Vornado's deals have a tornado's impact

Abstract

Vornado's name rhymes with tornado--and it often acts like one. Last week the Saddle Brook-based real estate investment trust announced a deal that hit the market like a hurricane. In partnership with Crescent Real Estate Equities, an investment company in Fort Worth, Texas, Vornado said it was taking over Americold in Portland, Oregon, and URS Logistics in Georgia, the country's two biggest cold-storage warehouse companies. The two giants control 79 warehouses with 368 million cubic feet of space. The price tag for the transaction: A whopping $950 million, including assumed debt.

Vornado's name rhymes with tornado--and it often acts like one. Last week the Saddle Brook-based real estate investment trust announced a deal that hit the market like a hurricane. In partnership with Crescent Real Estate Equities, an investment company in Fort Worth, Texas, Vornado said it was taking over Americold in Portland, Oregon, and URS Logistics in Georgia, the country's two biggest cold-storage warehouse companies. The two giants control 79 warehouses with 368 million cubic feet of space. The price tag for the transaction: A whopping $950 million, including assumed debt.

When news of the transaction hit the wires, it stunned Wall Street. The company's shares started rising, and by the end of the day, they had risen by a hefty 21% to reach a high of $86.88. Though Vornado has struck several large deals in the past year, this is the biggest yet.

Americold and URS Logistics are relatively unknown outside their industry, but their clients--companies like Kraft Foods and Pillsbury--are household names. Vornado and Crescent plan to buy the cold-storage warehousing companies from Kelso & Co., a New York City investment firm. When the deal closes at the end of the year, Vornado will own 60% of the cold-storage companies, and Crescent will own 40%. Says Ron Dyehouse, Americold's chief executive officer: "Vornado intends to provide growth capital to support long-term development of our nationwide distribution network."

This latest transaction makes Vornado a leading player in the cold-storage warehouse market. Real estate experts warn that this is a risky market, because tenants who leave are difficult to replace. Vornado bid against Crescent to take over the two cold-storage warehouse firms before deciding upon a joint transaction.

But the takeover is typical of the REIT's deals. Once largely a shopping-center owner, Vornado has in the past year moved aggressively out of its traditional retail stronghold into such new markets as office real estate, housing and hospitality. In doing so, the company has diversified its property portfolio. Real estate insiders say that in addition to making Vornado a bigger company, this strategy could protect the REIT in the future if the industry goes through a shakeout.

The strategy of building a diversified portfolio is unusual among REITs. Most companies do not diversify: They specialize in narrow niches such as office buildings, warehouses or apartments. Vornado, however, is hardly like most REITs. Although it is a public company, its CEO, Steve Roth, rarely talks to the press. Real estate industry executives say that he is among the sharpest deal-makers in real estate.

Industry insiders also credit Michael Fascitelli, who left Goldman, Sachs, the Wall Street investment firm, last December to become Vornado's president, with playing a crucial role in the deals that the REIT struck this year. Last year Roth was widely criticized for paying Fascitelli a princely signing bonus of $25 million to lure him away from Goldman, Sachs. The spate of deals that Vornado has struck seems to indicate, however, that Fascitelli has earned his pay.

Even before the cold-storage warehouse deals, Vornado had a busy year. The company is now likely to become active in the Manhattan housing market. At the end of September, Vornado and developer David Edelstein bought the rights to build a 41-story condominium complex on New York City's Upper West Side for $9.3 million from the YMCA of Greater New York. According also news reports, which Vornado has declined to confirm, plans call for the construction of five new floors on the top of the YMCA.

Vornado also struck a deal last month in the hospitality business. It has teamed up with Planet Hollywood International of Orlando, Florida, to remodel New York City's Hotel Pennsylvania, a 1,705-room hotel, and convert it into a sports-theme hotel and entertainment complex named Official All Star Hotel. The total investment in the project will be some $200 million, and more funds will be invested over the next two years to improve the property. Vornado is one of three partners involved in the project: It will own 40% of the venture. The REIT's associates include Planet Hollywood International and Hotel Properties, a Singapore-based company involved in the retail, entertainment and lodging industries.

All these moves into fields such as warehousing, housing and hospitality come on the heels of a major foray that Vornado made earlier this year into office real estate. The company struck a $656 million deal to buy a 4-million-square-foot portfolio from Mendik Co., which gave it a strong presence in the New York City office market. The company has also made aggressive bids for prime office properties in New Jersey--although it has not always succeeded. Vornado tried, for example, to buy Newport Financial Tower, an upscale office complex, in Jersey City, but the deal flopped. A Canada-based real estate investment company, TrizecHahn, bought the property earlier this year.

All this might suggest that Vornado is straying far from its traditional roots in retail. The company first plunged into the retail market in the 1980s when it fought a prolonged battle against Donald Trump over Alexander's, a bankrupt retail chain. Roth defeated Trump and gained control of Alexander's--and though the chain's retail business never quite recovered, it gave Vornado access to some of the best shopping centers in the Northeast. Vornado built on this base until it controlled some 60 shopping centers.

Despite its entry into new markets, Vornado is still interested in retail deals. For example, it paid $225 million to buy Arbor Property Trust, which owns the 1.8 million-square-foot Green Acres Mall on Long Island, New York. Under the terms of the deal, which included the assumption of $125 million in debt, Arbor's shareholders received 15.4% of Vornado's convertible preferred stock or 12.2% of Vornado's common stock for each of their shares.

What will Vornado do next? If the recent past is any guide, it could do almost anything. The deals that Vornado has signed this year show that the REIT is growing rapidly in lots of markets. Speaking at a real estate conference in April, Roth said that he believed a shakeout is on the way in the REIT industry. The best chance of survival, he suggested, belongs to companies that are large enough to take over weaker ones. So far, at least, Vornado is on the winning team in that game.