Vornado Realty Trust, one of the three partners (Bain Capital and Kohlberg, Kravis, Roberts & Co. are the others) that bought out Toys ‘R’ Us for $6.6 billion last year, has agreed to purchase up to 44 previously closed stores for up to $190 million. These properties comprise 1.8 million square feet and are primarily located in eight East Coast states, Texas and California. Of these, 26 are leased or subleased to other retailers and 18 are currently vacant: 21 are owned, eight are ground-leased and 15 are space-leased.

Vornado didn't announce plans for the sites, but it is spinning the properties into a new subsidiary: Vornado Surplus 2006 Realty LLC, in a move that hearkens back to Vornado's roots. In the mid-1990s, it bought Two Guys and Alexander's, shut down both chains and converted them to realty companies and redeveloped or sold off the real estate over a period of several years — which is what observers think Vornado has in mind. The locations Vornado is acquiring are in dense markets with few opportunities for greenfield development.

Vornado declined to comment beyond the press release it issued.

The biggest question was not why Vornado, a Paramus, N.J. — based REIT with 58 million square feet of commercial real estate assets, made the move — which analysts predicted the day the deal was announced — but why it took so long.

“My guess is that when you have three partners at the table, doing anything is not that simple,” says Howard Davidowitz, chairman of Davidowitz Associates Inc., a national retail consultant and investment banking firm. (Davidowitz has served as a consultant to Vornado in the past.) “When [Vornado Chairman and CEO] Steven Roth does his own stuff he just sits there and makes his calls and that's the end. But here things are a little more delicate.”

The new owners have been busy on other fronts, implementing a strategy to shrink the U.S. store count, grow the international business and expand the Babies ‘R’ Us sub-chain. The investors also recently brought in former Target Corp. vice chairman Gerald Storch as CEO. At Target, Storch managed supply-chain operations, technology services, financial services, and Internet divisions. The company has also formed a series of new strategic partnerships to improve its logistics, and rethink its online strategy. It also hired Ron Boire, Best Buy's former global merchandising manager, to bring the chain's offerings more in line with the digital age.

Britt Beemer, chairman and founder of America's Research Group, thinks, however, that Toys' best bet on the domestic front is to continue to cash in on Toys' real estate and focus on growing Babies ‘R’ Us.

“The hottest category is the video game category and once you get into that there are so many other retailers that have a bigger presence and do a better job than Toys does,” Beemer says. “Personally, I think the toy store industry is in big trouble.… Babies, on the other hand, has staying power because there is no one left competing with them and there is more than enough demand to serve them.”

Vornado could use a boost from redeploying the Toys assets. In the year since the deal closed, its 32.9 percent stake in the retailer has been a drag on earnings; in three of the last four quarters Toys has posted net losses, restricting Vornado's FFO gains. For Vornado's third quarter, which ends Sept. 30, its results will include a Toys' operating loss of $36.4 million, which will drag Vornado's FFO down $0.18 per diluted share. As a result, it is estimating its FFO per share will come in at $0.92 per share for the quarter. That followed Toys' losses of $7.8 million in the second quarter and $39.6 million in the fourth quarter of 2005. Only in the first quarter of this year was Toys' impact positive — providing Vornado a net income of $52.8 million.

Since the merger, Toys has decreased its overall store count by about 100. It now operates 587 U.S. stores, down from 681 stores. Meanwhile its international store count has risen from 601 to 651 and the Babies ‘R’ Us chain has added 26 locations to grow to 244 units.