Vornado-led JV defaults on $450M loan on Fifth Ave

Steve Roth’s Vornado Realty Trust expects 2023 to be a “down year,” but one that will spotlight well-heeled landlords — even as the firm acknowledges it may need to turn some of its properties over to lenders.

Michael Franco, the REIT’s president and CFO, predicted that there will be a “heightened focus on quality of the landlord” among tenants and brokers savvy enough to avoid buildings with over-leveraged owners, who may be unable to invest or hold onto their properties. 

Franco said such a dynamic will play in Vornado’s favor on the firm’s fourth-quarter earnings call Tuesday. It will not, however, shield it from high interest rates, slowing leasing activity and a lack of cheap construction financing. 

At its retail properties, the firm is negotiating to keep tenants in place, offering discounted renewals to those with expiring leases or with options to leave early, such as Swatch and Levi’s at 1535 Broadway. In some cases, it is considering walking away from properties altogether. 

Vornado reported that its joint venture with Crown Acquisitions and other investors defaulted on a $450 million non-recourse loan at 697-703 Fifth Avenue that matured in December. Franco said the asset was “not refinanceable,” and that the venture is negotiating with its lender to restructure the loan. If that’s unsuccessful, Vornado will hand over the keys to the property, an increasingly common move by commercial landlords. Still, Franco said he believes it is also in the lender’s best interest to work something out.  

“We have the option to walk away,” he said. “Do I think that will happen? Probably not.” 

The building is part of a struggling portfolio of seven retail properties along Fifth Avenue and near Times Square once valued at $5.6 billion but now worth $4 billion after Vornado announced a $600 million writedown earlier this month.

Vornado reported $493.3 million, or $2.57 per share, in net losses for the quarter, which can largely be attributed to its impairment loss on the retail properties, which include 640, 655, 666, 689 and 697-703 Fifth Avenue; and 1535 and 1540 Broadway. The latest writedown follows a $306 million loss in 2020. 

“It is a very thin market, there are very few transactions on Fifth Avenue and Times Square,” Roth said Tuesday. “There is not the same lust for space that there was five years ago, but that will come back for sure.”

It has been a rough few weeks for the firm. In January, Vornado’s stock was booted from the S&P 500 because its stock was “more representative of the mid-cap market space,“ S&P Dow Jones Indices wrote in a late-December press release. 

The REIT also slashed its dividend nearly 30 percent. Roth had previously warned that the board would “right-size dividends” this year in light of expected drops in taxable income, but the size of the cut was larger than some analysts projected. 

But the firm reported higher-than-expected funds from operations, a key earnings metric used by REITs, at $139 million, or 72 cents per share, on an adjusted basis in the fourth quarter. Revenue hit $446.9 million for the quarter and $1.8 billion for the year. 

Vornado executives reiterated on the earnings call that the environment for new construction is hostile — a sentiment that has raised doubts about the company’s involvement in the state’s Penn Station megadevelopment. The REIT recently reached a deal with Rudin Management and Ken Griffin’s Citadel that would pave the way for a 1.7-million-square-foot tower at 350 Park Avenue. If Vornado decides to stay on as a developer on the project, it already has Citadel as the anchor tenant and will use the land value as equity. Or it could cash out, “taking the money and run,” Roth said, but that will not be decided for a few years.

“Construction financing is very expensive if available, which it generally is not,” Franco told analysts on the call when asked about the timing for the Park Avenue property and the Penn developments. “Today is not the day that we have to line that up.”