Stock-based Compensation

Vornado’s 2010 Omnibus Share Plan (the “Plan”) provides the Compensation Committee of Vornado’s Board of Trustees (the “Committee”) the ability to grant incentive and non-qualified Vornado stock options, restricted stock, Appreciation-Only Long-Term Incentive Plan Units ("AO LTIP Units"), restricted Operating Partnership units (the "OP Units") and out-performance plan awards (the "OPPs" to certain of our employees and officers. Under the Plan, awards may be granted up to a maximum of 6,000,000 Vornado shares, if all awards granted are Full Value Awards, as defined, and up to 12,000,000 Vornado shares, if all of the awards granted are Not Full Value Awards, as defined, plus shares in respect of awards forfeited after May 2010 that were issued pursuant to Vornado’s 2002 Omnibus Share Plan. Full Value Awards are awards of securities, such as Vornado restricted shares, that, if all vesting requirements are met, do not require the payment of an exercise price or strike price to acquire the securities. Not Full Value Awards are awards of securities, such as Vornado stock options, that do require the payment of an exercise price or strike price. This means, for example, if the Committee were to award only Vornado restricted shares, it could award up to 6,000,000 Vornado restricted shares. On the other hand, if the Committee were to award only Vornado stock options, it could award options to purchase up to 12,000,000 Vornado common shares (at the applicable exercise price). The Committee may also issue any combination of awards under the Plan, with reductions in availability of future awards made in accordance with the above limitations. As of December 31, 2018, Vornado has approximately 1,848,000 shares available for future grants under the Plan, if all awards granted are Full Value Awards, as defined.

On February 8, 2019, the Committee approved an amendment to our previously issued OP Units and Vornado restricted stock agreements which provides that the time-based vesting requirement no longer applies to participants who have reached 65 years of age. However, the right to convert such OP units and to sell such Vornado restricted stock are still subject to time-based vesting.


16.	Stock-based Compensation - continued

We account for all equity-based compensation in accordance with ASC 718. Below is a summary of our stock-based based compensation expense, a component of "general and administrative" expenses on our consolidated statements of income, during the years ended December 31, 2018, 2017 and 2016.



(Amounts in thousands)	December 31,
	2018		2017		2016
OP Units	$	17,763	$	20,630	$	21,136
OPPs	10,689		10,723		11,055
AO LTIP Units	2,113		—		—
Vornado stock options	587		747		937
Vornado restricted stock	570		729		851
	$	31,722	$	32,829	$	33,979

Below is a summary of unrecognized compensation expense for the year ended December 31, 2018.



(Amounts in thousands)	December 31, 2018		Weighted-Average Remaining Contractual Term
OP Units	$	17,930	1.6
OPPs	3,798		1.8
AO LTIP Units	1,371		1.6
Vornado stock options	902		1.7
Vornado restricted stock	913		1.7
	$	24,914	1.6

OPPs

OPPs are multi-year, performance-based equity compensation plans under which participants have the opportunity to earn a class of units (“OPP units”) of the Operating Partnership if, and only if, Vornado outperforms a predetermined total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR during the three-year performance period (the “Performance Period”) as described below. OPP units, if earned, become convertible into Class A units of the Operating Partnership (and ultimately into Vornado common shares) following vesting.

Awards under the 2017 OPP may be earned if Vornado (i) achieves a TSR level greater than 21% over the Performance Period (the “2017 Absolute Component”) and/or (ii) achieves a TSR above that of the SNL US Equity REIT Index over the three-year performance period (the “2017 Relative Component”).

Awards under the 2018 OPP may be earned if Vornado (i) achieves a TSR level greater than 21% over the Performance Period (the “2018 Absolute Component”, collectively with the 2017 Absolute Component, the “Absolute Components”) and/or (ii) achieves a TSR above a benchmark weighted index comprised of 70% of the SNL US Office REIT Index and 30% of the SNL US Retail Index over the Performance Period (the “2018 Relative Component”, collectively with the 2017 Relative Component, the “Relative Components”).

