NYRT - New York REIT

[BG2008]

So excess cashflow if you're holding onto the building.  This is rough math.  $80mm of NOI less 4% at 1.2bn is $48mm a year.  For our 50%, we get $32mm/2 which is $16mm a year.  That's a levered return of about 7% a year.  Over 2-3 years, you get 14-21% of your capital back.  It's decent, but doesn't necessarily de-risk the entire thesis.  If your math is different, please let me know. 

 

Btw, I think that in 2017, the RE players had much different anticipation of interest rates. 

[given2invest]

7% levered cash flow is accurate.  But rents are escalating so it will go higher. 

 

I got to 1.5b by taking NYRT market cap of 225M and subtracting 90M of restricted cash = 135m market cap for 50% equity interest in 1WWP.  x2 = 270m.  Add 1.2b in debt = 1.47b.  There is net cash on NYRT balance sheet above the liabilities so I look at this as conservative. 

 

The assumption is the 90m in rest cash isn't flushed down the toilet which is $180M in total (90m is just NYRT portion) and I feel good about that.

 

Re Cravath, for the 100th time, it was known their lease was coming up when 3 bidders were valuing property north of 1.7b.  I feel fine that there is a business plan to lease the space.  I'm told that's what the majority of the 180m in restricted cash is for.

[johnny]

BG, really appreciate you stepping in here. I'm really on the fence about my position. Big time thesis drift for me, since I came in at WWPstub=100M and figured that thing would just double before delist.

 

One of the issues of concern that's been tangentially addressed here is how much weight to give to the SLG/RXR mark on the property. I remember SL talking about their stake in one of the calls, and they seemed to really be promoting it--talking about how they had stood back and not participated in any similar deals for the year or so prior, and implying they saw opportunity in the releases. I've also had trouble squaring this with the Cushman Wakefield data. Can't really make heads or tails of what's going on here.

 

At $13.59, building is at a 5.9% cap against the 85M in NOI from the 2017 underwriting (my math is close to as given2invest's). Earlier in the thread I was having trouble with some of their latest dividend predictions, because they strike me as being substantially above these 2017 numbers.

 

One thing that makes me a little nervous is I don't have a full picture of how the company's financing behaves IF resigning/replacing Cravath doesn't go so smoothly. It's obvious enough to say that NYRT's share of the building's cashflow changes from ~18M to say ~8.5M in a world where the entire Cravath space releases at like ~$78. But I have to assume that such a catastrophic change to the building's economics is probably going to mean the distributions actually stop entirely, rather than simply get halved.

[BG2008]

Johnny,

 

I think you do okay if sized small.  I think if you do this 50 times, you probably come up with positive expected value.  But if you want to call this table pounding deep value with large margin of safety, it's not.  I go to 2-3 real estate conferences a year.  I've heard office landlords complain about how much more tenant improvement it cost them to lease space.  WeWork really screwed everyone.  The millennial want features and the landlord has to pay for them.  If that $90mm was to be distributed, sure you've got half of your chip off the table.  But it will be spent toward Cap Ex.  Especially with the market being down lately, I feel like there is a quite a bit of alternatives.  I have hold a few liquidations that don't trade.  The disadvantage is that you can't arbitrage the price/NAV over time.

 

I wrote what I wrote in order to make sure I was not missing anything critical.  At $10 a share, it becomes a lot more interesting as the upside/downside gets really skewed.  But it still isn't something that we will back the truck up on. 

[bizaro86]

$180MM in capex to deal with a 600k sqft expiry is $300/sqft. That feels like it should be enough to me. Even if you wrote Cravath a check for $180 MM and in exchange they extended another 12 years at their current rents. Their rent is (from the numbers in the thread) roughly $25 above market, so a 12 year extension would be them giving it back over time with no time value of money. That would push their expiry out to 2036, which is plenty, especially given the Nomura lease ends ~2033 and there is likely upside on re-lease there.

 

Then if you have $85 MM NOI @ 5% cap thats $1.7 B, subtract $1.2 B debt = $500 MM * 0.5 for NYRT share = $225 MM, or basically the current value, plus you get the cashflow while you wait. That seem like a pretty worst case scenario to me. You could probably add something for the debt terms at this point as well.

