Friday, March 17, 2017

New York REIT: Winthrop Team Liquidating Another REIT

New York REIT (NYRT), as the name implies, owns office, retail, and hospitality real estate exclusively in New York City.  It began as a public non-traded REIT, then known as American Realty Capital New York Recovery REIT, and was brought public in April 2014 and externally managed by American Realty Capital (run by Nick Schorsch).  So it had two strikes against it: 1) former non-traded REITs tend to have disparate portfolios since they turn into indiscriminate buyers of anything that's for sale as their commission incentivized sales force pushes client assets into the REIT; 2) externally managed vehicles are often filled with conflicts, especially in regard to adding assets to boost the external manager's fees.

Not surprisingly, after going public the shares consistently traded below net asset value, making additional capital raises difficult for the already highly levered New York REIT.  They couldn't issues shares without serious dilution, they couldn't raise additional debt, they were stuck as a sub-scale REIT that would have difficultly growing and justifying itself as a standalone entity.

Facing investor pressure, the company put itself up for sale in late 2015, which eventually led to a confusing transaction with Washington DC developer JBG Companies that was effectively structured as a back door IPO for JBG, and would have created a confusing mismatch of stabilized NYC assets and a large, mostly multi-family, development pipeline in Washington DC.  Michael Ashner of Winthrop Realty Trust (FUR) launched a campaign against the deal, arguing instead that management should pursue a liquidation of the company, similar to the stance he took at Winthrop (which is now a liquidating trust and no longer traded).  The deal was terminated, and JBG recently found a new dance partner with Vornado (VNR), Vornado will be spinning off their Washington DC assets in an effort to become a NYC centric REIT as well, and will immediately merge the spunoff assets with JBG to create JBG Smith (JBGS).  JBG's management will run the new entity, I'm skeptical of their intentions, but it's one to watch as REIT investors may undervalue the development pipeline value "hidden" within the typical FFO/AFFO valuation metrics.

Back to New York REIT and fast forward a few months, the board and shareholders have approved the liquidation plan and appointed Winthrop as the new external manager and tasked them with selling all their assets and returning the proceeds to shareholders.

Winthrop REIT Advisors
A little background on the new manager (or "Service Provider" as they're listed in the management agreement), they previously managed, and still kind of do, an opportunistic REIT in FUR that invested across the capital structure, asset classes within real estate, both stabilized and development opportunities, and the market never properly valued the company as a result of its complexity.  Michael Ashner, who ran FUR, made the relatively odd decision to wind down the company and temporarily put himself out of a job, clearly a shareholder friendly move that paid off considerably as the total anticipated proceeds will be well in excess of the original estimates.  To get more background on how Michael Ashner thinks, Winthrop Realty Trust still has the old shareholder letters up on their investor relations page which may come down at some point now that the liquidation is almost wrapped up.

Michael Ashner's lieutenant, Wendy Silverstein, is officially in charge of New York REIT as the newly appointed CEO.  She has a long history, so does Ashner, in the New York real estate scene.  Winthrop has now set themselves up as a professional liquidator and its interesting to see how they've structured their incentive fee with New York REIT:
(b)          Incentive Fee.

(i)  In connection with the payment of (x) Distributions during the term of this Agreement and (y) any other amounts paid to the Stockholders on account of their Common Shares in connection with a merger or other Change in Control transaction pursuant to an agreement with the Company entered into after the Transition Date (such Distributions and payments, the “Hurdle Payments”), in excess of $11.00 per share (the “Hurdle Amount”), when taken together with all other Hurdle Payments, the Company shall pay an Incentive Fee to Service Provider as compensation for Services rendered by Service Provider and its Affiliates in an amount equal to 10.0% of such excess; providedhowever, that the Hurdle Amount shall be increased on an annualized basis by an amount equal to the product of (a) the Treasury Rate plus 200 basis points and (b) the Hurdle Amount minus all previous Hurdle Payments.

(ii)  The Incentive Fee shall be payable within two (2) business days of any applicable Hurdle Payment.
They've done their homework and clearly think its worth more than $11.00 per share when today it trades at about $9.70 per share.  In their initial activist presentation, Winthrop laid out their own NAV calculation based on management estimates that's a good  valuation road map for how to think of the ultimate liquidation proceeds.
It's a bit hard to read, but they came up with $11.39 - $12.31 assuming exit cap rates of 4.0 to 4.5%, which still seems about the right range based on industry numbers I've seen.

