On Sept. 13, Vornado Realty Trust (NYSE: VNO, IDR 'BBB', Outlook Stable)
announced that Steven Roth and Clifford Broser had resigned from the
boards of J.C. Penney Company, Inc. (NYSE: JCP, IDR 'B-', Outlook
Negative) and Lexington Realty Trust (NYSE: LXP, not rated),
respectively. The directorships did not preclude VNO from selling its
interests in either company (as demonstrated by the March 2013 sale of
JCP shares). However, when combined with the company's recent public
comments regarding anticipated holding periods for both companies, the
resignations foretell that dispositions may occur sooner rather than
later, which Fitch Ratings views as a credit positive.
As Fitch has previously stated, Vornado's efforts to simplify its
holdings are a credit positive despite the limited effect on the metrics
(VNO's holdings in JCP and LXP totaled less than $400 million and
provided only $11 million in annualized cash contributions to EBITDA at
Sept. 13, 2013). The non-core portfolio has been a source of
consternation for both shareholders and management and a factor driving
share price performance (i.e. VNO underperforming the REIT index on
trailing three- and five-year bases and outperforming over the past 12
months and year-to-date as the company communicated and effectuated its
simplification). Future sales of JCP and LXP, combined with the
completed sales of VNO's interests in LNR Property LLC and non-core
retail and Merchandise Mart properties, would leave interests in Toys
'R' Us, Inc. (IDR 'B-', Outlook Stable) and Alexander's (not rated) as
the remaining noteworthy investments. Fitch does not project that
Vornado will exit either in the short-to-medium term due to Toys'
illiquidity and the stature of Alexander's real estate in Vornado's
portfolio.
A simplified Vornado has four positive effects on unsecured creditors.
First, to the extent it drives additional outperformance for
shareholders, the value of VNO's equity should improve and potentially
become a renewed currency for investments. Second, assuming VNO
reinvests the capital into properties, the quality of the cash flow
supporting the ratings would improve. Third, depending on whether VNO
procures secured debt on investments, redeployed capital may improve
unencumbered asset coverage. And lastly, management would be able to
reallocate the resources spent on simplification back towards the basic
blocking and tackling of acquisitions, redevelopment and portfolio
management.
Fitch currently rates VNO and Vornado Realty, L.P. (collectively,
Vornado) as follows:
Vornado Realty Trust:
--Issuer Default Rating (IDR) 'BBB';
--Preferred stock 'BB+';
Vornado Realty, L.P.:
--IDR 'BBB';
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage,' Aug. 5, 2013;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis,' Dec. 13, 2012;
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12,
2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
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