Macklowe ripple effect hits Vornado

Real Estate Weekly,  March 5, 2008  by Daniel Geiger

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Vornado Realty Trust released its 2007 earnings last week, posting stronger overall returns than in 2006 but a worse fourth quarter than the year before. The company, one of the largest landlords in Manhattan and the owner of millions more square feet of retail and office space in other major markets across the country like Chicago and Washington D.C., netted $511.7 million in 2007.

The performance beat last year's $502.6 million net income but ended more sluggishly. In the fourth quarter, Vornado posted net income of $90.9 million, less than the $105.4 million the company earned during the same period a year before and perhaps reflective of the larger economic problems that began building late in the year and have now thrust the economy into a slowdown.

Vornado said that it incurred a $57 million loss in the fourth quarter due at least in part to what appears to be uncollected portions of mezzanine debt it purchased in the stack of financing that investor Harry Macklowe used to acquire a $7 billion portfolio of office buildings in Manhattan from the Blackstone Group last year.

Macklowe essentially defaulted on those loans earlier this month and is trying to work out a deal with his creditors. It appears he has reached an agreement with Deutsche Bank, the senior lender, to sell the buildings off, but Vornado, using its leverage as a stakeholder is resisting that deal, a move that some real estate experts say is aimed at trying to gain control of the portfolio.

According to SEC documents, Vornado purchased a 42% interest in two mezzanine loans totaling $158.7 million for $66.4 million. The loans are tied to four of the seven buildings in the seven building portfolio: Worldwide Plaza, 1540 Broadway, 527 Madison Avenue and Tower 56. The documents indicate the loan is due in February. Vornado also purchased a roughly $100 million interest in a $1.43 billion bridge loan that Fortress Investment Group gave Macklowe to fund the equity portion of the acquisition. That loan too is now in default and has forced Macklowe to put his most prized trophy office building, the GM Building, up for sale.

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