lead to significant costs or business disruptions[61][75][81][85][87] - Acquisition and development activities carry risks of delays, budget overruns, and difficulties in integrating new properties or companies, while investments in non-controlled entities may lead to conflicts of interest[93][99] - Vornado's REIT status is critical, and failure to qualify could result in corporate income taxes Changes in tax laws could also adversely affect the company[112][113] - The trading price of Vornado's common shares has been volatile and may fluctuate due to various factors, including financial performance, market conditions, and analyst recommendations, potentially leading to substantial losses for equity holders[128][129] ITEM 1B. UNRESOLVED STAFF COMMENTS As of the filing date, there are no unresolved comments from the Securities and Exchange Commission staff - There are no unresolved comments from the SEC staff as of the date of this Annual Report on Form 10-K[132] ITEM 2. PROPERTIES Vornado's 2018 property portfolio, primarily in New York, totals 27.9 million sq ft across 87 properties with 97.0% occupancy, alongside key assets in Chicago and San Francisco - As of December 31, 2018, the New York segment consisted of 27.9 million square feet in 87 properties, with an overall occupancy rate of 97.0%[142][144] New York Segment Property Overview (as of Dec 31, 2018) | Property Type | Square Feet (millions) | Number of Properties | Occupancy Rate | | :--- | :--- | :--- | :--- | | Office | 19.9 | 36 | 97.2% | | Retail | 2.6 | 71 | 97.3% | | Residential Units | 1,999 | 11 | 96.6% | | Hotel Pennsylvania | 1.4 | 1 | 86.4% (Avg. Occupancy) | New York Segment Weighted Average Annual Rent Per Square Foot (In Service) | Property Type | 2018 Rent Per Sq Ft | | :--- | :--- | | Office | $74.04 | | Retail | $228.43 | - Key tenants in the New York segment include Swatch Group USA (3.4% of revenues), IPG and affiliates (3.3%), Macy's (2.3%), and AXA Equitable Life Insurance (2.3%)[148] New York Segment Lease Expirations (Office) - 2019-2028 | Year | Square Feet of Expiring Leases (thousands) | Percentage of New York Square Feet | Weighted Average Annual Rent Per Square Foot | | :--- | :--- | :--- | :--- | | Month to month | 47 | 0.3% | $106.60 | | 2019 | 627 | 3.9% | $65.58 | | 2020 | 1,240 | 7.8% | $69.65 | | 2021 | 1,188 | 7.5% | $77.79 | | 2022 | 709 | 4.5% | $66.39 | | 2023 | 1,971 | 12.4% | $81.06 | | 2024 | 1,391 | 8.8% | $78.90 | | 2025 | 804 | 5.1% | $74.91 | | 2026 | 1,236 | 7.8% | $76.05 | | 2027 | 1,118 | 7.0% | $72.93 | | 2028 | 1,022 | 6.4% | $71.20 | New York Segment Lease Expirations (Retail) - 2019-2028 | Year | Square Feet of Expiring Leases (thousands) | Percentage of New York Square Feet | Weighted Average Annual Rent Per Square Foot | | :--- | :--- | :--- | :--- | | Month to month | 71 | 3.7% | $131.76 | | 2019 | 103 | 5.4% | $257.03 | | 2020 | 82 | 4.3% | $195.74 | | 2021 | 58 | 3.0% | $165.33 | | 2022 | 29 | 1.5% | $248.52 | | 2023 | 110 | 5.8% | $400.97 | | 2024 | 298 | 15.6% | $283.51 | | 2025 | 42 | 2.2% | $457.62 | | 2026 | 134 | 7.0% | $332.26 | | 2027 | 32 | 1.7% | $709.97 | | 2028 | 45 | 2.4% | $410.16 | Other Segment Property Overview (as of Dec 31, 2018) | Property | Ownership | Square Feet (millions) | Occupancy Rate | Weighted Average Annual Rent Per Sq Ft | | :--- | :--- | :--- | :--- | :--- | | theMART, Chicago | 100.0% | 3.7 | 94.7% | $48.16 | | 555 California Street, San Francisco | 70.0% | 1.8 | 99.4% | $75.60 | ITEM 3. LEGAL PROCEEDINGS Vornado is involved in routine legal actions, but management expects no material adverse effect on its financial position or operations - Vornado is involved in ordinary course legal actions, but the outcome is not expected to materially affect financial position, results of operations, or cash flows[157] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Vornado Realty Trust - This item is not applicable[158] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Vornado Realty Trust common shares trade on NYSE, while Vornado Realty L.P. Class A units are redeemable, with no recent issuer purchases reported - Vornado Realty Trust's common shares trade on the NYSE under 'VNO', with 935 holders of record as of February 1, 2019[161] - Vornado