VORNADO REALTY TRUST 2008 ANNUAL REPORT VORNADO COMPANY PROFILE Vornado Realty Trust is a fully-integrated real estate investment trust. The Company owns: Office Properties: • 28 office properties aggregating approximately 16.1 million square feet in Midtown Manhattan; • 84 office properties aggregating approximately 17.7 million square feet in the Washington, DC/Northern Virginia area; • A 70% controlling interest in 555 California Street, a three-building complex aggregating 1.8 million square feet in San Francisco’s financial district; Retail Properties: • 176 retail properties primarily in Manhattan, New York, New Jersey, Pennsylvania, Washington, DC/Northern Virginia area and Puerto Rico aggregating approximately 21.9 million square feet; Merchandise Mart Properties: • 8.9 million square feet of showroom and office space, including the 3.5 million square foot Merchandise Mart in Chicago; Other Real Estate Investments: • 32.5% of the common stock of Alexander’s Inc. (NYSE:ALX); • the Hotel Pennsylvania in New York; • 32.7% interest in Toys “R” Us, Inc.; • mezzanine loans on real estate; and • other investments and marketable securities. Vornado’s common shares are listed on the New York Stock Exchange and are traded under the symbol: VNO. FINANCIAL HIGHLIGHTS Year Ended December 31, 2008 2007 Revenues $ 2,697,051,000 $ 2,410,516,000 EBITDA (before minority interest and gains on sale of real estate): * $ 1,731,146,000 $ 2,074,631,000 Net income $ 337,952,000 $ 511,729,000 Net income per share⎯basic $ 2.20 $ 3.37 Net income per share⎯diluted $ 2.14 $ 3.23 Total assets $ 21,418,210,000 $ 22,478,935,000 Shareholders’ equity $ 5,664,485,000 $ 5,418,099,000 Funds from operations* $ 844,568,000 $ 966,638,000 Funds from operations per share* $ 5.16 $ 5.89 EBITDA, adjusted for comparability* $ 1,981,481,000 $ 1,901,520,000 Funds from Operations, adjusted for comparability* $ 880,784,000 $ 874,663,000 Funds from Operations, adjusted for comparability per share* $ 5.38 $ 5.33 * In these financial highlights and in the letter to our shareholders that follows, we present certain non-GAAP measures, including EBITDA before Minority Interest and Gains on Sale of Real Estate, EBITDA, adjusted for comparability, Funds from Operations (“FFO”) and Funds from Operations, adjusted for comparability. We have provided reconciliations of these non-GAAP measures to the applicable GAAP measure in the appendix to the Chairman’s letter and in Management’s Discussion and Analysis of Financial Condition and Results of Operations. To Our Shareholders Vornado’s Funds from Operations for the year ended December 31, 2008 was $844.6 million, $5.16 per diluted share, compared to $966.6 million, $5.89 per diluted share, for the year ended December 31, 2007. Net Income applicable to common shares for the year ended December 31, 2008 was $338.0 million, $2.14 per diluted share, versus $511.7 million, $3.23 per diluted share, for the previous year. Here are the financial results (presented in EBITDA format) by business segment: % of 2008 ($ IN MILLIONS, EXCEPT SHARE DATA) EBITDA 2008 2007 Same Store EBITDA: New York Office 31% 586.8 514.2 6.2% Washington Office 21% 396.6 393.8 4.5% Total Office 52% 983.4 908.0 5.5% Retail 18% 333.8 323.3 4.8% Merchandise Mart 6% 116.4 114.2 (.2%) Hotel Pennsylvania 2% 42.3 37.9 11.6% Alexander’s 3% 58.1 64.1 Lexington Realty Trust 1% 26.4 19.2 Toys “R” Us 18% 345.8 302.0 Other (175.1) 305.9 EBITDA before minority interest and gains on sale of real estate 100% 1,731.1 2,074.6 Funds from Operations 844.6 966.6 Funds from Operations per share 5.16 5.89 The businesses of Vornado performed well in 2008 (and even performed well in the fourth quarter of 2008, a period which may turn out to be the very eye of the storm(1)). In fact, adjusting for the $481 million swing in Other, 2008 EBITDA would have been $138 million greater than in 2007. We present the detail of Other in Appendix I. Our core business is concentrated geographically in New York and Washington, DC, is office and retail centric, and represents 80% of our EBITDA. (1) But remember, real estate is a lagger. This letter and this Annual Report contain forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward- looking statements are not guarantees of performance. The Company’s future results, financial condition and business may differ materially from those expressed in these forward-looking statements. