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Vornado Spinning Off Strip Shopping Centers, Malls into Separate REIT

04/14/2014 | By Sarah Borchersen-Keto

Vornado Spinning Off Strip Shopping Centers, Malls into Separate REIT

Vornado Realty Trust (NYSE: VNO) said April 11 that it plans to simplify its business model by spinning off 81 strip shopping centers and four malls into a new stock exchange-listed REIT currently known as “SpinCo.”

“We seek a very clean exit from the retail business… it’s all very, very logical… we are in the business of focusing,” said Steven Roth, chairman and CEO of Vornado, during an April 14 conference call.

Following the spinoff and disposal of several additional retail assets, Vornado will be concentrated in high-quality office properties in New York and Washington, D.C. Jeffrey Olson will become SpinCo’s chairman and CEO once he leaves his current position as CEO of Equity One, Inc. (NYSE EQY) at the end of 2014. SpinCo’s 2014 net operating income is estimated to be approximately $200 million.

Asked whether Vornado would consider further simplification, Roth stressed that scale and size are an important aspects of Vornado’s strategy and that the company has no intention to “bifurcate into 15 separate companies.”

Roth also emphasized that Vornado has no wish to dispose of its Manhattan retail assets.

“We think the street retail business is a great business. It’s not for sale, it’s not for spin,” Roth said.

Alexander Goldfarb, managing director of equity research at Sandler O’Neill, agreed that Vornado should retain the Manhattan retail assets.

“It’s an incredible business. You can pay $5,000, $10,000 a square foot for street retail and drive rents that are $1,000, $2,000 a square foot. It’s an astronomical business… you’re seeing a lot more areas where people are willing to pay eye-popping rents,” Goldfarb said.

Goldfarb also said the decision to spin-off the strip centers reflects a larger development within the REIT industry.

“In the past few years the investment community and the analyst community has gotten much more active about questioning the rationale for business decisions, and that’s been good for REITs,” Goldfarb said. He noted that Sandler O’Neill has been advocating for Vornado to implement a split for the past two years, while other REIT analysts proposed a similar move more than 15 years ago.

David Harris, REIT analyst with Imperial Capital LLC, added that “investors within the REIT domain do place a value on specialist companies and feel they represent a better value proposition that typically companies that have multiple property types.”