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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Certain statements contained in this Quarterly Report constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results, financial condition, results of operations and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For a further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly, any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
Management’s Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our consolidated financial statements for the three and six months ended June 30, 2018 and 2017. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2017 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 2 – Summary of Significant Accounting Policies” to the consolidated financial statements included therein. For the six months ended June 30, 2018, there were no material changes to these policies, other than the adoption of Accounting Standards Update (“ASU”) 2014-09, described in “Part I - Financial Information, Item 1 - Financial Statements, Note 3 - Recently Issued Accounting Literature” of this Quarterly Report on Form 10-Q.
Overview
Alexander’s, Inc. (NYSE: ALX) is a real estate investment trust (“REIT”), incorporated in Delaware, engaged in leasing, managing, developing and redeveloping its properties. All references to “we,” “us,” “our,” “Company,” and “Alexander’s”, refer to Alexander’s, Inc. and its consolidated subsidiaries. We are managed by, and our properties are leased and developed by, Vornado Realty Trust (“Vornado”) (NYSE: VNO). We have seven properties in the greater New York City metropolitan area.
We compete with a large number of property owners and developers. Our success depends upon, among other factors, trends of the world, national and local economies, the financial condition and operating results of current and prospective tenants and customers, the availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, population trends, zoning laws, and our ability to lease, sublease or sell our properties, at profitable levels. Our success is also subject to our ability to refinance existing debt on acceptable terms as it comes due.
Quarter Ended
June 30, 2018
Financial Results Summary
Net income for the quarter ended June 30, 2018 was $17,570,000, or $3.43 per diluted share, compared to $20,660,000, or $4.04 per diluted share in the prior year’s quarter. Funds from operations (“FFO”) (non-GAAP) for the quarter ended June 30, 2018 was $26,138,000, or $5.11 per diluted share, compared to $28,667,000, or $5.60 per diluted share in the prior year’s quarter.
Six Months Ended
June 30, 2018
Financial Results Summary
Net income for the six months ended June 30, 2018 was $7,870,000, or $1.54 per diluted share, compared to $42,327,000, or $8.28 per diluted share in the prior year’s six months. FFO (non-GAAP) for the six months ended June 30, 2018 was $24,589,000, or $4.81 per diluted share, compared to $58,248,000, or $11.39 per diluted share in the prior year’s six months. Net income and FFO for the six months ended June 30, 2018 included (i) $23,797,000, or $4.65 per diluted share, of expense for potential additional New York City real property transfer taxes on the 2012 sale of Kings Plaza Regional Shopping Center (“Kings Plaza”), which is being contested and (ii) $4,737,000, or $0.92 per diluted share, of expense from the decrease in the fair value of marketable securities resulting from a new GAAP accounting standard effective January 1, 2018. Previously, changes in the fair value of marketable securities were recognized through “accumulated other comprehensive (loss) income” on our consolidated balance sheets and did not impact our consolidated statements of income.
Square Footage, Occupancy and Leasing Activity
As of
June 30, 2018
, our portfolio was comprised of seven properties aggregating 2,437,000 square feet and was 99.5% occupied.
Real Property Transfer Tax Litigation
In 2012, we sold Kings Plaza and paid real property transfer taxes to New York City in connection with the sale. In 2015, the New York City Department of Finance (“NYC DOF”) issued a Notice of Determination to us assessing an additional New York City real property transfer tax amount, including interest, which we are contesting.
In 2014, in a case with similar facts, the NYC DOF issued a Notice of Determination to a Vornado joint venture assessing an additional New York City real property transfer tax amount, including interest. In January 2017, a New York City administrative law judge made a determination upholding the Vornado joint venture’s position that such additional real property transfer taxes were not due. On February 16, 2018, the New York City Tax Appeals Tribunal (the “Tribunal”) overturned the January 2017 determination. The Vornado joint venture is appealing the Tribunal’s decision to the Appellate Division of the Supreme Court of the State of New York.
Based on the precedent of the Tribunal’s decision, we accrued an expense for the potential additional real property transfer taxes of $23,797,000 ($15,874,000 of real property transfer tax and $7,923,000 of interest) during the three months ended March 31, 2018. On April 5, 2018, we paid this amount in order to stop the interest from accruing. Our case is on hold pending the outcome of the Vornado joint venture’s appeal.
