NYRT - New York REIT

[given2invest]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

[Gregmal]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

 

I'm sure it was known when they sold. I'd imagine it at least played a part in why this didn't get a great deal of interest and had to be put on hold for 4 years. These guys have not earned their paychecks, and IMO NYRT is basically just a gamble on the NY RE market at this point.

 

Saying it was their "goal" to renegotiate this is like Trump pulling WH invitations after teams say they won't go.

[given2invest]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

 

I'm sure it was known when they sold. I'd imagine it at least played a part in why this didn't get a great deal of interest and had to be put on hold for 4 years. These guys have not earned their paychecks, and IMO NYRT is basically just a gamble on the NY RE market at this point.

 

Saying it was their "goal" to renegotiate this is like Trump pulling WH invitations after teams say they won't go.

 

I guess you misunderstood me.  Not a goal, but it was in the business plan many many months ago.

[Gregmal]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

 

I'm sure it was known when they sold. I'd imagine it at least played a part in why this didn't get a great deal of interest and had to be put on hold for 4 years. These guys have not earned their paychecks, and IMO NYRT is basically just a gamble on the NY RE market at this point.

 

Saying it was their "goal" to renegotiate this is like Trump pulling WH invitations after teams say they won't go.

 

I guess you misunderstood me.  Not a goal, but it was in the business plan many many months ago.

 

Indeed I did. My bad. Just don't think too highly of these guys. They've screwed this thing up so bad its unbelievable. Basically air balled a layup attempt. The best investment decision I made last year was passing on this.

[BG2008]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

 

SLG was my biggest error of omission back in 2009.  Its stock went from $150 at the peak to less than $10.  At $10, I thought it was at least a 5 bagger.  Anyway, if you think that any of these guys like SLG/VNO etc create a ton of value, I've got news for you.  They don't.  I personally know guys who don't speak a word of English in Chinatown NYC who have done a 100x in NYC real estate by buying stuff for $1mm with 20-30% down that are now worth $20mm.  The truth is if you own real estate in NYC, just sitting on it and doing nothing would get you rich in the last 20-30 years.  Is it in their plan, yes.  Why do people make investment decisions like "so and so is quite smart, don't you think they did the work?"  I hate that line of reasoning.  Frankly, I only think like that when Buffet does something or when Packer tells me to invest in a Quad Play cable/telco.  These guys aren't really any better than others.  Anyone who knows a thing or two about NYC is aware that Hudson Yards is where it's at now for Office.  1 WPP was always an odd duck.  Now even Avenue of the Americas, 6th Ave in Midtown is getting the cold shoulder.  People who big floor plates, open layouts, think WeWork.  Those Pesky Millenials don't want to work in Cubicles of the past.  The older office products don't lend themselves to that type of layout.  It's a problem that everyone in NYC faces.  I was at a conference and the head of Brookfield Property was talking about how the tenant want all these amenities and he's thinking "shit, that's going to cost a lot of LC and TI."  Yes the office market shifts West, but 1 WPP is not where Hudson Yards is.    Okay, rant over.  I'm not really into buying stuff with 70% LTV anyway. 

[given2invest]

Not concerned about that.  CFO (now CEO) told me that it's been their goal since the deal to get this renegotiated so they can free up some of the space as Cravath doesn't need all the space they have now.

 

I think this is obvious BS. They think they can get higher rent? These guys are incompetent IMO

 

Huh?  They aren't even running the building, SL Green and RXR are.  It's not a higher rent it's repurposing it and splitting it up amongst different tenants.  And this tennant and their price/sf was known when the building was sold last year.  You don't think SL Green and RXR Reality did their due diligence first?

 

I'm sure it was known when they sold. I'd imagine it at least played a part in why this didn't get a great deal of interest and had to be put on hold for 4 years. These guys have not earned their paychecks, and IMO NYRT is basically just a gamble on the NY RE market at this point.

 

Saying it was their "goal" to renegotiate this is like Trump pulling WH invitations after teams say they won't go.

 

I guess you misunderstood me.  Not a goal, but it was in the business plan many many months ago.

