That probably means Washington DC. Indeed, Roth said during the earnings call that “We are up to our eyeballs considering that.”

Roth first introduced the idea of a Washington spin off — along with the notion that Vornado might spin off its street retail too — in April of 2015 in his annual letter to shareholders.

At the time Roth cited “difficult market conditions” in DC as the reason.

Some ten or so months later, the Washington DC market has definitely improved, both generally and within Vornado's portfolio, but there are still enough weaknesses for Vornado to keep the notion of another spin off alive.

“If We Were to Exclude Skyline…”

Roth called Washington a “tale of slow recovery being dragged down by Skyline.” That would be the 100-acre, mixed-use Skyline corporate park in Northern Virginia. It has more than 2.5 million square feet of office space — literally half of it empty now — and is located near Bailey's Crossroads.

The tenants have typically been US government contractors and other companies connected to the BRAC ecosystem – companies that did not renew their leases when they turned over. With a now 50.1% occupancy rate, executives freely admit it is a drag on Vornado's DC portfolio. Indeed, executives are given to describing the DC portfolio's performance and future forecast accompanied by some variation of “if we were to exclude Skyline…”

Vornado ended the year with an 82.1% office occupancy rate, an increase of 140 basis points over year-end 2014, Mitchell Schear, president of the Washington DC division, said during the earnings call “Without Skyline, our office occupancy at year end was 89.9%, an improvement of 250 basis points over 2014. Our Crystal City occupancy at year end was 89.5%, an improvement of 430 basis points over 2014,” he said.

2015 comparable EBITDA for Vornado's Washington portfolio was down about $3.5 million from 2014, and for this year the company expects EBITDA from its core Washington business to be flat to $4 million higher in 2015.

Unfortunately Schear said, that growth will be offset in part by a projected additional 500 basis points or so drop in its Skyline properties occupancy, which “will decrease EBITDA by approximately $6.5 million.”

Bright Spots

There are bright spots in Vornado's local portfolio as well as the economy. As Schear noted, job growth more than tripled between 2014 and 2015 — from 20,800 to more than 68,000, 48% of which was in office-using sectors. Also, the federal government passed a two-year budget.

Within the portfolio itself, the REIT leased more than 2.1-million square feet in 216 deals at an initial average cash rent of $40.20 per square foot last year. About one-third of those leases were new and expanding tenants.

Also, Vornado's efforts to turn Crystal City into a tech hub are delivering some nice dividends. Of that 2.1-million square feet of leases signed last year, 1.1-million square feet were office leases in Crystal City. “Crystal City is starting to gain traction, as noted in several local brokerage reports,” Schear said. “JLL cited that Crystal City led all other submarkets in the region in net absorption last year. Those deals were predominately done by us.”

Closing the Books on the BRAC Era

Vornado has now resolved or has pending deals to fill about 74% of the original 2.4 million square feet of space vacated by BRAC tenants. The REIT has 630,000 square feet left to resolve, of which — and here it is again — 412,000 square feet is due to Skyline.

The poster child of these efforts is 2221 South Clark St., which had been vacated by defense agencies, but is now the site of WeWork's first location in Northern Virginia. The office portion opened on Feb. 1 and is already 60% occupied. The building conversion also includes some 216 collaborative-living apartments, which will deliver in the Spring.

Vornado Plans Demolition For 1700 M St.

Vornado is also moving forward on at least two development projects this year. This spring it plans to demolish two obsolete buildings to develop a project it has discussed before — a 335,000-square-foot “state-of-the-art, trophy” office project at 1700 M St. NW.

Vornado didn't say anything about a pre-lease for the building during its earnings call, which presumably it would have in hand, before it started active construction.

Nonetheless, this project too will do a number on Vornado's local EBITDA in 2016 as it takes 1726 M St., NW, and 1150 17th St., NW, out of service, decreasing EBITDA by approximately $4.5 million.

Vornado also received approval to redevelop a Crystal City building that the US Marshals Service will be vacating at the end of this year. 1770 Crystal Dr. will redeliver in early 2018 with a new skin, new lobby, new systems, new retail, and a conference center for delivery in early 2018.