The value of awards under the Relative Components and Absolute Components will be calculated separately and will each be subject to an aggregate $35,000,000 maximum award cap for all participants. The two components will be added together to determine the aggregate award size, which shall also be subject to the aggregate $35,000,000 maximum award cap for all participants. In the event awards are earned under the Absolute Components, but Vornado underperforms the index by more than 200 basis points per annum over the Performance Period (600 basis points over the three years), the amount earned under the Absolute Components will be reduced (and potentially fully negated) based on the degree by which the index exceeds Vornado’s TSR. In the event 2017 awards are earned under the 2017 Relative Component, but Vornado fails to achieve a TSR of at least 3% per annum, award earned under the 2017 Relative Component will be reduced on a ratable sliding scale based on Vornado’s absolute TSR performance, with no awards being earned in the event Vornado’s TSR during the applicable measurement period is 0% or negative. In the event 2018 awards are earned under the 2018 Relative Component, but Vornado fails to achieve a TSR of at least 3% per annum, awards earned under the 2018 Relative Component will be reduced on a ratable sliding scale based on Vornado’s absolute TSR performance, with awards earned under the Relative Component being reduced by a maximum of 50% in the event Vornado’s TSR during the applicable measurement period is 0% or negative.


16.	Stock-based Compensation - continued

OPPs - continued

If the designated performance objectives are achieved, awards under the 2017 and 2018 OPP will vest ratably in each of years three, four and five. In addition, all of Vornado’s Named Executive Officers (as defined in Vornado’s Proxy Statement filed on Schedule 14A with the Securities and Exchange Commission on April 6, 2018) are required to hold any earned and vested awards for one year following each such vesting date. Dividends on awards granted under the 2017 and 2018 OPP accrue during the Performance Period and are paid to participants if awards are ultimately earned based on the achievement of the designated performance objectives.

Below is the summary of the OPP units granted during the years December 31, 2018, 2017 and 2016.



Plan Year	Total Plan Notional Amount		Percentage of Notional Amount Granted		Grant Date Fair Value⁽¹⁾		OPP Units Earned
2018	$	35,000,000	78.2	%	$	10,300,000	To be determined in 2021
2017	35,000,000		86.6	%	10,800,000		To be determined in 2020
2016	40,000,000		86.7	%	11,800,000		Not earned

________________________________________

(1)

During the years ended December 31, 2018, 2017 and 2016, $8,040,000, $7,558,000, and $7,250,000, respectively, was immediately expensed on the respective grant date due to acceleration of vesting for employees who are retirement eligible (have reached age 65 or age 60 with at least 20 years of service). The remaining $10,052,000, in aggregate, is being amortized into expense over a 5-year period from the date of each grant, using a graded vesting attribution model.

Vornado Stock Options

Vornado stock options are granted at an exercise price equal to the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant, generally vest over 4 years and expire 10 years from the date of grant. Compensation expense related to Vornado stock option awards is recognized on a straight-line basis over the vesting period.

Below is a summary of Vornado’s stock option activity for the year ended December 31, 2018.



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2018	2,823,900		$	46.62
Granted	33,897		72.40
Exercised	(620,157	)	28.52
Cancelled or expired	(7,347	)	75.25
Outstanding at December 31, 2018	2,230,293		$	51.95	1.6	$	26,464,877
Options vested and expected to vest at December 31, 2018	2,240,526		$	52.13	1.6	$	26,472,765
Options exercisable at December 31, 2018	2,162,843		$	51.15	1.4	$	26,464,877

The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions for grants in the years ended December 31, 2018, 2017 and 2016.



	December 31,
	2018	2017	2016
Expected volatility	35%	35%	35%
Expected life	5.0 years	5.0 years	5.0 years
Risk free interest rate	2.25%	1.95%	1.76%
Expected dividend yield	2.9%	3.0%	3.2%

The weighted average grant date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $18.42, $25.84 and $22.14 , respectively. Cash received from option exercises for the years ended December 31, 2018, 2017 and 2016 was $5,927,000, $28,253,000 and $6,825,000, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $25,820,000, $9,178,000 and $5,519,000, respectively.

