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Investments in Partially Owned Entities
 12 Months Ended
Dec. 31, 2012
Equity Method Investments and Joint Ventures [Abstract]  
Investments in Partially Owned Entities

6. Investments in Partially Owned Entities

 

 

The following is a summary of condensed combined financial information for all of our partially owned entities, including Toys “R” Us, Alexander's, Inc., Lexington Realty Trust and LNR Property Corporation, as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010.

 (Amounts in thousands)    December 31,  
 Balance Sheet:    2012 2011  
  Assets(1)    $ 122,692,000 $ 153,861,000  
  Liabilities(1)      117,064,000   147,854,000  
  Noncontrolling interests      88,000   132,000  
  Equity      5,540,000   5,875,000  
              
    For the Year Ended December 31,  
 Income Statement: 2012 2011 2010  
  Total revenue $ 15,119,000 $ 15,321,000 $ 14,962,000  
  Net income(2)   1,091,000   199,000   63,000  
              
             
              
 (1)2012 and 2011 include $97 billion and $127 billion, respectively, of assets and liabilities of LNR related to consolidated CMBS and CDO trusts which are non-recourse to LNR and its equity holders, including us. 
              
 (2)2012 includes a $600,000 net gain on sale of real estate. 

Toys “R” Us (“Toys”)

As of December 31, 2012, we own 32.6% of Toys. The business of Toys is highly seasonal. Historically, Toys' fourth quarter net income accounts for more than 80% of its fiscal year net income. We account for our investment in Toys under the equity method and record our 32.6% share of Toys net income or loss on a one-quarter lag basis because Toys' fiscal year ends on the Saturday nearest January 31, and our fiscal year ends on December 31.

 

Since our acquisition in July 2005, the carrying amount of our investment has grown from $396,000,000 to $518,041,000 after we recognized our share of Toys third quarter net loss in our fourth quarter. We estimate that the fair value of our investment is approximately $478,000,000 at December 31, 2012. We have concluded that the $40,000,000 decline in the value of our investment is “other-than-temporary” based on, among other factors, compression of earnings multiples of comparable retailers and our inability to forecast a recovery in the near term. Accordingly, we recognized a non-cash impairment loss of $40,000,000 in the fourth quarter.

 

We will continue to assess the recoverability of our investment each quarter. To the extent that the current facts don't change, we would recognize a non-cash impairment loss equal to our share of Toys fourth quarter net income in our 2013 first quarter.

 

Below is a summary of Toys' latest available financial information on a purchase accounting basis:

 (Amounts in thousands)      Balance as of  
 Balance Sheet:     October 27, 2012 October 29, 2011  
  Assets      $ 12,953,000 $ 13,221,000  
  Liabilities        11,190,000   11,530,000  
  Noncontrolling interests        44,000   -  
  Toys “R” Us, Inc. equity        1,719,000   1,691,000  
                 
       For the Twelve Months Ended  
 Income Statement:  October 27, 2012 October 29, 2011 October 30, 2010  
  Total revenues    $ 13,698,000 $ 13,956,000 $ 13,749,000  
  Net income attributable to Toys      138,000   121,000   189,000  

6. Investments in Partially Owned Entities – continued

 

 

Alexander's, Inc. (“Alexander's”) (NYSE: ALX)

 

As of December 31, 2012, we own 1,654,068 Alexander's commons shares, or approximately 32.4% of Alexander's common equity. We manage, lease and develop Alexander's properties pursuant to the agreements described below which expire in March of each year and are automatically renewable. As of December 31, 2012, Alexander's owed us an aggregate of $46,445,000 pursuant to such agreements.

 

On November 28, 2012, Alexander's completed the sale of its Kings Plaza Regional Shopping Center located in Brooklyn, New York, for $751,000,000. Upon completion of the sale, we recognized our share of the financial statement gain of $179,934,000. Alexander's distributed the taxable gain to its stockholders in December 2012 as a special long-term capital gain dividend, of which our share was $201,796,000, and we in turn paid a $1.00 per Vornado share special long-term capital gain dividend to our common shareholders in December 2012.