 

If I owned 100% of this structure I'd probably choose to wait it out, collect Cravath's checks until 2024 and offer them smaller space with some fit-out capital to modernize it at a bit of a discount to what they pay now. Then spend the rest of the capex attracting a new tenant(s) then. Even if the market is going into a downturn, I doubt NYC office rents are lower in 6 years than they are now. The problem is these guys are a forced seller in a few more years, and 2 years before a huge expiry is a bad time to sell, especially if the expiry is above market.

 

I suppose the very worst case scenario is you blow the capex and still re-lease the 600k sqft at a $25/ft discount, taking $15 MM off your NOI. That would make the building only worth $1.4 B @5% cap rate...

[johnny]

Exactly how forced of a forced seller will they be in ~2022? The fact that the hold period seems to have been expanded tacitly by a quarter makes me think they do have some flexibility, but if its absolutely known that they have some hard limit, by statute or trust or LLC language or whatever, then that does seem like a fact that is super relevant to how we model the worst case scenario.

 

 

If I owned 100% of this structure I'd probably choose to wait it out, collect Cravath's checks until 2024 and offer them smaller space with some fit-out capital to modernize it at a bit of a discount to what they pay now.

 

When they first took the space, Cravath had about 2,000 sqft per lawyer. Now the number is around 1,250. Is there really more room to shrink there? I would have imagined that if they're going to relocate, they'd be looking to increase space. I'd imagine that if Cravath is going to make a move, it's going to be a move up, size/prestige/glitz-wise. They're doing very well and the market for associates is becoming very competitive again. I guess that's why what BG said about the neighborhood worries my slightly. If there's a much cooler place to be, that should have a pretty big impact on the firm's calculus, since they're constantly trying to dozens of 25 year olds who are sensitive to what geography puts them in a better Tinder-pool.

[BG2008]

I think some of that cap ex is for them to upgrade some common area.  Remember leasing commission generally run 4% of the entire duration of the lease.  So 600k times $80/sqft times 10 years times 4% is roughly $19.2mm for leasing commission alone.  Let's say you put 1/3 of that $180mm into common area, that leaves about $100mm of TI for 600k sqft.  That's about $166/sqft which seems about right if you want your tenant to sign a 10-12 year lease.  Everything cost more in NYC.  A half a gallon of Tropicana OJ is like $7.  Rent ain't cheap. 

 

Your comment about forced seller is exactly correct.  Like I said, everyone who has a vested interest has checked out.  Do you really want some liquidating trustee to make a fiduciary decision for you?  I prefer the Baker family or myself. 

 

Btw, if you're an insurance company who's about to pay 4.5% cap rate for a NYC office building, will you really want a building that potentially comes with 600k sqft of empty space.  Like I said, there are other neighborhoods that are hip and hotter these days.  This one is kind of on an island of its own.  By the way, if you google New York City office markets.  It's very easy to see that Chelsea is hot because of Google FB etc.  Hudson Yards is hot.  Lots of new supply from Freedom tower.  Neighborhoods change and shift all the time. 

 

Haha, Tinder Pool. 

 

Yeah, the problem with the last scenario is that you blow your $90mm of restricted cash and lease it at a $25/sqft discount and sell the building for $1.4bn at a 5% cap rate.  You will lose money at today's price of $13 and change a share.  At $1.4 bn, you have to split the other 50% with other players.  So your proceed is $100mm on a $229mm market cap today.  Being down 56% is an actual possibility.  Yes, yes, I'm being creative with my downside.  But isn't that the art of value investing?  Again, if done over 30-50 iterations, I would bet you make money.  I just wouldn't back the truck up on this one. 

[BG2008]

Exactly how forced of a forced seller will they be in ~2022? The fact that the hold period seems to have been expanded tacitly by a quarter makes me think they do have some flexibility, but if its absolutely known that they have some hard limit, by statute or trust or LLC language or whatever, then that does seem like a fact that is super relevant to how we model the worst case scenario.

 

 

If I owned 100% of this structure I'd probably choose to wait it out, collect Cravath's checks until 2024 and offer them smaller space with some fit-out capital to modernize it at a bit of a discount to what they pay now.

 

When they first took the space, Cravath had about 2,000 sqft per lawyer. Now the number is around 1,250. Is there really more room to shrink there? I would have imagined that if they're going to relocate, they'd be looking to increase space. I'd imagine that if Cravath is going to make a move, it's going to be a move up, size/prestige/glitz-wise. They're doing very well and the market for associates is becoming very competitive again. I guess that's why what BG said about the neighborhood worries my slightly. If there's a much cooler place to be, that should have a pretty big impact on the firm's calculus, since they're constantly trying to dozens of 25 year olds who are sensitive to what geography puts them in a better Tinder-pool.

