NEW YORK CITY—Having already spun off its shopping center business into a separate, publicly traded REIT, Vornado Realty Trust is considering selling off its street retail properties as well as its Washington, DC holdings. Chairman and CEO Steven Roth made the announcement in his annual letter to the VNO's shareholders, filed with the SEC on Friday.
“We are confident that we will do very well in Washington as over time we raise the occupancy rate and income level back to normal and execute on the trove of development opportunities we have,” Roth wrote, referring to the city in which the New York City-based REIT controls 16.1 million square feet of office as well as seven residential properties. “Nevertheless, we have considered and are still considering options with respect to our Washington business, such as inviting in a new investor(s) or even separating the business in a spin or in a spin-merge. Ditto for our street retail business.”
For Roth to make this statement “should not be a revelation or a surprise to anyone” in view of VNO's continuous re-evaluation of its options, he wrote. “Everything is on the table.” He added, however, “Of course, there can be no assurance that any transaction will occur here.”
On VNO's February earning call, discussing fourth-quarter and full-year results, Roth waxed enthusiastic about the REIT's home city. “2014 was a great year for us, in New York City in particular,” he said. He referred to a recent New York Times article which reported that “New York City has created more jobs over the past five years than during any five-year period in the last 50 years. And this was accomplished with less than 1% of job creation coming from the big banks and brokerages, who have historically been the big drivers.” Instead, the technology sector, healthcare and other industries took up the slack—a fact represented in VNO's “record-breaking” Manhattan office leasing in '14.
Although Roth said on that earnings call that focusing on New York and DC was “the right strategy for us”—there are also sizable single-asset holdings in Chicago and San Francisco—his chairman's letter cited “difficult market conditions” in the nation's capital, notwithstanding the 2.1 million square feet of leases the company signed in that market last year. Furthermore, the numbers in VNO's annual report speak volumes: increases in both same-store and overall EBITDA and funds from operations, except in the DC operations, which saw year-over-year decreases in all of these metrics.
And while Roth pointed to the triple-digit increases in Manhattan retail rents since 2004—600% in the case of Times Square, compared to 82% gains in Midtown South office rents during that time—VNO has reduced its retail footprint recently. Along with spinning off its mall and strip-center business as Urban Edge Properties, it traded Springfield Town Center in Springfield, VA to Pennsylvania Real Estate Investment Trust for $465 million. Last year it also sold off its stake in JC Penney.
Echoing comments he made during February's earnings call, Roth wrote in his chairman's letter, “I am beginning to get a little wary. It looks like the easy money has been made for this cycle. Asset prices today are high, well past the 2007 peak, and acquisitions are getting dicey. Our sense is that this may be a better time to harvest than to invest…and that this is the time in the cycle when the smart guys start to build cash. At Vornado, we will continue to build cash reserves for opportunities that will undoubtedly present themselves in the future.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
