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

NEW YORK (TheStreet) -- After years of losing bets on investments outside its core real estate business, Vornado Realty Trust (VNO) may finally catch a break if, as rumored, it spins off its suburban shopping centers into a separate company and then merges that company with San Diego-based Retail Opportunities Investment Corp. (ROIC).

If those rumors from earlier in March are true, it wouldn't be the first real estate investment trust to go down that road.

American Realty Capital Properties (ARCP), Simon Property Group (SPG) and Ashford Hospitality (AHT) are among the REITS with similar strategies. Of these, the only one to actually close on a spinoff was Ashford Hospitality Trust, which initiated a spinoff of an eight-hotel portfolio late last year called Ashford Hospitality Prime (AHP).

For Vornado, whose shares trade around $98 and are up over 10% for the year to date, a spinoff would continue be another part of the REIT's plan to simplify.

Vornado was founded in 1962 and became a REIT in 1993. It has a portfolio of over 73 million square feet, primarily located in the New York and Washington, D.C. areas, the source of about 80% of its earnings. The company also owns retail properties primarily in the Northeast, California, and Puerto Rico. The chairman and CEO is Steve Roth.

When Vornado has made investments outside its core business of high-quality office and retail properties, things haven't gone very well. It took an investment approach similar to that of a mutual fund strategy in an attempt to diversify revenue.

That strategy had Vornado making debt and/or equity investments in numerous companies in whichthe REIT didn't have control including investments in Roth's company Alexander's Inc. (ALX) (32.4% owned by Vornado), Toys "R" Us and LNR Property.

The bets haven't paid off and the company has been working feverishly to shed the non-core assets ever since.

In September Vornado sold its remaining 13.4 million shares in J.C. Penney (JCP) for $13 a share, ending a three-year investment in the struggling department store operator. Vornado owned 6.1% of shares, which it sold in a block trade to Citigroup (C).

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