Overview - continued
Tenant Matters
On April 4, 2017, Sears closed its 195,000 square foot store at our Rego Park I property. Annual revenue is approximately $10,400,000, under a lease which expires in March 2021. In its 2016 annual report on Form 10-K, Sears indicated that substantial doubt exists related to its ability to continue as a going concern. There are $3,271,000 of receivables arising from the straight-lining of rent and $343,000 of unamortized deferred leasing costs on our consolidated balance sheet related to the Sears lease as of
June 30, 2018
which we will continue to assess for recoverability.
In connection with the Toys “R” Us (“Toys”) Chapter 11 bankruptcy, its 47,000 square foot lease at our Rego Park II shopping center ($2,600,000 of annual revenue) was rejected effective June 30, 2018 and possession of the space was returned to us. Consequently, we accelerated depreciation and amortization of the remaining balances of $588,000 of tenant improvements and $215,000 of deferred leasing costs during the three months ended June 30, 2018. We also wrote off the Toys receivable arising from the straight-lining of rent of $500,000 during the six months ended June 30, 2018.
Significant Tenant
Bloomberg L.P. (“Bloomberg”) accounted for revenue of $52,672,000 and $52,187,000 for the six months ended June 30, 2018 and 2017, respectively, representing approximately 45% and 46% of our total revenues in each period, respectively. No other tenant accounted for more than 10% of our total revenues. If we were to lose Bloomberg as a tenant, or if Bloomberg were to be unable to fulfill its obligations under its lease, it would adversely affect our results of operations and financial condition. In order to assist us in our continuing assessment of Bloomberg’s creditworthiness, we receive certain confidential financial information and metrics from Bloomberg. In addition, we access and evaluate financial information regarding Bloomberg from other private sources, as well as publicly available data.
Results of Operations – Three Months Ended
June 30, 2018
, compared to
June 30, 2017
Property Rentals
Property rentals were $38,618,000 in the quarter ended
June 30, 2018
, compared to $38,264,000 in the prior year’s quarter, an increase of $354,000.
Expense Reimbursements
Tenant expense reimbursements were $19,635,000 in the quarter ended
June 30, 2018
, compared to $18,926,000 in the prior year’s quarter, an increase of $709,000. This increase was primarily due to higher reimbursable real estate taxes and operating expenses.
Operating Expenses
Operating expenses were $21,511,000 in the quarter ended
June 30, 2018
, compared to $20,744,000 in the prior year’s quarter, an increase of $767,000. This increase was primarily due to higher real estate taxes of $505,000.
Depreciation and Amortization
Depreciation and amortization was $8,700,000 in the quarter ended
June 30, 2018
, compared to $8,138,000 in the prior year’s quarter, an increase of $562,000. This increase was primarily due to acceleration of depreciation and amortization related to the Toys lease termination.
General and Administrative Expenses
General and administrative expenses were $1,689,000 in the quarter ended
June 30, 2018
, compared to $1,696,000 in the prior year’s quarter, a decrease of $7,000.
Interest and Other Income, net
Interest and other income, net was $1,730,000 in the quarter ended
June 30, 2018
, compared to $1,297,000 in the prior year’s quarter, an increase of $433,000. This increase was primarily due to $1,776,000 of higher interest income from the Rego Park II loan participation entered into in July 2017, partially offset by $1,600,000 of expense from a litigation settlement.
Interest and Debt Expense
Interest and debt expense was $10,945,000 in the quarter ended
June 30, 2018
, compared to $7,255,000 in the prior year’s quarter, an increase of $3,690,000. This increase was primarily due to higher interest expense of (i) $2,075,000 due to an increase in average LIBOR, (ii) $802,000 resulting from the refinancing of the office portion of 731 Lexington Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $817,000 of higher amortization of debt issuance costs.
Change in Fair Value of Marketable Securities
Change in fair value of marketable securities was income of $433,000 in the quarter ended
June 30, 2018
, resulting from The Macerich Company’s (“Macerich”) closing share price of $56.83 as of June 30, 2018, compared to $56.02 as of March 31, 2018, on 535,265 shares owned.
