Vornado to Spin Off Strip Shopping Centers Into New REIT

Vornado Realty Trust will spin off its U.S. strip shopping centers into a new publicly traded real estate investment trust as part of an effort to focus primarily on properties in New York and the Washington area.

The 81 centers along with four malls are located primarily in the Northeast U.S. and include Bergen Town Center in Paramus, New Jersey; Monmouth Mall in Eatontown, New Jersey; and two malls in the suburbs of San Juan, Puerto Rico. Jeffrey S. Olson, currently chief executive officer of shopping-center landlord Equity One Inc., will be chairman and CEO of the new REIT, New York-based Vornado said yesterday in a statement.

“Our objective is to de-conglomerate two very different businesses, by separating a great Northeastern strip shopping center business with great potential, leaving a unique, world class Manhattan and Washington business,” Vornado Chairman and CEO Steven Roth wrote in his annual letter to shareholders, included in a regulatory filing yesterday. “These businesses have been together for legacy reasons, but have no real operating synergies.”

Vornado has sold about $3.5 billion of assets in the past two years to address investor complaints that the company was too complicated and produced uneven earnings. Its stock, whose return was about half that of the Standard & Poor’s 500 in the last three years, has narrowed the gap in the past 12 months.

The properties being spun off have about 16.1 million square feet (1.5 million square meters) and average occupancy of 95.5 percent as of Dec. 31, Vornado said. The new REIT’s net operating income will be about $200 million this year.

Company Focus

“It’s clearly a positive,” Alex Goldfarb, an analyst at Sandler O’Neill & Partners LP, said of the planned spinoff. He has a buy rating on Vornado. “It gets the company focused on pure office and street retail as the mainstay for Vornado.”

Roth will be on the board of the new REIT, which hasn’t been given a name yet. Goldman Sachs Group Inc. and Morgan Stanley are Vornado’s financial advisers on the spinoff.

Roth first laid out a strategy to pare down Vornado six years ago. In an April 2008 letter to investors, he said his goal was to “simplify and prune” the company’s holdings, starting with the sale of a group of cold-storage buildings.

“The financial crisis put the kibosh on that, but the intent was there,” Robert Gadsden, portfolio manager at Alpine Woods Capital Investors LLC of Purchase, New York, said in an interview before the spinoff announcement. His firm had about 54,000 Vornado shares at the end of 2013, according to data compiled by Bloomberg.

‘Remarkable Progress’

In yesterday’s letter, Roth said Vornado has “made remarkable progress” in its goal of simplifying the company.

Roth said in April 2012 he wanted to focus Vornado primarily on New York and Washington office buildings and Manhattan storefront retail, which are its strongest operations. “Everything is on the table,” he wrote then.

Yesterday he wrote that “we have accomplished each of the objectives set forth in my April 2012 Chairman’s Letter; we have exited business lines and sold 48 assets for $3.5 billion (with a gain of $928 million).”

Two years ago, he said Vornado would, at least temporarily, hold on to its 23.4 million J.C. Penney Co. shares “to reap the benefits of the company’s transformation” under former Apple Inc. retail chief Ron Johnson. Instead, Vornado sold those shares, resulting in $256 million of losses. Johnson was ousted as the retailer’s CEO, and Roth quit J.C. Penney’s board.

Mistake Admitted

“With respect to J.C. Penney, we obviously sold to cut losses and admit a mistake,” he wrote in yesterday’s letter.

The company still holds about a one-third interest in Toys “R” Us Inc., the closely held children’s retail chain. Roth said its interest in the company has been written down to about $80 million, and Vornado is planning on “zeroing out” its investment by the end of the year.

Since April 2012, Vornado has sold most of its Merchandise Mart showroom operations, with the 3.6 million-square-foot complex in Chicago the only property left, according to Roth’s letter. The company also sold Brooklyn’s Kings Plaza mall and Green Acres Mall in Valley Stream, New York, and has a contracts to sell the Beverly Connection near Beverly Hills, California, for $260 million and Springfield Town Center in the Washington suburbs for $465 million.

Roth said Vornado bought six properties in 2013 for an aggregate price of $813 million, all but one of which include Manhattan retail space. The exception was the land and air rights to 220 Central Park South, where the company plans to build a luxury condominium high-rise.

Investors have rewarded Vornado for its moves. The shares have returned 16 percent with dividends since last April, in line with the Standard & Poor’s 500 total return, while the Bloomberg REIT Index is little changed.

“We consider stock price to be the most important report card of our performance,” Roth wrote. “Our stock price has done better of late.”

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