|Shares Out. (in M):||168||P/E||0||0|
|Market Cap (in $M):||1,610||P/FCF||0||0|
|Net Debt (in $M):||763||EBIT||0||0|
NYRT - compelling risk/reward
We have followed the NYRT situation for some time and we believe an investment is timely given a key recent announcement that is a catalyst to unlock the value. NYRT is a New York City REIT that offers approx. 15% to 30% return in the next 12 months with strong downside protection and a 4.9% dividend while waiting for the value to be unlocked.
The situation has led to significant investor fatigue and finally, after multiple surprises along the way, we believe the value will shortly be unlocked via a sale or liquidation of the Company.
We will first provide an overview of the Company and valuation of the assets and then explain the events over the past couple years that have led to the current mispricing as well as the recent announcements that should lead to a near-term positive outcome.
NYRT overview and valuation
NYRT was set up in 2010 as a private REIT to invest in NYC commercial real estate at depressed prices. The Company was publicly listed in April 2014.
The portfolio is made up of approx. 3.3 million square feet comprised of 19 very well located, quality office, retail and hotel assets in Manhattan (one in Brooklyn).
See the properties at: http://www.nyrt.com/property-map.html
The portfolio is over 94% occupied with an average lease term of approx. 9.4 years.
The Company has a strong balance sheet with debt/EV of approx. 45%.
We estimate the in-place rents are 10% to 20% below market, providing a margin of safety and potential upside.
The following 5 Manhattan properties with high quality tenants account for over 65% of the Company’s NOI
- Worldwide Plaza (49% owned today)
- 1440 Broadway
- 245-249 West 17th Street
- 333 West 34th Street
- 218 West 18th Street
In addition to its commercial and retail properties, NYRT owns:
- the Viceroy Hotel on 57th Street; and
- an option to purchase the remaining 51.1% of Worldwide Plaza that it does not already own at an attractive price of $678 per square foot, which the Company has stated will be executed by end of 2016.
Our valuation of the portfolio is as follows:
A few comments on the valuation.
Cap rate drives the value. We believe 4.5% is appropriate and likely conservative as quality Manhattan real estate tends to trade at 4% or lower. Moreover, the rents on many of the properties are 10% to 20% below market and a number of leases also have escalators in them. The Company, in its February 2016 presentation, indicated that its current run rate NOI including lease rollovers this year (excluding Viceroy) is $132 million (we use $129 million above) with a target stabilized NOI of $142 million.
It is also worth noting the CEO’s commentary on the earnings call in May 2015:
“So therefore in the early days as a listed company, we had no sell side research coverage so, to help give direction to the market, we did estimate our own NAV which…was at or around $12.49. Now that we have sell side research coverage, we're not going to estimate our own NAV publicly, but I will just comment that I think the market has only improved since that time - rents are up in New York City, cap rates are down, there is a lot of demand for real estate in the city.”
Our base case is that over the next 12 months we receive between $11.50 and $12.50 via a sale of the Company or an orderly liquidation. This includes frictional costs of selling assets, which we estimate at approx. $60 million (~$0.35 per share).
Why does this opportunity exist? Strategic reviews, merger announcement and cancellation
Strategic review I
In October 2014, NYRT announced that it had hired an investment bank to evaluate strategic alternatives. In May 2015, the Company ended the strategic review process stating that although they “did receive a number of indications of interest, the Company's Board has concluded that none of the proposals were likely to result in a formal offer that the board felt would fairly value the Company”. REIT Wrap and other rumors suggested that there were two preliminary offers between $12.50 and $12.75. On the following earnings call, management indicated that the NYC real estate market had improved since it published its $12.49/share NAV when the company listed its shares, suggesting the offers were not sufficient to justify a deal.
Strategic review II
The JBG merger was withdrawn even prior to the proxy being released, likely driven by the Board realizing that the merger would not be approved by shareholders following the strong activism against it.
FINALLY: Likely liquidation or sale in coming months
Following the merger cancellation, the Board announced it had approved a plan of liquidation and would begin the process of selling assets subject to approval from shareholders. While we believe this outcome would still lead to a reasonable return to shareholders, there has been concern as to whether the conflicted external advisor and Board would ultimately maximize value for shareholders.
WW investors, led by Michael Ashner and Steve Witkoff, have kept up the activist pressure, believing their board nominees are best positioned to maximize the value.
On September 7, 2016, the NYRT Board issued an RFP to “qualified parties to serve as the external manager for New York REIT…that would take effect December 27, 2016”.
While fatigued investors might have viewed this announcement as a potential game that the Board is playing, we believe that NYRT’s Board understood the strong opposition to the current advisor remaining in place and is looking seriously at the best outcome. As a result, it appears to us the Board is finally taking steps to unlock the value for shareholders.
SIGNIFICANT ANNOUNCEMENT: On October 24, 2016, NYRT announced a settlement agreement with Ashner, Witkoff, and WW Investors. As part of the settlement, directors nominated by WW Investors will be added to the board. This settlement is a key catalyst as we believe Ashner and Witkoff would not have settled if they did not believe it would lead to value being maximized for shareholders. http://www.snl.com/IRWebLinkX/file.aspx?IID=4246025&FID=36353308
We expect the Company will shortly confirm the annual meeting date at which the liquidation plan and a new external advisor will be confirmed. Shortly thereafter, I expect the value to be unlocked via either a sale of all or part of the portfolio or an orderly liquidation. Interestingly, REIT Zone suggested last week that SL Green, RXR and Blackstone are each looking at NYRT’s assets.
The key risk is a sudden deterioration in the NYC commercial real estate market. While we are somewhat cautious on the pricing at the very high end of the NYC residential market, I believe other NYC real estate remains solid and low interest rates and even Brexit are likely to keep cap rates at or below my assumptions for the years to come.
The settlement plays out differently to what Ashner and Witkoff expect. This outcome seems unlikely as Ashner and Witkoff are sophisticated but there have been multiple unexpected events along the way with NYRT.
- Sale of Company
- Sale of part of portfolio
- New advisor selected
- Liquidation plan approved and commences (if no sale of portfolio occurs)