Investments in Partially Owned Entities

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

As of September 30, 2018, we own 1,654,068 Alexander’s common shares, or approximately 32.4% of Alexander’s common equity. 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, 2018, the market value ("fair value" pursuant to ASC 820) of our investment in Alexander’s, based on Alexander’s September 28, 2018 quarter ended closing share price of $343.30, was $567,842,000, or $456,000,000 in excess of the carrying amount on our consolidated balance sheet. As of September 30, 2018, 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 $39,093,000. 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.

Alexander's paid $3,971,000 of Transfer Tax upon the November 2012 sale of its Kings Plaza Regional Shopping Center located in Brooklyn, New York. Alexander's accrued $23,797,000 of potential additional Transfer Tax and related interest based on the precedent established by the Tax Tribunal's decision regarding One Park Avenue (see Note 6 - Real Estate Fund Investments for details) during the first quarter of 2018 which was subsequently paid on April 5, 2018 in order to preserve Alexander's rights to continue litigation and stop accrual of interest, of which our 32.4% share is $7,708,000 and is included in “income (loss) from partially owned entities” on our consolidated statements of income in the nine months ended September 30, 2018.

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

As of September 30, 2018, 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 2018 and 2017, 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, 2018, the fair value of our investment in UE, based on UE’s September 28, 2018 quarter ended closing share price of $22.08, was $126,235,000, or $80,837,000 in excess of the carrying amount on our consolidated balance sheet.

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

As of September 30, 2018, we own 6,250,000 PREIT operating partnership units, representing an 7.9% 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 September 30, 2018, the fair value of our investment in PREIT, based on PREIT’s September 28, 2018 quarter ended closing share price of $9.46, was $59,125,000 or $2,389,000 below the carrying amount on our consolidated balance sheet. As of September 30, 2018, the carrying amount of our investment in PREIT exceeds our share of the equity in the net assets of PREIT by approximately $36,096,000. 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.


8.	Investments in Partially Owned Entities - continued

Independence Plaza

We have a 50.1% economic interest in a joint venture that owns Independence Plaza, a three-building 1,327 unit residential complex in the Tribeca submarket of Manhattan. The joint venture paid $1,730,000 of Transfer Tax upon its acquisition of the property in December 2012. The joint venture accrued $13,103,000 of potential additional Transfer Tax and related interest based on the precedent established by the Tax Tribunal's decision regarding One Park Avenue (see Note 6 - Real Estate Fund Investments for details) during the first quarter of 2018, which was subsequently paid on April 5, 2018, in order to preserve the joint venture's rights to continue litigation and stop accrual of interest. Because we consolidate the entity that incurred the potential additional Transfer Tax, $13,103,000 of expense is included in “transaction related costs and other” and $6,538,000 is allocated to “noncontrolling interests in consolidated subsidiaries” on our consolidated statements of income.

On June 11, 2018, the joint venture completed a $675,000,000 refinancing of Independence Plaza. The seven-year interest-only loan matures in July 2025 and has a fixed rate of 4.25%. Our share of net proceeds, after repayment of the existing 3.48% $550,000,000 mortgage and closing costs, was $55,618,000.

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. In the second quarter of 2018, Toys liquidated the inventory of its U.S. stores and ceased operations. 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 as of September 30, 2018 at approximately $420,000,000, which could result in a tax deduction in future periods.

666 Fifth Avenue Office Condominium

On August 3, 2018, we completed the sale of our 49.5% interests in the 666 Fifth Avenue Office Condominium. We received net proceeds of $120,000,000 and recognized a financial statement gain of $134,032,000 which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the three and nine months ended September 30, 2018. The gain for tax purposes was approximately $244,000,000. We continue to own all of the 666 Fifth Avenue Retail Condominium encompassing the Uniqlo, Tissot and Hollister stores with 125 linear feet of frontage on Fifth Avenue between 52nd and 53rd Street.

