Investors and analysts listening in on Vornado Realty Trust’s recent fourth-quarter earnings call were taken aback when, instead of hearing the raspy, Rhode Island accent of CEO Michael Fascitelli, they were greeted by the booming New York voice of chairman Steven Roth.
What followed was largely unexpected, even among the company’s closest followers. Roth announced that Fascitelli, Vornado’s longtime golden boy, would be stepping down this month.
“The board has asked that I come back for another tour as CEO,” Roth said on the late February call.
Roth was emphatic that the move was strictly personal. “Mike is family,” Roth said. “This was entirely his decision.”
Fascitelli echoed those sentiments, saying: “Vornado has been my consuming passion for 16 years,” and that he would take “a break before doing something different.”
But some real estate insiders who follow the mega real estate investment trust were more skeptical, saying that a combination of factors — including the major financial hit Vornado took on a deal to buy hundreds of millions of dollars in JCPenney stock and Vornado’s lukewarm stock price in the last couple of years — could have been behind the CEO’s departure.
One top executive at a Vornado subsidiary, who asked to remain anonymous, told The Real Deal the decision was the result of a clash of personalities between Fascitelli and Roth. Roth has a tendency to chew on deals and over-negotiate them, while Fascitelli likes to get things done at a swifter pace, the executive said.
Fascitelli’s role as CEO, the executive added, meant that he was supposed to be running the show, but that turned out not to be the case.
In addition, an analyst at a prominent European investment bank — who also asked to remain anonymous because he regularly interacts with officials at the REIT — said that the suddenness of the announcement surprised him, though not the decision itself. The announcement, he said, was a result of Vornado’s relatively lackluster stock performance in recent years. Indeed, Vornado’s rolling five-year annualized returns (a measure analysts say is a more accurate reflection of stock performance than simple returns) have dropped from highs of over 30 percent in pre-crisis years to under 5 percent in the last two years. In addition, in the past two years, Vornado’s stock price has depreciated roughly 4.6 percent (to $81.90 at press time). By comparison, rival SL Green Realty’s stock has appreciated 18.8 percent in the same period, to $86.90.
Nonetheless, Alexander Goldfarb, an analyst with the Midtown-based investment banking firm Sandler O’Neill + Partners, said he believed it was simply a question of Fascitelli wanting to move on, a desire that may have intensified after a near-fatal car accident last year.
In August 2012, the driver of a car Fascitelli and his wife were traveling in had a heart attack, hit a truck and flipped the vehicle, leaving Fascitelli and his wife Beth trapped for over an hour. Fascitelli sustained a serious shoulder injury, while his wife suffered a concussion.
“He’s been working 24-7 for over 20 years in a pretty high-pressure environment,” Goldfarb said.
Roth lured Fascitelli from Goldman Sachs — where he headed the real estate division — in 1996 for a then-mammoth compensation package of $25 million in cash and $24 million in stock options.
George Auerbach, an analyst at investment research firm ISI Group, said if the two men hadn’t had good chemistry, Fascitelli wouldn’t have lasted at the REIT for 16 years — first as president and then, starting in 2009, as CEO.
But regardless of what caused Fascitelli’s departure, observers say the pressing question now is: What will it mean for the long-term health of the company?
The prevailing view is that 71-year-old Roth is only stepping in as CEO as a stopgap measure, and that he and the board will be actively seeking someone to take the reins. Indeed, real estate insiders speculate that the search has already begun.
A private report from real estate research firm Green Street Advisors obtained by The Real Deal dubbed Fascitelli’s departure “a succession failure,” as TRD reported online last month.
“The point is that Mr. Roth always had Mr. Fascitelli, but there is not an obvious Fascitelli 2.0 behind the original,” analyst Michael Knott wrote in the report.
Roth acknowledged during the earnings call that Vornado’s track record on corporate governance — the relationship between the board, management and stakeholders — was far from stellar.
“I can tell you we grapple,” he said, conceding that the resignation would lead to a “downtick” from analysts in Vornado’s corporate governance grade. But, Roth noted, the implications of Fascitelli’s decision have “been debated long and hard” among the board.
The Green Street report rated Fascitelli’s tenure at Vornado as mixed, marked by extreme highs such as the $437 million acquisition of office landlord Mendik Co. in 1997 — “among the best M&A deals in REIT history” — to disasters such as the 2010 purchase of a 10.7 percent stake in JCPenney.
The latter decision led to a $224.9 million loss for Vornado.
Since the 2000s, the report noted, the REIT had evolved from an “industry behemoth with a perceived Midas touch” to “a company struggling to find its long-term identity.”
The report added, however, that some of Vornado’s recent big-ticket investments, such as the $140 million commitment to develop the retail space underneath the New York Marriott Marquis at 1535 Broadway in Times Square, were appropriate for its long-term plans.
ISI’s Auerbach described Fascitelli’s resignation as “a step back” in Vornado’s plan to simplify its holdings, a goal Roth announced in his annual chairman’s letter to shareholders last year. Indeed, the company sold $2 billion worth of assets over the past year, but invested in only $1.3 billion worth of assets. (In recent years, the company was thought to have strayed too far from its core retail business, the Green Street report said.)
Next in line
Some have speculated that the JCPenney debacle led to Fascitelli being nudged out. A major real estate player interviewed by TRD, who’s done a number of marquee deals with Vornado, dismissed that, saying losses, even if that size, were simply par for the course.
“It’s a pimple on their ass,” he said of the JCPenney deal.
“Mike was a real driver of progress,” he added, noting that Fascitelli was adept at implementing Roth’s big-ticket ideas.
In fact, both the Green Street report and the executive at the Vornado subsidiary believed that the JCPenney deal was likely driven by Roth.
There are several names being floated around as possible replacements. Internally, Vornado’s 60-year-old David Greenbaum and 53-year-old Mitchell Schear, heads of the REIT’s New York and Washington, D.C., units respectively, are front-runners, according to the Green Street report.
Outside of the firm, the aforementioned real estate player named SL Green’s CEO Marc Holliday, who he called “one of the greatest geniuses in our industry,” a possible candidate. The source also cited General Growth Properties CEO (a former Vornado retail chief) Sandeep Mathrani.
But Sandler O’Neill’s Goldfarb said that Holliday, who has been lionized for growing SL Green into the city’s top office landlord since he took over as CEO in 2004, would be loath to leave his current job. “Holliday has taken [SL Green] from being in the shadow to being a dominant player,” Goldfarb said.
But jumping ship could be a lucrative move for Holliday — his total compensation in 2012 was $15 million, while Fascitelli’s was $64.4 million, according to Forbes.
A spokesman for Vornado declined to comment on Fascitelli’s resignation, deferring instead to the earnings call.
Fascitelli, meanwhile, is signing a one-year noncompete clause, Roth said. Joseph Macnow, Vornado’s chief financial officer, added that there would be no severance package.
After the year, Fascitelli would probably take over a large real estate company, the executive at the Vornado subsidiary said.