 

Indeed I did. My bad. Just don't think too highly of these guys. They've screwed this thing up so bad its unbelievable. Basically air balled a layup attempt. The best investment decision I made last year was passing on this.

 

There are no "guys" anymore.  It's a shell.  The property is being run by SL Green.

[given2invest]

Just a heads up to anyone holding that bought in last 12-18 months.  The de-listing is a taxable event and the "print" is at NAV not at what it closed at that day.  As a result, holders that bought post blowup will be looking at a nasty tax bill despite the stock not up much.  Of course, once the propery is sold in 3 years or whenever you will get credit for the step up in basis but that's a long time to lend money to the IRS.  As a result I sold.

 

This is actually a positive to any fund that's a long term bagholder because they will be able to realize tax *losses* now vs having to wait 3 years.

[given2invest]

Now someone is saying the tax will be based on LAST TRADING DAY price not NAV - I have a call in with management to confirm. 

[Foreign Tuffett]

Now someone is saying the tax will be based on LAST TRADING DAY price not NAV - I have a call in with management to confirm.

 

Thanks for the updates on this.

[given2invest]

I was wrong.  Management says it will be done by some form of last day price (average of high/low etc).  I apologize for posting w/o knowing definitively.

 

I guess the volume selling is funds that can't own post the vote. 

 

Management says this should trade to early November, fwiw.  Viceroy closes end of Sept then 30 +/- days after that.

[writser]

Your updates are appreciated.

[Foreign Tuffett]

$3.25 per share distribution coming.

 

http://www.snl.com/irweblinkx/file.aspx?IID=4246025&FID=395258679

[johnny]

I was wrong.  Management says it will be done by some form of last day price (average of high/low etc).  I apologize for posting w/o knowing definitively.

 

I guess the volume selling is funds that can't own post the vote. 

 

Management says this should trade to early November, fwiw.  Viceroy closes end of Sept then 30 +/- days after that.

 

Exact language from link Tuffett just posted:

 

For tax purposes, the fair value of each unit in the LLC received by Company stockholders when the conversion becomes effective, which reflects the value of the remaining assets of the Company (net of liabilities), will equal the average of the high and low trading prices for shares of the Company's common stock on the last three days on which shares are traded on the NYSE.

 

Thanks to all in the thread for doing the work on this, and participating in the melodrama of it all.

 

Is anybody committed to sticking with it through delisting (at these prices)?

[given2invest]

I am.  I think it's a very very good opportunity.  Here is something I wrote up on it before we go today's $3.25 div (I used $4 I think but NAV didn't change so my math/thinking doesn't change)

 

Here are my notes:

 

NYRT NOTES:

 

16.8 Million Shares

60M in Net Cash

=$3.57 net cash/share as of June 30th. Will be higher when they announce final distribution because will have Q2 and maybe Q3 of 1WWP cash flow. Should be >$4

 

NAV by liquidation accounting = $25

 

Which means ~21.50 = 1WWP + 90M restricted cash = $361M or $271M pro forma for the cash. Values 1WWP at 1.725b (1.2b debt) and we own 50.1% of it so #s jive. This is what it was sold at in fall 2017.

 

Going to assume a $4 dividend in next 6 weeks.

 

$1.44 a year in dividends annually (>10% yield on $14.20 stub)

 

Source, taken from Q1 press release:

"plus an additional $3.58 per share of net cash flow generated by holding Worldwide Plaza for an additional two and a half year hold period beyond what is recognized in the financial statements."

 

$18-4.00 = $14.00 stub. 14.00 stub will be worth 20-30 dollars in 2.5 years. With divs 14.00 stub worth 23.50 to 33.50 in 2.5 years.

 

The 23.50 assumes no appreciation in the property - just that they sell it for what they sold half of it at in 2017. IRR >20%.

 

Key is the 1.2b mortgage is locked in for 9 full years at a fixed rate. The rents are contractual. This means the 10% yield is here to stay even in a recession.

 

There is 1 catalyst which is renegotiating the big lease up in mid 2020's and then releasing it out.

 

This will be a headache for your taxes, you will get a K1. I have confirmed they plan on paying out 1WWP cash flow AT LEAST once a year. So your basis will go down by ~10% a year while we wait for the sale.