New York REIT Valuation
A quick snapshot of New York REIT that I recreated from their recent supplemental:
Winthrop's net asset value estimate came from an earlier version of this slide the company published in August:
The majority of New York REIT's value is in 5-6 properties, the two highlighted above, Viceroy Hotel and 1440 Broadway, require the most asset management/re-positioning.  The Viceroy Hotel opened in the fall of 2013, it's a 5-star hotel located two blocks from Central Park, the company paid $148.5MM for it but took a $27.9MM impairment charge recently as the hotel has failed to live up to expectations.  1440 Broadway is only 75% leased and had a few lease expirations that weren't renewed in 2016.

Others might not want to give credit to these two stabilizations occurring, but how I think this plays out is both Viceroy and 1440 Broadway will be some of the last assets sold and only once they've been stabilized, that's been Winthrop's playbook previously.  I think it makes sense to stretch out the liquidation time-frame, rather than discount the NOI for these two assets.  While there is a "clock" on the incentive fee Winthrop earns, their incentive is skewed towards price over speed.

The most significant asset New York REIT owns is a 48.9% equity interest in One Worldwide Plaza, a large predominately office building that takes up an entire city block.  It was purchased in October 2013, included in the sale was an option to purchase the remaining 51.1% at a fixed price of $678 per square foot, valuing the entire building at $1.375 billion.  New York REIT has leased up the building to 100% occupancy, the two largest tenants are Nomura Holdings and Cravath, Swaine & Moore that that both represent more than 10% of the company's overall rent roll.

The Real Deal recently published an article saying the building is being shopped for $1,000 per square foot.  NYRT investor, Rambleside Holdings, came up with a similar number of $1,100 per square foot in a letter sent to management in 2015:
To back into a $1,000 per square foot price, in the 10-K, New York REIT disclosed Worldwide Plaza's cash rent per square foot at $67.75 for the office space and $42.30 for the retail space.
Assuming a 4% cap rate, 60% NOI margins, and using last year's rent roll (conservative since you'd assume some increases), you could just about back into that $1000 per square foot price justification.

Using management's $144MM NOI run rate, the initial $115MM liquidation expense estimate, $1.51B in net debt, and nothing for ongoing NOI, we can come up with a simple table varying the exit cap rates and price per square foot for One Worldwide Plaza outlining the possible outcomes.
I'm hopeful the total liquidation distribution total is somewhere in the $11.33 - $12.44 per share range, with upside if they find someone to overpay significantly for One Worldwide Plaza, 1440 Broadway, or the Viceroy Hotel.  At $9.70 per share today, that's somewhere between ~17% and ~28% upside, with the wild card being timing of the liquidation distributions.  The liquidation plan outlines a 6-12 month time period to realize most of the asset sales, this feels quick?  But unlike Winthrop Realty Trust (FUR), New York REIT doesn't have any assets under development and most of the asset base is stabilized in a fairly liquid market.

Other risks include general softness in New York real estate, it currently appears mostly centered on the high end condo and multi-family market, but could clearly leak into office and particularly retail as that industry continues to be under pressure.  Rising cap rates is also a concern as interest rates continue to pick up, but that tends to not be a perfect correlation and given the near term nature of the asset sales, we'd need to see a significant shift in how the market views the pace of interest rates increasing to have a large impact on pricing.

Disclosure: I own shares of NYRT

31 comments:

  1. Thx for this. Good idea, I agree.

    What do you make of Mr. Hughes resignation letter from the board?
    It doesn't seem related to the liquidation decision to sell company outright vs piecemeal?

    http://www.snl.com/IRWebLinkX/doc.aspx?IID=4246025&DID=39545217

    ReplyDelete
    Replies
    1. It's strange, hard to tell who it really relates to, but it's odd because he was part of the Ashner group. Could easily dismiss it otherwise, but it does give me pause especially since I've done well with other REITs Gregory Hughes has been on the board. In the end, it's a bet on the Ashner group to get this done.

      Delete
  2. I have been looking at NYRT for a bit of time also. I did take a very small position as I'm not quite comfortable with all the valuations yetbut I intend to keep on working on it. I really appreciate your presentation it is very thorough.

    ReplyDelete
  3. I have some too, time to final payment is a consideration. The Winthrop Realty (FUR) liquidation has taken more than the full 2 years to liquidate as a listed company, and now shareholders own about half the original assets unlisted. So anyway, there definitely has to be an extra time discount built into the rate of return. Also sometimes the last handful of assets are the least wanted and get continually marked down... But i own some, as this price seems ok

    ReplyDelete
  4. Why is there no deduction for the Worldwide Plaza debt (it is unconsolidated) but stands at $875MM based on the 10-K?

