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Vornado Needs a Spinoff Strategy That Makes Sense (and Money)

That $250 million Penney's hit translated to a 40% loss in Vornado's original investment in the retailer. But in April 2013 Vornado reaped around $241 million in net proceeds from the sale of LNR Property, in which Vornado owned a 26.2% stake.

Other recent sales include the Green Acres Mall in Valley Stream, N.Y. ($500 million); The Plant in San Jose, Calif. ($203 million); 866 United Nations Plaza in Manhattan ($200 million) and 1800 Park Avenue in Manhattan ($66 million).

The Last Piece of the Puzzle

If the company goes through with the spinoff and liquidating its position in Toys "R" Us, Vornado will be a much more streamlined REIT. Vornado, with Bain Capital and KKR, had purchased Toys "R" Us back in 2005 for $6.6 billion.

By teaming up with an established retail REIT, I would not be surprised to see Vornado shares become more valuable and investors less confused. Also, I would not be surprised to see Kimco Realty (KIM), Brixmor (BRX) or DDR Corporation (DDR) emerge as buyers/partners for the Vornado assets.

Kimco appears to be a logical buyer/partner given the company's more recent strategy of trimming non-core assets and creating a focused approach on retail centers. However, DDR has also made great strides in cleaning up its balance sheet and being prepared for a large portfolio transaction.

Vornado's dividend yield is 2.98%, and although that's weaker compared to other retail REITs, the majority of the company's assets are in New York and that's the cost of doing business in the Big Apple. Other New York-based office REITs, notably S.L. Green (SLG), at 2.01%, and Empire State Realty Trust (ESRT), at 2.26%, have lower yields.

I'm not a buyer at Vornado's current share price (the company's price to funds from operations multiple is 20.7x). However, I believe Vornado is making some good decisions to simplify its business plan.

I believe the spinoff strategy is a good idea. By sticking to its knitting, Vornado is likely to improve its balance sheet and take advantage of its deep-rooted experience in office investments.

At the time of publication the author is long ARCP.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

For more information on REIT investing, check out my newsletter HERE.
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