6. Investments in Partially Owned Entities
Toys “R” Us (“Toys”)
As of December 31, 2013, we own 32.6% of Toys. We account for our investment in Toys under the equity method and record our 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. The business of Toys is highly seasonal and substantially all of Toys' net income is generated in its fourth quarter.
At December 31, 2012, we estimated that the fair value of our investment was $40,000,000 less than the carrying amount of $518,041,000 and concluded that the decline in the value of our investment was “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 of 2012.
In the first quarter of 2013, we recognized our share of Toys' fourth quarter net income of $78,542,000 and a corresponding non-cash impairment loss of the same amount to continue to carry over our investment at fair value.
At December 31, 2013, we estimated that the fair value of our investment in Toys was approximately $80,062,000 ($83,224,000 including $3,162,000 for our share of Toys' accumulated other comprehensive income), or $162,215,000 less than the carrying amount after recognizing our share of Toys third quarter net loss in our fourth quarter. In determining the fair value of our investment, we considered, among other inputs, a December 31, 2013 third-party valuation of Toys. We have concluded that the decline in the value of our investment is “other-than-temporary” based on, among other factors, Toys' 2013 holiday sales results, compression of earnings multiples of comparable retailers and our inability to forecast a recovery in the near term. Accordingly, we recognized an additional non-cash impairment loss of $162,215,000 in the fourth quarter of 2013.
We will continue to assess the recoverability of our investment each quarter. To the extent the fair value of our investment does not change, we will recognize a non-cash impairment loss equal to our share of Toys' fourth quarter net income, if any, in our first quarter of 2014.
Below is a summary of Toys' latest available financial information on a purchase accounting basis:
| (Amounts in thousands) | Balance as of | ||||||||||||
| Balance Sheet: | November 2, 2013 | October 27, 2012 | |||||||||||
| Assets | $ | 11,756,000 | $ | 12,953,000 | |||||||||
| Liabilities | 10,437,000 | 11,190,000 | |||||||||||
| Noncontrolling interests | 75,000 | 44,000 | |||||||||||
| Toys “R” Us, Inc. equity (1) | 1,244,000 | 1,719,000 | |||||||||||
| For the Twelve Months Ended | |||||||||||||
| Income Statement: | November 2, 2013 | October 27, 2012 | October 29, 2011 | ||||||||||
| Total revenues | $ | 13,046,000 | $ | 13,698,000 | $ | 13,956,000 | |||||||
| Net (loss) income attributable to Toys | (396,000) | 138,000 | 121,000 | ||||||||||
| (1) | As of December 31, 2013, the carrying amount of our investment in Toys is less than our share of Toys' equity by approximately $322,255,000. This basis difference results primarily from non-cash impairment losses aggregating $280,757,000 that we recognized in 2013 and 2012. We have allocated the basis difference to Toys' real estate (which will be amortized over its estimated useful life), and intangible assets, primarily trade names and trademarks (which is not being amortized and will be recognized upon disposition of our investment). | ||||||||||||
6. Investments in Partially Owned Entities – continued
Alexander's, Inc. (“Alexander's”) (NYSE: ALX)
As of December 31, 2013, 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, 2013, we have a $43,307,000 receivable from Alexander's for fees under these agreements.
As of December 31, 2013 the market value (“fair value” pursuant to ASC 820) of our investment in Alexander's, based on Alexander's December 31, 2013 closing share price of $330.00, was $545,842,000, or $378,057,000 in excess of the carrying amount on our consolidated balance sheet. As of December 31, 2013, 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 $42,048,000. 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
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 revenue 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) $272,000, 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% (1.84% at December 31, 2013).
Other Agreements
Building Maintenance Services (“BMS”), our wholly-owned subsidiary, supervises (i) cleaning, engineering and security services at Alexander's 731 Lexington Avenue property and (ii) security services at Alexander's Rego Park I and Rego Park II properties, for an annual fee of the costs for such services plus 6%. During the years ended December 31, 2013, 2012 and 2011, we recognized $2,036,000, $2,362,000 and $2,442,000 of income, respectively, under these agreements.
