Description

RNY Property Trust (RNY) is a microcap Australian-listed property trust (market cap $76M) solely invested in commercial properties in the New York Tri-State area (LI, NJ, Westchester, CT). RNY owns a 75% interest in 21 properties (and a 5.85% interest in 3 other properties) located in the New York Tri-State area. The remaining 25% of this portfolio is owned by a joint venture controlled by RXR Realty, a realty manager in New York.
 

RNY is worth approx. double the current price. Key to my analysis is the appraisal value property estimates, which appear reasonably conservative. This is the equity of levered (approx. 64% LTV) commercial real estate so the key risk is a real estate value decline if the US economy goes back into recession, and occupancy and rental rates begin to fall. That said, there is minimal downside risk at the current price given the relatively low leverage and the asset holdings structure. The property portfolio is split into three pools that are not cross-collateralized with one another or at the corporate level. Further, there is zero debt at the RNY corporate level.
 

Valuation

• The NTA (or book value) at Dec. 31, 2013 was ~$0.54 per share, ~85% above the current stock price.
• I estimate the intrinsic value of the portfolio to be higher than the NTA, with a reasonable probability of value (and also the NTA) being between $0.60 and $0.75 in 18 to 24 months driven by the following:
  • With current operating leverage, revenue from higher occupancy or higher rents flows almost directly to the bottom line (checks suggest rents have stabilized and are starting to increase).
  • The recent refinancing of the ISB pool (currently 46.1% LTV) will generate interest expense savings to help cover leasing costs that will drive incremental value.
  • NTA currently based on conservative cap rate estimates (average 8.04%) applied by CBRE – 7.5% seems more appropriate for these assets.
  • Distributable cash of about 3 cents per share annually will be retained.
• Valuation: assuming a 5% increase in NOI (combination of occupancy and rent increases) and applying a cap rate of 7.5% yields a NTA of $0.72 value per share, approx. 145% higher than the current stock price. This is giving no credit to cash flow being retained in the business or interest savings from the recent lowering of the ISB pool interest rate.
   

How this plays out / catalysts

• ISB Pool interest rate was just lowered to 4.25% (from 6.13%) leading to $800K annual interest savings
• RXR Realty (or other related party) makes an offer to acquire RNY over the next 18 to 36 months. Management/Board suggest it makes little sense for RNY to stay public given high costs to keep an Australian office, dual reporting, etc. and have indicated they will explore options in the future.
• In the meantime, the book value increases (driven by about 3 cents of retained cash per year, increasing NOI and a slightly declining cap rate over time), and management will be opportunistic to increase value such as repurposing certain properties over time.
   

Overview of portfolio (as of Dec 31, 2013)

• EH/TL pool: 9 properties, $203.9M asset value, $156.2M debt, equity value $47.7M, 76.6% LTV
• Citibank pool: 7 properties, $128.9M asset value, $72.0M debt, equity value $56.9M, 55.9% LTV
• ISB pool: 5 properties, $88.7M asset value, $40.9M debt, equity value $47.8M, 46.1% LTV
• Details of individual properties are available in the supplementary financials and the Company’s website http://www.rnypt.com.au/
  
  

RISKS:

• This is levered real estate (although not significant at 63.8% LTV overall). That said, if the economy really turned commercial real estate prices in these areas would decline, and credit markets could re-freeze.
• Very low renewal rates in the next 24 months would be a near-term negative (there are a few large renewals coming up but brokers indicate the market for these properties is continually improving).
• Meaningful increase in interest rates (which would likely impact the entire sector).  
   

Management ownership is aligned with shareholders

In October 2008 the three executive directors of RNY (who are also directors of RXR Realty) purchased ~19.9% of RNY, which is the Australian legal limit. The executive directors are the largest RNY shareholders, suggesting their incentives are aligned with shareholders. It is possible that the directors attempt to purchase RNY below fair value. This seems unlikely as:

• These executives have not previously acted in a questionable manner and they are public New York figures (e.g. Chairman Scout Rechler is the Vice Chairman of Port Authority) and multiple contacts indicate they would avoid negative publicity.
• There are three Australian independent directors who are clearly not affiliated with the executive directors.
   

Why does this opportunity exist?

• US real estate investors are not looking at the Australian market for US real estate investments.
• Illiquid microcap with zero coverage.
• Not currently paying out any distribution.
   

Other points

• Distributable earnings were A$6.7M in 2013 ($0.026) and $6.6M in 2012 ($0.025 per share). No dividend is currently paid as cash is retained in order to fund renewal costs.
• Local real estate experts suggest that appraisals are probably conservative as there remain few comp transactions in the area and CBRE does not want to be wrong on valuations as the firm was pre-crisis.
• Very diverse tenant mix by vertical and client. Top three tenants in rental revenue terms at Dec. 31, 2013 as follows: Lockheed Martin (6.0%), Radianz (5.8%), Perkin Elmer (5.5%).
• As RNY is listed on the Australian Stock Exchange (ASX), the Company only reports twice per year. 
• Company financials, presentation, supplementary financials and financial details of each property in the portfolio are available at the Company’s website http://www.rnypt.com.au/
  
  

History

RNY was listed via IPO in Australia in 2005 to offer Australian investors a way to invest in real estate in the New York Tri-State area. The issue price was $1.00 per unit ($263M market cap on IPO). Proceeds from the IPO were used to acquire a 75 percent indirect interest in a portfolio of 25 commercial office properties from Reckson Associates Realty Corp (“Reckson”). Reckson, a publicly listed REIT, retained a 25% indirect interest in this portfolio. On 25 January 2007, Reckson was merged into SL Green Realty Corp, at which time an affiliate of RXR Realty acquired Reckson’s 25% stake in the portfolio. 

Catalyst

• RXR Realty (or other related party) makes an offer to acquire RNY over the next 18 to 36 months. Management/Board suggest it makes little sense for RNY to stay public given high costs to keep an Australian office, dual reporting, etc. and have indicated they will explore options in the future.
• Company reinstates the dividend
• Investors notice the large discount to NTA