Investments in Partially Owned Entities

6 Months Ended

Jun. 30, 2017

Equity Method Investments and Joint Ventures [Abstract]

6. Investments in Partially Owned Entities

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

As of June 30, 2017, we own 1,654,068 Alexander’s common shares, representing a 32.4% interest in Alexander’s. We account for our investment in Alexander’s under the equity method. We manage, lease and develop Alexander’s properties pursuant to agreements which expire in March of each year and are automatically renewable.

As of June 30, 2017, the market value (“fair value” pursuant to ASC Topic 820, Fair Value Measurements (“ASC 820”)) of our investment in Alexander’s, based on Alexander’s June 30, 2017 closing share price of $421.46, was $697,124,000, or $570,494,000 in excess of the carrying amount on our consolidated balance sheet. As of June 30, 2017, 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 $39,468,000. 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.

On June 1, 2017, Alexander’s completed a $500,000,000 refinancing of the office portion of 731 Lexington Avenue. The interest-only loan is at LIBOR plus 0.90% (2.06% at June 30, 2017) and matures in June 2020 with four one-year extension options. In connection therewith, Alexander’s purchased an interest rate cap with a notional amount of $500,000,000 that caps LIBOR at a rate of 6%. The property was previously encumbered by a $300,000,000 interest-only mortgage at LIBOR plus 0.95% which was scheduled to mature in March 2021.

Urban Edge Properties (“UE”) (NYSE: UE)

As of June 30, 2017, we own 5,717,184 UE operating partnership units, representing a 4.8% ownership interest in UE. We account for our investment in UE under the equity method and record our share of UE’s net income or loss on a one-quarter lag basis. In 2017 and 2016, we provided UE with information technology support. UE is providing us with leasing and property management services for (i) certain small retail properties that we plan to sell, and (ii) our affiliate, Alexander’s, Rego Park retail assets. As of June 30, 2017, the fair value of our investment in UE, based on UE’s June 30, 2017 closing share price of $23.73, was $135,669,000, or $93,777,000 in excess of the carrying amount on our consolidated balance sheet.

During the six months ended June 30, 2017, UE issued approximately 14,000,000 operating partnership units related to property acquisitions and a public offering of its common stock. As a result, our ownership interest in UE decreased to 4.8% from 5.4%. In accordance with ASC 323-10-40-1, we account for a unit issuance by an equity method investee as if we had sold a proportionate share of our investment. The average issuance price per unit of the newly issued UE capital is $26.07. Our average per unit carrying amount is $4.55. Accordingly, we recorded a $15,900,000 net gain in connection with this issuance which is included in “income (loss) from partially owned entities” on our consolidated statements of income.

Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE: PEI)

As of June 30, 2017, we own 6,250,000 PREIT operating partnership units, representing an 8.0% interest in PREIT. We account for our investment in PREIT under the equity method and record our share of PREIT’s net income or loss on a one-quarter lag basis. As of June 30, 2017, the fair value of our investment in PREIT, based on PREIT’s June 30, 2017 closing share price of $11.32, was $70,750,000, or $46,854,000 below the carrying amount on our consolidated balance sheet. As of June 30, 2017, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $84,087,000. The majority of this basis difference resulted from the excess of the fair value of the PREIT operating units received over our share of the book value of PREIT’s net assets. Substantially all of this basis difference was allocated, based on our estimates of the fair values of PREIT’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 PREIT’s net loss. The basis difference related to the land will be recognized upon disposition of our investment.

Farley Post Office Joint Venture

In September 2016, our 50.1% joint venture with the Related Companies (“Related”) was designated by Empire State Development (“ESD”), an entity of New York State to redevelop the historic Farley Post Office building. The building will include a new Moynihan Train Hall and approximately 850,000 rentable square feet of commercial space, comprised of approximately 730,000 square feet of office space and approximately 120,000 square feet of retail space. On June 15, 2017, the joint venture closed a 99-year, triple-net lease with ESD for the commercial space at the Farley Post Office building and made a $230,000,000 upfront contribution, of which our share is $115,230,000, towards the construction of the train hall. The lease calls for annual rent payments of $5,000,000 plus payments in lieu of real estate taxes. Simultaneously, the joint venture completed a $271,000,000 loan facility, with an initial advance of $202,299,000. The interest only loan is at LIBOR plus 3.25% (4.41% at June 30, 2017) and matures in June 2019 with two one-year extension options.

