This month, Vornado’s chairman and chief executive, Steven Roth, told investors he was considering splitting off another aspect of Vornado: its Washington portfolio.
In the Washington area, nearly 7.5 million out of 16.1 million square feet of Vornado’s holdings are in Crystal City, which has been battered by vacancy and government cutbacks.
Like the shopping properties before it, the Washington portfolio is viewed as a negative for the company’s stock. Analysts from Stifel Nicolaus issued a report in February calling Crystal City Vornado’s “last value drag.”
In an April 3 letter to shareholders, Roth wrote that Vornado’s leadership was “confident that we will do very well in Washington as over time we raise the occupancy rate and income level back to normal.”
“Nevertheless, we 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,” he wrote.
Roth did not return a call for comment and Mitchell N. Schear, president of the Washington unit, declined to discuss the possibility.
If Vornado’s local office were set loose it would be a return to the past, when the portfolio grew as the empire of developer Charles E. Smith. Smith founded the company in 1946 and it had run independently for 51 years when Vornado bought its first stake.
Vornado owned one-third of the Smith commercial portfolio by 1999, and bought the rest of the commercial unit in 2002.
Jonathan Morris, a former director of real estate finance for the Smith Cos. who was close with the family, said that save a couple of missteps — such as the Skyline office properties in Falls Church — the Smith portfolio in Washington was primed to bounce back.
He said he could see a spin-off working but that the companies were more likely to succeed in tandem.
“The commercial portfolio is extremely valuable and a stand-alone company with these assets would be tremendous,” he said. “[However] I still believe that these assets give a lot of support to Vornado.”
That the Crystal City properties still need a lot of cost-intensive work may be a reason for the company to remain part of the larger parent, which could lower borrowing costs, said John Bejjani of Green Street Advisors.
Many of the local properties had been dated government offices and are being completely redeveloped. Vornado has a 699-unit residential project under construction in Pentagon City and is renovating an existing 165,000-square-foot Crystal City building into a residential project for WeWork, the co-working company.
It also plans to demolish two older buildings downtown and develop a 335,000-square-foot office project at 1700 M Street NW.
“There are issues that Vornado needs to tackle first,” Bejjani said. “It’s possible that they would spin out D.C., but they would likely wait until the office portfolio is more stabilized.”
“They have work there that they need to get done and it’s easier to do that as a part of a bigger company, at least from a capital perspective,” he added.
Schear’s efforts to turn Crystal City into a tech hub have certainly drawn attention. At a tech announcement in Crystal City last week, Virginia Gov. Terry McAuliffe (D), standing on the rooftop terrace of a Vornado building, credited Schear’s vision.
“He had to deal with defense cuts and see businesses move out,” McAuliffe said. “Some people would have just sat back and wondered what to do. He didn’t. He got to work and said we are going to transform Crystal City. And by the time he’s done, you can forget Silicon Valley, you can forget anywhere else, Crystal City will be the hub of innovators and start-ups in the United States of America.”
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