Concurrently with the sale of our interests, the existing mortgage loan on the property was repaid and we received net proceeds of $55,244,000 for the participation we held in the mortgage loan. We recognized a financial statement gain of $7,308,000, which is included in "net gains on disposition of wholly owned and partially owned assets" on our consolidated statements of income for the three and nine months ended September 30, 2018.


8.	Investments in Partially Owned Entities - continued

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



(Amounts in thousands)		Percentage Ownership at September 30, 2018	Balance as of
		Percentage Ownership at September 30, 2018	September 30, 2018			December 31, 2017
Investments:
	Partially owned office buildings/land⁽¹⁾	Various	$	502,826		$	504,393
	Alexander’s	32.4%	111,842			126,400
	PREIT	7.9%	61,514			66,572
	UE	4.5%	45,398			46,152
	Other investments⁽²⁾	Various	187,860			313,312
			$	909,440		$	1,056,829

	330 Madison Avenue⁽³⁾	25.0%	$	(57,935	)	$	(53,999	)
	7 West 34th Street ⁽⁴⁾	53.0%	(49,647		)	(47,369		)
			$	(107,582	)	$	(101,368	)

____________________


(1)	Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park 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, Moynihan Office Building and others.


(3)	Our negative basis resulted from a refinancing distribution and is included in “other liabilities” on our consolidated balance sheets.


(4)	Our negative basis resulted from a deferred gain from the sale of a 47.0% ownership interest in the property on May 27, 2016 and is included in “other liabilities” on our consolidated balance sheets.

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



(Amounts in thousands)		Percentage Ownership at September 30, 2018	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		Percentage Ownership at September 30, 2018	2018			2017			2018			2017
Our share of net income (loss):
	Alexander's (see page 26 for details):
	Equity in net income⁽¹⁾	32.4%	$	4,278		$	6,510		$	7,215		$	20,092
	Management, leasing and development fees		1,149			1,335			3,378			4,351
			5,427			7,845			10,593			24,443

	UE (see page 26 for details):
	Equity in net income⁽²⁾	4.5%	2,696			5,908			3,017			25,793
	Management, leasing and development fees		67			100			217			518
			2,763			6,008			3,234			26,311

	Partially owned office buildings⁽³⁾	Various	735			(967		)	(1,546		)	79

	PREIT (see page 26 for details)⁽⁴⁾	7.9%	(616		)	(49,748		)	(2,113		)	(53,480		)

	Other investments⁽⁵⁾	Various	(1,103		)	(4,939		)	(4,109		)	8,225

			$	7,206		$	(41,801	)	$	6,059		$	5,578

____________________

(1)

The three and nine months ended September 30, 2018 include our $1,085 share of a non-cash straight-line rent write-off adjustment related to Sears Roebuck and Co. which filed for Chapter 11 bankruptcy relief and our $518 share of Alexander’s litigation expense due to a settlement. The nine months ended September 30, 2018 also includes our $7,708 share of Alexander's potential additional Transfer Tax, our $3,162 share of higher interest expense due to an increase in average LIBOR and higher average mortgage balances due to a refinancing and our $1,802 share of expense related to the change in fair value of marketable securities held by Alexander’s.


(2)	The three and nine months ended September 30, 2017 include $5,200 and $21,100, respectively, of net gain resulting from UE operating partnership unit issuances.


(3)	Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 7 West 34th Street, 330 Madison Avenue, 512 West 22nd Street, 85 Tenth Avenue and others. The nine month period ended September 30, 2018 includes our $4,978 share of potential additional Transfer Tax related to the March 2011 acquisition of One Park Avenue (see Note 6 - Real Estate Fund Investments).


(4)	The three and nine months ended September 30, 2017 include a $44,465 non-cash impairment loss.

(5)

Includes interests in Independence Plaza, Fashion Centre Mall/Washington Tower, Rosslyn Plaza, 50-70 West 93rd Street, 666 Fifth Avenue Office Condominium (sold on August 3, 2018) and others. In the nine months ended September 30, 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.