 

There are slides here of when the property was purchased (find the December 11, 2017 post)

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/nyrt-new-york-reit/

 

They expect double digit equity appreciation. Note, I am assuming NO appreciation for the 20% IRR. The buyers are very savvy RE players.

[johnny]

Thanks for sharing; I did a set-it-and-forget-it thing with this investment and ended up completely disoriented after the distributions and reverse split. Your post has helped me get my bearings again.

 

That said, it seems to me like they're delisting with substantially more cash than I originally thought they would. Unfortunately I didn't have very thorough notes justifying my assumptions; so I don't know to what extent I was rolling dice when I put them down. Or maybe I'm misunderstanding the 2Q?

 

In that filing they show:

 

$30M cash

$93M restricted

$38M viceroy (not sold in 2Q, but they've said it netted 38)

 

So that's $161M. Announcement suggests they're going to dividend out about $55. So we're rolling into the LLC with over $100M? Just weird to think that the end of the liquidation process is still an investment that is about 40% cash, by quote. I guess my issue here is more of a squabble since the number is only 10 or 20 million higher than I thought, maybe all the would-be building cashflow is preoccupied and so they need this all to pay the AP or something?

 

Also, have they filed a draft of the intended LLC Membership agreement at all? Not sure where/when to even expect something like that in this kind of situation.

 

[johnny]

More tangible question: For the $1.44/yr in dividends, I assume this is coming from the claim about $5.01 per share in cash production over the 3.5 year hold? Have they elaborated on that at all? Just feels quite a bit higher than what I had baked in for WWP's economics last year:

 

1. 2017 Q3 call, they were projecting $0.42 in dividends over a four year hold period. 20% improvement, and on a shorter hold period. What happened here? They used substantially the same language in making the prediction, so there's not much wiggle room for say, stuffing the company with surplus cash and then making bigger distributions with that cushion.

 

2. To spot check, the underwriting on the refinance in 2017 suggested total building NOI of like $85M, which after the mortgage ends up being something like $19M for to the LLC, which is ~$1.13 a share. Even if we fully add back the vacancy/credit reserve on the underwriting, I can only get to $1.36, and doing that makes me feel like I'm starting to fly close to the sun.

[given2invest]

Hi Johny

 

$90M of the cash on the balance sheet is restricted.  It will be used with $90 million of their partners money on potential cap ex at 1WWP.  Management believes that they will either get a return OF or ON capital if they spend that money (that it's not maintenance cap ex).  This is probably fair because 1WWP traded for 1.72b + the knowledge this money was going to be set aside by both parties, ie, $1.9b after you flush that $ down the toilet.  So once it's flushed, should be worth at least 1.9b.  They explain this in Q1 press release I believe.

 

I got the $1.44 year over the 2.5 year additional hold period directly from the Q1 press release.  I confirmed this recently with management.  The reason the #s go up so much from the current cash flow is there was a period of free rent + rent escalation. 

 

I believe (looking to confirm) that after the $3.25 div there should be around 10-15M in net unrestricted cash on the balance sheet but no more.

[johnny]

Abatements and escalations should have been visible and baked in last year, no?

 

I think the answer here is that they've lengthened the hold period. on 9/30/17, we were looking at a "4 year hold", and three quarters later, it has become a "3.5 year hold". So we've tacked on another ~quarter, even though it's not very clear since they use language like "through 2021" in both instances.

 

I got the impression last year that the $90M they were setting aside really represented a sort of stretch idea of what they might do, and that they really expected the real number to be somewhat lower than that. So them rolling in with even an extra $10M of pocket change surprises me.

[given2invest]

I made up the $10M number, we won't know what it actually is till we see future financials or management get back to me.  But they will dividend out cash flow from 1WWP *at least* once a year so it doesn't bother me if they have a little extra $ on balance sheet.

 

In the end, these minor things are not relevant.  It's a +20% IRR even if 1WWP is sold for 1.72b in a few years - assuming the $90M isn't flushed down the toilet.