Below is a summary of Alexander's latest available financial information:
| (Amounts in thousands) | Balance as of December 31, | ||||||||||||||
| Balance Sheet: | 2013 | 2012 | |||||||||||||
| Assets | $ | 1,458,000 | $ | 1,482,000 | |||||||||||
| Liabilities | 1,124,000 | 1,150,000 | |||||||||||||
| Stockholders' equity | 334,000 | 332,000 | |||||||||||||
| For the Year Ended December 31, | |||||||||||||||
| Income Statement: | 2013 | 2012 | 2011 | ||||||||||||
| Total revenues | $ | 196,000 | $ | 191,000 | $ | 185,000 | |||||||||
| Net income attributable to Alexander’s (1) | 57,000 | 674,000 | 79,000 | ||||||||||||
| (1) | 2012 includes a $600,000 net gain on sale of real estate. | ||||||||||||||
6. Investments in Partially Owned Entities – continued
LNR Property Corporation (“LNR”)
In January 2013, we and the other equity holders of LNR entered into a definitive agreement to sell LNR for $1.053 billion, of which our share of the net proceeds was $240,474,000. The definitive agreement provided that LNR would not (i) make any cash distributions to the equity holders, including us, through the completion of the sale, which occurred on April 19, 2013, and (ii) take any of the following actions (among others) without the purchaser's approval, the lending or advancing of any money, the acquisition of assets in excess of specified amounts, or the issuance of equity interests. Notwithstanding the terms of the definitive agreement, in accordance with GAAP, we recorded our pro rata share of LNR's earnings on a one-quarter lag basis through the date of sale, which increased the carrying amount of our investment in LNR above our share of the net sales proceeds and resulted in us recognizing an “other-than-temporary” impairment loss on our investment of $27,231,000 in the three months ended March 31, 2013. LNR's net loss for the period from January 1, 2013 through April 19, 2013 was $80,654,000, including a $66,241,000 non-cash impairment loss. Our share of the net loss was $21,131,000, including $17,355,000 for our share of the non-cash impairment loss. In the three months ended June 30, 2013, we recorded our share of the net loss but did not record our share of the non-cash impairment loss, as it was effectively considered in our assessment of “other-than-temporary” impairment loss when we recorded the $27,231,000 impairment loss in the three months ended March 31, 2013. As a result of recording our share of the net loss of $3,776,000 for the three months ended June 30, 2013, the carrying amount of our investment decreased below our share of the net sales proceeds; accordingly, we recorded an offsetting gain on the sale of our investment.
| The following table summarizes the activity related to our investment in LNR by quarter for the year ended December 31, 2013. | ||||||||||||||
| For the Three Months Ended | For the Year Ended | |||||||||||||
| (Amounts in thousands) | March 31, 2013 | June 30, 2013 | December 31, 2013 | |||||||||||
| Balance at beginning of period | $ | 224,724 | $ | 241,377 | $ | 224,724 | ||||||||
| Equity in earnings of LNR | 45,962 | (3,776) | 42,186 | |||||||||||
| Other comprehensive loss | (2,078) | (903) | (2,981) | |||||||||||
| Balance before impairment loss | 268,608 | 236,698 | 263,929 | |||||||||||
| Other-than-temporary impairment loss | (27,231) | - | (27,231) | |||||||||||
| Net gain on sale | - | 3,776 | 3,776 | |||||||||||
| Net sales proceeds | - | (240,474) | (240,474) | |||||||||||
| Balance at end of period | $ | 241,377 | $ | - | $ | - | ||||||||
| Below is a summary of LNR’s financial information as of December 31, 2012 and through the date of sale: | ||||||||||||||
| (Amounts in thousands) | Balance as of September 30, | |||||||||||||
| Balance Sheet: | 2013 | 2012 | ||||||||||||
| Assets (1) | $ | - | $ | 98,530,000 | ||||||||||
| Liabilities (1) | - | 97,643,000 | ||||||||||||
| Noncontrolling interests | - | 8,000 | ||||||||||||
| LNR Property Corporation equity | - | 879,000 | ||||||||||||
| For the period ended | ||||||||||||||
| October 1, 2012 | For the Twelve Months Ended September 30, | |||||||||||||
| Income Statement: | to April 19, 2013 | 2012 | 2011 | |||||||||||
| Total revenues | $ | 122,222 | $ | 238,000 | $ | 208,000 | ||||||||
| Net income attributable to LNR | 94,949 | 266,000 | 224,000 | |||||||||||
| (1) | Includes $97 billion of assets and liabilities of LNR related to consolidated CMBS and CDO trusts which were non-recourse to LNR and its equity holders, including us. | |||||||||||||
6. Investments in Partially Owned Entities – continued
Independence Plaza
On December 21, 2012, we acquired a 58.75% economic interest in Independence Plaza, a three-building 1,328 unit residential complex in the Tribeca submarket of Manhattan (the “Property”). We determined, at that time, that we were the primary beneficiary of the variable interest entity (“VIE”) that owned the Property. Accordingly, we consolidated the operations of the Property from the date of acquisition. Upon consolidation, our preliminary purchase price allocation was primarily to land ($309,848,000) and building ($527,578,000). Based on a third party appraisal and additional information about facts and circumstances that existed at the acquisition date, which was obtained subsequent to the acquisition date, we finalized the purchase price allocation in the first quarter of 2013, and retroactively adjusted our December 31, 2012 consolidated balance sheet as follows:
| (Amounts in thousands) | ||||
| Land | $ | 602,662 | ||
| Building and improvements | 252,844 | |||
| Acquired above-market leases (included in identified intangible assets) | 13,115 | |||
| Acquired in-place leases (included in identified intangible assets) | 67,879 | |||
| Other assets | 7,374 | |||
| Acquired below-market leases (included in deferred revenue) | (99,074) | |||
| Purchase price | $ | 844,800 |
On June 7, 2013, the existing $323,000,000 mortgage loan was refinanced with a $550,000,000 five-year fixed-rate interest only mortgage loan bearing interest at 3.48%. The net proceeds of $219,000,000, after repaying the existing loan and closing costs, were distributed to the partners, of which our share was $137,000,000. Simultaneously with the refinancing, we sold an 8.65% economic interest in the Property to our partner for $41,000,000 in cash, which reduced our economic interest to 50.1%. As a result of this transaction, we determined that we were no longer the primary beneficiary of the VIE. Accordingly, we deconsolidated the operations of the Property on June 7, 2013 and began accounting for our investment under the equity method.