16. Stock-based Compensation – continued

AO LTIP Units

AO LTIP Units are a class of partnership interests in the Operating Partnership that are intended to qualify as “profits interests” for federal income tax purposes and generally only allow the recipient to realize value to the extent the fair market value of a Vornado common share exceeds the threshold level set at the time the AO LTIP Units are granted, subject to any vesting conditions applicable to the award. The threshold level is intended to be equal to 100% of the then fair market value of a Vornado common share on the date of grant. The value of vested AO LTIP Units is realized through conversion of the AO LTIP Units into Class A Operating Partnership units. The number of Class A Units into which vested AO LTIP Units may be converted is determined based on the quotient of (i) the excess of the conversion value on the conversion date over the threshold value designated at the time the AO LTIP Unit was granted, divided by (ii) the conversion value on the conversion date. The “conversion value” is the value of a Vornado common share on the conversion date multiplied by the Conversion Factor as defined in the Partnership Agreement, which is currently one. AO LTIP Units have a term of 10 years from the grant date. Each holder will generally receive special income allocations in respect of an AO LTIP Unit equal to 10% (or such other percentage specified in the applicable award agreement) of the income allocated in respect of a Class A Unit. Upon conversion of AO LTIP Units to Class A Units, holders will be entitled to receive in respect of each such AO LTIP Unit, on a per unit basis, a special distribution equal to 10% (or such other percentage specified in the applicable award agreement) of the distributions received by a holder of an equivalent number of Class A Units during the period from the grant date of the AO LTIP Units through the date of conversion.

Below is a summary of AO LTIP Units activity for the year ended December 31, 2018.



	Units		Weighted-Average Grant-Date Fair Value
Granted at January 12, 2018	185,046		$	72.40
Cancelled or expired	(6,200	)	72.40
Outstanding at December 31, 2018	178,846		72.40

AO LTIP Units granted during the year ended December 31, 2018 had a fair value of $3,484,000. The fair value of each AO LTIP Units granted is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions for grants in the year ended December 31, 2018.



	December 31, 2018
Expected volatility	35%
Expected life	5.0 years
Risk free interest rate	2.25%
Expected dividend yield	2.9%


16.	Stock-based Compensation – continued

OP Units

OP Units are granted at the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant, vest ratably over four years and are subject to a taxable book-up event, as defined. Compensation expense related to OP Units is recognized ratably over the vesting period using a graded vesting attribution model. Distributions paid on unvested OP Units are charged to “net income attributable to noncontrolling interests in the Operating Partnership” on Vornado’s consolidated statements of income and to “preferred unit distributions” on the Operating Partnership’s consolidated statements of income and amounted to $2,559,000, $2,310,000 and $1,968,000 in the years ended December 31, 2018, 2017 and 2016, respectively.

Below is a summary of restricted OP unit activity for the year ended December 31, 2018.



Unvested Units	Units		Weighted-Average Grant-Date Fair Value
Unvested at January 1, 2018	628,962		$	76.13
Granted	267,203		65.36
Vested	(246,670	)	73.12
Cancelled or expired	(7,651	)	76.62
Unvested at December 31, 2018	641,844		72.79

OP Units granted in 2018, 2017 and 2016 had a fair value of $17,463,000, $24,927,000 and $18,492,000, respectively. The fair value of OP Units that vested during the years ended December 31, 2018, 2017 and 2016 was $18,037,000, $20,903,000 and $22,701,000, respectively.

Vornado Restricted Stock

Vornado restricted stock awards are granted at the average of the high and low market price of Vornado’s common shares on the NYSE on the date of grant and generally vest over four years. Compensation expense related to Vornado’s restricted stock awards is recognized on a straight-line basis over the vesting period. Dividends paid on unvested Vornado restricted stock are charged directly to retained earnings and amounted to $44,000, $46,000 and $56,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

Below is a summary of Vornado’s restricted stock activity for the year ended December 31, 2018.



Unvested Shares	Shares		Weighted-Average Grant-Date Fair Value
Unvested at January 1, 2018	14,845		$	81.05
Granted	8,602		72.40
Vested	(6,247	)	78.75
Cancelled or expired	(514	)	78.38
Unvested at December 31, 2018	16,686		77.54

Vornado restricted stock awards granted in 2018, 2017 and 2016 had a fair value of $623,000, $601,000 and $927,000, respectively. The fair value of restricted stock that vested during the years ended December 31, 2018, 2017 and 2016 was $492,000, $645,000 and $641,000, respectively.