Vornado Realty Trust
Vornado Realty Trust
Park 80 West, Plaza II
Saddle Brook, New Jersey 07663
Fax: (201) 587-0600
Incorporated: 1936 as Windsor-Fifth Ave., Inc.
Sales: $116.9 million (1996)
Stock Exchanges: New York
SICs: 6512 Operators of Nonresidential Buildings
Vornado Realty Trust is a real-estate investment trust (REIT) that owns, leases, develops, and manages real-estate properties, primarily in the Northeast and Mid-Atlantic states. At the end of 1996 the company owned 57 shopping centers in 7 states. Vornado was a retailer until 1980, when Steven Roth wrested control of the firm and converted it into a developer of the properties occupied by its Two Guys store chain. In the 1990s Roth positioned Vornado to become a major developer of commercial real estate in midtown Manhattan.
Retail Operator, 1947-80
Vornado’s corporate history dates back to Windsor-Fifth Ave., Inc., a Manhattan decorating company formed in 1936. In 1947 Herbert Hubschman and his brother Sidney opened a household-appliance store in a Harrison, New Jersey, converted diner. This was the first in a discount chain named Two Guys From Harrison, which originally sold major appliances, later adding other appliances and housewares. The Hubschmans were pioneers in the development of one-stop shopping centers in New Jersey, all under one roof and consisting chiefly of leased departments. Vital to their success was their policy of locating in outlying areas, where they could obtain cheaper land and offer customers larger parking lots than other retailers. Sales grew from $6.8 million in fiscal 1952 (the year ended August 31,1952) to $38 million in fiscal 1957. Net income rose from $162,723 to $816,675 over this period.
Two Guys From Harrison was operating, through subsidiaries, 16 discount stores—14 of them in northern New Jersey— when it went public as Two Guys from Harrison, Inc. in 1957, offering one-fourth of its common stock at $9 a share. In 1959 Two Guys entered a new field by acquiring O.A. Sutton Corp., Inc. for stock. Incorporated in 1941, Sutton was in 1954 manufacturing Vornado electric fans and room air conditions, fuel tanks for the Air Force, and air conditioners under the Westinghouse, Hotpoint, and Kelvinator trade names in Wichita, Kansas. Auto air conditioners and dehumidifiers were later added to its products. Net sales rose from $3.1 million in fiscal 1949 (the year ended November 30, 1949) to $38 million in fiscal 1954, while net income grew from $282,859 to nearly $1.5 million over this period. In fiscal 1957, however, Sutton lost $1.7 million on sales of $37.9 million. The next year it suspended manufacturing and began liquidating its inventories to pay off bank notes.
The acquisition provided Two Guys with additional working capital as well as the Vornado line of appliances and an income-tax shelter later challenged by the Internal Revenue Service. Renamed Vornado, Inc., the consolidated company expanded the Vornado line of appliances to more than 50 in under three years, including ranges, freezers, hair dryers, and electronic can openers sold by the Two Guys chain as well as other dealers. Manufacturing operations were contracted out, however, rather than retained by the firm. Meanwhile, Two Guys continued to thrive. By the end of 1965 it was the nation’s fifth-largest discount chain, with 25 stores in 5 states, stretching from Connecticut to Maryland, and sales in fiscal 1966 (the year ended January 31, 1966) of $247.2 million, with net income of $8 million.
Two Guys’s units, which included seven company-owned properties, were among the largest in the discount industry, with average store size close to 146,000 square feet. All but seven included company-operated supermarkets. Food, appliances, and clothing and apparel contributed the most to sales volume, with other items including housewares, home furnishings, shoes, auto accessories, jewelry, cosmetics, toys, and seasonal merchandise. Leased departments now accounted for only 5 percent of sales. Vornado maintained a fleet of almost 200 trailers and trucks and had in-house advertising, service, and construction departments. Herbert Hubschman died in 1964; since his brother had previously left the company, an associate, Frederick Zissu, succeeded as chairman.