650 Madison Avenue
On September 30, 2013, a joint venture, in which we have a 20.1% interest, acquired 650 Madison Avenue, a 27-story, 594,000 square foot Class A office and retail tower located on Madison Avenue between 59th and 60th Street in Manhattan, for $1.295 billion. The property contains 523,000 square feet of office space and 71,000 square feet of retail space. The purchase price was funded with cash and a new $800,000,000 seven-year 4.39% interest-only loan. We account for our investment in the joint venture under the equity method.
The following is a summary of condensed combined financial information for all of our partially owned entities, including Toys, Alexander's and LNR (sold in April 2013), as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011.
| (Amounts in thousands) | Balance as of December 31, | ||||||||||||
| Balance Sheet: | 2013 | 2012 | |||||||||||
| Assets(1) | $ | 21,773,000 | $ | 122,692,000 | |||||||||
| Liabilities(1) | 17,982,000 | 117,064,000 | |||||||||||
| Noncontrolling interests | 96,000 | 88,000 | |||||||||||
| Equity | 3,695,000 | 5,540,000 | |||||||||||
| For the Year Ended December 31, | |||||||||||||
| Income Statement: | 2013 | 2012 | 2011 | ||||||||||
| Total revenue | $ | 14,092,000 | $ | 15,119,000 | $ | 15,321,000 | |||||||
| Net income(2) | (368,000) | 1,091,000 | 199,000 | ||||||||||
| (1) | 2012 includes $97 billion of assets and liabilities of LNR related to consolidated CMBS and CDO trusts which were non-recourse to LNR and its equity holders, including us. | ||||||||||||
| (2) | 2012 includes a $600,000 net gain on sale of real estate. | ||||||||||||
6. Investments in Partially Owned Entities - continued
Below are schedules summarizing our investments in, and income from, partially owned entities.
| Percentage | ||||||||||||||||
| (Amounts in thousands) | Ownership at | As of December 31, | ||||||||||||||
| Investments: | December 31, 2013 | 2013 | 2012 | |||||||||||||
| Toys | 32.6% | $ | 83,224 | $ | 478,041 | |||||||||||
| Alexander’s | 32.4% | $ | 167,785 | $ | 171,013 | |||||||||||
| Lexington (see page 110 for details) | n/a | - | 75,542 | |||||||||||||
| LNR (see page 113 for details) | n/a | - | 224,724 | |||||||||||||
| India real estate ventures | 4.1%-36.5% | 88,467 | 95,516 | |||||||||||||
| Partially owned office buildings (1) | Various | 621,294 | 446,933 | |||||||||||||
| Other investments (2) | Various | 288,897 | 212,528 | |||||||||||||
| $ | 1,166,443 | $ | 1,226,256 | |||||||||||||
| ______________________________________________________ | ||||||||||||||||
| (1) | Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others. | |||||||||||||||
| (2) | Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others. | |||||||||||||||
| Percentage | |||||||||||||||||
| (Amounts in thousands) | Ownership at | For the Year Ended December 31, | |||||||||||||||
| Our Share of Net Income (Loss): | December 31, 2013 | 2013 | 2012 | 2011 | |||||||||||||
| Toys: | |||||||||||||||||
| Equity in net (loss) income | 32.6% | $ | (128,919) | $ | 45,267 | $ | 39,592 | ||||||||||
| Non-cash impairment losses (see page 111 for details) | (240,757) | (40,000) | - | ||||||||||||||
| Management fees | 7,299 | 9,592 | 8,948 | ||||||||||||||
| $ | (362,377) | $ | 14,859 | $ | 48,540 | ||||||||||||
| Alexander's: | |||||||||||||||||
| Equity in net income | 32.4% | $ | 17,721 | $ | 24,709 | $ | 25,013 | ||||||||||
| Management, leasing and development fees | 6,681 | 13,748 | 7,417 | ||||||||||||||
| Gain on sale of real estate | - | 179,934 | - | ||||||||||||||