 

Wow, I can't believe I'm talking about sqft/lawyer at 7:57PM on a Friday night.  What a nerd!!! But I found this great report about sqft/lawyer for NYC law firms.  Now Cravath is super white shoe, so they may commend more space per lawyer.  But it seems like yes, they can definitely go below 1,250 sqft per lawyer since some others are already in the 600 to 700 sqft per lawyer range.  This article is crazy detailed and it was published one month ago!!!

 

https://www.abramslaw.com/webfiles/pdfs/201891294112_000.pdf

 

 

[bizaro86]

Does $166/sqft seem high low or mid range to you? I have no baseline for that, other than I have never paid more than $300/sqft for real estate ever in my life. Obviously none of it was in Manhattan, but that much TI seems crazy to me. I could come pretty close to building a pretty nice building here from scratch for that $/sqft.

[Spekulatius]

Interesting discussion here, especially BG2008 posts. I definitely recommend walking around in Manhattan to get a feel for the locations. Just a few blocks can make a large difference. I was surprised by the many store vacancies in Manhattan when I walked there and some areas loved pretty run down, most likely caused by retail malaise. I am guessing that New Yorkers really like Amazon nowadays. My only RE investment is NYC centered MNPP, which trades at a ~50% discount to NAV and a close to 10% cap rate. Sure, a lot of their building arnt top not notch and even premium malls aren’t the rage right now, but it is leverage is low and it seem that they have done Ok the past few years, yet the stock is down. I like about RE that it’s sort of like watching grass grow. You can look at this about once a year and that’s basically enough to make an economic assessment. Stock prices can do all kind of crazy things in between, but if the leverage is low, and you buy cheap enough and high enough in quality, you should be doing OK over a long enough time frame.

[writser]

I tend to agree with given2invest. There were three bidders around 1.7b, there's value in the loan, the restricted cash should add some value, you get rental income. And you buy the whole package at a discount. Sounds like decent bet. Of course it is risky: buying real estate with a huge amount of leverage is always risky ..

 

Are additional qualitative data points, i.e. let me dismissively state them as 'I don't like the building, the neighborhood isn't hip, and I have walked Manhattan' really that valuable in comparison? How do you weigh that vs. the fact that three buyers were willing to pay $1.7b? I'd rather go with the numbers. But I'm a numbers guy. Also, of course the point re: interest rates is very valid.

 

It's a pet peeve of me to think that investors who are experts on a certain subject sometimes have a tendency to focus a bit too much on qualitative aspects of their area of expertise rather than the investment case. The IT nerd who loves AMD because their new processor is super cool (never mind that nobody is buying it). The investment professional who thinks IBKR is a great stock because he loves the advanced features of the platform (never mind that half of their users don't understand a thing about it). And, perhaps in this case: the real estate expert who doesn't like NYRT because he has a strong opinion on their sole piece of real estate (never mind that the quantitative aspects are actually quite favourable).

[michaelj]

Apologizes for the basic question, but does the liquidation suggest or stipulate a time period for a sale of the asset? Is it possible that ownership could be forced to sell at the same time that (a) Cravath has noticed their intent not to renew, and/or (b) a substantial amount of new office product comes online on the westside, and/or © in the midst of a downturn specific to NYC office, and/or (d) in the midst of a recession?

[bizaro86]

IBKR has huge growth rates and trades at a reasonable valuation, so I own it even though I'm not smart enough for TWS and only use "quick trade."

[Deepdive]

I tend to agree with given2invest. There were three bidders around 1.7b, there's value in the loan, the restricted cash should add some value, you get rental income. And you buy the whole package at a discount. Sounds like decent bet. Of course it is risky: buying real estate with a huge amount of leverage is always risky ..

 

Are additional qualitative data points, i.e. let me dismissively state them as 'I don't like the building, the neighborhood isn't hip, and I have walked Manhattan' really that valuable in comparison? How do you weigh that vs. the fact that three buyers were willing to pay $1.7b? I'd rather go with the numbers. But I'm a numbers guy. Also, of course the point re: interest rates is very valid.

 

It's a pet peeve of me to think that investors who are experts on a certain subject sometimes have a tendency to focus a bit too much on qualitative aspects of their area of expertise rather than the investment case. The IT nerd who loves AMD because their new processor is super cool (never mind that nobody is buying it). The investment professional who thinks IBKR is a great stock because he loves the advanced features of the platform (never mind that half of their users don't understand a thing about it). And, perhaps in this case: the real estate expert who doesn't like NYRT because he has a strong opinion on their sole piece of real estate (never mind that the quantitative aspects are actually quite favourable).