In 1967 Vornado acquired Food Giant Markets, Inc., a West Coast supermarket chain that also held a discount-store division and other retail enterprises, for an estimated $50 million of company stock. The purchase seemed to be a bargain: for its stock Vornado acquired a company doing $350 million worth of business a year, with 70 supermarkets, 241 Foster’s Freeze franchised fast-food drive-ins, 14 Unimart general-merchandise discount stores, 5 package liquor stores, and a chain of more than 20 Builders Emporium stores selling do-it-yourself supplies. Vornado’s sales immediately more than doubled, and its profits rose, although by a lesser amount.
Before long, however, security analysts were characterizing the acquisition as a serious drag on profits. Food Giant, still under its old management, instituted discounting but alienated shoppers by shortening hours and eliminating trading stamps. When managers from the East took over, they eliminated established California brands in favor of Vornado’s own private labels, which were unknown out West. Unimart had a huge inventory of unsalable merchandise. Company debt had reached $97.2 million by 1971.
In fiscal 1972 the Vornado empire enjoyed record sales of $827.1 million and record net income of $12.1 million. There were 53 Two Guys stores (including 4 in California), 65 Food Giant stores, 240 Foster Freezes, and 31 Builders Emporium units. Most of the Unimarts had been phased out or were being converted to Two Guys outlets. In addition the company had purchased 12 Disco Fair stores in California from Beck Industries Inc. and also owned a bakery and a dairy-products company. The Food Giant chain was disposed of piecemeal in 1971 and 1972, but this failed to stem a steady decline in profits. In fiscal 1977 Vornado earned only $145,000 on sales of $946.5 million.
In 1978 Vornado sold 22 Two Guys stores in California and a Builders Emporium to Fed-Mart Corp. for $38.3 million and the assumption by the buyer of $27.3 million in mortgage debt. It sold the other 59 Builders Emporium stores to Wickes Corp. for $56.3 million in cash and the assumption of $10.7 million in mortgage debt. This left the company with 60 Two Guys stores and some $100 million in cash but also about $103 million in debt. By the fall of 1979 Interstate Properties Inc., a private partnership engaged in shopping-center development, had taken a 17-percent stake in Vornado. In fiscal 1980 the company reported a loss of $750,000 on sales of $733.4 million, and later that year Interstate Properties took control of the firm after winning a proxy struggle.
Shopping Center Landlord in the 1980s
Steven Roth, the active Interstate partner, regarded Vornado’s real-estate holdings as more valuable than its declining retail operations. He liquidated Two Guys, which was doing $600 million a year in business but had an operating loss of more than $20 million in the first half of 1981, disposing of $196 million of inventory. Montgomery Ward & Co., Inc. had leased 12 Philadelphia-area locations from Vornado in 1980; in March 1982 The Stop & Shop Cos., Inc., agreed to lease 11 more Vornado shopping centers for its Bradlees discount department stores. While seeking tenants for its 34 other shopping centers and its eight warehouses, the company retained three Sutton Place catalog stores, which were subsequently phased out, and the Steinwurtzel finished-apparel wholesaling operation. Company revenues, $36.2 million in 1982, had reached $66.3 million in 1985, when real estate outstripped merchandising from Steinwurtzel (which was discontinued in 1991) as the chief source of sales. In 1989 Vornado had net income of $10.4 million on sales of $81.6 million.
Eyeing Manhattan in the 1990s
Roth, through Interstate Properties, entered the Manhattan real-estate market in 1985 by buying a small stake in Alexander’s, a failing retailer whose land holdings included its flagship store, occupying the entire block between East 58th and 59th streets and Lexington and Third avenues. Interstate and developer Donald Trump raised their respective shares of Alexander’s to 22 percent each in 1987 and agreed to expand or sell their interests in the firm jointly. In 1988 they each raised their stakes to 27 percent. The agreement lapsed in 1991, when Trump turned over his holdings in Alexander’s to Citicorp, which had been holding them as collateral for a personal loan. The following year Roth and Alexander’s creditors forced the firm into bankruptcy. They closed the remaining stores in operation and raised $120 million by leasing a half-dozen of its properties to Caldor.
