Tags: Vornado | JC | Penney | Investment

Vornado Throws in the Towel on JC Penney Investment

Sunday, 15 Sep 2013 11:20 AM

 

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Vornado Realty Trust Chairman and Chief Executive Officer Steven Roth resigned from J.C. Penney Co.’s board as his firm plans to sell its stake, ending a costly three-year attempt to remake the department-store chain.

The real estate investment trust plans to exit its J.C. Penney holding in the “not-too-distant future,” Vornado said Friday in a filing with the U.S. Securities and Exchange Commission. Vornado owns about 6.1 percent, according to the filing. That makes it the retailer’s sixth-largest shareholder, according to data compiled by Bloomberg.

The board departure and plan to unload the chain’s stock heralds the end of saga that saw Roth and fellow investor Bill Ackman acquire large stakes in the retailer in 2010, join the board in 2011 and push for change. Ron Johnson, their choice for chief executive officer, was ousted in April after failing to revamp the retailer. Ackman resigned from the board in August and later sold his stake.

“We don’t think Roth’s resignation or Vornado’s decision to sell its stake comes as a surprise to investors,” Deborah Weinswig, an analyst at Citigroup Inc. in New York, wrote in a note to clients. It’s not surprising, given that Ackman, Vornado’s investment partner, resigned a month ago, she said.

J.C. Penney fell 0.7 percent to $13.82 at the close in New York Friday. Shares of the Plano, Texas-based company have slid 30 percent this year, compared with an 18 percent gain for the Standard & Poor’s 500 Index. The stock has tumbled 57 percent since Oct. 8, 2010 when Pershing and Vornado announced their investments.

Vision Backfires

Ackman’s Pershing Square Capital Management LP and Vornado took initial stakes of 16.5 percent and 9.9 percent, respectively.

The two investors joined the board in February 2011 and four months later the retailer announced the hiring of Johnson, the former Apple Inc. retail executive. Johnson implemented an aggressive plan to transform the chain’s merchandise, pricing and store layouts. His vision backfired as established customers fled while not attracting enough new ones, leading to a sales drop of 25 percent and a net loss of $985 million last year.

Vornado sold more than 40 percent of its stake in J.C. Penney in March after the chain reported a fourth quarter in which sales declined 28 percent and it posted a net loss of $552 million. On that transaction Vornado had a loss of $97 million by selling the shares at $16.03 each.

Sears, McDonald’s

Roth gained fame within the real estate world in 1980 by taking over Vornado, whose sole asset was the struggling Two Guys discount-store chain. Since then, he has transformed Vornado into the third biggest U.S. real estate investment trust by market value, with office buildings in New York, Washington and San Francisco, as well as shopping malls throughout the nation.

Roth has also taken stakes in companies such as Toys “R” US, Sears Holdings Corp. and McDonald’s Corp., often as a way of gaining exposure to real estate at a lower cost than buying property outright. He compared this strategy in an April 2005 shareholders letter to that of T. Boone Pickens, noting that the oilman discovered in the 1970s that he could “mine” for crude more cheaply by purchasing energy stocks than drilling wells.

Vornado shares have generated an average annual return of 10.3 percent, including dividends, in the past 10 years through Aug. 30, besting the average gains of 7.1 percent provided by the benchmark Standard & Poor’s 500 Index during the same period.

In the past two years through August, the REIT has posted average annual gains of just 1.4 percent, well behind the benchmark’s 18.3 percent and Roth had come under pressure to abandon deal-making strategies outside of owning retail and office space, analysts said.

© Copyright 2014 Bloomberg News. All rights reserved.

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