 

As of December 31, 2012 the market value (“fair value” pursuant to ASC 820) of our investment in Alexander's, based on Alexander's December 31, 2012 closing share price of $330.80, was $547,166,000, or $376,153,000 in excess of the carrying amount on our consolidated balance sheet. As of December 31, 2012, the carrying amount of our investment in Alexander's, excluding amounts owed to us, exceeds our share of the equity in the net assets of Alexander's by approximately $43,383,000. The majority of this basis difference resulted from the excess of our purchase price for the Alexander's common stock acquired over the book value of Alexander's net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of Alexander's assets and liabilities, to real estate (land and buildings). We are amortizing the basis difference related to the buildings into earnings as additional depreciation expense over their estimated useful lives. This depreciation is not material to our share of equity in Alexander's net income. The basis difference related to the land will be recognized upon disposition of our investment.

 

Management and Development Agreements

 

Effective December 1, 2012, as a result of the sale of the Kings Plaza Regional Shopping Center, the management and development agreement with Alexander's was amended. Pursuant to the amended agreement, we receive an annual fee for managing Alexander's and all of its properties equal to the sum of (i) $2,800,000, (ii) 2% of the gross income from the Rego Park II Shopping Center, (iii) $0.50 per square foot of the tenant-occupied office and retail space at 731 Lexington Avenue, and (iv) $264,000, escalating at 3% per annum, for managing the common area of 731 Lexington Avenue.

 

In addition, we are entitled to a development fee of 6% of development costs, as defined.

 

Leasing Agreements

 

We provide Alexander's with leasing services for a fee of 3% of rent for the first ten years of a lease term, 2% of rent for the eleventh through twentieth year of a lease term and 1% of rent for the twenty-first through thirtieth year of a lease term, subject to the payment of rents by Alexander's tenants. In the event third-party real estate brokers are used, our fee increases by 1% and we are responsible for the fees to the third-parties. We are also entitled to a commission upon the sale of any of Alexander's assets equal to 3% of gross proceeds, as defined, for asset sales less than $50,000,000, or 1% of gross proceeds, as defined, for asset sales of $50,000,000 or more. The total of these amounts is payable to us in annual installments in an amount not to exceed $4,000,000 with interest on the unpaid balance at one-year LIBOR plus 1.0% (2.13% at December 31, 2012). As a result of the sale of Kings Plaza, we earned a $6,423,000 sales commission, which is net of a third party broker fee.

 

Other Agreements

 

Building Maintenance Services (“BMS”), our wholly-owned subsidiary, supervises the cleaning, engineering and security services at Alexander's 731 Lexington Avenue property for an annual fee of the costs for such services plus 6%. During the years ended December 31, 2012, 2011 and 2010, we recognized $2,934,000, $2,970,000 and $2,775,000 of income, respectively, under these agreements.

 

6. Investments in Partially Owned Entities - continued

Below is a summary of Alexander's latest available financial information:

 (Amounts in thousands)     Balance as of December 31,  
 Balance Sheet:     2012 2011  
  Assets     $ 1,482,000 $ 1,771,000  
  Liabilities       1,150,000   1,408,000  
  Noncontrolling interests       -   4,000  
  Stockholders' equity       332,000   359,000  
                
    For the Year Ended December 31,  
 Income Statement:  2012 2011 2010  
  Total revenues   $ 191,000 $ 185,000 $ 174,000  
  Net income attributable to Alexander’s (1)    674,000   79,000   66,000  
                
                
 (1)2012 includes a $600,000 net gain on sale of real estate.     

Lexington Realty Trust (“Lexington”) (NYSE: LXP)

 

As of December 31, 2012, we own 18,468,969 Lexington common shares, or approximately 10.5% of Lexington's common equity. We account for our investment in Lexington on the equity method because we believe we have the ability to exercise significant influence over Lexington's operating and financial policies, based on, among other factors, our representation on Lexington's Board of Trustees and the level of our ownership in Lexington as compared to other shareholders. We record our pro rata share of Lexington's net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to the time that Lexington files its financial statements.

