Alexander's Rises Again
As a Real-Estate Gem

Few but the most die-hard New York bargain hunters remember Alexander's, the scrappy department store chain that went bust more than a decade ago.

In fact, Alexander's still exists as a public company, albeit a much changed one. Even though it hasn't sold a skirt or towel since the early 1990s, the restyled company's shares have quadrupled in the past four years.

What's driving Alexander's now is real estate. The 64-year-old chain's biggest asset was the land under its 11 stores -- particularly a block-long plot in Manhattan, across the street from Bloomingdale's flagship store on Lexington Avenue.

The gleaming Manhattan complex at 731 Lexington Avenue stands where the old Alexander's store once did.

Call it the surprise beneath the box. As the overall real-estate market has soared, the leases and land owned by many retailers have also climbed in value, sometimes making the land more attractive to investors than the store operations themselves. Real estate has been a key factor in a string of other recent deals among retailers -- including Kmart Holding Corp. and Sears, Roebuck & Co., Federated Department Stores Inc. and May Department Stores Co. as well as the sales of Toys "R" Us and Target Corp.'s Mervyn's.

No company, though, illustrates a retailer's second lease on life better than Alexander's -- even if its path has been long and circuitous.

The identity shift from failed retailer to hot real-estate property began in 1995, when Vornado Realty Trust, a real-estate investment trust, bought a controlling interest in Alexander's Inc. after it emerged from bankruptcy protection as a pure real-estate play. Steven Roth, Vornado's gruff and determined chief executive, had grand plans for Alexander's Manhattan site, envisioning a magnificent tower. Mr. Roth, who had previously built strip malls in New Jersey, sought to unlock the value in the retailer's property and hoped to become one of New York City's real-estate heavyweights in the process.

A bygone time

But as years went by, the delays mounted. The empty building became an eyesore as at least four potential tenants and three architecture firms came and went. Homeless people camped out there and rats scurried in front of the site. Mr. Roth constantly changed plans -- including eliminating a hotel from the project and moving the tower after the foundation had already been laid. Some New York real-estate players dubbed him the "Hamlet of Lexington Avenue" and questioned whether the project would ever see the light of day.

Today, nobody is casting Mr. Roth as a hapless Dane. The elegant $630 million, 56-story glass, stainless steel and aluminum tower and adjoining 11-story building, designed by well-known architecture firm Cesar Pelli & Associates, opened late last year and is widely hailed as a success. Citigroup Inc.'s Citibank, and Home Depot Inc. have taken large blocks of space. More than 100 luxury condos with enviable views of Central Park are nearly sold out at prices ranging from $1.7 million to $27 million. Le Cirque restaurant is moving in. Hot Swiss retailer Hennes & Mauritz is a big tenant -- and so is New York City Mayor Michael Bloomberg's company. After more than two years of negotiations, the building is the new world headquarters for Bloomberg LP, the financial information company, which signed a 25-year lease for 700,000 square feet of space.

Mr. Roth, who is also chairman of Alexander's, will soon issue his annual shareholder's letter. In it, he is expected to announce his next plan for the company, which includes five other properties in New York and New Jersey. The plan, as he told shareholders last year, "may include selling it, or simply leaving it to seek its natural value as a freestanding, separately traded REIT, as it now is, or other options." Mr. Roth and Vornado declined to comment for this article.

The performance of Alexander's stock, which trades just a few thousand shares a day, has given Vornado a huge gain. In 4 p.m. New York Stock Exchange trading yesterday, shares of Alexander's were down $3.06 to $236.44, while shares of Vornado, which controls a third of Alexander's, were up 75 cents to $75.15.

Whether land provides other retailers in transition such a huge boost remains to be seen, but others are trying.

"With Alexander's, you had underlying value that a department store was not capturing," said Michael Beyard, a senior resident fellow with the Urban Land Institute. "Whether it's a department store failing and being converted to something else, whether it's a hotel or obsolete office building, all of these are part of the same trend of maximizing the value and return of the underlying real estate."

Earlier this month, ShopKo Stores Inc., a retail chain with stores in the Midwest, Mountain and Pacific Northwest regions, agreed to be acquired by a private-equity firm for $715 million, excluding debt. ShopKo owns about 80% of the 140 stores that bear its name and it has been estimated that its real estate could be worth about $24 a share. According to the merger agreement, private-equity firm Goldner Hawn Johnson & Morrison Inc. will partially finance the acquisition with $700 million of real-estate financing, likely from the sale of ShopKo's real estate.

Last month, a consortium of two private-equity firms and Vornado Realty Trust agreed to buy Toys "R" Us for about $5.7 billion. A group that included Kimco Realty Corp., a REIT, had also bid for the retailer. Prudential Equity Group LLC estimated the value of the chain's real-estate assets world-wide at $11 a share, or $2.2 billion.

Profits from selling off Kmart stores helped Connecticut investor Edward Lampert, whose hedge fund had taken control of Kmart after the giant chain entered bankruptcy protection, raise Kmart's share price and ultimately helped finance Kmart's $11 billion agreement to purchase Sears in November. Target last year sold its struggling Mervyn's discount department-store chain for about $1.65 billion to an investment group that included a firm that makes real-estate investments in retail businesses.

But investors looking to work similar magic with the real estate of ailing retailers shouldn't assume it will be easy. Vornado benefited from soaring real-estate prices and because it was among the first to value a retailer for the real estate it controlled. Now everyone evaluates retailers in terms of their real estate.

What Vornado did with the Alexander's site is a "one in a hundred long-shot example," says Erik Gordon, a professor of marketing at Johns Hopkins University. "That deal represents the siren song. For some investors, pursuing that strategy is more likely to lead to disaster than success. If you look at Sears and other real estate that will come to market, they're not on the Upper East Side of Manhattan, to say the least."

It may also be hard for anyone to match the efforts Mr. Roth put into this project, raising the question of whether these strategies can scale from a few dozen stores to hundreds. Toys "R" Us, for example, has more than 900 stores. But some of them are plopped in undesirable strip-mall locations.

Mr. Roth was intimately involved in the Alexander's transformation, especially the Manhattan site, paying close attention to exterior and interior design elements that other developers leave to architects and designers. "This has been Steve Roth's baby," says Mr. Pelli, the architect. "He came to New Haven [where Mr. Pelli's studio is] innumerable times. He was untiring in studying alternatives to make it better."

Mr. Roth was equally demanding with prospective tenants. Vornado held extensive discussions with auction houses Sotheby's, Christie's, department-store chain Nordstrom Inc. and hotelier Ritz-Carlton, but never reached a deal.

Bloomberg and Vornado also went back and forth for nearly four years, and ultimately Mr. Roth gave in to Bloomberg's request for more space, which scuttled plans for a hotel on the site, according to Barry M. Gosin, chief executive of real-estate services firm Newmark, which represented Bloomberg.

Vornado has redeveloped or leased its remaining Alexander's sites so there is a limit to how much the portfolio can be rejiggered. Still, "there's a lot of interest in the potential of what this company can be," says Samuel A. Lieber, chief executive of Alpine mutual funds, which owns about 125,000 shares of Alexander's.

That intrigue is part of what's been driving the share price -- the anticipation that Vornado will come up with an innovative plan for Alexander's. If Vornado sells its retail properties to Alexander's, for instance, it could transform Alexander's into an even bigger empire and make each company more focused in a specific sector. Or Vornado could seek to split Alexander's shares, opening it up to more investors and giving it more liquidity. Says Mr. Lieber: "It all gets down to what is Alexander's going to be now that it has grown up."

-- Alex Frangos contributed to this article.

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