Income Taxes
Income tax expense was $1,000 in the quarter ended
June 30, 2018
, compared to income tax benefit of $6,000 in the prior year’s quarter.
Results of Operations - Six Months Ended June 30, 2018, compared to June 30, 2017
Property Rentals
Property rentals were $76,859,000 in the six months ended June 30, 2018, compared to $76,537,000 in the prior year’s six months, an increase of $322,000.
Expense Reimbursements
Tenant expense reimbursements were $39,274,000 in the six months ended June 30, 2018, compared to $37,882,000 in the prior year’s six months, an increase of $1,392,000. This increase was primarily due to higher reimbursable real estate taxes and operating expenses.
Operating Expenses
Operating expenses were $43,788,000 in the six months ended June 30, 2018, compared to $41,665,000 in the prior year’s six months, an increase of $2,123,000. This increase was primarily due to (i) higher real estate taxes of $1,008,000, (ii) higher reimbursable operating expenses of $450,000 and (iii) higher bad debt expense of $398,000.
Depreciation and Amortization
Depreciation and amortization was $16,983,000 in the six months ended June 30, 2018, compared to $16,183,000 in the prior year’s six months, an increase of $800,000. This increase was primarily due to acceleration of depreciation and amortization related to the Toys lease termination.
General and Administrative Expenses
General and administrative expenses were $2,950,000 in the six months ended June 30, 2018, compared to $2,852,000 in the prior year’s six months, an increase of $98,000.
Interest and Other Income, net
Interest and other income, net was $4,768,000 in the six months ended June 30, 2018, compared to $2,024,000 in the prior year’s six months, an increase of $2,744,000. This increase was primarily due to (i) higher interest income of $3,361,000 from the Rego Park II loan participation and (ii) $1,438,000 from an increase in average interest rates, partially offset by (iii) $1,600,000 of expense from a litigation settlement, (iv) $231,000 of lower bankruptcy recoveries and (v) $211,000 of lower interest income due to lower average investment balances.
Interest and Debt Expense
Interest and debt expense was $20,774,000 in the six months ended June 30, 2018, compared to $13,415,000 in the prior year’s six months, an increase of $7,359,000. This increase was primarily due to higher interest expense of (i) $3,701,000 due to an increase in average LIBOR, (ii) $2,181,000 resulting from the refinancing of the office portion of 731 Lexington Avenue on June 1, 2017 for $500,000,000 at LIBOR plus 0.90% (previously a $300,000,000 loan at LIBOR plus 0.95%) and (iii) $1,606,000 of higher amortization of debt issuance costs.
Change in Fair Value of Marketable Securities
Change in fair value of marketable securities was an expense of $4,737,000 in the six months ended June 30, 2018, resulting from Macerich’s closing share price of $56.83 as of June 30, 2018, compared to $65.68 as of December 31, 2017, on 535,265 shares owned. See “Part I - Financial Information, Item 1 - Financial Statements, Note 3 - Recently Issued Accounting Literature.”
Income Taxes
Income tax expense was $2,000 in the six months ended June 30, 2018, compared to $1,000 in the prior year’s six months.
Loss from Discontinued Operations
Loss from discontinued operations was $23,797,000 in the six months ended June 30, 2018. The loss was due to a payment of potential additional real property transfer taxes from the 2012 sale of Kings Plaza which is being contested. See “Part I - Financial Information, Item 1 - Financial Statements, Note 8 - Discontinued Operations.”
Liquidity and Capital Resources
Cash Flows
Property rental income is our primary source of cash flow and is dependent on a number of factors, including the occupancy level and rental rates of our properties, as well as our tenants’ ability to pay their rents. Our properties provide us with a relatively consistent stream of cash flow that enables us to pay our operating expenses, interest expense, recurring capital expenditures and cash dividends to stockholders. Other sources of liquidity to fund cash requirements include our existing cash, proceeds from financings, including mortgage or construction loans secured by our properties and proceeds from asset sales. We anticipate that cash flows from continuing operations over the next twelve months, together with existing cash balances, will be adequate to fund our business operations, cash dividends to stockholders, debt amortization and capital expenditures. We may refinance our maturing debt as it comes due or choose to repay it.