[BG2008]

I really really wanted to like this investment.  But I just keep finding myself looking at a hog with lipstick on.  I am going to be an a$$hole and basically be a bear on NYRT.  Convince me otherwise. 

 

1) Unless you've been living under a rock, interest rates have moved and moved substantially this year.  Look at all the REITs.  I've even notice it in the residential real estate prices here in NYC.

2) If you are comparing One Worldwide Plaza to Hudson Yards, Park Ave, or Chelsea, I am going to call bullshit.  I used to live in a shoebox apartment on 9th Ave by 55th St.  There was a serious dance studio downstairs and there were always young cute 20 year old female dancers hanging around.  Okay, stop going off on tangents.  Anyway, I used to have to walk to 7th Ave for work as a RE I banker.  Occasionally, I would go to One Worldwide Plaza for drinks with my friends.  This is because, they had a nice courtyard where you can drink some adult beverages.  NYC office has undergone some serious transformation. 

3) Midtown used to be all the rage.  Think PE and HF and finance hotshots pre-2008/2009 used to dominate Midtown.  But, it was always 7th Ave and East.  After the recession, the center moved South because rent was cheap.  Think 30th street and below.  Chelsea is all the rage now with tech and all.  Hudson Yards is all the rage now.  Ave of the Americas (6th Ave) is still really convenient and stately.  But their floor plates don't offer the new WeWork style setups.  But Ave of America has a certain prestige to it.  Park Ave is Park Ave.  7th Ave in the low 50th is very finance and insurance.  Midtown South is very TAMI (Tech, Advertising, Media, and Info).  Anything in the high 50s is cool, because you're so close to the South Side of Central Park.  If you're high up, you get amazing views.  Eighth Ave?  Who goes there? To your South is Port Authority.  Eww.  Seriously Eww.  Just imagine Mean Girls saying this.  Hudson Yards is 34th Street.  But that's master planned and it's got tons of amenities.  OMG, that's like South of Port Authority and all the way on 10th and 11th Ave.  That's almost like George S Patton versus Polk High where our folk hero Al Bundy scored four touchdowns in a single game.  Just don't put One Worldwide Plaza and Hudson Yards in the same sentence.  What's on 8th Ave?  One Worldwide Plaza is a loner of an office building on Eighth Ave. 

4) Guys, if you live in NYC, please go and just walk around.

5) If you don't live in NYC, please use Google Maps?  Eighth Ave is all residential towers.  Just walk around via Google Maps

 

https://www.google.com/maps/@40.7622138,-73.9877942,3a,75y,37.03h,99.93t/data=!3m7!1e1!3m5!1sYZ1DRb1xIDO5Ps7qNYLPzw!2e0!6s%2F%2Fgeo1.ggpht.com%2Fcbk%3Fpanoid%3DYZ1DRb1xIDO5Ps7qNYLPzw%26output%3Dthumbnail%26cb_client%3Dmaps_sv.tactile.gps%26thumb%3D2%26w%3D203%26h%3D100%26yaw%3D217.46375%26pitch%3D0%26thumbfov%3D100!7i16384!8i8192

 

6) Take a look at this NYC office market snapshot.  http://www.cushmanwakefield.com/en/research-and-insight/unitedstates/manhattan-office-snapshot

Asking rent for office in the Westside is $78 per square foot.  Cravath lease is up in 2022 or something.  They are paying $98 per sqft.  Have you heard of the massive reshaping of the modern law firm layout?  No? Apparently the law firms cut their sqft/employee by 40% or half (some large number) in the last decade.  They got rid of partners office.  People sit closer together.  etc.  The modern day law office is not what it use to look like.  I know I know Cravath is really really white shoe.  But I have this suspicion that they won't need the same amount of space when their lease is up.

 

7) $1.2 bn of debt and low cap rates, small movements, huugge effect!!! 

8) Saying SL Green is savvy is like saying mutual funds are really good at stock picking. 

9) You may do well, you may not.  But stop repeating the 20% IRR.  That's like "basic bro" level of IRR for 60% LTV, single asset, real estate projects. 

