Vornado to Spin Off Shopping Centers - Analyst Blog

Real estate investment trust (REIT) Vornado Realty Trust VNO will spin off its U.S. shopping center business into a new publicly traded REIT. The move will help Vornado focus exclusively on the office assets in the New York City and Washington, DC region and the Manhattan street retail assets.

The company will spin off 81 strip shopping centers and four malls. These strip shopping centers are positioned in the Northeast U.S. and the malls comprise the Bergen Town Center in Paramus, NJ, Monmouth Mall in Eatontown, NJ as well as two malls in the suburbs of San Juan, Puerto Rico. These 85 properties span around 16.1 million square feet and enjoy considerable occupancy levels (average occupancy of 95.5% as of Dec 31, 2013).

For the new unit, the move will help unleash the potential of strip centers and malls that will be owned by it and Vornado projects this unit's net operating income to be around $200 million in 2014. The average base rent of these properties is $18.75 per square foot and this is well above that of the peer median of $15.66 per square foot.

This new unit will have Jeffrey S. Olson as its Chairman of the Board and Chief Executive Officer. Olson is currently serving as the Chief Executive Officer of Equity One Inc. EQY.

However, Vornado will keep 20 small retail assets, worth around $100 million, for sale in the near term. Two other properties – Beverly Connection and Springfield Town Center – which are currently under contract for disposition – will also be retained by Vornado.

As a matter of fact, this spin off is an outcome of Vornado's decision to separate two businesses, which have been together for legacy reasons but with no real operating synergies. The move will result in the company having properties exclusively in the Manhattan and Washington region and we expect the stream lining efforts on part of Vornado to enhance its profitability, going forward.

The filing of the initial Form 10 registration statement with the SEC is expected to be made in the second quarter of 2014, while the transaction is targeted to be accomplished in the fourth quarter of this year.

In recent times, another REIT – Simon Property Group Inc. SPG – also decided to spin off its strip center business and smaller enclosed malls into a publicly traded REIT. The move would help this retail real estate investment trust (REIT) to increase utilization of resources for expanding its global portfolio of larger malls, mills and premium outlets.

At present, Vornado carries a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider Duke Realty Corp. DRE which has a Zacks Rank #2 (Buy).