“Negative surprises”: Vornado execs talk retail struggles on Q2 earnings call

Vornado was landlord to both Topshop stores which closed in June
By Kevin Sun | July 30, 2019 05:35PM

Vornado chairman and CEO Steven Roth, and 608 Fifth Avenue (Credit: Getty Images)

Vornado chairman and CEO Steven Roth, and 608 Fifth Avenue (Credit: Getty Images)

As the retail apocalypse claims another victim, Vornado Realty Trust may be looking to offload one of its retail properties — or convert another one to offices.

Fast-fashion brand Topshop closed all U.S. stores in June, and Vornado was the landlord at both of its New York locations. This put a dent in the firm’s second quarter earnings, and was a topic that came up early and often in Tuesday morning’s earnings call.

“Overall, the retail market continues to be challenging, with leasing velocity slow, and assets prone to negative surprises, a la Topshop,” Vornado president Michael Franco said in a prepared statement at the start of the call.

Although rent for the two locations was paid through the end of June, accounting methodology — specifically, the “straight-lining” of rent over the duration of a lease — means that the Topshop closures had a negative impact on the firm’s earnings for the past quarter.

Overall, the New York-based real estate investment trust reported adjusted earnings of $42.6 million or $0.22 per share for the second quarter, down from $0.36 per share for the same period the year before.

At one of the former Topshop locations, the landmarked Swiss Center at 608 Fifth Avenue, Vornado may end up abandoning the property altogether. The ground lease on that property, which is owned by the Korein family and expires in 2033, includes a cancellation option, Franco noted. Vornado took over the ground lease from Aby Rosen’s RFR Holding in 2013.

Vornado CEO Steven Roth further clarified the firm’s position during the Q&A segment. “First of all, we have not said that we are abandoning the ground lease. That may come; It’s an option that we have in the future,” he said, noting that the economics of the property were “a push, to slightly underwater.”

“The likelihood is that this is not something that we want to spend our energy and time on,” Roth concluded.

The other former Topshop, at 478 Broadway, may have a brighter outlook. “This is great space, which we will re-lease in the ordinary course,” Franco said. “We may convert some of the upper floors to office, given the attractiveness of this bullseye location in Soho to creative types.”

Meanwhile, more retail troubles are already on the horizon. “I will also point out Forever 21 has hired restructuring advisors, and is working with mall owners to provide rent relief to help stabilize the company,” Franco said, noting that the company will likely participate in rent relief “in some small measure” at the retailer’s 1540 Broadway location.

Meanwhile, Vornado has chosen not to renew Forever 21’s lease in 4 Union Square, instead leasing part of its space to Whole Foods in a 70,000-square-foot, 20-year renewal deal. A third Forever 21 location, at 435 Seventh Avenue, just opened recently.

All in all, Vornado’s retail occupancy declined from 97.1 percent to 94.7 percent over the course of the quarter, all due to Topshop and the abortive attempt to revive the Four Seasons restaurant at 280 Park .