What happens when the market won't let you in? With the retail market and, frankly, development in general being completely saturated, one company is buying shares of retailers to own their real estate. Brilliant or insane?!.
Property is becoming too expensive or too complicated to buy, so Vornado Realty’s tactic is still to buy the retailers themselves to gain control of their real estate, Michael Fascitelli, president and CEO of New York City–based Vornado, told attendees at ICSC’s Capital MarketPlace Conference in New York City this week. “You can buy real estate cheaper on the stock market than Main Street,” he said, pointing to his firm’s purchase of stakes in JCPenney, Toys R Us, and the now-defunct Virgin Megastores North America. The firm is doing fewer “straight” retail real estate deals, Fascitelli said, because the returns are so tight. Instead it finds that retailer stocks are generally undervalued and easy to acquire, especially when compared to the moribund retail real estate transactions market, where buyers and sellers are having a hard time agreeing on terms.
Fascitelli pointed to Vornado’s experience with Virgin Megastores North America to illustrate his point. Vornado bought the 400,000-square-foot Virgin Megastore building in Times Square for $240 million at a 3.5 percent cap rate and bought out tenants to bring in more profitable retailers at higher rents. “We offered Virgin $85 million to leave. And they said ‘take a hike,”’ Fascitelli said. “So we started buying up their debt and then they didn’t say no.” Vornado purchased the retailer along with development firm Related Cos., and then closed the Virgin Megastore Times Square, re-tenanting it with higher-rent-paying and more viable tenants such as Forever 21 and Disney. The signs on the property are worth $12 million in annual rent alone, he added. “The internal rate of return is going to be very good,” he said.
And Vornado isn’t stopping there. In early October the firm bought a 9.9 percent stake in JCPenney, forming a partnership with hedge fund Pershing Square, which bought an additional 16.8 percent of the retailer. The retailer owns 416 of the 1108 stores it operates, according to company filings, leaving Vornado with ample opportunities to “add value” to those properties. “And we did it all with equity,” Fascitelli said. “If you want to take advantage of ‘value-added’ opportunities you are going to have to do more equity in the future than you have in the past.”