 

 

A lot of the commentary is spoken by an alter ego of myself who is practicing to be a stand up comedian.  He is brash and tells it like it is.  So, have some fun with this.  But I think it highlights some local knowledge.  98% of the investors that I talked to about NYRT has never seen the buildings in person. 

[BG2008]

Btw, I think NYRT is okay if sized small.  But I don't think it is table pounding, back the truck up type of investment.  Definitively sub 3% for my taste and I run fairly concentrated. 

[thepupil]

BG2008,

 

I have a great deal of respect for your opinions on real estate and real estate stocks. You've made me/my family good money on FRPH and I'm building a position in HHC. An inconsistency that I notice in your discussion of NYRT is that somewhere (I can't remember where) you acknowledged that FRPH's Dock79 was highly leveraged, but then pointed out that it was non-recourse 10 year interest only at a nice rate, which is precisely the situation with 1WWP. In other words, you clearly recognize that long term fixed rate financing is somewhat of a mitigant to a building being very levered, but seem pretty hung up on the risk of 1WWP. I could make an argument DC multi-family outlook over the next 10 years or apartment buildings in the former wasteland around the ballpark have just as risky of an outlook as old office buildings in a not great location in Manhattan. A logical retort would be that the whole of FRPH is far less levered than 1WWP/NYRT and I'd agree with that. But I think you understand my point.

 

I agree with you that this should be sized small, but I think a simplistic thesis of 1)make the cash on cash for the term of the in place leases, bear the risks of the market, have 10 years to figure it out, and end up with a highly levered outcome is not a completely unreasonable punt. And that's all it is in my view. Nothing more, nothing less. It's a way of getting a RE PE deal in small size with a boat load of leverage. I haven't seen anyone say "I'm super bulled up on the NYC office market, think this is a no lose situation and have put 20% of my net worth/fund in it". It seems like everyone views this similarly and is treating it similarly as you; it simply doesn't meet your underwriting threshold.

 

To be clear, I don't own this and sold at a 4% loss to buy an equally low conviction position in VNO.

[given2invest]

I really really wanted to like this investment.  But I just keep finding myself looking at a hog with lipstick on.  I am going to be an a$$hole and basically be a bear on NYRT.  Convince me otherwise. 

 

1) Unless you've been living under a rock, interest rates have moved and moved substantially this year.  Look at all the REITs.  I've even notice it in the residential real estate prices here in NYC.

2) If you are comparing One Worldwide Plaza to Hudson Yards, Park Ave, or Chelsea, I am going to call bullshit.  I used to live in a shoebox apartment on 9th Ave by 55th St.  There was a serious dance studio downstairs and there were always young cute 20 year old female dancers hanging around.  Okay, stop going off on tangents.  Anyway, I used to have to walk to 7th Ave for work as a RE I banker.  Occasionally, I would go to One Worldwide Plaza for drinks with my friends.  This is because, they had a nice courtyard where you can drink some adult beverages.  NYC office has undergone some serious transformation. 

3) Midtown used to be all the rage.  Think PE and HF and finance hotshots pre-2008/2009 used to dominate Midtown.  But, it was always 7th Ave and East.  After the recession, the center moved South because rent was cheap.  Think 30th street and below.  Chelsea is all the rage now with tech and all.  Hudson Yards is all the rage now.  Ave of the Americas (6th Ave) is still really convenient and stately.  But their floor plates don't offer the new WeWork style setups.  But Ave of America has a certain prestige to it.  Park Ave is Park Ave.  7th Ave in the low 50th is very finance and insurance.  Midtown South is very TAMI (Tech, Advertising, Media, and Info).  Anything in the high 50s is cool, because you're so close to the South Side of Central Park.  If you're high up, you get amazing views.  Eighth Ave?  Who goes there? To your South is Port Authority.  Eww.  Seriously Eww.  Just imagine Mean Girls saying this.  Hudson Yards is 34th Street.  But that's master planned and it's got tons of amenities.  OMG, that's like South of Port Authority and all the way on 10th and 11th Ave.  That's almost like George S Patton versus Polk High where our folk hero Al Bundy scored four touchdowns in a single game.  Just don't put One Worldwide Plaza and Hudson Yards in the same sentence.  What's on 8th Ave?  One Worldwide Plaza is a loner of an office building on Eighth Ave. 