 

Based on Lexington's December 31, 2012 closing share price of $10.45, the market value (“fair value” pursuant to ASC 820) of our investment in Lexington was $193,001,000, or $117,459,000 in excess of the December 31, 2012 carrying amount on our consolidated balance sheet. As of December 31, 2012, the carrying amount of our investment in Lexington was less than our share of the equity in the net assets of Lexington by approximately $31,427,000. This basis difference resulted primarily from $107,882,000 of non-cash impairment charges recognized during 2008, partially offset by purchase accounting for our acquisition of an additional 8,000,000 common shares of Lexington in October 2008, of which the majority relates to our estimate of the fair values of Lexington's real estate (land and buildings) as compared to the carrying amounts in Lexington's consolidated financial statements. The basis difference related to the buildings is being amortized over their estimated useful lives as an adjustment to our equity in net income or loss of Lexington. This amortization is not material to our share of equity in Lexington's net income or loss. The basis difference attributable to the land will be recognized upon disposition of our investment.

 

Below is a summary of Lexington's latest available financial information:

 (Amounts in thousands)      Balance as of September 30,  
 Balance Sheet:      2012 2011  
  Assets      $ 3,386,000 $ 3,164,000  
  Liabilities        2,211,000   1,888,000  
  Noncontrolling interests        27,000   59,000  
  Shareholders’ equity        1,148,000   1,217,000  
                
      For the Twelve Months Ended September 30,  
 Income Statement:  2012 2011 2010  
  Total revenues   $ 333,000 $ 315,000 $ 330,000  
  Net income (loss) attributable to Lexington     196,000   (81,000)   (90,000)  

6. Investments in Partially Owned Entities – continued

 

 

LNR Property Corporation (“LNR”)

 

On January 24, 2013, LNR entered into a definitive agreement to be sold. We own 26.2% of LNR and expect to receive net proceeds of $241,000,000. The sale, which is subject to customary closing conditions, is expected to be completed in the second quarter of 2013.

As of December 31, 2012, we own a 26.2% equity interest in LNR. We account for our investment in LNR under the equity method and record our 26.2% share of LNR's net income or loss on a one-quarter lag basis because we file our consolidated financial statements on Form 10-K and 10-Q prior to receiving LNR's consolidated financial statements.

LNR consolidates certain commercial mortgage-backed securities (“CMBS”) and Collateralized Debt Obligation (“CDO”) trusts for which it is the primary beneficiary. The assets of these trusts (primarily commercial mortgage loans), which aggregate approximately $97 billion as of September 30, 2012, are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including us. Changes in the fair value of these assets each period are offset by changes in the fair value of the related liabilities through LNR's consolidated income statement. As of December 31, 2012, the carrying amount of our investment in LNR does not materially differ from our share of LNR's equity.

Below is a summary of LNR's latest available financial information:

 (Amounts in thousands)    Balance as of September 30,  
 Balance Sheet:    2012 2011  
  Assets    $ 98,530,000 $ 128,536,000  
  Liabilities      97,643,000   127,809,000  
  Noncontrolling interests      8,000   55,000  
  LNR Property Corporation equity      879,000   672,000  
              
   For the Twelve  For the Twelve  For the Period   
    Months Ended Months Ended July 29, 2010 to  
 Income Statement: September 30, 2012 September 30, 2011 September 30, 2010  
  Total revenue $ 238,000 $ 208,000 $ 23,000  
  Net income attributable to LNR   266,000   224,000   8,000  
              

6. Investments in Partially Owned Entities - continued

 

 

Below is a schedule of our investments in partially owned entities as of December 31, 2012 and 2011.

       Percentage       
(Amounts in thousands) Ownership at As of December 31, 
Investments:  December 31, 2012 2012 2011 
Toys    32.6%(1) $ 478,041 $ 506,809 
                 
Alexander’s   32.4% $ 171,013 $ 189,775 
                 
Lexington   10.5%(2)   75,542   57,402 
                 
LNR    26.2%   224,724   174,408 
                 
India real estate ventures   4.0%-36.5%   95,516   80,499 
                 
Partially owned office buildings:           
 280 Park Avenue   49.5%   197,516   184,516 
 Rosslyn Plaza   43.7%-50.4%   62,627   53,333 
 West 57th Street properties   50.0%   57,033   58,529 
 One Park Avenue   30.3%   50,509   47,568 
 666 Fifth Avenue Office Condominium   49.5%   35,527   23,655 
 330 Madison Avenue   25.0%   30,277   20,353 
 Warner Building   55.0%   8,775   2,715 
 Fairfax Square   20.0%   5,368   6,343 
 1101 17th Street   55.0%   -   20,407 
 Other partially owned office buildings   Various   9,315   11,547 
                 
Other investments:           
 Downtown Crossing, Boston   50.0%   48,122   46,691 
 Monmouth Mall   50.0%   7,205   7,536 
 Verde Realty Operating Partnership(3)   n/a   -   59,801 
 Independence Plaza Partnership(4)   n/a   -   48,511 
 Other investments(5)   Various   147,187   140,061 
      $ 1,226,256 $ 1,233,650 
                 
___________________________________           
(1)  32.7% at December 31, 2011.
                 
(2)  12.0% at December 31, 2011.
                 
