New York REIT - More Questions Than Answers

by: William Stanley

Summary

An Interesting Portfolio of Properties.

Recent Potential Strategic Alternatives - Appear to Be Off the Table.

External Management Structure in a Word "Expensive".

New York REIT - Start Spreading the News

Disclosures

Co-Author William Stanley served as a director for NYRT from its inception and Lead Independent Director until his resignation in December or 2014.

Mr. Stanley's resignation was prompted by his selection to act as Interim Chairman and CEO of ARCP now VER who board he joined on Jan. 1, 2014.

During his time at VER he oversaw the restatement of the company's financial statements, participated in the search for a permanent CEO and restructure as well as other initiatives including strengthening accounting and reporting procedures, negotiating with lenders, moving the company's headquarters to Phoenix, etc.

Mark Painter, CFA acted as leader manager of SEL Capital an entity that was retained by AR Capital to manage two publicly offered mutual funds. Both Funds are currently being liquidated and Mr. Painter has no other affiliation with AR Capital of any related entity.

Observations

New York REIT, Inc. acquires income-producing commercial real estate in New York City, primarily office and retail properties in Manhattan.

The company is currently paying an annual dividend of 46 cents or 4.5% assuming a value of $10.20 per share.

Their portfolio which included downtown New York Office Building, a Luxury Hotel and some very hot emerging retail locations with the plum being their investment in Worldwide Plaza.

Having served on multiple Net Lease Boards and several operational real estate boards, I find that the skill set to manage a diverse NY centric portfolio is simply a different animal than the Triple Net Lease World.

To this end, I believe that Mike Happel and his entire team are thoughtful, analytical and experienced real estate professionals.

They Aren't Making any More of It

The old saying about real estate that they are not making any more of it is especially true in New York. And while Hong Kong has recaptured some land from the sea and Water Street at the tip of lower Manhattan may have indeed been under Water, I don't envision much filling in of the Hudson or East River to support buildings anytime in the near future.

Thus this old axiom of not making more real estate is especially true in New York.

Manhattan is land-locked which has pushed the rapid development into the boroughs. I have real estate clients that are finishing up projects in Brooklyn and say that the opportunity to buy at attractive prices is long gone.

New York and London real estate are generally considered attractive places to park money for international investors. Long ago when Middle Eastern Russian and Brazilian Oil and Commodity Tycoons had money, they flocked to the Big Apple to buy Bricks and Mortar as did Chinese Industrialists to the extent they could move funds out.

Years ago the buzz was the Japanese buying Rockefeller center. Well fast forward 3 decades or so and the Japanese are broke but Rock Center lives on.

Structure

Much has been written about the management structure of NYRT which is externally managed by entities controlled by AR Capital whose travails have been well documented in the financial press.

New York Recovery Operating Partnership, L.P.

Conducts company business

New York Recovery Advisors, LLC

Manages day-to-day affairs

New York Recovery Properties, LLC

Property Manager

Realty Capital Securities, LLC

Initial Dealer Manager for IPO - Provides ongoing services

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G&A Expenses for the Quarter were $6,519 while fees paid to the advisor were $3,121 for the quarter ended 9/30/15.

Together they equal 21.6% of the Total Operating Revenue of $44,608, an excessive amount in our view.

Assets

The company owns 23 properties with the most significant being an investment in the entity that owns Worldwide Plaza (WWP).

WWP - Summary

Holding

48.9% share of entity holding World Wide Plaza Property

Purchase Date

10-30-13

Price Paid

$220.1 Million (based on $1,325 Billion valuation less $875 Debt)

Pro-rata debt (9/15)

$427.9 million

Weighted Av. Int.

4.6%

Purchase Option

Balance of WWP

Option Price

$1.4 Bil. Property Value (subject to adjustments)

Option Date

Dec. 2016

Penalty

$25 million if option not exercised

Click to enlarge

Debt Stack

A review of the debt stack shows that the company appears to be enjoying very good current interest rates through a combination of Direct Lending against properties and a credit facility consisting of a term loan and a revolver. A brief summary from the 9/30/15 10-Q is as follows:

Credit Facility

Average

Amount

IR

Maturity

Term

$305,000,000

2.21%

Aug-18

Revolver

$400,000,000

2.21%

Aug-16

Total

$705,000,000

Encumbered

Effective

Properties

Amount

IR

Maturity

Design Center

19,899,000

4.40%

Dec-21

Foot Locker

3,250,000

4.60%

Jun-16

Duane Reade

8,400,000

3.60%

Nov-16

1100 Kings Hwy

20,200,000

3.40%

Aug-17

1623 Kings Hwy

7,288,000

3.30%

Nov-17

256 W. 38th St

24,500,000

3.10%

Dec-17

1440 Broadway

305,000,000

3.80%

Oct-19

TOTALS

388,537,000

3.80%

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The company showed a net loss of ($13,186,000) for the quarter of which ($20,284,000) was depreciation

Total Interest Expense for the Quarter ended 9/30/15 was ($7,172,000) or ($28,688,000) extrapolated for a full year.

A review of the maturity dates shows that virtually all of this debt will come due over the next four years.

An while it does not appear that we will see high interest rates anytime soon, the availability of funds could be an issue if the U.S. slips back into recession.

Maturity Date

Amount

% Maturing

2016

411,650,000

37.6%

2017

51,988,000

4.8%

2018

305,000,000

27.9%

2019

305,000,000

27.9%

2020

0.0%

2021

19,899,000

1.8%

Total

1,093,537,000

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Recent Events

On October 1, 2015 the company announced that it retained Eastdil Secured to "evaluate potential strategic transactions at the asset or entity level."

On Nov. 16, the company sold two "non-core" properties, a retail office building in Brooklyn and a retail property in Queens. Additionally, they announced a suspension of a search for a permanent CFO.

On Dec. 4, there were reports that SL Green Realty Corp was close to an agreement to acquire New York REIT.

On Jan 21, the REAL DEAL reported that SL Green isn't in negotiations to buy New York REIT.

Stock Price - Peer Comparison

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Conclusion

A company with an interesting portfolio yet major structural and expense hurdles that appears to be searching for a direction.

We do not see a compelling reason for investors at this juncture.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mark R. Painter,CFA is co-author for this article