Vornado Buys, Sells–and Pulls Back Its Veil

Vornado had a busy 4th of July week, with nearly $1.3 billion in deals. But in announcing its array of purchases and dispositions, it has also been pursuing a new "transparency" strategy. What remains to be seen is how the market will react to everything it's doing.

Buy a little, sell a little. Vornado had a busy 4th of July week, with nearly $1.3 billion in deals. In addition to entering into an agreement to acquire a retail condominium at Manhattan’s 666 Fifth Ave. for $707 million, the REIT snapped up a retail property in Miami for $132 million and signed on to sell three of its Mart segment properties and an office asset for an aggregate $428 million.

All of this fits into a relatively new strategy. “They’ve been telling everybody for the last year or so they’re going to start doing a few things differently,” John Guinee, managing director with brokerage and investment banking firm Stifel, Nicolaus & Co., told Commercial Property Executive. “They said they’re going to be more active acquirers and disposers of assets, do much more in terms of asset recycling. And the second thing they said they were going to do is start to reach out more to the street–both buy and sell sides–and be much more forthcoming and just give people more insight as to their comings and goings.”

The big bucks will trade hands in Manhattan. The retail condominium that Vornado will purchase at the 1.5 million-square-foot 666 Fifth office building consists of 114,000 square feet and comes with a price tag of $707 million.  Approximately 39,000 square feet will be purchased in fee, and the remaining 75,000 square feet by long-term lease. But Vornado is no stranger to the 41-story trophy property. The REIT came into possession of a 49.5 interest in the office segment of the asset in late 2011, after having established a joint venture with co-owner Kushman Cos. to recapitalize the space.

Vornado will rely on property-level debt and proceeds from property dispositions to fund the acquisition, which is on track to reach completion in the fourth quarter of this year.  Retail at 666 Fifth comes at a pretty penny. In March of 2011, Kushman and co-owners Carlyle Group and Crown Acquisitions sold an approximately 38,000-square-foot condominium segment to Spain’s Inditex Group for $324 million.

Clearly, Vornado was in a retail frame of mind last week. Through its 5 percent-owned real estate fund, Vornado Capital Partners L.P., the REIT shelled out $132 million for 1100 Lincoln Road, a 167,000-square-foot retail center in Miami Beach. The property is 97 percent leased, due in no small part to its position as one of the anchors of the city’s thriving Lincoln Road shopping district. The asset also includes a parking facility for the accommodation of 298 vehicles. Vornado partially financed the acquisition through a $66 million new mortgage loan bearing an interest rate at LIBOR plus 2.75 percent and featuring a maturity date of 2015, with the option for two one-year extensions.

But it wasn’t just a shopping spree that the REIT indulged in last week. Vornado also revealed it had committed to letting go of a few assets, entering into agreements to trade the Washington Design Center, the Boston Design Center, the L.A. Mart, as well as the Canadian Trade Shows for a total of $228 million. “They basically told everyone they were going to sell these merchandise marts, so they sent out a press release to say they’ve done it,” said Guinee. As Vornado chair Steven Roth noted in the company’s 2011 annual report, “This business was a grower for us until it fell victim to the housing recession/depression.”

The recent flurry of Vornado news also includes the REIT’s announcement that it has signed on to sell the 420,000-square-foot trophy office building at 409 Third St., S.W., in Washington, D.C., for $200 million. The office property is adjacent to the Washington Design Center and will be sold to the same company that is purchasing the mart.  The L.A. Mart and Canadian Trade Shows deals have already closed, and the Boston Design Center, Washington Design Center and 409 Third transactions are scheduled to reach completion during the third quarter.

Vornado has certainly pulled back the veil with these multiple announcements about its activities. The impact of the company’s new transparency policy, however, remains to be seen, as it may reveal both the pluses and minuses. “What people are waiting to see is, when you peel back the onion what you really get,” Guinee explained. “A lot of people are cautiously optimistic as disclosure becomes more thorough and you can understand their portfolio a little bit better–that’s a positive. The offset is, they’ve still got three huge negatives, (one of which is) that no one feels comfortable calling the bottom and the downside in Northern Virginia regarding the federal government cutbacks and all of their federal government exposure and defense contractor exposure (there).”

And the wariness extends beyond Vornado’s direct real estate portfolio. “People don’t know how to value and don’t like what they see at Toys R Us,” he added. “And people are looking at the major JCPenney investment that they did as, ‘You got away from your core competencies and that hasn’t worked.’ ” Vornado owns a 32.6 percent share of Toys R Us and revealed at the end of June that it will record a first-quarter loss of $19.2 million from its stake in the toy company. In May, JCPenney announced year-over-year sales had dropped approximately 20 percent in the first quarter and that the department store chain would cut its quarterly dividend.

“What ends up happening in this business is people respond overly favorably to positive catalysts and positive changes in a company but stay on sidelines for an extra-long time when there are storm clouds on the horizon,” Guinee said. “Right now, the positives are that there’s more disclosure, more thoroughness for the ability to understand the company, but the negatives are still there.”