Vornado JV Refinances Office Property

Vornado Realty Trust (VNO - Analyst Report), a leading real estate investment trust (REIT), has recently formed a joint venture with Kushner Companies, a diversified real estate firm, to refinance a mortgage loan collateralized by ‘666 Fifth Avenue’ – a 39-story office complex spanning 1.45 million square feet in New York City.

In concurrence with the agreement, Vornado acquired a minority stake (49.5% ownership interest) in the building from its current owner Kushner. At the same time, the company converted the existing $1.215 billion mortgage loan into a $1.1 billion A-Note and a $115 million B-Note, thereby extending the maturity date to February 2019.

Moving forward, both Vornado and Kushner have committed to lend the joint venture $110 million for tenant improvements and working capital requirements for the property. While Vornado has decided to inject $80 million of equity in the building, Kushner will contribute the remaining $30 million. The equity contributions are expected to cover the leasing costs of about 30% of the building remaining vacant and renovating the space to suit tenant needs.

New York-based Vornado is one of the largest REITs in the U.S., engaged in acquiring, owning and leasing office properties, retail space and temperature-controlled logistics and refrigerated warehouses. Besides its properties, the company also has investments in other REITs, industrial buildings and Toys ‘R’ Us. Vornado currently owns about 32.7% of Toys ‘R’ Us.

Vornado has a strong asset portfolio in two of the best long-term office markets in the U.S. –  New York City and Washington DC. This provides the company a competitive advantage to continually increase rents. The core properties of the company are also performing satisfactorily and are maintaining strong occupancies in its New York City office and retail portfolios. We believe this pushes the company well ahead of many of its competitors, which have assets in relatively weak markets struggling with high vacancies and little pricing power.

We maintain our long-term ‘Neutral’ rating on Vornado, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for Brookfield Properties Corporation (BPO - Snapshot Report), a competitor of Vornado.

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