Vornado CEO Says It Again: A Spin-off of DC Assets Is Still On the Table

Vornado has sent the Skyline portfolio into special servicing.

We continue to explore separating Washington into its own freestanding business unit.  There can be no assurance that any transaction will be completed. Our objective in pursuing a separation of Washington would be much the same as it was in our separation of Urban Edge Properties, namely to create a smaller, laser-focused business unit with its own dedicated management and its own report card (i.e. stock price).

Roth made similar comments in the REIT’s earnings call in February, but he elaborated further  in his annual letter. A big part of the consideration, for instance, is that New York and Washington DC are in two different cycles, he wrote.

While it is true that Washington and New York are both office-centric, each is its own market and there really is little overlap or synergy between them. Furthermore, New York and Washington are in totally different lifecycle situations (growth vs recovery).

Roth then put it even more bluntly:

Our Washington business is bouncing along the bottom.  Excluding Skyline and buildings coming out of service, we expect the core business’ EBITDA to be flat to positive $4 million in 2016 versus 2015.

Indeed, perhaps the biggest issue for Vornado in the Washington DC area is its Skyline portfolio, the 100-acre, mixed-use corporate park in Northern Virginia. It has more than 2.5 million square feet of office space, half of which is empty now. 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. Skyline’s Loan Moves into Special Servicing In a footnote in his annual letter, Roth noted that Skyline is subject to a non-recourse mortgage loan of $678 million. “We have requested the loan be transferred to special servicing with the intent to substantially restructure the loan and/or dispose of all or a substantial interest in the properties,” he wrote. All together, the Skyline Portfolio is backed by eight office properties located in Falls Church, Virginia totaling 2.6 million square feet, according to Trepp. Trepp traced the history of the Skyline portfolio’s journey through the capital markets in a recent research note. The portfolio loan was originally split among three 2007 securitizations, it noted. Then there was a special servicing transfer in 2013, and the loan was further split into A/B structures and received a loan extension of 60 periods. Other Reasons There may be other reasons why Vornado wants out of the Washington DC area. In general, the REIT has been selling far more than it has been buying and when it does buy it is usually is to trade up an asset in its portfolio.  He listed several recent transactions in which that was the case including the sale of 1750 Pennsylvania Ave., in Washington DC . It was replaced by Old Navy on 34th Street in New York City, Roth wrote. Also, in another footnote Roth appears genuinely confused about the market’s inability to recover. He wrote:

Washington has been a victim of the US Government’s Department of Defense Base Realignment and Closure Statute move-outs, limited government growth in the Capital District, and a generally all around soft real estate market.  Confoundingly, Washington has the lowest unemployment rate in the nation, the most educated work force in the nation, coupled with the highest vacancy rate in the nation; something doesn’t add up.