Six Months Ended June 30, 2018
Cash and cash equivalents and restricted cash were $300,083,000 as of
June 30, 2018
, compared to $393,279,000 as of December 31, 2017, a decrease of $93,196,000. This decrease resulted from (i) $126,391,000 of net cash used in financing activities and (ii) $270,000 of net cash used in investing activities, partially offset by (iii) $33,465,000 of net cash provided by operating activities.
Net cash used in financing activities of $126,391,000 was primarily comprised of debt repayments of $80,206,000 (primarily the refinancing and subsequent repayment of the mortgage loan on our Rego Park I shopping center) and dividends paid of $46,044,000.
Net cash used in investing activities of $270,000 was comprised of construction in progress and real estate additions of $1,789,000, partially offset by principal repayment proceeds from the Rego Park II loan participation of $1,519,000.
Net cash provided by operating activities of $33,465,000 was comprised of (i) net income of $7,870,000 and (ii) adjustments for non-cash items of $26,909,000, partially offset by (iii) the net change in operating assets and liabilities of $1,314,000. The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $19,740,000, (ii) the change in fair value of marketable securities of $4,737,000, (iii) straight-lining of rental income of $2,038,000 and (iv) stock-based compensation expense of $394,000.
Six Months Ended June 30, 2017
Cash and cash equivalents and restricted cash were $551,023,000 as of June 30, 2017, compared to $374,678,000 as of December 31, 2016, an increase of $176,345,000. This increase resulted from (i) $142,745,000 of net cash provided by financing activities and (ii) $35,805,000 of net cash provided by operating activities, partially offset by (iii) $2,205,000 of net cash used in investing activities.
Net cash provided by financing activities of $142,745,000 was primarily comprised of (i) $500,000,000 of proceeds from the refinancing of the office portion of 731 Lexington Avenue, partially offset by (ii) debt repayments of $301,819,000 (primarily the repayment of the former loan on the office portion of 731 Lexington Avenue) and (iii) dividends paid of $43,474,000.
Net cash provided by operating activities of $35,805,000 was comprised of net income of $42,327,000, adjustments for non-cash items of $19,877,000 and the net change in operating assets and liabilities of $26,399,000 (primarily due to prepaid real estate taxes). The adjustments for non-cash items were comprised of (i) depreciation and amortization (including amortization of debt issuance costs) of $17,334,000, (ii) straight-lining of rental income of $2,149,000 and (iii) stock-based compensation expense of $394,000.
Net cash used in investing activities of $2,205,000 was comprised of construction in progress and real estate additions.
Commitments and Contingencies
Insurance
We maintain general liability insurance with limits of $300,000,000 per occurrence and per property, and all-risk property and rental value insurance coverage with limits of $1.7 billion per occurrence, including coverage for acts of terrorism, with sub-limits for certain perils such as floods and earthquakes on each of our properties.
Liquidity and Capital Resources - continued
Fifty Ninth Street Insurance Company, LLC (“FNSIC”), our wholly owned consolidated subsidiary, acts as a direct insurer for coverage for acts of terrorism, including nuclear, biological, chemical and radiological (“NBCR”) acts, as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020. Coverage for acts of terrorism (including NBCR acts) is up to $1.7 billion per occurrence and in the aggregate. Coverage for acts of terrorism (excluding NBCR acts) is fully reinsured by third party insurance companies and the Federal government with no exposure to FNSIC. For NBCR acts, FNSIC is responsible for a $306,000 deductible and 18% of the balance of a covered loss, and the Federal government is responsible for the remaining 82% of a covered loss. We are ultimately responsible for any loss incurred by FNSIC.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. We are responsible for deductibles and losses in excess of our insurance coverage, which could be material.
Our mortgage loans are non-recourse to us and contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance our properties.
