Investments in Partially Owned Entities

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

As of September 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 September 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 September 29, 2017 quarter ended closing share price of $424.09, was $701,474,000, or $575,842,000 in excess of the carrying amount on our consolidated balance sheet. As of September 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 $39,418,000. 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% (2.14% at September 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 6.00%. 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 September 30, 2017, we own 5,717,184 UE operating partnership units, representing a 4.5% 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 September 30, 2017, the fair value of our investment in UE, based on UE’s September 29, 2017 quarter ended closing share price of $24.12, was $137,898,000, or $91,356,000 in excess of the carrying amount on our consolidated balance sheet.

During the three and nine months ended September 30, 2017, UE issued approximately 6,250,000 and 20,250,000 operating partnership units related to property acquisitions and public offerings of its common stock. As a result, our ownership interest in UE decreased to 4.5% 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. Accordingly, during the three and nine months ended September 30, 2017, we recorded $5,200,000 and $21,100,000, respectively, of net gains in connection with these issuances which are included in “(loss) income from partially owned entities” on our consolidated statements of income.

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

As of September 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.

Based on PREIT’s September 29, 2017 quarter ended closing share price of $10.49, the market value (“fair value” pursuant to ASC Topic 323, Investments - Equity Method and Joint Ventures) of our investment in PREIT was $65,563,000 or $44,465,000 below the carrying amount on our consolidated balance sheet. We have concluded that our investment in PREIT is “other-than-temporarily” impaired and recorded a $44,465,000 non-cash impairment loss on our consolidated statements of income. Our conclusion was based on a sustained trading value of PREIT stock below our carrying amount and our inability to forecast a recovery in the near-term.


6.	Investments in Partially Owned Entities - continued

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

As of September 30, 2017, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $33,399,000. 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.

Moynihan Office Building

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 Moynihan 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% (4.48% at September 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 racetrack 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.

330 Madison Avenue

On July 19, 2017, the joint venture, in which we have a 25.0% interest, completed a $500,000,000 refinancing of 330 Madison Avenue, an 845,000 square foot Manhattan office building. The seven-year interest-only loan matures in August 2024 and has a fixed rate of 3.43%. Our share of net proceeds, after repayment of the existing $150,000,000 LIBOR plus 1.30% mortgage and closing costs, was approximately $85,000,000.

280 Park Avenue

On August 23, 2017, the joint venture, in which we have a 50.0% interest, completed a $1.2 billion refinancing of 280 Park Avenue, a 1,250,000 square foot Manhattan office building. The loan is interest-only at LIBOR plus 1.73% (2.97% at September 30, 2017) and matures in September 2019 with five one-year extension options. Our share of net proceeds, after repayment of the existing $900,000,000 LIBOR plus 2.00% mortgage and closing costs, was approximately $140,000,000.


6.	Investments in Partially Owned Entities - continued

Toys "R" Us, Inc. ("Toys")

We own 32.5% of Toys. On September 18, 2017, Toys filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. We carry our Toys investment at zero. Further, we do not hold any debt of Toys and do not guarantee any of Toys’ obligations. For income tax purposes, we carry our investment in Toys at approximately $420,000,000 which could result in a tax deduction in future periods.

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



(Amounts in thousands)		Percentage Ownership at	Balance as of
		September 30, 2017	September 30, 2017			December 31, 2016
Investments:
	Partially owned office buildings/land ⁽¹⁾	Various	$	542,778		$	734,536
	Alexander’s	32.4%	125,632			129,324
	PREIT	8.0%	66,477			122,883
	UE	4.5%	46,542			24,523
	Other investments ⁽²⁾	Various	283,553			366,988
			$	1,064,982		$	1,378,254

	330 Madison Avenue⁽³⁾	25.0%	$	(53,237	)	$	—
	7 West 34th Street ⁽⁴⁾	53.0%	(46,013		)	(43,022		)
			$	(99,250	)	$	(43,022	)

____________________


(1)	Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue (2016 only - see (3) below), 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, Moynihan Office Building, Toys (which has a carrying amount of zero), and others.


(3)	Our negative basis resulted from a refinancing distribution and is included in "other liabilities" on our consolidated balance sheets as of September 30, 2017.


(4)	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.


6.	Investments in Partially Owned Entities - continued

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



(Amounts in thousands)		Percentage Ownership at September 30, 2017	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		Percentage Ownership at September 30, 2017	2017			2016			2017			2016
Our share of net (loss) income:
	PREIT (see page 23 for details):
	Non-cash impairment loss	8.0%	$	(44,465	)	$	—		$	(44,465	)	$	—
	Equity in net earnings		(5,283		)	52			(9,015		)	(4,763		)
			(49,748		)	52			(53,480		)	(4,763		)
	Alexander's (see page 23 for details):
	Equity in net earnings	32.4%	6,510			6,891			20,092			20,640
	Management, leasing and development fees		1,335			1,894			4,351			5,307
			7,845			8,785			24,443			25,947
	UE (see page 23 for details):
	Net gain resulting from UE operating partnership unit issuances	4.5%	5,200			—			21,100			—
	Equity in net earnings		708			1,949			4,693			3,896
	Management fees		100			209			518			627
			6,008			2,158			26,311			4,523

	Partially owned office buildings/land⁽¹⁾	Various	(5,551		)	(8,642		)	(23,508		)	(29,882		)

	Other investments⁽²⁾	Various	(355		)	1,458			31,812			8,067

			$	(41,801	)	$	3,811		$	5,578		$	3,892

____________________


(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, 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.