A Pretty Package

All in all, it is a pretty package for investors that would be interested in owning a stake in these diverse properties and submarkets. Even Skyline has long-term potential, Vornado executives agree — they just don't have the patient to wait for it to emerge.

“It will take time until we either find the right engine or the right growth engine that will occupy space there that will have the follow-on effect that it will return to the situation that it was in,” Schear said of Skyline.

“It's obviously very close proximity to the Pentagon and will make sense over the long run. We just can't predict at this point how long it will take and given some of the other vacancies in the marketplace.”

WASHINGTON, DC—New York City-based Vornado Realty Trust is, like most REITs, very frustrated with its stock price and discount to net asset value. The REIT is considering various strategies to close this pricing gap — including a scenario it floated last year: spinning off its Washington DC holdings into a separate REIT, much like it did with its high-barrier Northeastern shopping center assets last year. That company, Urban Edge Properties, is celebrating its first anniversary after a year of solid performance.

It was a great decision, CEO Steven Roth said during the REIT's earning call last week and in a way, its success illustrates how crazy the market has been with valuations.

“If the Urban Edge assets were still bundled inside Vornado, they probably would be valued at a big discount, just like Vornado is,” he said during the call.

Given UE's success, Roth continued, “the concept of laser-focused smaller entities may well be a template for the future.”

That probably means Washington DC. Indeed, Roth said during the earnings call that “We are up to our eyeballs considering that.”

Roth first introduced the idea of a Washington spin off — along with the notion that Vornado might spin off its street retail too — in April of 2015 in his annual letter to shareholders.

At the time Roth cited “difficult market conditions” in DC as the reason.

Some ten or so months later, the Washington DC market has definitely improved, both generally and within Vornado's portfolio, but there are still enough weaknesses for Vornado to keep the notion of another spin off alive.

“If We Were to Exclude Skyline…”

Roth called Washington a “tale of slow recovery being dragged down by Skyline.” That would be the 100-acre, mixed-use Skyline corporate park in Northern Virginia. It has more than 2.5 million square feet of office space — literally half of it empty now — and is located near Bailey's Crossroads.

The tenants have typically been US government contractors and other companies connected to the BRAC ecosystem – companies that did not renew their leases when they turned over. With a now 50.1% occupancy rate, executives freely admit it is a drag on Vornado's DC portfolio. Indeed, executives are given to describing the DC portfolio's performance and future forecast accompanied by some variation of “if we were to exclude Skyline…”

Vornado ended the year with an 82.1% office occupancy rate, an increase of 140 basis points over year-end 2014, Mitchell Schear, president of the Washington DC division, said during the earnings call “Without Skyline, our office occupancy at year end was 89.9%, an improvement of 250 basis points over 2014. Our Crystal City occupancy at year end was 89.5%, an improvement of 430 basis points over 2014,” he said.

2015 comparable EBITDA for Vornado's Washington portfolio was down about $3.5 million from 2014, and for this year the company expects EBITDA from its core Washington business to be flat to $4 million higher in 2015.

Unfortunately Schear said, that growth will be offset in part by a projected additional 500 basis points or so drop in its Skyline properties occupancy, which “will decrease EBITDA by approximately $6.5 million.”

Bright Spots

There are bright spots in Vornado's local portfolio as well as the economy. As Schear noted, job growth more than tripled between 2014 and 2015 — from 20,800 to more than 68,000, 48% of which was in office-using sectors. Also, the federal government passed a two-year budget.

Within the portfolio itself, the REIT leased more than 2.1-million square feet in 216 deals at an initial average cash rent of $40.20 per square foot last year. About one-third of those leases were new and expanding tenants.

Also, Vornado's efforts to turn Crystal City into a tech hub are delivering some nice dividends. Of that 2.1-million square feet of leases signed last year, 1.1-million square feet were office leases in Crystal City. “Crystal City is starting to gain traction, as noted in several local brokerage reports,” Schear said. “JLL cited that Crystal City led all other submarkets in the region in net absorption last year. Those deals were predominately done by us.”

Closing the Books on the BRAC Era