twasn't lack of faith, i didn't know how to play it. KMRT has moved up so much from the emerging from BK price of 10 or so. This looks to be a powerhouse combo - with the smarts of Lambert and the tax advantages of KMRT's tax loss carry forward, i think this is just the beginning. there was a great article on Lambert being the next buffett. i will try and post it.
meantime, here is an article from last week:
Vornado's Sears Stake Gives It Foothold Into Ppty Sale
By JANET MORRISSEY
November 8, 2004 2:24 p.m.
Of DOW JONES NEWSWIRES
NEW YORK -- Vornado Realty Trust's (VNO) decision to take a 4.3% stake in Sears Roebuck & Co. (S) will give the company a front-row seat at the Sears table in a potentially huge real estate deal, analysts said.
Vornado has a track record as a shrewd and opportunistic investor that never takes passive stakes in retailers.
"Vornado only does it if it believes there is an opportunity to get at the underlying real estate value," said Deutsche Bank analyst Louis Taylor.
"They may buy lemons, but they're not going to hold them as lemons for very long," said Taylor. "They realize there is a process to convert lemons to lemonade, but they're willing to spend the time, the money, in courts, whatever is necessary, to work through the process to do it."
In the past, Vornado has reaped huge returns by investing in financially troubled retailers such as the old TWO Guys chain in the early 1970s and Alexander's Inc. (ALX) in 1995, where it acquired the real estate, fixed it up, and sold or redeveloped it for big profits. It made an unsuccessful bid for Mervyn's earlier this year and is touted as among those currently bidding for Toys 'R' Us Inc. (TOY).
But Sears is its biggest bet yet.
Although the 4.3% stake appears small on the surface, many market experts speculate that Vornado is working alongside Eddie Lampert of ESL Investments Inc., which is Sears' largest investor with about a 15% stake. Lampert was the key investor who spearheaded the successful turnaround of Kmart Holding Corp. (KMRT) by orchestrating the selloff of Kmart real estate.
"Lampert worked wonders at Kmart in realizing real estate value far in excess of what other investors thought," said Lehman Brothers analyst David Shulman. "Kmart sold a bunch of assets at prices far higher than the market had anticipated."
Shulman said the Kmart real estate sales caused Kmart's stock to skyrocket. "The price of Kmart has gone from getting $20 to $95," he said.
Over the past year, Lampert has been increasing his stake in Sears, leaving many market experts to speculate he's gearing up for a similar move there. Many speculate that if Vornado hooks up with Lampert, it will share the driver's seat in reaping big returns.
Vornado purchased 1.2 million Sears shares for $40.6 million, and put up another $64 million as collateral to acquire options for another 7.2 million shares at a strike price of $39.82 and an expiration date of April 2006.
Lampert and Vornado represent a 20% block of Sears ownership that is more focused on real estate than ongoing operations, said Deutsche Bank retailer analyst Bill Dreher.
"I view it as a cheap option (for Vornado) to get a seat at the table," said Shulman. "And it opens up the possibility of them forming a coalition with Lampert," he said.
"Our gut is that (Vornado) took a 4% economic stake because they want to get closer to Sears and be involved in an ongoing review of their real estate portfolio," said Morgan Stanley analyst Greg Whyte, in a note. Whyte values Sears' real estate at about $5 billion, while Shulman estimates it in excess of $10 billion.
Taylor said Vornado doesn't want to just be one of five to eight bidders for Sears' real estate - and wind up losing as it did in the Mervyn's auction. "By coming in on the Sears side, they'll effectively be on the other side of the transaction - the selling side," he said.
Market experts believe Sears is open to the idea of selling off its underperforming stores, and they believe there are plenty of retailers willing to buy them. Retail construction has dropped off significantly to about 1% annual growth in square footage from its peak level of 5% to 6% growth in the 1980s, said Taylor. As a result, retailers wanting to open new stores need to find space in existing malls from retailers, such as Sears, who sell real estate.
But the investment isn't without risk.
If the real estate sales never come to fruition and the stock tanks below Vornado's strike price, Vornado will have to swallow its $100 million investment. "They do have the economic risk of ownership," said Shulman.
Also, many of Sears' stores are located in malls, which means there are "reciprocal easement agreements." These agreements basically mean mall owners and other stores in the mall must approve how a particular block of space is re-leased and to which retailer. And this process could take time. "Doing this is easy to talk about, but much harder to execute," said Shulman.
Still, Vornado limited its potential risk by acquiring options as opposed to purchasing the stake outright. This was likely done for several reasons. First, it lowered the cash outlay and potential losses the company could incur if the real estate profits never appear. Second, the company may have had to limit its exposure in order to maintain its real estate investment trust status.
Under REIT rules, a REIT cannot own more than a 10% voting stake in a non-real estate company. Also, no more than 5% of a REIT's total assets can be made up of securities of a non-real estate company. These tests may be the reason Vornado limited its stake in Sears to 4.3% as Sears has been an active re-purchaser of stock and the REIT could hit the 5% limit if Sears continued to buy back large quantities of its stock.
History has shown that Vornado doesn't make rushed or foolhardy investments. Chief Executive Steve Roth is considered a tough, but savvy executive who will spend months - sometimes years - negotiating a deal until he's certain the terms favor Vornado. "Roth is one of the meanest, richest SOBs in the sector, which is quite an accomplishment," Taylor said during a Vornado conference call with investors Monday.
Indeed, Vornado was the company that made the highest bid to acquire the 99-year lease on the World Trade Center back in 2001. However, after weeks of intense and frustrating negotiations, the Port Authority threw up its hands and decided to negotiate with the second highest bidder, Larry Silverstein, who ultimately purchased the lease.
Vornado's shares recently traded at $68.75, up 75 cents, or 1.1%, on volume of 399,900 shares, compared with average daily volume of 342,696.
Sears' shares recently changed hands at $43.80, off 2%, or 4.5%, on volume of 8.2 million shares compared with average daily volume of 2.9 million. |