4) Guys, if you live in NYC, please go and just walk around.

5) If you don't live in NYC, please use Google Maps?  Eighth Ave is all residential towers.  Just walk around via Google Maps

 

https://www.google.com/maps/@40.7622138,-73.9877942,3a,75y,37.03h,99.93t/data=!3m7!1e1!3m5!1sYZ1DRb1xIDO5Ps7qNYLPzw!2e0!6s%2F%2Fgeo1.ggpht.com%2Fcbk%3Fpanoid%3DYZ1DRb1xIDO5Ps7qNYLPzw%26output%3Dthumbnail%26cb_client%3Dmaps_sv.tactile.gps%26thumb%3D2%26w%3D203%26h%3D100%26yaw%3D217.46375%26pitch%3D0%26thumbfov%3D100!7i16384!8i8192

 

6) Take a look at this NYC office market snapshot.  http://www.cushmanwakefield.com/en/research-and-insight/unitedstates/manhattan-office-snapshot

Asking rent for office in the Westside is $78 per square foot.  Cravath lease is up in 2022 or something.  They are paying $98 per sqft.  Have you heard of the massive reshaping of the modern law firm layout?  No? Apparently the law firms cut their sqft/employee by 40% or half (some large number) in the last decade.  They got rid of partners office.  People sit closer together.  etc.  The modern day law office is not what it use to look like.  I know I know Cravath is really really white shoe.  But I have this suspicion that they won't need the same amount of space when their lease is up.

 

7) $1.2 bn of debt and low cap rates, small movements, huugge effect!!! 

8) Saying SL Green is savvy is like saying mutual funds are really good at stock picking. 

9) You may do well, you may not.  But stop repeating the 20% IRR.  That's like "basic bro" level of IRR for 60% LTV, single asset, real estate projects. 

 

 

A lot of the commentary is spoken by an alter ego of myself who is practicing to be a stand up comedian.  He is brash and tells it like it is.  So, have some fun with this.  But I think it highlights some local knowledge.  98% of the investors that I talked to about NYRT has never seen the buildings in person.

 

A lot of these points are ridiculous such as you don't like the building/location (there was a clearing price for the property at 1.72b and there were THREE bidders all within 25 million of that price). 

 

Your point #1 and #7 is absolutely valid.  I doubt the property is worth 1.72b today.  However you also have a very good 9 year loan at sub 4% that is worth a profit mark to market today. 

 

Let me be very clear:  The 20% IRR is based on selling the property for the last sales price - not with any appreciation.  That is *not* how 99.9% of Real Estate deals base 20% IRR's on.  Buying this at a large discount to what it last traded based on technical reasons is the *sole* opportunity, not believing a specific piece of real estate.

 

At $14, we are paying sub 1.5B for the property + have a 9 year loan at amazing fixed rate.  It's a pretty interesting idea.  Just not as great before rates/REITS/market imploded.

[BG2008]

BG2008,

 

I have a great deal of respect for your opinions on real estate and real estate stocks. You've made me/my family good money on FRPH and I'm building a position in HHC. An inconsistency that I notice in your discussion of NYRT is that somewhere (I can't remember where) you acknowledged that FRPH's Dock79 was highly leveraged, but then pointed out that it was non-recourse 10 year interest only at a nice rate, which is precisely the situation with 1WWP. In other words, you clearly recognize that long term fixed rate financing is somewhat of a mitigant to a building being very levered, but seem pretty hung up on the risk of 1WWP. I could make an argument DC multi-family outlook over the next 10 years or apartment buildings in the former wasteland around the ballpark have just as risky of an outlook as old office buildings in a not great location in Manhattan. A logical retort would be that the whole of FRPH is far less levered than 1WWP/NYRT and I'd agree with that. But I think you understand my point.