 

I think the qualitative factors are important when the 3 bids were submitted in an interest rate environment that was 100bps lower.  The 3 bids keeps getting quoted, is that anchoring?  In a 4% cap rate world, a 1% movement in interest rate is huge.  $85mm @ 4% cap rate is $2.1 billion $85mm at 5% cap rate is $1.7 billion

[writser]

I think the qualitative factors are important when the 3 bids were submitted in an interest rate environment that was 100bps lower.  The 3 bids keeps getting quoted, is that anchoring?  In a 4% cap rate world, a 1% movement in interest rate is huge.  $85mm @ 4% cap rate is $2.1 billion $85mm at 5% cap rate is $1.7 billion

 

If due to a big move in interest rates a building is potentially worth $400m less I still think a walk around the block isn't a very important data point. But then again, I'm a numbers guy. Also, as given2invest pointed out, the value of the loan increases when rates are rising which acts as a partial hedge. FWIW I don't have a position (yet?). Unfavourable tax implications and rising interest rates make it look a bit marginal for me but it's definitely an interesting idea.

[bizaro86]

I think there are really only two big questions here:

 

1) Is the restricted cash maintenance capex or growth capex

 

2) What cap rate is appropriate.

 

Since (2) is mostly based on the market and hard to predict, it is a source of variance but I don't think it is predictable in a way that is likely to add value. I'm generally happy to take macro variance as long is it isn't hugely concentrated.

 

That leaves (1) as a pretty important question. The near term lease expiry on a huge chunk of the building at a high value is a key risk. I found one source that said new leases have tenant improvement/free rent incentives of $173 per square foot.

 

https://therealdeal.com/2017/11/06/tenant-improvement-allowances-at-manhattans-trophy-office-towers-nearly-3x-pre-recession-levels/

 

That seems really high to me, but I'm not in the market at all. That is just over $100 MM for the Cravath space. If that's the market cost of that, you've burned through a bunch of cash and not increased the value of the building much.

[given2invest]

I think the qualitative factors are important when the 3 bids were submitted in an interest rate environment that was 100bps lower.  The 3 bids keeps getting quoted, is that anchoring?  In a 4% cap rate world, a 1% movement in interest rate is huge.  $85mm @ 4% cap rate is $2.1 billion $85mm at 5% cap rate is $1.7 billion

 

If due to a big move in interest rates a building is potentially worth $400m less I still think a walk around the block isn't a very important data point. But then again, I'm a numbers guy. Also, as given2invest pointed out, the value of the loan increases when rates are rising which acts as a partial hedge. FWIW I don't have a position (yet?). Unfavourable tax implications and rising interest rates make it look a bit marginal for me but it's definitely an interesting idea.

 

Just curious, what unfavorable tax implications?  Yah K1 is annoying but all the income and gains will be taxed at the lower rates.

 

Also, thanks for all the comments in the thread.  I felt like I was talking to myself but clearly others understand what I'm trying to say.

 

Re the restricted cash, everyone is missing the point.  The building traded for 1.72B PLUS ~180m in restricted cash.  There were 3 bidders at this value.  You don't have to believe what that 180m is (maintenance or growth cap ex) - that's the value it traded at.  I don't know how many times I need to say this.  You can argue shit has changed in the last 12 months, which is a FAIR argument, but it's just a fact this was the fairly liquid (3 bidders) mark a year ago.  In plain english, if the 180m is maint cap ex, then the fair value of the building post 1 time maint cap ex for Cravath is 1.9b and you get to the same end result. 

[BG2008]

I think there are really only two big questions here:

 

1) Is the restricted cash maintenance capex or growth capex

 

2) What cap rate is appropriate.

 

Since (2) is mostly based on the market and hard to predict, it is a source of variance but I don't think it is predictable in a way that is likely to add value. I'm generally happy to take macro variance as long is it isn't hugely concentrated.

 

That leaves (1) as a pretty important question. The near term lease expiry on a huge chunk of the building at a high value is a key risk. I found one source that said new leases have tenant improvement/free rent incentives of $173 per square foot.

