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Vornado Becomes Latest to Spin Off REIT Into Crowded Strip Shopping Center Field

'You've Got to Spin It to Win It' Says CEO Steven Roth, Naming Equity One Chief Jeffrey S. Olson Chairman/CEO of New $200M REIT
April 16, 2014
Executing a move that's been in the works since last summer, Vornado Realty Trust (NYSE:VNO) announced a plan to spin off its non-Manhattan portfolio of 81 strip shopping centers and four malls into a new publicly traded REIT.

The strip shopping centers are located mostly in the Northeast, with the malls consisting of the Bergen Town Center in Paramus, NJ; Monmouth Mall in Eatontown, NJ; and two malls in suburbs of San Juan, Puerto Rico. The 85 properties total 16.1 million square feet and had average occupancy of 95.5% at year-end 2013.

As CoStar reported a couple weeks ago, the move by retail REITs to simplify their business plans and raise capital to reduce leverage is driving proposals by retail REITs such as Vornado, Simon Property Group and American Realty Capital Properties to launch pure-play spin-offs for their strip centers, shopping centers and smaller enclosed malls.

Blackstone took Brixmor Property Group Inc. (NYSE:BRX) public last fall under a similar strategy. Vornado's plan was first reported in the Wall Street Journal in March. The company proposal to spin off the shopping centers into a REIT with estimated net operating income of about $200 million in 2014 was approved by Vornado's board of trustees.

In his jocular annual letter to shareholders, VNO founder and CEO Steve Roth name-checked his granddaughters in coming up with the slogan, "you've got to spin it to win it."

Spinoffs have become "popular sport these days," principally to separate B and C malls and isolate risk from struggling retailers Sears and JCPenney, said Roth, noting that "if an anchor leaves an A mall, most times it creates an opportunity. But, if an anchor leaves a B or C Mall, it could remain empty forever and begin or hasten a death spiral."

Most companies doing this are in a single asset class, but Vornado's objective is to separate two very different businesses via a tax-free spinoff: Northeast strip shopping center, leaving VNO's unique, world-class Manhattan and Washington office and retail business, Roth said.

"These businesses have been together for legacy reasons, but have no real operating synergies," Roth said. "By separating, we intend to create two focused pure plays."

Jeffrey S. Olson, currently CEO of Equity One Inc., will be the new company's chairman and CEO, and Robert Minutoli, executive vice president of Vornado's retail segment, will move aboard the new REIT as its COO.

"The spin makes strategic sense, in our view, providing a choice of more focused opportunities for investors, and Jeff is a perfect leader," said Citi REIT analyst Michael Bilerman in an investor note, adding that VNO’s portfolio generates two-thirds of its pre-tax and depreciation earnings from it NYC properties (48% office, 19% street retail) and 24% from Washington, D.C. office.

Intriguingly, Roth again referenced the possibility, while remote, of the company’s street retail business as another standalone company. VNO currently owns 2.4 million square feet of street retail in Manhattan in 55 properties, including those at the base of its office buildings, with rents considerably below market value, Bilerman noted.

Vornado's retail management team and personnel will also remain with the new company, and Steven Roth, chairman of the board and CEO of Vornado, will serve on the board of directors of the spinoff company.

The parent company believes that the retail portfolio will be well positioned to deliver "both internal growth through active asset management and redevelopments and external growth through acquisitions and selective new developments," Vornado said in a release.

The portfolio has an average population of 149,000 within three miles and an average household income of $71,000. The average base rent is $18.75 per square foot, compared to the median of $15.66 per square foot for competing companies.

Vornado plans to dispose of 20 small retail assets valued at approximately $100 million which do not fit the new company's strategy. VNO will also retain Beverly Connection and Springfield Town Center, which are under contract for disposition.

VNOs business after the dispositions and spin-off will be highly concentrated in New York City and Washington, DC, and comprised of high-quality office portfolios and the largest, most valuable portfolio of Manhattan street retail assets.

The entities plan to treat the pro rata distribution of the spin-off company's shares to Vornado common shareholders and Vornado Realty LP common unit holders as a tax-free spin-off for tax purposes. Vornado anticipates maintaining its current annualized dividend of $2.92 per share through the combination of Vornado's and the new company's dividends.

The registration statement for the spin-off is expected to be filed with the Securities and Exchange Commission in the current quarter, with share distribution expected to be completed in the fourth quarter, subject to certain conditions.

Goldman, Sachs & Co. and Morgan Stanley are Vornado's financial advisors and Sullivan & Cromwell LLP is legal advisor in connection with the proposed transaction.

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