 

I agree with you that this should be sized small, but I think a simplistic thesis of 1)make the cash on cash for the term of the in place leases, bear the risks of the market, have 10 years to figure it out, and end up with a highly levered outcome is not a completely unreasonable punt. And that's all it is in my view. Nothing more, nothing less. It's a way of getting a RE PE deal in small size with a boat load of leverage. I haven't seen anyone say "I'm super bulled up on the NYC office market, think this is a no lose situation and have put 20% of my net worth/fund in it". It seems like everyone views this similarly and is treating it similarly as you; it simply doesn't meet your underwriting threshold.

 

To be clear, I don't own this and sold at a 4% loss to buy an equally low conviction position in VNO.

 

Pupil,

 

Thank you for the kind words.  Very flattered.  The key difference is that the Baker family can and will sit on that water front property for 10 years.  The location is truly one-of-a-kind and irreplaceable.  I've eaten there in their new restaurant.  The second key difference is that while both have 10 year loans on the property.  We know that one of the property is actively looking for a buyer in 2-3 years right around the time when Cravath's lease is coming up for renewal. I think I read somewhere that cap rate in NYC office has moved from 4.0% to 4.5%.  So, if you have 1/3 of the building paying $98 and now it's going to $78.  On $80mm of NOI (I'm guessing here, I think I saw it somewhere that the NOI is $80mm) So, it will knock $5mm of NOI off that lease.  $75mm at 5% cap rate is $1.5bn.  $80mm at 5% is $1.6bn.  You see the point.  The other tenants pay below market.  But those leases won't be up for renewal for a long time.  So there is a some lease mismatching.  I used to invest in a lot of liquidations.  Wendy has checked out already.  There is a mandate to return capital to shareholders.  Maybe they watch out for your interest, maybe they don't.  Maybe the trustees just sell it to SLG in a crisis.  If Cravath does not have a lease coming up, I would probably have a position on this.  I guess I am just so sick and tire of hearing about NYRT.  I get ask by 20 people what I think of SRG and NYRT. 

[BG2008]

I really really wanted to like this investment.  But I just keep finding myself looking at a hog with lipstick on.  I am going to be an a$$hole and basically be a bear on NYRT.  Convince me otherwise. 

 

1) Unless you've been living under a rock, interest rates have moved and moved substantially this year.  Look at all the REITs.  I've even notice it in the residential real estate prices here in NYC.

2) If you are comparing One Worldwide Plaza to Hudson Yards, Park Ave, or Chelsea, I am going to call bullshit.  I used to live in a shoebox apartment on 9th Ave by 55th St.  There was a serious dance studio downstairs and there were always young cute 20 year old female dancers hanging around.  Okay, stop going off on tangents.  Anyway, I used to have to walk to 7th Ave for work as a RE I banker.  Occasionally, I would go to One Worldwide Plaza for drinks with my friends.  This is because, they had a nice courtyard where you can drink some adult beverages.  NYC office has undergone some serious transformation. 

3) Midtown used to be all the rage.  Think PE and HF and finance hotshots pre-2008/2009 used to dominate Midtown.  But, it was always 7th Ave and East.  After the recession, the center moved South because rent was cheap.  Think 30th street and below.  Chelsea is all the rage now with tech and all.  Hudson Yards is all the rage now.  Ave of the Americas (6th Ave) is still really convenient and stately.  But their floor plates don't offer the new WeWork style setups.  But Ave of America has a certain prestige to it.  Park Ave is Park Ave.  7th Ave in the low 50th is very finance and insurance.  Midtown South is very TAMI (Tech, Advertising, Media, and Info).  Anything in the high 50s is cool, because you're so close to the South Side of Central Park.  If you're high up, you get amazing views.  Eighth Ave?  Who goes there? To your South is Port Authority.  Eww.  Seriously Eww.  Just imagine Mean Girls saying this.  Hudson Yards is 34th Street.  But that's master planned and it's got tons of amenities.  OMG, that's like South of Port Authority and all the way on 10th and 11th Ave.  That's almost like George S Patton versus Polk High where our folk hero Al Bundy scored four touchdowns in a single game.  Just don't put One Worldwide Plaza and Hudson Yards in the same sentence.  What's on 8th Ave?  One Worldwide Plaza is a loner of an office building on Eighth Ave. 

4) Guys, if you live in NYC, please go and just walk around.

