2013/3/6 - Fitch: Vornado's Exit from J.C. Penney Indicative of Priorities

In June 2012, we noted that a more streamlined VNO is a credit positive longer term; however, the disposition or monetization process for some of the larger, noncore investments may be protracted. As such, when coupled with the previously announced disposition of VNO's stake in LNR Property LLC, the sale of J.C. Penney stock represents progress exceeding our expectations for noncore investments. The repurposing of capital away from equity investments in speculative-rated retailers and into core New York City and Washington, D.C. office and retail assets would improve the asset quality of Vornado's balance sheet, all things being equal. Equity REITs, like most other corporates, are disinclined to recognize and/or realize losses and said losses are traditionally foretelling. However, it is a credit positive in this instance since it represents a demonstrable commitment to the re-prioritization of the company's focus.

Quantitatively, VNO's metrics should improve at the margin as J.C. Penney did not contribute to recurring operating EBITDA (we exclude realized and unrealized gains, and the dividend was suspended in 2012). Therefore, fixed-charge coverage and leverage would improve should net proceeds be used to pay down amounts outstanding on the line of credit or be re-invested into consolidated operating properties.

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