Stay or Go? Vornado Ponders Telling DC Goodbye

WASHINGTON, DC—Last week, Vornado Realty Trust gave the local market a hint at the proceeds it could realize from its DC area holdings. The REIT announced it completed a $308 million refinance of RiverHouse Apartments, a three-building, 1,670-unit complex. The loan was secured at an interest-only LIBOR + 1.28% rate, maturing in 2025. And the net proceeds? $43 million.

To be sure, stacked up against Vornado's local portfolio, $43 million does not seem especially significant. Certainly it is downright puny when compared to another recent deal by Vornado here: the final transfer of the redeveloped Springfield Town Center to Pennsylvania Real Estate Investment Trust for $465 million.

But both the refi and the Springfield Town Center deal take on added importance in light of CEO Steve Roth's letter to shareholders released shortly after the refi, on Friday.

As we reported yesterday, Vornado Realty Trust is considering selling off its street retail properties as well as its Washington, DC holdings.

"…[W]e have considered and are still considering options with respect to our Washington business, such as inviting in a new investor(s) or even separating the business in a spin or in a spin-merge. Ditto for our street retail business."

Roth told shareholders this news wasn't coming as a shock – and indeed, he just about sent the same message during its recent earnings call, which was, now is the time to be a seller. "Asset prices today are high, and acquisitions are getting dicey," he during that call. "We are now at the point in the cycle where the easy money has been made, and it seems to me that this is a better time to harvest than to invest."

But Roth also made haste to say a sell off could just as easily not happen.

Digging deeper into Vornado's recent earnings shows why the area may be on the precipice of falling off its "must have" list of cities, but still remains strong enough that the REIT is comfortable publicly vacillating about its decision.

For 2014, Vornado's Washington business produced $333.8 million of comparable EBITDA, lower than 2013 by $7.4 million or 2.2%. More than offsetting the decline in comparable EBITDA, the REIT realized an incremental reduction in interest expense of $16 million in 2014, from the restructuring of the Skyline mortgage loan. Net-net, Roth said during the call, the Washington segment's contribution to 2014 comparable FFO was $8.6 million ahead of the previous year.

Washington's 2015 comparable EBITDA will be flat with 2014, he also said.

But the DC region has clear strengths that appeal to Vornado. Negative absorption in Northern Virginia is getting close to zero, Mitchell Schear, president of the Washington DC division, pointed out during the earnings call, and there is positive absorption in downtown DC.

"And on the ground, tenant tour activity in all sectors has increased noticeably, and all signs point to continued improvement this year and next," he said.

The fourth quarter pipeline was robust, leasing 669,000-square feet of office and retail space. Overall, Schear reported, office leases signed in the fourth quarter generated a GAAP mark to market of negative 6.7%, and a cash mark to market of negative 7.7% -- a result that had been expected, he said, given the competitive market.

In 2015, the REIT has about 1.68 million square feet expiring. Of that number, it expects less than 300,000 square feet, or about 17%, to vacate without a replacement tenant in hand, according to Schear.

"Of the remaining 1.4 million square feet, we have already signed or have pending signatures for over 500,000 square feet or 38%. We are pleased with this progress, and consider the balance to be completely manageable."