Vornado Adopts Simpler REIT Strategy

TheStreet.com

NEW YORK (TheStreet) -- Last week Vornado Realty Trust announced the sales of The Plant, a power strip shopping center in San Jose, Calif., and a retail property that is part of Philadelphia's Gallery at Market East, for $203 million and $60 million, respectively.

The combined sales resulted in net proceeds of approximately $156 million, after the repayment of the mortgage on the San Jose property and closing costs.

The recent news reflects the continuing trend of the New York-based REIT to simplify its business model and focus more on its core property holdings.

Vornado owns and manages more than 100 million square feet of office and retail space across the country and generates nearly $3 billion in annual revenue, with around 80% of earnings from properties in Washington, D.C., and New York City.

So far this year, Vornado has made substantial progress in simplifying the company, and that is evident in the REIT's more recent plan to sell around 40%, or 10 million, of its J.C. Penney shares.

Although Vornado sold the JCP shares at a loss (or around 50%), the move was a necessary step towards a more broad-based transformation from the company's more hedge fund-like strategy into more of a pure-play REIT strategy.

Other noncore holdings that Vorndao likely will monetize include investments in Alexander's , Toys 'R' Us, Lexington Realty Trust and LNR Property.

It's widely known that Vornado's noncore approach to investing -- similar to a hedge fund strategy -- was originally designed to diversify revenue in higher-risk marketable securities.

Like JCP, Toys 'R' Us is also subject to the risks of e-commerce competition, and since Toys 'R' Us is a highly seasonal business, profits are not generated until the fourth quarter (around 80% of revenue is accounted for during the December holiday season). That could make Toys a tougher unwind.

Vornado also owns a 32.4% interest in the outstanding common stock of Alexander's, a small-cap REIT engaged in leasing, managing and developing properties that are focused primarily on the locations where its former department stores operated before they ceased operations in 1992.

Vornado is also divesting other noncore properties, including 715 Lexington Avenue in New York City. According to GlobeSt.com, the 20,400 square foot property could sell for around $50 million.

Fascitelli Moving On

After his departure in late February, Vornado's former CEO, Michael Fascitelli, is weighing his options. In an interview with SNL Financial, Fascitelli denied reports that his departure was the result of a disagreement with current chairman, Steve Roth. Fascitelli said, "It was just time for me to do something else. There is no fight between Steve and I. There's no disagreement."

And Fascitelli was adamant that the company's investment in J.C. Penney, the financially ailing department store, had no impact on his decision. He said, "Zero, Zero. Absolutely zero. No impact."

He went on:

"I don't think any of us are happy with the J.C. Penney investment, or proud of it at the moment. On a personal basis, I've been agitated and disappointed about it. But it didn't play at all in my decision to leave."

The executive said that he may eventually return to the real estate business.

"I had a guy say to me, a friend of mine I went to business school with ..., he said, 'Listen. This is what you're really good at. You're not that good at golf. You're not good at anything else. On a scale of 1 to 10, you're an 11. Take some time off, rejuvenate and come back.' So that's probably the most practical thing, but who knows."

This REIT Is Looking Less Like a Hedge Fund

Hedge Funds buy investments using riskier strategies, and they are lightly regulated. Conversely, REITs are known to invest in safer assets with a more focused dividend policy. Vornado, with a market cap of around $16.08 billion, is beginning to look more like a REIT. With an investment grade (BBB+) rating, the diversified REIT has begun to simplify its model, and that should make shares much less volatile and dividends much more attractive.

In 2008 Vornado shares traded for as much $103.00, but they had fallen by more than 25%, to around $75.00, by November 2012. Shares have traded back up to around $86.02 as Mr. Market begins to view the positive trends towards a simplified investment strategy.

At the time of publication, Thomas had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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