(3)  In 2012, we converted our 2,015,151 units in Verde Realty Operating Partnership into 2,015,151 common shares of Verde Realty ("Verde"), which we sold for $13.85 per share, or $27,910 in the aggregate. Accordingly, we recognized a $4,936 impairment loss in the third quarter, based on the difference between the carrying amount of the investment and the cash received. We have reclassified the $25,000 of convertible senior debentures that we continue to own to "other assets" on our consolidated balance sheets.
                 
(4)  On December 21, 2012, we acquired a 58.75% interest in Independence Plaza and began to consolidate the accounts of the property into our consolidated financial statements from the date of acquisition (see page 142 for details).
                 
(5)  Includes interests in 85 10th Avenue, Farley Project, Suffolk Downs, Dune Capital L.P., Fashion Centre Mall and others.

6. Investments in Partially Owned Entities – continued

 

Below is a schedule of income from partially owned entities for the years ended December 31, 2012, 2011 and 2010.

      Percentage      
(Amounts in thousands)Ownership at For the Year Ended December 31,  
Our Share of Net Income (Loss):December 31, 2012 2012 2011 2010 
Toys: 32.6%          
 Equity in net income before income taxes   $ 28,638 $ 38,460 $ 16,401 
 Income tax benefit      16,629   1,132   45,418 
 Equity in net income     45,267   39,592   61,819 
 Non-cash impairment loss (see page 146 for details)     (40,000)   -   - 
 Management fees     9,592   8,948   9,805 
         $ 14,859  $ 48,540 $ 71,624 
             
Alexander's: 32.4%          
 Equity in net income    $ 24,709 $ 25,013 $ 20,059 
 Management, leasing and development fees (1)     13,748   7,417   7,556 
 Gain on sale of real estate     179,934   -   - 
           218,391   32,430   27,615 
                  
Lexington: 10.5%          
 Equity in net (loss)     (23)   (1,409)   (2,692) 
 Net gain resulting from Lexington's stock issuance and asset acquisition     28,763   9,760   13,710 
           28,740   8,351   11,018 
                  
LNR (acquired in July 2010): 26.2%          
 Equity in net income     66,270   31,409   1,973 
 Income tax benefit, assets sales and tax settlement gains     -   27,377   - 
       66,270   58,786   1,973 
                  
India real estate ventures 4.0%-36.5%           
 Equity in net (loss)     (5,008)   (1,087)   2,581 
 Impairment loss     -   (13,794)   - 
           (5,008)   (14,881)   2,581 
             
Partially owned office buildings:            
 Warner Building: 55.0%          
  Equity in net (loss)     (10,186)   (9,853)   (344) 
  Straight-line reserves and write-off of tenant improvements     -   (9,022)   - 
         (10,186)   (18,875)   (344) 
 280 Park Avenue (acquired in May 2011) 49.5%   (11,510)   (18,079)   - 
 666 Fifth Avenue Office Condominium (acquired in December 2011) 49.5%   7,009   198   - 
 330 Madison Avenue 25.0%   3,609   2,126   2,059 
 1101 17th Street 55.0%   2,576   2,740   416 
 One Park Avenue (acquired in March 2011) 30.3%   1,123   (1,142)   - 
 West 57th Street properties 50.0%   1,014   876   (10,990) 
 Rosslyn Plaza 43.7%-50.4%   822   2,193   (2,419) 
 Fairfax Square 20.0%   (132)   (42)   (28) 
 Other partially owned office buildings Various   1,905   7,735   2,405 
       (3,770)   (22,270)   (8,901) 
                  