| 24,402 | 218,391 | 32,430 | |||||||||||||||
| Lexington (see page 110 for details): | |||||||||||||||||
| Equity in net loss | n/a | (979) | (23) | (1,409) | |||||||||||||
| Net gain resulting from Lexington's stock issuance and asset acquisition | - | 28,763 | 9,760 | ||||||||||||||
| (979) | 28,740 | 8,351 | |||||||||||||||
| LNR (see page 113 for details): | |||||||||||||||||
| Equity in net income | n/a | 42,186 | 66,270 | 31,409 | |||||||||||||
| Impairment loss | (27,231) | - | - | ||||||||||||||
| Net gain on sale | 3,776 | - | - | ||||||||||||||
| Income tax benefit, assets sales and tax settlement gains | - | - | 27,377 | ||||||||||||||
| 18,731 | 66,270 | 58,786 | |||||||||||||||
| India real estate ventures: | |||||||||||||||||
| Equity in net loss | 4.1%-36.5% | (3,533) | (5,008) | (1,087) | |||||||||||||
| Impairment loss | - | - | (13,794) | ||||||||||||||
| (3,533) | (5,008) | (14,881) | |||||||||||||||
| Partially owned office buildings (1) | Various | (4,212) | (3,770) | (22,270) | |||||||||||||
| Other investments (2) | Various | (10,817) | 103,644 | 7,656 | |||||||||||||
| $ | 23,592 | $ | 408,267 | $ | 70,072 | ||||||||||||
| ______________________________________________________ | |||||||||||||||||
| (1) | Includes interests in 280 Park Avenue, 650 Madison Avenue, One Park Avenue, 666 Fifth Avenue (Office), 330 Madison Avenue and others. | ||||||||||||||||
| (2) | Includes interests in Independence Plaza, Monmouth Mall, 85 10th Avenue, Fashion Center Mall, 50-70 West 93rd Street and others. | ||||||||||||||||
6. Investments in Partially Owned Entities - continued
| Below is a summary of the debt of our partially owned entities as of December 31, 2013 and 2012, none of which is recourse to us. | |||||||||||||||
| Percentage | Interest | ||||||||||||||
| Ownership at | Rate at | 100% Partially Owned Entities’ | |||||||||||||
| (Amounts in thousands) | December 31, | December 31, | Debt at December 31, | ||||||||||||
| 2013 | Maturity | 2013 | 2013 | 2012 | |||||||||||
| Toys: | |||||||||||||||
| Notes, loans and mortgages payable | 32.6% | 2014-2021 | 6.56% | $ | 5,702,247 | $ | 5,683,733 | ||||||||
| Alexander's: | |||||||||||||||
| Mortgages payable | 32.4% | 2014-2018 | 3.83% | $ | 1,049,959 | $ | 1,065,916 | ||||||||
| Lexington (see page 110 for details): | |||||||||||||||
| Mortgages payable | n/a | n/a | n/a | $ | - | $ | 1,994,179 | ||||||||
| LNR (see page 113 for details): | |||||||||||||||
| Mortgages payable | n/a | n/a | n/a | $ | - | $ | 309,787 | ||||||||
| Liabilities of consolidated CMBS and CDO trusts | n/a | n/a | - | 97,211,734 | |||||||||||
| $ | - | $ | 97,521,521 | ||||||||||||
| Partially owned office buildings(1): | |||||||||||||||
| Mortgages payable | Various | 2014-2023 | 5.74% | $ | 3,622,759 | $ | 2,731,893 | ||||||||
| India Real Estate Ventures: | |||||||||||||||
| TCG Urban Infrastructure Holdings mortgages | |||||||||||||||
| payable | 25.0% | 2014-2022 | 13.50% | $ | 199,021 | $ | 236,579 | ||||||||
| Other(2): | |||||||||||||||
| Mortgages payable | Various | 2014-2023 | 4.56% | $ | 1,709,509 | $ | 1,150,543 | ||||||||
| (1) | Includes 666 Fifth Avenue (Office), 650 Madison Avenue, 280 Park Avenue, One Park Avenue, 330 Madison Avenue and others. | ||||||||||||||
| (2) | Includes Independence Plaza, Monmouth Mall, Fashion Center Mall, 50-70 West 93rd Street 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 $4,189,403,000 and $29,443,128,000 as of December 31, 2013 and 2012, 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 at December 31, 2012.