Vornado Realty Trust’s declaration that it plans to shed non-core retail holdings in the coming year met with enthusiasm from both analysts and stockholders this week. A variety of potential dispositions, including sales of Vornado’s enclosed malls and shopping centers and the sale of its stake in Toys ‘R’ Us, would allow the firm to focus on what it does best—developing and managing office and retail properties in New York City and Washington, D.C. —according to analysts who cover the company.
In Vornado’s annual report to shareholders, Chairman Steven Roth addressed the fact that the company’s shares have been trading at a discount to net asset value (NAV), primarily because investors see Vornado’s asset portfolio as too complex. To deal with that perception, Vornado executives plan to start selling the company’s enclosed malls, non-strategic strip centers and strip centers located outside its core geographic areas and dispose of its 32.7 percent stake in Toys ‘R’ Us.
“They are accustomed to being the superstar, they are very smart people with large egos, and so when they’ve underperformed, they’ve really taken it to heart,” says Michael Knott, managing director with Green Street Advisors, a Newport Beach, Calif.-based independent research and consulting firm.
“There is a fair bit of an identity question with Vornado: What are they? Typically, investors prefer very tightly focused companies, either by property type or by geographic focus. And Vornado is a very large company with a lot of moving parts. By making promises to divest some of their business parts and divest their mall business, they could help improve investor perception and get themselves to a place where they are accustomed to being.”
Right time to get fit
Today, Vornado, a diversified REIT, owns more than 137 retail centers nationwide, totaling 24.5 million sq. ft. of space, in addition to its retail holdings in New York City. But without developing the scale necessary to compete for tenants with larger owners who specialize exclusively in malls and shopping centers it doesn’t make sense for the company to hold on to retail assets outside its two biggest markets, according to Todd Lukasik, an analyst with Chicago-based research firm Morningstar.
In New York City, Vornado still carries significant clout as a landlord because the availability of street retail space here is so tight, Lukasik notes.
Meanwhile, with high-quality regional malls currently selling at premiums, Vornado can take advantage of favorable market conditions to raise capital to invest in the core parts of its business, says Alexander Goldfarb, managing director with Sandler O’Neill + Partners, a New York City-based investment banking firm. Earlier this week, Australian REIT the Westfield Group sold a majority stake in seven of its U.S. malls to Starwood Capital Group for $1 billion. Retail REITs as a sector have been focusing on shedding non-core assets recently.
Vornado’s enclosed regional mall portfolio contains about 14 assets, including 1.5-million-sq.-ft. Monmouth Mall in Eatontown, N.J., 1-million-sq.-ft. Kings Plaza in Brooklyn, N.Y., 824,893-sq.-ft. Manassas Mall in Manassas, Va. and 330,000-sq.-ft. Beverly Connection in Los Angeles.
“Right now there is a very strong bid for malls and mall pricing has definitely become much more attractive,” says Goldfarb. “The mall business is also one of size and scale, so if you own the dominant mall in the region, you can survive with a small portfolio. But if you just have a small portfolio of malls, you don’t get the size and scale that a company like Simon or Taubman would get.”
Vornado also reiterated its desire to dispose of its stake in big-box toy retailer Toys ‘R’ Us, which it bought in partnership with Kohlberg Kravis Roberts and Bain Capital in 2005. The partners have been planning to take the chain public for longer than two years now, with no IPO date in sight.
Shedding Toys ‘R’ Us would make Vornado easier to value, since given the ownership structure, it’s currently difficult to gauge how much the chain is worth, notes Lukasik.
Plus, while the Toys ‘R’ Us acquisition ultimately paid off for Vornado because the REIT and its partners were able to improve its retail operations, Vornado hasn’t been able to capitalize on Toys ‘R’ Us’ real estate, which was the main reason it made the investment, according to Goldfarb.
“When they originally did that deal, they thought real estate would serve as a backstop and there would also be value to be extracted from it,” he says. “In hindsight, it made money because the operations improved, not because of real estate.”
As of noon on Thursday, Vornado shares were trading at $83.44 apiece, up from $80.97 a share at the beginning of the week.