GWCAR Quarterly: Fall 2002 Feature Article - Smith-Vornado Merger, A Merger Creates Opportunity

CBQ >> Fall 2002 Issue

Smith-Vornado Merger
A Merger Creates Opportunity

On January 1, 2002, Charles E. Smith Commercial Realty became the Washington DC division of Vornado Realty Trust - an $11.5 B Real Estate Investment Trust - one of the largest in the U.S.

Today, Vornado is the largest owner of office space in both Washington, DC and New York City. In addition to its dominant market position, Vornado has a strong market reputation as an entrepreneurial company with an exceptional track record of performance.

Vornado's total office portfolio includes 74 properties aggregating approximately 27 million square feet in New York and Washington-with 14.2 million square feet in New York City (primarily in mid-town)-and now, approximately 13 million square feet in the Washington DC region. (Vornado also owns approximately 500,000 square feet of office space in the Washington Design Center as part of its Merchandise Mart portfolio).

The Vornado/Smith merger added a significant new chapter to Vornado's remarkable growth history. Since 1993, Vornado has grown from a $959 million company with 11 million square feet of shopping centers to an $11.5 billion integrated real estate company with over 80 million square feet across four business lines - including office, retail, Merchandise Mart, and temperature controlled logistics.

Merger Background and Rationale

Although the merger was announced October 19, 2001, Smith's preparation for this merger began over 7 years ago with several events:

In 1994, Smith Residential went public and evolved into the industry's dominant owner of high-rise, multi-family properties-and subsequently merged with Archstone Communities.

That move separated the commercial and residential Smith operating units, allowing Smith Commercial to begin planning for its future.

From 1997-2001, most of the Smith Commercial interests were consolidated into a 13 million square foot master limited partnership - Smith Commercial Realty, which included a 34% equity interest from Vornado Realty Trust. This roll-up began the merger preparation process.

Although Smith considered several potential merger candaidates, the Smith/Vornado merger offered perhaps the best possible alignment of objectives:

Smith offered Vornado irreplaceable assets in excellent locations, a first-rate management team, strong local knowledge/relationships, and a dominant position in the "protected" Washington market.
Vornado offered Smith greater access to capital, a high regard for the Smith operating team, positive market perception, a track record of performance - and the kind of entrepreneurial style required to support creative growth strategies.

In addition, Vornado and Smith had a positive, developed relationship since 1997 - the foundation for sound communication, alignment of interests, and integration of cultures.

Smith/Vornado Merger Driven by a Strategic Focus on Long-term Growth and Value Creation

The most compelling driver of the Smith/Vornado merger was the opportunity to create a growth platform for the Smith portfolio - similar to what was achieved in New York City with Vornado's acquisition of the Mendik portfolio. In 1997, Vornado purchased the Mendik Company - a family-owned portfolio comprised of mid-town properties in prime locations and a strong operating team.

Since the acquisition, this portfolio has achieved substantial growth and success. Through a disciplined development and acquisition strategy, EBITDA has more than doubled and same store growth has averaged over 13% per year. Today, Vornado is leading some of the most exciting New York development projects in the industry--including The Bloomberg Building on 59th Street.

Like Mendik, the Smith portfolio offered the opportunity to potentially generate similar growth and value, here in Washington, by executing a similar strategy through the Smith team.

Managing the Merger Process: Over-Riding Principles

Effectively managing the merger process required focus on several key areas:

--> Running the merger process, while running the business -- This balancing act involved managing all of the key stakeholders: principals and employees on both sides, Wall Street, customers, and consultants… while running the business.

--> An early start-well before closing and with no delay in closing.

--> Strong focus on retention and severance issues - recognizing the challenges involved in maintaining focus and commitment of existing employees, especially in functions typically consolidated, but crucial to maintaining "business as usual" in the post-transition period (eg Information Technology). Key Smith and Vornado executives focused on marketing the merger opportunity internally, and provided regular communications and updates.

--> Realistic expectations - - to ensure alignment of strategy and focus, going forward.

Now…Post-Merger

The merger brought together the best of both worlds: Smith's strong local strength, operating team, and market position with Vornado's considerable financial resources, vitality, and vision for the future.

Charles E. Smith Comercial Realty is now the second largest division of Vornado. The existing Smith leadership team continues to run operations and leasing activities throughout the portfolio - building on established local relationships with tenants and brokers.

The Vornado/Smith team is working together to develop a growth strategy that offers high-performance results, and leverages the resources and expertise of the combined companies. Ultimately this growth focus presents new opportunities for the entire Washington real estate community - for brokers, owners, investors, and tenants.