Realty L.P.'s Class A units have no public market but are redeemable for cash or Vornado common shares on a one-for-one basis, with 984 unitholders of record as of February 1, 2019[162][163] - In 2018, the Operating Partnership issued 915,834 Class A units for equity awards, receiving $19.08 million in cash proceeds, under a Section 4(2) exemption[164] - No recent issuer purchases of equity securities were reported[167] Five-Year Cumulative Return (Indexed to $100 at Dec 31, 2013) | Year | Vornado Realty Trust | S&P 500 Index | The NAREIT All Equity Index | | :--- | :--- | :--- | :--- | | 2013 | $100 | $100 | $100 | | 2014 | $136 | $114 | $128 | | 2015 | $131 | $115 | $132 | | 2016 | $141 | $129 | $143 | | 2017 | $135 | $157 | $155 | | 2018 | $111 | $150 | $149 | ITEM 6. SELECTED FINANCIAL DATA This section provides selected financial data for Vornado Realty Trust and Vornado Realty L.P. from 2014-2018, including operating, balance sheet, and FFO metrics Vornado Realty Trust - Selected Operating Data (Amounts in thousands, except per share amounts) | Operating Data | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $2,163,720 | $2,084,126 | $2,003,742 | $1,985,495 | $1,792,168 | | Total expenses | $1,580,759 | $1,475,475 | $1,423,896 | $1,365,918 | $1,280,172 | | Operating income | $582,961 | $608,651 | $579,846 | $619,577 | $511,996 | | Net income attributable to common shareholders | $384,832 | $162,017 | $823,606 | $679,856 | $783,388 | | Net income per common share - diluted | $2.01 | $0.85 | $4.34 | $3.59 | $4.15 | | Dividends per common share | $2.52 | $2.62 | $2.52 | $2.52 | $2.92 | Vornado Realty Trust - Selected Balance Sheet Data (Amounts in thousands) | Balance Sheet Data | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $17,180,794 | $17,397,934 | $20,814,847 | $21,143,293 | $21,157,980 | | Real estate, at cost | $16,237,883 | $14,756,295 | $14,187,820 | $13,545,295 | $12,438,940 | | Debt, net | $9,836,621 | $9,729,487 | $9,446,670 | $9,095,670 | $7,557,877 | | Total equity | $5,107,883 | $5,007,701 | $7,618,496 | $7,476,078 | $7,489,382 | Vornado Realty Trust - Funds From Operations (FFO) (Amounts in thousands) | FFO Data | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | FFO attributable to common shareholders plus assumed conversions | $729,740 | $717,805 | $1,457,583 | $1,039,035 | $911,130 | Vornado Realty L.P. - Selected Operating Data (Amounts in thousands, except per unit amounts) | Operating Data | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $2,163,720 | $2,084,126 | $2,003,742 | $1,985,495 | $1,792,168 | | Total expenses | $1,580,759 | $1,475,475 | $1,423,896 | $1,365,918 | $1,280,172 | | Operating income | $582,961 | $608,651 | $579,846 | $619,577 | $511,996 | | Net income attributable to Class A unitholders | $410,310 | $172,733 | $877,066 | $722,929 | $830,951 | | Net income per Class A unit - diluted | $2.00 | $0.83 | $4.32 | $3.57 | $4.14 | | Distributions per Class A unit | $2.52 | $2.62 | $2.52 | $2.52 | $2.92 | Vornado Realty L.P. - Selected Balance Sheet Data (Amounts in thousands) | Balance Sheet Data | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $17,180,794 | $17,397,934 | $20,814,847 | $21,143,293 | $21,157,980 | | Real estate, at cost | $16,237,883 | $14,756,295 | $14,187,820 | $13,545,295 | $12,438,940 | | Debt, net | $9,836,621 | $9,729,487 | $9,446,670 | $9,095,670 | $7,557,877 | | Total equity | $5,107,883 | $5,007,701 | $7,618,496 | $7,476,078 | $7,489,382 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes Vornado's financial condition and operations, covering revenue, expenses, debt, liquidity, and reconciliations of GAAP net income to non-GAAP NOI and FFO Overview Vornado, a REIT, aims to maximize shareholder value through strategic investments, reporting increased 2018 net income and FFO, with mixed same-store NOI performance - Vornado's business objective is to maximize shareholder value, measured by total return, through maintaining a superior team, investing in select markets like New York City, acquiring quality properties, developing/redeveloping assets, and investing in real estate-component operating companies[183][184] - Net income attributable to common shareholders increased to $384.83 million ($2.01 per