Paramus
In 2001, we leased 30.3 acres of land located in Paramus, New Jersey to IKEA Property, Inc. The lease has a purchase option in 2021 for $75,000,000. The property is encumbered by a $68,000,000 interest-only mortgage loan with a fixed rate of 2.90%, which matures on October 5, 2018. The annual triple-net rent is the sum of $700,000 plus the amount of debt service on the mortgage loan. If the purchase option is exercised, we will receive net cash proceeds of approximately $7,000,000 and recognize a gain on sale of land of approximately $60,000,000. If the purchase option is not exercised, the triple-net rent for the last 20 years would include debt service sufficient to fully amortize $68,000,000 over the remaining 20-year lease term.
Rego Park I Litigation
In June 2014, Sears Roebuck and Co. (“Sears”) filed a lawsuit in the Supreme Court of the State of New York against Vornado and us (and certain of our subsidiaries) with regard to space that Sears leases at our Rego Park I property alleging that the defendants are liable for harm that Sears has suffered as a result of (a) water intrusions into the premises, (b) two fires in February 2014 that caused damages to those premises, and (c) alleged violations of the Americans with Disabilities Act in the premises’ parking garage. Sears asserted various causes of actions for damages and sought to compel compliance with landlord’s obligations to repair the premises and to provide security, and to compel us to abate a nuisance that Sears claims was a cause of the water intrusions into its premises. In addition to injunctive relief, Sears sought, among other things, damages of not less than $4 million and future damages it estimated would not be less than $25 million. In March 2016, Sears withdrew its claim for future damages leaving a remaining claim for property damages, which we estimate to be approximately $650,000 based on information provided by Sears. We intend to defend the remaining claim vigorously. The amount or range of reasonably possible losses, if any, is not expected to be greater than $650,000.
Letters of Credit
Approximately $1,040,000 of standby letters of credit were issued and outstanding as of
June 30, 2018
.
Other
There are various other legal actions against us in the ordinary course of business. In our opinion, the outcome of such matters in the aggregate will not have a material effect on our financial position, results of operations or cash flows.
Funds from Operations (“FFO”) (non-GAAP)
FFO is computed in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net gains from sales of depreciated real estate assets, real estate impairment losses, depreciation and amortization expense from real estate assets and other specified non-cash items, including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO and FFO per diluted share are used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. FFO does not represent cash generated from operating activities and is not necessarily indicative of cash available to fund cash requirements and should not be considered as an alternative to net income as a performance measure or cash flow as a liquidity measure. FFO may not be comparable to similarly titled measures employed by other companies. A reconciliation of our net income to FFO is provided below.
FFO (non-GAAP) for the three and six months ended June 30, 2018 and 2017
FFO (non-GAAP) for the quarter ended June 30, 2018 was $26,138,000, or $5.11 per diluted share, compared to $28,667,000, or $5.60 per diluted share in the prior year’s quarter.
FFO (non-GAAP) for the six months ended June 30, 2018 was $24,589,000, or $4.81 per diluted share, compared to $58,248,000, or $11.39 per diluted share in the prior year’s six months. FFO for the six months ended June 30, 2018 included (i) $23,797,000, or $4.65 per diluted share, of expense for potential additional New York City real property transfer taxes on the 2012 sale of Kings Plaza, which is being contested and (ii) $4,737,000, or $0.92 per diluted share, of expense from the decrease in the fair value of marketable securities resulting from a new GAAP accounting standard effective January 1, 2018. Previously, changes in the fair value of marketable securities were recognized through “accumulated other comprehensive (loss) income” on our consolidated balance sheets and did not impact our consolidated statements of income.
The following table reconciles our net income to FFO (non-GAAP):
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Amounts in thousands, except share and per share amounts)
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2018
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2017
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2018
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2017
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Net income
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$
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17,570
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$
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20,660
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$
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7,870
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$
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42,327
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Depreciation and amortization of real property
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8,568
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8,007
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16,719
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15,921
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FFO (non-GAAP)
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$
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26,138
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$
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28,667
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$
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24,589
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$
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58,248
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FFO per diluted share (non-GAAP)
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$
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5.11
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$
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5.60
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$
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4.81
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$
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11.39
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Weighted average shares used in computing FFO per diluted share
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5,116,657
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5,115,320
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5,116,321
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5,115,012
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