The joint venture has also entered into a development agreement with ESD and a design-build contract with Skanska Moynihan Train Hall Builders. Under the development agreement with ESD, the joint venture is obligated to build the Moynihan Train Hall, with Vornado and Related each guaranteeing the joint venture’s obligations. Under the design-build agreement, Skanska Moynihan Train Hall Builders is obligated to fulfill all of the joint venture’s obligations. The obligations of Skanska Moynihan Train Hall Builders have been bonded by Skanska USA and bears a full guaranty from Skanska AB.

Mezzanine Loan – New York

On May 9, 2017, a $150,000,000 mezzanine loan owned by a joint venture in which we have a 33.3% ownership interest was repaid at its maturity and we received our $50,000,000 share. The mezzanine loan earned interest at LIBOR plus 9.42%.

Sterling Suffolk Racecourse, LLC (“Suffolk Downs JV”)

On May 26, 2017, Suffolk Downs JV, a joint venture in which we have a 21.2% equity interest, sold the property comprising the Suffolk Downs race track in East Boston, Massachusetts (“Suffolk Downs”) for $155,000,000, which resulted in net proceeds and a net gain to us of $15,314,000. In addition, we were repaid $29,318,000 of principal and $6,129,000 of accrued interest on our debt investments in Suffolk Downs JV, resulting in a net gain of $11,373,000.

Below is a schedule summarizing our investments in partially owned entities.

(Amounts in thousands)		Percentage
		Ownership at		Balance as of
		June 30, 2017		June 30, 2017		December 31, 2016
Investments:
	Partially owned office buildings⁽¹⁾		Various	$	804,492	$	825,421
	Alexander’s		32.4%		126,630		129,324
	PREIT		8.0%		117,604		122,883
	UE		4.8%		41,892		24,523
	India real estate ventures		4.1%-36.5%		26,491		30,290
	Other investments⁽²⁾		Various		236,980		295,578
				$	1,354,089	$	1,428,019

	7 West 34th Street⁽³⁾		53.0%	$	(45,789)	$	(43,022)


(1)	Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue, 512 West 22nd Street, 85 Tenth Avenue, 61 Ninth Avenue and others.
(2)	Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, Farley Post Office Joint Venture, Toys "R" Us, Inc. (which has a carrying amount of zero) and others.
(3)	Our negative basis results from a deferred gain from the sale of a 47.0% ownership interest in the property and is included in "other liabilities" on our consolidated balance sheets.

Below is a schedule net income (loss) from partially owned entities.

(Amounts in thousands)				Percentage		For the Three Months Ended				For the Six Months Ended
				Ownership at		June 30,				June 30,
				June 30, 2017		2017		2016		2017		2016
Our Share of Net Income (Loss):
		UE (see page 23 for details):
			Net gain resulting from UE operating
			partnership unit issuances		4.8%	$	15,900	$	-	$	15,900	$	-
			Equity in net earnings				2,894		1,071		3,985		1,947
			Management fees				209		209		418		418
							19,003		1,280		20,303		2,365

		Alexander's (see page 23 for details):
			Equity in net income		32.4%		6,690		6,812		13,582		13,749
			Management, leasing and development fees				1,507		1,688		3,016		3,413
							8,197		8,500		16,598		17,162

		Partially owned office buildings⁽¹⁾			Various		(7,897)		(12,398)		(17,840)		(26,647)

		India real estate ventures			4.1%-36.5%		(1,644)		(1,934)		10		(2,620)

		PREIT (see page 24 for details)			8.0%		(902)		(527)		(3,732)		(4,815)

		Other investments⁽²⁾			Various		29,519		5,721		32,382		10,957

						$	46,276	$	642	$	47,721	$	(3,598)


(1)	Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street, 85 Tenth Avenue and others.
(2)	Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, Toys "R" Us, Inc. and others. In the second quarter of 2017, we recognized $26,687 of net gains, comprised of $15,314 representing our share of a net gain on the sale of Suffolk Downs and $11,373 representing the net gain on repayment of our debt investments in Suffolk Downs JV. See page 24 for details.