5) If you don't live in NYC, please use Google Maps?  Eighth Ave is all residential towers.  Just walk around via Google Maps

 

https://www.google.com/maps/@40.7622138,-73.9877942,3a,75y,37.03h,99.93t/data=!3m7!1e1!3m5!1sYZ1DRb1xIDO5Ps7qNYLPzw!2e0!6s%2F%2Fgeo1.ggpht.com%2Fcbk%3Fpanoid%3DYZ1DRb1xIDO5Ps7qNYLPzw%26output%3Dthumbnail%26cb_client%3Dmaps_sv.tactile.gps%26thumb%3D2%26w%3D203%26h%3D100%26yaw%3D217.46375%26pitch%3D0%26thumbfov%3D100!7i16384!8i8192

 

6) Take a look at this NYC office market snapshot.  http://www.cushmanwakefield.com/en/research-and-insight/unitedstates/manhattan-office-snapshot

Asking rent for office in the Westside is $78 per square foot.  Cravath lease is up in 2022 or something.  They are paying $98 per sqft.  Have you heard of the massive reshaping of the modern law firm layout?  No? Apparently the law firms cut their sqft/employee by 40% or half (some large number) in the last decade.  They got rid of partners office.  People sit closer together.  etc.  The modern day law office is not what it use to look like.  I know I know Cravath is really really white shoe.  But I have this suspicion that they won't need the same amount of space when their lease is up.

 

7) $1.2 bn of debt and low cap rates, small movements, huugge effect!!! 

8) Saying SL Green is savvy is like saying mutual funds are really good at stock picking. 

9) You may do well, you may not.  But stop repeating the 20% IRR.  That's like "basic bro" level of IRR for 60% LTV, single asset, real estate projects. 

 

 

A lot of the commentary is spoken by an alter ego of myself who is practicing to be a stand up comedian.  He is brash and tells it like it is.  So, have some fun with this.  But I think it highlights some local knowledge.  98% of the investors that I talked to about NYRT has never seen the buildings in person.

 

A lot of these points are ridiculous such as you don't like the building/location (there was a clearing price for the property at 1.72b and there were THREE bidders all within 25 million of that price). 

 

Your point #1 and #7 is absolutely valid.  I doubt the property is worth 1.72b today.  However you also have a very good 9 year loan at sub 4% that is worth a profit mark to market today. 

 

Let me be very clear:  The 20% IRR is based on selling the property for the last sales price - not with any appreciation.  That is *not* how 99.9% of Real Estate deals base 20% IRR's on.  Buying this at a large discount to what it last traded based on technical reasons is the *sole* opportunity, not believing a specific piece of real estate.

 

At $14, we are paying sub 1.5B for the property + have a 9 year loan at amazing fixed rate.  It's a pretty interesting idea.  Just not as great before rates/REITS/market imploded.

 

Can you walk me through how you're paying $1.5bn for the property? 

 

Investments in real estate $41mm

Ivnestment in unconsolidated JV $265mm

Cash and Cash Equivalent $30.6mm

Restricted Cash $92.9mm

AR $2.1mm

Total liabilities $10.5mm

 

They paid $3.25 per share at 16.8mm shares that's $54.6mm.  So, cash and investment in RE will be lowered $54.6mm.  The $92.9mm will be spent on cap ex.  I think SLG and all the parties knows that they need that spend that $93mm on leasing commission, tenant improvement to either keep Cravath in house or attract a different tenant.  You can argue that the value in the real estate should go up by that amount.  From my experience, it doesn't matter if you're in a bear market.  A 50-75bps move in cap rate will wipe that out in an instant. The issue is that, it is not value add necessarily.  Properties get tired and you as a landlord just need to jazz it up a bit. 

 

So there really isn't any excess cashflow left except for what may come if they hold onto the property.  Today's market cap is $228mm. Divide that by 50% and you have a $456mm figure.  Add on $1.2 billion of debt.  You're buying the building at $1.656bn. 

 

If Cravath's lease is 10 years, we won't be having this conversation.  But it is.  There is not enough time between now and when the shares stop trading to get a sense of what will happen.  So, it's a weird dynamic.  Single asset, hard to invest.