Alexander’s emerged from bankruptcy in 1993, but as a real-estate investment trust (REIT). Two years later Vornado, which already held a small portion of the retailer, bought Citicorp’s share for $54.8 million—about 25 percent under market value. Roth, who now held majority control through Vornado and Interstate, became chief executive officer of the company. Vornado’s plans for Alexander’s East Side property—perhaps the most conspicuously unoccupied tract of prime Manhattan real estate in the 1990s—remained uncertain.
Vornado Inc. was converted to Vornado Realty Trust, a REIT, in 1993. By this time the company held $115 million in cash and $421 million in total assets. Its shares had increased in value by about 17 times since 1981, and Roth had realized $29.2 million the previous year by exercising options on 1.5 million shares of Vornado stock. The new equity offering raised $172 million and left Roth, through Interstate Properties and his personal holdings, with 38 percent of the outstanding shares. A special dividend of $54 million was distributed to shareholders.
At the end of fiscal 1995 Vornado had posted average 3-, 5-, and 10-year annual total returns of 27.4, 33.7, and 28.9 percent, respectively. The company suffered a blow when Bradlees, now the anchor store in 21 of Vornado’s 56 shopping centers, filed for bankruptcy protection in 1995. Standard & Poor’s concluded, however, that most of the leases would survive the bankruptcy because of the above-average sales of the stores involved, superior locations, and Bradlees’ lease guarantees from its former owner, Stop & Shop. Bradlees held 17 leases from Vornado at the end of 1996. They were mostly in New Jersey but also included the location of its store near Manhattan’s Union Square.
Michael Fascitelli, a Goldman, Sachs & Co. real-estate investment banker, was recruited to become president of Vornado in December 1996 by a compensation package valued at from $50 million to $100 million or more. The lucrative deal was seen as evidence that Vornado was ready to buy downtown office buildings and regional malls. Rumors about the company’s intentions sent the price of the stock to $61 a share in March 1997, compared to $37 a share a year earlier. Shortly thereafter Vornado confirmed one source of speculation by purchasing Mendik Co. for $437 million in cash and securities from developer Bernard Mendik, who became co-chairman of Vornado. Vornado also assumed $217 million in debt. Mendik Co. held control of seven midtown Manhattan office buildings totaling 4 million square feet of space. Roth was said to have told friends privately that he intended “to become the largest owner of commercial real estate in New York.”
One of Mendik’s buildings was adjacent to Madison Square Garden, and another was across the street. A few months later Vornado agreed to buy another nearby building, the Hotel Pennsylvania, in a $160-million joint venture with Ong Beng Seng, a Singaporean hotel developer and financier. And in June 1997 Vornado purchased three small buildings a block north of the hotel, plus leases of retail spaces in two buildings previously acquired by Vornado, for about $75 million. These transactions aroused speculation that Vornado was contemplating a multilevel shopping and entertainment complex in the area, which included not only Madison Square Garden but also the Manhattan passenger terminals for Amtrak and the Long Island Rail Road.
At the end of 1996 Vornado owned 57 shopping centers in New Jersey New York, Pennsylvania, Maryland, Connecticut, Massachusetts, and Texas, containing 10 million square feet of space. They were generally located on major regional highways in densely populated areas. Shopping centers accounted for 92 percent of Vornado’s rental revenues in 1996, and the occupancy rate was 90 percent. About 80 percent of the square footage was being leased to stores taking more than 20,000 square feet. Such stores included discount department stores, supermarkets, home-improvement stores, discount apparel stores, membership warehouse clubs, and “category killers”: large stores that offered a complete selection of a category of items at low prices, often in a warehouse format. The company also owned eight warehouse/industrial properties in New Jersey, containing 2 million square feet of space, and two office buildings with 250,000 square feet of space. Vornado was leasing its executive headquarters in Saddle Brook, New Jersey.
Vornado had record income from continuing operations of $61.4 million in 1996 on record revenues of $116.9 million. Interstate Properties, a general partnership in which Roth was managing general partner, held 24.4 percent of its shares. Vornado held 29.3 percent of Alexander’s common stock at this time and was managing, developing, and leasing Alexander’s properties under a three-year agreement.
Vornado, Inc.; Vornado Acquisition Corporation; Vornado Finance Corp.; Vornado Holding Corporation; Vornado Investments Corporation; and Vornado Lending Corp.
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