11/24/2009 | By Allen Kenney
By Allen Kenney
In May, Mike Fascitelli, CEO of Vornado Realty Trust (NYSE: VNO), began the unenviable task of trying to fill the shoes of one of the commercial real estate industry's legends, Steven Roth. As part of a long-standing succession strategy, Roth ceded the Chief Executive title to Fascitelli, but he remains an active Chairman.
Yet, even though there's a new face behind the CEO mantel, don't expect a dramatic change in direction for one of the REIT industry's biggest names. After Fascitelli was brought on by Roth in 1997 to serve as Vornado's President and "Chief Growth Officer," the two worked side by side in what essentially amounted to a partnership running the company.
In April, Vornado did an add-on public offering of 17.25 million shares priced at $43. In September, an unsecured debt offering garnered the company approximately $460 million. Real Estate Portfolio magazine recently interviewed Fascitelli to find out what the transition has been like for him and what Vornado plans to do with all that new capital.
Portfolio: You took over as CEO of Vornado in May of this year. How would you say the transition has gone, and what is it like trying to fill the shoes of one of the commercial real estate industry's legends, Steven Roth?
Mike Fascitelli: Steve and I have been working together as partners for the last 13 years. It continues to be a partnership, and although our individual roles are evolving, I expect this partnership will continue to be quite productive for a long time. And it's not just Steve and me. We have an extremely talented group of business heads who have been and will continue to be keys to our success.
Portfolio: Roth garnered a reputation as a deft opportunist throughout his career. Would you agree, and, if so, what have you learned from watching him in action?
Fascitelli: That's definitely true. Steve made his reputation by doing a number of unique, highly profitable deals. He probably is at his best in bad markets. He is very disciplined and extremely conservative in terms of the way he thinks and acts, even though he may sound less conservative if you listen to him on panels or TV. He is really smart, creative, provocative and challenging.
Portfolio: What would you say is your company's greatest strength?
Fascitelli: Our franchise—all the things we've done over time to build the company to where we are now. We have a terrific position in the public markets in terms of our investor support, capital base, great asset base and access to capital for growth. And we have a talented management team that can execute.
Portfolio: If you had to name your top short-term goal for Vornado, what would it be? What about in the long-term?
Fascitelli: The short-term goal for Vornado is to bolster our balance sheet to be the best in class. I think we are almost there.
Second, we want to make sure we maximize our operating performance and our assets. Our team is doing a terrific job performing in a market that is quite difficult. Our people are extremely talented, experienced, focused and motivated. The thing that will define us going forward is how we invest to create long-term capital appreciation for our shareholders. That applies to both the return we can generate from our existing capital, as well as how we deploy future capital.
Portfolio: Vornado and a select number of REITs have successfully tapped the unsecured debt markets this year. Do you think the credit markets are finally starting to thaw for commercial real estate borrowers?
Fascitelli: The fixed income credit markets have had an incredible rally. Spreads have tightened dramatically. However, the commercial real estate debt market has lagged that rally significantly. The market for commercial mortgage-backed securities is still closed. Getting a mortgage is still very difficult, underwriting and valuations are very conservative, particularly for large assets, and the gaps between equity and debt remain high.
So I'd say commercial real estate borrowing is still difficult, with limited and much reduced capacity. And I expect that will be true for a while. But the huge rally in the unsecured credit markets has allowed public companies to issue unsecured bonds, and for those that can access that market, it will be a very competitive and attractive type of financing.
Portfolio: The recent equity and debt offerings appear to be part of a larger effort on Vornado's part to amass capital for new acquisitions. When does the buying spree start?
Fascitelli: Believe me, we're looking. I think everyone has been surprised by the lack of trading and slow velocity of deals. There is still a wide gap in buyers' and sellers' price expectations and little price discovery. Even debt has been tough to purchase. Some sellers just can't take the losses. Others think the future may be better. With low carrying costs, some are just holding on to their assets and hoping.
It's tough to predict when we'll buy. Typically, our acquisitions have been lumpy and scaled up during times when we think there is great value. We're not afraid to wade in there, but we just haven't seen something we really like yet.
Portfolio: Assuming analysts' predictions hold true about the abundance of distressed assets soon to come to market, who will have the advantage in capitalizing on the new opportunities: private funds or publicly traded companies?
Fascitelli: Both will be participating. However, I really believe that public companies pre-2007 were at a huge disadvantage relative to the private companies and funds.
Debt was plentiful and cheap. Private buyers were willing to use high leverage to take advantage of that environment. This was most evident by the fact that many public companies were bought by private equity funds. The private funds grew bigger and bigger, and the privatization cycle exploded–then the music stopped.
Now, I think that dynamic has flipped. The public markets are in much better shape. They have re-priced quickly. Public companies have accessed capital much more quickly and in much bigger size than private players have or can. I believe the public markets are going to be the dominant provider of capital, just as the case was in the 1990s. I'm not saying the private funds won't be active. They certainly will. But, I would bet the vast amount of the dollars to deleverage and buy real estate will come from the public markets.
Portfolio: What would you say has been the greatest lesson of the last market downturn?
Fascitelli: You have to maintain appropriate levels of leverage, and use longer-term debt. Leverage is risky! Companies with a high percentage of debt, and/or short-term maturities have really struggled in this cycle.
Also, when the markets are as vibrant as they were during the peak, you either have to sell more assets or make sure you create much more of a cushion for the downturn. Trees don't grow to the sky–and no one ever goes broke taking a profit!
Portfolio: What is the optimal amount of leverage for a REIT?
Fascitelli: I don't believe in an optimal leverage level. The nature and predictability of the cash flows mean real estate can run at higher leverage. The measure to focus on should be how well you can pay your debt service–good, old-fashioned coverage. In general, I think people are overcompensating for this crisis and cycle and are reacting by saying, "No leverage." The answer is probably in between.
Portfolio: If you had to pick one word to sum up this year, what would it be?
Fascitelli: (laughing) "Survived." Look, 2009 essentially has been two different years: before April and after April. At the beginning of 2009, people were expecting the worst and everyone was shell-shocked, frozen. Fear prevailed–volatility was incredibly high, uncertainty even higher. It was time to play defense. Now, the worries and risk of a potential meltdown of the financial system or financial Armageddon have subsided.
We can and will go from defense to offense. We know our business, we know how to buy and we have an extremely talented group of people to execute our strategy. We will be opportunistic once again. The future is exciting.
Editor's Note: This article originally appeared in the November/December 2009 edition of Real Estate Portfolio magazine.