diluted share) in 2018 from $162.02 million ($0.85 per diluted share) in 2017[189] - FFO attributable to common shareholders plus assumed conversions increased to $729.74 million ($3.82 per diluted share) in 2018 from $717.81 million ($3.75 per diluted share) in 2017[190] Same Store NOI at Share % Increase (Decrease) | Segment | Year ended Dec 31, 2018 vs 2017 | Year ended Dec 31, 2017 vs 2016 | | :--- | :--- | :--- | | Total | 0.8% | 2.7% | | New York | 1.4% | 2.7% | | theMART | (12.2)% | 4.2% | | 555 California Street | 14.9% | 1.9% | Same Store NOI at Share - Cash Basis % Increase (Decrease) | Segment | Year ended Dec 31, 2018 vs 2017 | Year ended Dec 31, 2017 vs 2016 | | :--- | :--- | :--- | | Total | 3.9% | 11.8% | | New York | 4.3% | 11.3% | | theMART | (6.5)% | 7.6% | | 555 California Street | 18.1% | 36.0% | Acquisitions In 2018, Vornado acquired 537 West 26th Street for $44 million, 1535 Broadway retail condominium for $442 million, and increased its Farley joint venture ownership to 95.0% for $41.5 million - - 537 West 26th Street: Acquired for $44 million, including 14,000 sq ft commercial property and 55,000 sq ft of additional zoning air rights (Feb 9, 2018) - 1535 Broadway: Acquired retail condominium for $442 million (inclusive of $240 million capital lease liability), fulfilling a put/call arrangement (Sep 21, 2018) - Farley Office and Retail Building: Increased ownership to 95.0% from 50.1% for $41.5 million, plus $33.03 million reimbursement of costs (Oct 30, 2018) Recognized a net gain of $44.06 million and $16.77 million income tax expense due to this transaction[199][200][201] Dispositions Vornado's 2018 dispositions included the $82 million sale of 11 East 68th Street retail condominium, $45 million sale of 27 Washington Square North, and $120 million sale of 666 Fifth Avenue Office Condominium interest - - 11 East 68th Street: Fund sold retail condominium for $82 million, realizing a $46.26 million net gain (Jan 17, 2018) - 27 Washington Square North: Sold for $45 million, resulting in a $23.56 million net gain (June 21, 2018) - 666 Fifth Avenue Office Condominium: Sold 49.5% interests for $120 million net proceeds, recognizing a $134.03 million financial statement gain (Aug 3, 2018) Concurrently, received $55.24 million net proceeds from mortgage loan participation, with a $7.31 million financial statement gain[202][203][204] Financings In 2018, Vornado redeemed $470 million in preferred shares, extended a $750 million term loan, and completed multiple property refinancings totaling over $1.3 billion - - Preferred Securities: Redeemed all outstanding 6.625% Series G and Series I cumulative redeemable preferred shares/units for $470 million, expensing $14.49 million of issuance costs (Jan 2018) - Unsecured Term Loan: Extended $750 million unsecured term loan to February 2024, lowering interest rate to LIBOR + 1.00% and entering an interest rate swap to a fixed rate of 3.87% (Oct 26, 2018) - 33-00 Northern Boulevard: Completed $100 million refinancing at LIBOR + 1.80% (swapped to 4.14% fixed) with $37.2 million net proceeds (Jan 5, 2018) - Crowne Plaza Times Square Hotel: Joint venture completed $255 million refinancing at LIBOR + 3.53% (6.00% at Dec 31, 2018) with an interest rate cap (Apr 19, 2018) - Independence Plaza: Joint venture completed $675 million refinancing at a fixed rate of 4.25%, with Vornado's share of net proceeds at $55.62 million (June 11, 2018) - 4 Union Square South: Completed $120 million refinancing at LIBOR + 1.40% (3.75% at Dec 31, 2018) (Aug 9, 2018) - 150 West 34th Street: Completed $205 million refinancing at LIBOR + 1.88% (4.26% at Dec 31, 2018) and invested $105 million in a participation in the loan (Nov 16, 2018)[205][207][208][209][210][211][212] Other Activities In Q4 2018, Vornado sold 11 220 Central Park South units for $214.78 million, generating an $81.22 million net gain and a $213 million loan repayment - - 220 Central Park South (220 CPS): Sold 11 condominium units for $214.78 million net proceeds, resulting in an $81.22 million net gain and $13.89 million income tax expense (Q4 2018) - 220 CPS Loan Repayment: $213 million of the $950 million 220 CPS loan was repaid in connection with these sales[213] Leasing Activity In 