    ReplyDelete
    Replies
    1. Their $427.9MM share of the $875MM is included in the $1.5B net debt figure.

      Delete
    2. Thanks for the quick response. One point of confusion for me -- when you calculate the final table of potential share prices should the debt figure include the full $875MM? My thought here is that giving credit for the full value of Worldwide Plaza means the full amount of debt should also be deducted. I'd be curious to get your perspective.

      Delete
    3. Yes, in a roundabout way, I'm netting out the additional debt that would be incurred and only including the value of the option. For instance, they're paying $678, receiving $1000 of value, I'm giving them credit for the net $322 in the table. Sorry if that's a confusing way to present it, but was following the Winthrop team's lead in their original activist presentation.

      Delete
    4. I got it. Thanks again -- your blog is well done.

      Delete
  5. Turned up in my research:
    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.”

    ReplyDelete
    Replies
    1. Yep. I saw that too. I think Bobba is right above, really comes down to timing and how much they can sell in 6-12 months, was that Winthrop trying to win the management contract or is that a legit timeline? Thanks.

      Delete
  6. On cap rates - shouldn't annualized (based on q4) NOI be closer to $127 assuming ~1mm Vice NOI? Also, any reason you are not including $260mm in escrow (from mez loan) to pay for option? I think after adjusting for this you would have much higher value if they hit $144 NOI - but I would not run a base case on that number.

    ReplyDelete
    Replies
    1. Not sure why I overlooked the escrow, it's an error -- should have included it, but maybe it all washes out when incentive fees, and a lower NOI base rate case is used.

      I'm using the higher base case NOI number because based on the experience with FUR, the Winthrop team is likely not going to sell Viceroy or 1440 Broadway without them being fully stabilized in order to maximize the sale price -- thus maximize their incentive fee. I think they'll trade top dollar over speed, and this drags out longer than their initial 6-12 month timeline. Thanks.

      Delete
  7. I've been looking at this one since the new team. The risk/reward profile looks interesting, but I'm concerned about the weakness in NYC real estate.

    ReplyDelete
  8. since you been into reits lately, I very much agree that STAR and RSO were the best risk/reward. Not as much of a fan for NYRT. Like to know your thoughts on CBL and WPG. Both yielding 12%. Definitely some risk involve regarding B malls but risk/reward seems compelling.

    ReplyDelete
    Replies
    1. Besides the obvious problems with B malls, I think part of the problem is that dividend, being levered, stock price being low, where is the money going to come from to redevelop all the properties that need repositioning? They need to thread the needle from a capital allocation perspective -- I'd be more interested if they raised the white flag, slashed the dividend significantly and saved that cash for redevelopment opportunities.

      I think that's a similar problem with SRG too. But at least with CBL and WPG I think you control your own destiny more, SRG is relying on both SHLD to slowly liquidate and for the likes of CBL/WPG to upkeep the malls with property they're redeveloping, seems like their destiny is in too many others hands.

      Delete
    2. Good write-up as always - thanks.

      On B malls and SRG: at first glance it looks like SRG has a long runway to reinvest CFs at 12-15% unlevered returns. But why wouldn’t that 12-15% drop to mid-single digits as more and more landlords employ the same strategy? Page 3 of this blog post also makes a couple of good point on SRG – “which tenants can generate sustainable profits in B/C space?”


      https://www.hvst.com/posts/79186-why-value-investors-need-systems-thinking

      -KH

      Delete
    3. Thanks, good post, came at it from a different angle but similar conclusion. It's a tricky balance. SRG is attached to malls they don't control, they want the B/C malls to redevelop and keep up with the times in order to improve the desirability of SRG's properties, but that makes them competitors at the same time.

      Delete
  9. have you ever looked into NEWM? paying close to 10%.

    ReplyDelete
    Replies
    1. I did at the time of the spin:
      https://clarkstreetvalue.blogspot.com/2014/02/new-media-investment-group-spinoff.html

      I would still have concerns about an operating company having an external management structure, it's almost like investing a PE fund directed at local newspapers.

      Delete
  10. Thoughts on the estimated liquidation value of $9.25?

    ReplyDelete
  11. I saw that too. Will wait for their presentation. WW doesn't get their bonus, which exceeds their fee by significant amounts, unless liquidation exceeds $11. Curious. Low balling?? Over conservative??

    ReplyDelete
  12. Someone on twitter pointed out - they mention $3.6bn in gross sales for all assets yet immediately below in the 10-q mention total liquidation value of assets (gross) of 2.78. I'm not sure what makes up $800mm difference.

    ReplyDelete
    Replies
    1. I think in the liquidation amount its the net value of WWP in the unconsolidated joint venture line? And that reference is the gross value of all their assets, including WWP?

