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:
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.(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; provided, however, 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.
New York REIT Valuation
A quick snapshot of New York REIT that I recreated from their recent supplemental:
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:
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.
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