 

https://therealdeal.com/2017/11/06/tenant-improvement-allowances-at-manhattans-trophy-office-towers-nearly-3x-pre-recession-levels/

 

That seems really high to me, but I'm not in the market at all. That is just over $100 MM for the Cravath space. If that's the market cost of that, you've burned through a bunch of cash and not increased the value of the building much.

 

Bizarro,

 

Thanks for posting that link. I thought I had provided a link earlier, it must not have been uploaded. 

[BG2008]

I think the qualitative factors are important when the 3 bids were submitted in an interest rate environment that was 100bps lower.  The 3 bids keeps getting quoted, is that anchoring?  In a 4% cap rate world, a 1% movement in interest rate is huge.  $85mm @ 4% cap rate is $2.1 billion $85mm at 5% cap rate is $1.7 billion

 

If due to a big move in interest rates a building is potentially worth $400m less I still think a walk around the block isn't a very important data point. But then again, I'm a numbers guy. Also, as given2invest pointed out, the value of the loan increases when rates are rising which acts as a partial hedge. FWIW I don't have a position (yet?). Unfavourable tax implications and rising interest rates make it look a bit marginal for me but it's definitely an interesting idea.

 

Just curious, what unfavorable tax implications?  Yah K1 is annoying but all the income and gains will be taxed at the lower rates.

 

Also, thanks for all the comments in the thread.  I felt like I was talking to myself but clearly others understand what I'm trying to say.

 

Re the restricted cash, everyone is missing the point.  The building traded for 1.72B PLUS ~180m in restricted cash.  There were 3 bidders at this value.  You don't have to believe what that 180m is (maintenance or growth cap ex) - that's the value it traded at.  I don't know how many times I need to say this.  You can argue shit has changed in the last 12 months, which is a FAIR argument, but it's just a fact this was the fairly liquid (3 bidders) mark a year ago.  In plain english, if the 180m is maint cap ex, then the fair value of the building post 1 time maint cap ex for Cravath is 1.9b and you get to the same end result.

 

You're pounding the table saying, look at the 3 bids a little over one year ago, I'm pounding the table saying, you can't rely on those bids anymore.  Plus, this is not the best asset due mostly to location.  So, we are both pounding tables.  One thing that has changed dramatically is that interest rates are higher. 

 

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018

 

The 10 year treasury is at 3.08% today and the 10 year treasury on Sep 14th 2017 was 2.20%.  So that's a 88bp movement.  Okay, let's take your number of $1.72bn plus $180mm, so $1.9bn for the building all in.  Three bidders, great support for pricing.  $85mm in NOI into $1.9 billion is a 4.47% cap rate.  Now, let's assume that cap rate moves 88bps because the 10 year treasury has moved that much.  So the new value would be $1.588bn.  This would mean that you only receive $194mm versus market cap of $229mm.  Maybe, the cap rates don't move as much as the 10 year treasury.  Let's say that it merely goes from 4.47% cap rate to 5.0%, so a 53bps movement.  $85mm/5.0% equals $1.7bn.  Assuming no frictional cost (selling commission, transfer tax etc), this would net $500mm for the entire building.  This would equate to $250mm versus a market cap of $229mm today.  That's 9.2% upside on a 60% levered real estate building.   

 

Does this not alarm you at all?  The Fed has said that they likely will have to raise interest rates an additional 4 times.  So that's another 100bps.  I think interest rates will likely be higher in 2-3 years than today.  We still have to deal with the risk of Cravath leaving or getting re-leased at lower rates. 

 

I don't know how old you are or if you own any real estate.  Pricing move around all the time depending on cycles, interest rates, GDP, local employment data.  How often have you heard of someone saying "Man, only if I sold my house 1, 2, 3, years ago.  People were bidding to buy.  Now, I have dropped my asking price and I still have get the deal done at a discount."  Three bids one year ago means nothing in this business when interest rate moved 88bps and the Fed is TELLING you that they need to increase interest rates further.

 

This is my last post on this thread.  I hope I have added value.  This is a hard pass for me in this market environment where other investments are much more attractive.       

 

 

[writser]

Just curious, what unfavorable tax implications?  Yah K1 is annoying but all the income and gains will be taxed at the lower rates.