      Delete
    2. Yes, I think you're right; I realized that later.

      I'm doing same thing as you - holding for now and seeing what materializes over the next year. I picked up a little more actually at 8.65 or so and will probably try to sell at a little over 9.

      Delete
  13. Yeah, I screwed this one up, badly. Relied too heavily on the Ashner slide and the faulty math around the option, not including the corresponding JV debt, etc. Just surprised that no one called him out on it? Why didn't the board take exception to the math and push back? Why did Winthrop choose an $11 promote if its wildly off? That wasn't a clear outlier when they were shopping the liquidation agent contract around? The call was strange too, Wendy got thrown under the bus. At $9.25 and short liquidation time horizon, Winthrop won't make a ton of money and just made it much more difficult to gain support to do it again in the future.

    That all said, I haven't sold yet, doesn't appear to be any rush to at these prices, they'll probably beat the $9.25 number slightly, not an exciting opportunity at these prices but will wait to sell until I find other things.

    ReplyDelete
    Replies
    1. Why do you believe the JV debt is excluded? Ashner looks like he just did $1000 PSF in value minus $678 PSF in option price times the 1.05mn sq. ft. acquired. The $678 number looks like it bakes in the underlying debt because $678 PSF x 1.05mn sq. ft = $710mn total cost. Net of the additional ~$450 million in debt acquired is ~$260mn in purchase price. The 8-K from March 31 says the purchase price is expected to be $269mn, so it comes out reasonably close.

      Delete
    2. But where are they getting the $270MM purchase price, they took out the POL loan for it? I don't think that's contemplated in the Ashner slide? His net debt number included the pro-rata portion from the WWP JV, how do we get to ~$2B now? The other half of the JV debt plus the proceeds from the POL loan to pay for the option? There's something missing from his slide, if not that, then what explains the large difference? Doesn't seem to be on the asset side based on NOI/cap rate assumptions.

      Delete
    3. Not sure I completely understand your question, but I'll give it a shot.

      His net debt number of $1.182bn definitely DOES NOT include the pro-rata portion of the WWP JV YET TO BE ACQUIRED. That debt is baked into the $0.330 billion in the option value he mentioned in his presentation via the method I described in my first post. He basically assigned a private market value PSF to 51% of 1WW of $1000 PSF, net of total option price of $678 PSF (which is just the purchase price of $270 plus the ~$450 million in JV debt, all divided by the pro-rata square footage of 1WW acquired). So I believe that he accounted for that extra JV debt and purchase price that NYRT would take on by acquiring the rest of 1WW by including it in the option value line of his valuation.

      The net debt ($1.182bn) he mentioned DOES include the pro-rata share they already owned because he cited the May 2016 investor deck on the JGB merger, which footnotes that the $1.182 billion does include pro-rata share of property-level debt.

      So where is the difference? I have no real idea, but my guess is management is implying a sales of price closer to $850 PSF for 1WW , which would drag down the entire valuation. Because if the building sells for $1.7 billion ($850 PSF), then based on an NOI of approx. $79mn for 1WW, that implies a cap rate of 4.7%. If the remaining NOI is approx. $83mn (162mn total NOI - $79 1WW NOI) and it's cap rate is approx. 4.3% (to get to the weighted average 4.5% total), then the remaining portfolio is worth $1.9 billion. So in total, $3.6 billion in gross sales that they mentioned. On top of that, I'm not super sure on the numbers for how they're accounting for 1440 Broadway occupancy stabilization or if the free rent burn-off that Happel mentioned previously is now baked into this NOI.

      Delete
    4. I have current management valuing 1WW at ~$1.65B. I come to that by adding the $875M in debt, the $529M JV in equity value, ~$262M in option value(.499 * ($1.4B - $875M)). Also, because of the equity reporting, in the $529M for JV, there is the estimated NOI of the 1WW until building is sold according to the call, which is roughly $30M assuming 3 months from the end of 3q estimate sale and exercise of option at $20M(98.8% ownership) and Mar 31 - June 30 at $10M (48.9% ownership).

      The big disconnect in everyone's & Ashner analysis was that 1WW would sell for $2B, but management is saying $1.65B. That's $2/share difference. $80M for 2016 NOI would lead to 4.85% cap rate for mgmt's estimate, which seems low, but we'll see what the final values are.

      Delete
    5. Ah yes, I was getting myself twisted up into knots on the option, but your explanations make sense. Thanks to both. Disappointing, but considering they're currently marketing the building, must be where the indication of interests are coming in at.

      Delete