2018, New York office leased 1.83 million sq ft with 33.7% GAAP rent increase, while retail saw a (22.7)% GAAP decrease, and other segments reported positive rent increases Leasing Activity - Year Ended December 31, 2018 (Square feet in thousands) | Segment | Total Square Feet Leased | Our Share of Square Feet Leased | Initial Rent (Cash Basis) | Weighted Average Lease Term (years) | | :--- | :--- | :--- | :--- | :--- | | New York Office | 1,827 | 1,627 | $79.03 | 9.6 | | New York Retail | 255 | 236 | $171.25 | 5.5 | | theMART | 243 | 243 | $53.47 | 5.8 | | 555 California Street | 249 | 174 | $89.28 | 10.3 | Second Generation Relet Space - Rent Changes (Year Ended December 31, 2018) | Segment | GAAP Basis % Increase (Decrease) | Cash Basis % Increase (Decrease) | | :--- | :--- | :--- | | New York Office | 33.7% | 22.7% | | New York Retail | (22.7)% | (1.0)% | | theMART | 20.9% | 12.7% | | 555 California Street | 34.3% | 13.4% | Tenant Improvements and Leasing Commissions (Year Ended December 31, 2018) | Segment | Per Square Foot | Per Square Foot Per Annum | Percentage of Initial Rent | | :--- | :--- | :--- | :--- | | New York Office | $92.69 | $9.66 | 12.2% | | New York Retail | $59.17 | $10.76 | 6.3% | | theMART | $17.63 | $3.04 | 5.7% | | 555 California Street | $94.98 | $9.22 | 10.3% | Square footage (in service) and Occupancy As of 2018, Vornado's in-service portfolio totaled 35.8 million sq ft (28.1 million Vornado share), with New York at 27.9 million sq ft and 97.0% occupancy Square Footage (in service) and Occupancy as of December 31, 2018 (Square feet in thousands) | Segment | Number of properties | Total Portfolio | Our Share | Occupancy % | | :--- | :--- | :--- | :--- | :--- | | New York Office | 36 | 19,858 | 16,632 | 97.2% | | New York Retail | 71 | 2,648 | 2,419 | 97.3% | | New York Residential (1,687 units) | 10 | 1,533 | 800 | 96.6% | | Alexander's (312 residential units) | 7 | 2,437 | 790 | 91.4% | | Hotel Pennsylvania | 1 | 1,400 | 1,400 | N/A | | Total New York | | 27,876 | 22,041 | 97.0% | | theMART | 3 | 3,694 | 3,685 | 94.7% | | 555 California Street | 3 | 1,743 | 1,220 | 99.4% | | Other | 10 | 2,522 | 1,187 | 92.8% | | Total Other | | 7,959 | 6,092 | N/A | | Total Portfolio | | 35,835 | 28,133 | N/A | Critical Accounting Policies Vornado's critical accounting policies involve real estate valuation, impairment, revenue recognition, and accounting for partially owned entities, while maintaining REIT status to minimize federal income taxes - Real estate is carried at cost, net of accumulated depreciation, with betterments and certain improvement/leasing costs capitalized Redevelopment costs are capitalized up to the estimated fair value of the redeveloped property[224] - Upon acquisition, purchase price is allocated to acquired assets (land, buildings, intangibles like above/below-market leases) and liabilities based on fair value, using cash flow projections and market information[225] - Properties are reviewed for impairment when circumstances indicate carrying amount may not be recoverable, with impairment loss measured as the excess of carrying amount over estimated fair value[227] - Investments in partially owned entities are consolidated if Vornado has a controlling financial interest (primary beneficiary of a VIE or majority voting interest); otherwise, they are accounted for under the equity method or cost method[229] - - Base rent: Recognized straight-line over non-cancelable lease term, including rent steps and abatements - Hotel revenue: Recognized when rooms are occupied or services transferred - Trade shows revenue: Recognized upon occurrence of trade shows - Operating expense reimbursements: Recognized in the same period as related expenses - Tenant services: Recognized as services are transferred - Fee and other income: Recognized as services are transferred; lease termination fees recognized immediately or straight-line over shortened term[232][233] - Vornado aims to qualify as a REIT, distributing 100% of its taxable income to shareholders to avoid federal income tax Taxable REIT subsidiaries are subject to federal and state corporate income tax[234][236] Net Operating Income At Share by Segment for the Years Ended December 31, 2018, 2017 and 2016 Total NOI