|Shares Out. (in M):||168||P/E||0||0|
|Market Cap (in $M):||840||P/FCF||0||0|
|Net Debt (in $M):||500||EBIT||0||0|
We expect the low ratings and down votes. We’ll be the first to admit we fell in love with the story and cast of characters. It had a villian, a hero, and a story that where good triumphs over evil. Clearly NYRT has not worked anywhere close to expectations. Please see Zbeex prior write-up and the extensive thread. But given the absolute investor fatigue, and the commensurate drop in price, tax loss selling, and now the reality that this will turn into a 3-4 years illiquid security, we think the risk-reward is very compelling, and with at least 50% of the story played out NYRT is worth a serious revisit. If you can hold the security it is worth a look. Even if you can't we think the gap will likely narrow over the next year and you can sell before it goes illiquid.
Over the course of the past year, NYRT has sold a majority of its assets at valuations roughly in line with ours (except two), and has begun distributing that cash to shareholders. Also during that time, real estate markets have come down from their peaks, causing disappointing outcomes in the sale of two of NYRT’s larger properties. The first is 1440 Broadway, which received underwhelming bids due to having significant vacancy. In the end, it was sold for $520M, which was $62M below management’s estimates. The second is Worldwide Plaza, which we will discuss in depth.
I won’t even attempt to try to value the remaining assets on a piecemeal basis. My investment thesis is predicated on Wendy Silverstein and Ashner and company being fundamentally honest people. I think they got this way wrong (as did I, and as Wendy has admitted), with a rapid softening of the NY RE markets, but I still don’t believe they acted nefariously. I also think at this point they have totally taken severe marks given how things have played out. NYRT has been left for dead, but given where we are in this exercise the likely end game is in the next 4 months, holders will own roughly 50% passive interest in WorldWide Plaza with RXR/SL Green as your JV partners, and a re-positioning playbook they have used a number of other times. With the building fully leased, and no development risk to speak of, and the West Side renaissance with Hudson yards, the repositioning plan seems credible, and the expectations seem very reasonable. Not a lot has to go right to make a pretty decent IRR, and the downside really does seem well covered (but I did say that before too).
The key assumption is: We use management’s numbers at face value. We actually think their might be some upside but here goes…
Worldwide Plaza is the “gem” of the NYRT portfolio. It is a mixed-use complex comprised of condos, retail and an office tower. The building has leasable space of over two million square feet and it spans the entire city block of 8th to 9th Avenue, and 49th to 50th Street. The building enjoys full occupancy and the largest tenants include a blue-chip law firm, CBS Broadcasting and Nomura’s US headquarters.
We originally thought that Worldwide Plaza would sell for $900-1100 per square foot based on recent transactions of Midtown Manhattan office complexes. Over the course of the past year, however, there were two changes in the market that caused the value of Worldwide Plaza to fall. The first was that some of the foreign sources of capital that were behind many of the large purchases in Manhattan had stepped away from the market, resulting in fewer bids for the building. The second is that interest rates continued to fall and debt markets were on “fire”. Worldwide Plaza was encumbered with a 10-year fixed-rate mortgage at 4.6% that contained a $115M prepayment penalty, and amortization in years 5-10. With current financing now available at 3.8% on an interest only basis, the debt attached to the building made it significantly less attractive to potential buyers. The ultimate bids for the building required NYRT to deliver the building unencumbered as buyers wanted to refinance with low-cost debt and eliminate the near-term amortization.
NYRT was underwhelmed with the bids they received and was left with three principal options.
1. Defer the sale until the prepayment penalty was no longer applicable (five years) and hope markets held.
2. Sell the whole building and be forced to bear the entire penalty themselves.
3. Sell half the building for $1.72B ($830/foot), split the prepayment penalty with the partner, refinance with attractive debt using the JV’s sponsorship, and work to reposition the building before selling in 3-4 years and participate in the potential value creation; but also wait a number of years and bear illiquidity.
In the end, NYRT chose option 3, selling 49% of the building to a joint venture between SL Green and RXR Realty, and retaining the rest. We believe their choice will result in the best outcome for shareholders. Both SL Green and RXR are among the best owner-operators in New York. Together, the new ownership group will invest $165M to improve the building and work to grow NOI as current tenants come off their sub-market leases. If everything goes to plan, the parties believe they can sell the building near/over $1000/foot in 3-4 years. NYRT also retains the right to sell its interest at any time, with its only obligation being to give to the JV the right of first offer.
NYRT’s decision to sell only half of Worldwide Plaza and work to improve the building certainly complicates what we initially thought would be a simple and fast liquidation. Additionally, investors choosing to participate in value creation beyond 2018 will be required to own a liquidating trust, a non-tradable security which can be a headache for some market participants. We believe these factors, along with the disappointing sale price of 1440 Broadway, are why NYRT’s stock has fallen to $5 despite management’s recent estimate of $6.45 a share ($8.52 estimate less the most recent distribution of $2.07).
We have attempted to value NYRT based on current information and believe a significant opportunity exists to earn an IRR of around 20% over the remaining lifetime of the investment. All of our assumptions are based on statements by management, whom we have followed for many years and have always found honest, astute and conservative with valuations.
These assumptions are:
- Management’s estimated pro-forma value of $6.45/share is accurate
- There will be $3.84 of distributions between now and March 2018
- Worldwide Plaza will sell over the next 3-4 years and NYRT shareholders will then receive $2.51 - $2.61 of total distributions for the remaining interest in the building
If those hold true, the remaining 50% of Worldwide Plaza is trading at a 56% discount to the cash flows investors can expect to receive in the future.
Using the same assumptions, we have then projected the IRR to investors if the sale is completed in the next 3-4 years.
· We think if SLG rallies, as it might do with a recent bump in its dividend, it is a great pair for this investment
· This stock is cursed
Anything can happen in 3-4 years.
· Liquidating Trusts can be headaches for lots of reasons
· Viceroy could be a debacle, and the $3.84 number could be flawed
· We think that company might hold the remaining distributions and just buy in the stock between March and 2018 year-end if the gap persists.
If NYRT falls too low, we expect SL Green and RXR will scoop up the shares in the open market once WW Plaza is the only asset left.
Further asset monetizations
Bump in NAV as plan takes hold