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors, see “Forward- Looking Statements” and “Item 1. Business-Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2008, a copy of which accompanies this letter. 2 We use Funds from Operations Adjusted for Comparability as an earnings metric to allow for apples-to-apples comparison of our business by eliminating certain one-time items. The following chart reconciles Funds from Operations to Funds from Operations Adjusted for Comparability: ($ IN MILLIONS, EXCEPT SHARE DATA) 2008 2007 Funds from Operations, as Reported 844.6 966.6 Adjustments for certain items that affect comparability: Reversal of deferred income taxes initially recorded in connection with the H Street acquisition 222.2 -- Americold Realty Trust (including in 2008 112.7 million net gain on sale) 118.8 24.7 Non-cash asset write-downs: Investment in Lexington Realty Trust (107.9) -- Marketable equity securities (76.4) -- Real Estate development costs (177.4) (10.4) Derivative positions in marketable equity securities (33.7) 136.6 Purchase price accounting adjustments (Toys -14.9 and Beverly Connection 4.1) (10.8) -- Alexander’s stock appreciation rights 6.6 14.3 MPH mezzanine loan loss reversal (accrual) 10.3 (57.0) After-tax net gain on sale of residential condominiums 5.4 -- GMH (in 2008, net gain on sale) 2.0 5.8 Net gain on extinguishment of debt, prepayment penalties, write-off of unamortized financing costs and other 1.2 (13.1) Minority interests’ share of above adjustments 3.5 (9.0) Total adjustments (36.2) 91.9 Funds from Operations, Adjusted for Comparability 880.8 874.7 Funds from Operations, Adjusted for Comparability per share 5.38 5.33 Funds from Operations Adjusted for Comparability increased $.05 per share to $5.38 from $5.33, as detailed below: ($ IN MILLIONS, EXCEPT SHARE DATA) Amount Per Share Operations: Same Store (Per Share: New York Office .18; Washington, DC Office .10; Retail .08; Merchandise Mart .00) 64.3 0.36 Non-same store (primarily write-offs of straight-lined rents receivable and lower fee income) (30.6) (0.17) Acquisitions, net of cost of capital 19.0 0.11 Toys “R” Us 20.0 0.11 Investment Income (71.2 ) (0.40) Interest Expense 22.0 0.12 Other (17.6 ) (0.10) Minority Interest 0.2 -- Accretion from decreased shares outstanding -- 0.02 Comparable FFO Increase 6.1 0.05 3 One-Timers Here is a schedule of certain one-time items we exclude from Funds from Operations Adjusted for Comparability: ($ IN THOUSANDS) Total 2008 2007 2006 2005 2004 Securities Investments: Sears, Sears Canada and McDonald’s 508,126 131,911 212,864 81,621 81,730 Other marketable securities (76,352) (76,352) Other derivatives (16,940) (33,740) 4,700 12,100 Non-cash asset write-downs: Real estate development costs (187,800) (177,400) (10,400) MPH mezzanine loan (46,700) 10,300 (57,000) Lexington Realty Trust (107,882) (107,882) Alexander’s stock appreciation rights (SARs) (62,437) 6,583 14,280 (49,000) (9,000) (25,300) Reversal of H Street deferred taxes 222,200 222,200 Americold Realty Trust 265,800 118,800 24,700 26,300 38,500 57,500 Minority Interest (55,485) 3,553 (9,352) (16,368) (12,655) (20,663) Other 17,360 (2,262) (6,939) (33,137) 8,021 51,677 459,890 (36,200) 91,900 152,759 106,487 144,944 Alexander’s SARs 62,437 (6,583) (14,280) 49,000 9,000 25,300 H Street deferred taxes (222,200) (222,200) One-timers as we look at them 300,127 (264,983) 77,620 201,759 115,487 170,244 One-timers are inevitable, and until this year, they were, by and large, a big plus. But, 2008 was the one-timer year from hell. To present this material as we look at it, I have adjusted the table by eliminating the non-cash accounting effect of Alexander’s SARs and the H Street deferred taxes. Accordingly, please focus on the last line above, which for the five-year period results in a positive $300 million even after 2008. This year we abandoned the MSG move project, delayed and substantially wrote down the Downtown Crossing project in Boston, and the Harlem Park project, and wrote-down/impaired eight others. (2) The $108 million write-down of our investment in Lexington deserves explanation. This investment began in 1998 when we acquired, over time with partners, interests in 104 separate net lease limited partnerships. In 2002 these were rolled up into Newkirk MLP, which in 2006 merged with the NYSE-traded Lexington Realty Trust.