at share for 2018 was $1.38 billion, with New York contributing $1.18 billion, and the New York City metropolitan area consistently generating 89% of total NOI - NOI is a primary non-GAAP financial measure used for decision-making and assessing unlevered segment performance, not a substitute for net income[237] NOI at Share by Segment (Amounts in thousands) | Segment | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total NOI at share | $1,382,620 | $1,401,383 | $1,364,108 | | New York | $1,176,990 | $1,166,065 | $1,108,526 | | Other | $205,630 | $235,318 | $255,582 | | Total NOI at share - cash basis | $1,337,916 | $1,314,541 | $1,193,631 | | New York - cash basis | $1,131,563 | $1,086,863 | $965,287 | | Other - cash basis | $206,353 | $227,678 | $228,344 | NOI at Share by Geographic Region (Percentage) | Region | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | New York City metropolitan area | 89% | 89% | 89% | | Chicago, IL | 7% | 8% | 8% | | San Francisco, CA | 4% | 3% | 3% | Reconciliation of Net Income to Net Operating Income At Share and Net Operating Income At Share - Cash Basis for the Years Ended December 31, 2018, 2017 and 2016 This section reconciles GAAP net income to non-GAAP NOI at share and cash basis NOI for 2016-2018, detailing key adjustments for various expenses and gains Reconciliation of Net Income to NOI at Share and NOI at Share - Cash Basis (Amounts in thousands) | Item | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net income | $422,603 | $264,128 | $981,922 | | Deductions (selected) | | | | | Income from partially owned entities | $(9,149) | $(15,200) | $(168,948) | | Net gains on disposition of assets | $(246,031) | $(501) | $(160,433) | | Additions (selected) | | | | | Depreciation and amortization expense | $446,570 | $429,389 | $421,023 | | General and administrative expense | $141,871 | $150,782 | $143,643 | | Interest and debt expense | $347,949 | $345,654 | $330,240 | | Income tax expense | $37,633 | $42,375 | $7,923 | | NOI at share | $1,382,620 | $1,401,383 | $1,364,108 | | Non-cash adjustments | $(44,704) | $(86,842) | $(170,477) | | NOI at share - cash basis | $1,337,916 | $1,314,541 | $1,193,631 | Results of Operations – Year Ended December 31, 2018 Compared to December 31, 2017 In 2018, Vornado's total revenues increased by $79.6 million, while expenses rose by $105.3 million, with significant net gains from asset dispositions and decreased income tax expense - Total revenues increased by $79.59 million in 2018 compared to 2017, primarily from same store operations ($44.76 million) and BMS cleaning fees ($16.21 million)[251] - Total expenses increased by $105.28 million in 2018 compared to 2017, mainly due to higher operating expenses ($76.88 million, including $15.15 million additional real estate tax accrual for theMART) and transaction-related costs/impairment loss ($29.54 million)[253][254] - Income from partially owned entities decreased to $9.15 million in 2018 from $15.2 million in 2017, impacted by Alexander's potential additional Transfer Tax and marketable securities fair value decrease[256][257] - Real estate fund investments resulted in an $89.23 million loss in 2018, compared to a $3.24 million income in 2017, primarily due to net unrealized losses on held investments and Transfer Tax expenses[260][261] - Interest and other investment income, net, decreased to $17.06 million in 2018 from $30.86 million in 2017, mainly due to a $26.45 million decrease in fair value of marketable securities (new GAAP standard)[263][264] - Interest and debt expense increased by $2.3 million to $347.95 million in 2018, driven by higher variable interest rates and delayed draw term loan interest, partially offset by higher capitalized interest and lower capital lease interest[266] - A $44.06 million purchase price fair value adjustment was recognized in 2018 due to increased ownership in the Farley joint venture[267] - Net gains on disposition of assets totaled $246.03 million in 2018, primarily from the sale of 666 Fifth Avenue Office Condominium interests ($134.03 million), 220 CPS condominium units ($81.22 million), and 27 Washington Square North ($23.56 million)[268] - Income tax expense decreased by $4.74 million to $37.63 million in 20