Other investments:            
 Independence Plaza Partnership (acquired in June 2011) (2) n/a   111,865   2,457   - 
 Verde Realty Operating Partnership (3) n/a   (5,703)   1,661   (537) 
 Monmouth Mall 50.0%   1,429   2,556   1,952 
 Downtown Crossing, Boston 50.0%   (1,309)   (1,461)   (1,155) 
 Other investments (4) Various   (2,638)   2,443   (13,677) 
       103,644   7,656   (13,417) 
                  
         $ 408,267  $ 70,072 $ 20,869 
___________________________________            
(1)  2012 includes $6,423 of commissions in connection with the sale of real estate.
(2)  2012 includes $105,366 of income comprised of (i) $60,396 from the accelerated amortization of discount on investment in subordinated debt of the property and (ii) a $44,970 purchase price fair value adjustment from the exercise of a warrant to acquire 25% of the equity interest in the property (see page 142 for details).
(3)  2012 includes a $4,936 impairment loss (see note 3 on page 150).
(4)  2011 includes a $12,525 net gain from Suffolk Downs' sale of a partial interest.

6. Investments in Partially Owned Entities - continued

              
  Below is a summary of the debt of our partially owned entities as of December 31, 2012 and 2011, none of which is recourse to us.
              
   Percentage   Interest 100% of
   Ownership at   Rate at Partially Owned Entities’ Debt at
(Amounts in thousands)December 31,   December 31, December 31, December 31,
 2012 Maturity 2012 2012 2011
Toys:32.6%(1)          
 Notes, loans and mortgages payable  2013-2021 7.34% $ 5,683,733 $ 6,047,521
             
Alexander's:32.4%          
 Mortgages payable  2013-2018 3.87% $ 1,065,916 $ 1,330,932
             
Lexington:10.5%(2)          
 Mortgages payable  2015-2037 5.29% $ 1,994,179 $ 1,712,750
             
LNR:26.2%          
 Mortgages payable  2013-2031 4.62% $ 309,787 $ 353,504
 Liabilities of consolidated CMBS and CDO trusts  n/a 5.40%   97,211,734   127,348,336
         $ 97,521,521 $ 127,701,840
              
Partially owned office buildings:           
 666 Fifth Avenue Office Condominium mortgage49.5% 02/19 6.76% $ 1,109,700 $ 1,035,884
  payable           
 280 Park Avenue mortgage payable49.5% 06/16 6.65%   738,228   737,678
 Warner Building mortgage payable55.0% 05/16 6.26%   292,700   292,700
 One Park Avenue mortgage payable30.3% 03/16 5.00%   250,000   250,000
 330 Madison Avenue mortgage payable25.0% 06/15 1.71%   150,000   150,000
 Fairfax Square mortgage payable20.0% 12/14 7.00%   70,127   70,974
 1101 17th Street mortgage payable55.0% 01/18 1.46%   31,000   -
 West 57th Street properties mortgages payable50.0% 02/14 4.94%   20,434   21,864
 Rosslyn Plaza mortgage payable43.7%-50.4% 01/12 n/a   -   56,680
 OtherVarious Various 6.37%   69,704   70,230
         $ 2,731,893 $ 2,686,010
              
India Real Estate Ventures:           
 TCG Urban Infrastructure Holdings mortgages           
  payable25.0% 2013-2022 13.22% $ 236,579 $ 226,534
              
Other:           
 Monmouth Mall mortgage payable50.0% 09/15 5.44% $ 159,896 $ 162,153
 Verde Realty Operating Partnership mortgages           
   payablen/a n/a n/a   -   340,378
 Other(3)Various Various 5.02%   990,647   992,872
         $ 1,150,543 $ 1,495,403
              
              
(1) 32.7% at December 31, 2011.
              
(2) 12.0% at December 31, 2011.
              
(3) Includes interests in Suffolk Downs, Fashion Centre Mall and others.

Based on our ownership interest in the partially owned entities above, our pro rata share of the debt of these partially owned entities, was $29,443,128,000 and $37,531,298,000 as of December 31, 2012 and 2011, respectively. Excluding our pro rata share of LNR's liabilities related to consolidated CMBS and CDO trusts, which are non-recourse to LNR and its equity holders, including us, our pro rata share of partially owned entities debt was $3,998,929,000 and $4,199,145,000 at December 31, 2012 and 2011, respectively.