 

I live in a country where I pay no capital gains tax (or any other tax on investment results) but a flat wealth tax. However, as far as I know the NYRT liquidation would be classified as FIRPTA and that would mean that I'd have to pay a 15% tax on all liquidating distributions, being a foreigner. I can potentially offset these taxes but there's a bit of uncertainty there and it would take a while, bringing down the IRR anyway. Not to mention that the K1 itself might mean I would have tax obligations in the US, something I have absolutely no appetite for. Filing in one country is enough, thank you. Finally, sometimes these liquidations end up sending cheques overseas which is also a hassle. Nobody in the civilized world uses cheques anymore so they are difficult and costly to cash in, especially for larger amounts. Given that I'd only be interested in a ~2% position anyway I'm tempted to avoid the whole mess - even if that means I might leave some money on the table.

[given2invest]

I think the qualitative factors are important when the 3 bids were submitted in an interest rate environment that was 100bps lower.  The 3 bids keeps getting quoted, is that anchoring?  In a 4% cap rate world, a 1% movement in interest rate is huge.  $85mm @ 4% cap rate is $2.1 billion $85mm at 5% cap rate is $1.7 billion

 

If due to a big move in interest rates a building is potentially worth $400m less I still think a walk around the block isn't a very important data point. But then again, I'm a numbers guy. Also, as given2invest pointed out, the value of the loan increases when rates are rising which acts as a partial hedge. FWIW I don't have a position (yet?). Unfavourable tax implications and rising interest rates make it look a bit marginal for me but it's definitely an interesting idea.

 

Just curious, what unfavorable tax implications?  Yah K1 is annoying but all the income and gains will be taxed at the lower rates.

 

Also, thanks for all the comments in the thread.  I felt like I was talking to myself but clearly others understand what I'm trying to say.

 

Re the restricted cash, everyone is missing the point.  The building traded for 1.72B PLUS ~180m in restricted cash.  There were 3 bidders at this value.  You don't have to believe what that 180m is (maintenance or growth cap ex) - that's the value it traded at.  I don't know how many times I need to say this.  You can argue shit has changed in the last 12 months, which is a FAIR argument, but it's just a fact this was the fairly liquid (3 bidders) mark a year ago.  In plain english, if the 180m is maint cap ex, then the fair value of the building post 1 time maint cap ex for Cravath is 1.9b and you get to the same end result.

 

You're pounding the table saying, look at the 3 bids a little over one year ago, I'm pounding the table saying, you can't rely on those bids anymore.  Plus, this is not the best asset due mostly to location.  So, we are both pounding tables.  One thing that has changed dramatically is that interest rates are higher. 

 

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2017

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018

 

The 10 year treasury is at 3.08% today and the 10 year treasury on Sep 14th 2017 was 2.20%.  So that's a 88bp movement.  Okay, let's take your number of $1.72bn plus $180mm, so $1.9bn for the building all in.  Three bidders, great support for pricing.  $85mm in NOI into $1.9 billion is a 4.47% cap rate.  Now, let's assume that cap rate moves 88bps because the 10 year treasury has moved that much.  So the new value would be $1.588bn.  This would mean that you only receive $194mm versus market cap of $229mm.  Maybe, the cap rates don't move as much as the 10 year treasury.  Let's say that it merely goes from 4.47% cap rate to 5.0%, so a 53bps movement.  $85mm/5.0% equals $1.7bn.  Assuming no frictional cost (selling commission, transfer tax etc), this would net $500mm for the entire building.  This would equate to $250mm versus a market cap of $229mm today.  That's 9.2% upside on a 60% levered real estate building.   

 

Does this not alarm you at all?  The Fed has said that they likely will have to raise interest rates an additional 4 times.  So that's another 100bps.  I think interest rates will likely be higher in 2-3 years than today.  We still have to deal with the risk of Cravath leaving or getting re-leased at lower rates. 

 

I don't know how old you are or if you own any real estate.  Pricing move around all the time depending on cycles, interest rates, GDP, local employment data.  How often have you heard of someone saying "Man, only if I sold my house 1, 2, 3, years ago.  People were bidding to buy.  Now, I have dropped my asking price and I still have get the deal done at a discount."  Three bids one year ago means nothing in this business when interest rate moved 88bps and the Fed is TELLING you that they need to increase interest rates further.

 

This is my last post on this thread.  I hope I have added value.  This is a hard pass for me in this market environment where other investments are much more attractive.     

 

I think I've mentioned multiple times that interest rates/cap rates have moved and thus the 1.72b is not as relevant.  We are paying sub 1.5b for the property today.  Additionally, we have a 9 year loan that has "mark to market" value.  I don't care what you think about the location...it means nothing to me as others have eloquently pointed out.  Thanks for your views though.

[johnny]

Thanks to all in the thread for the discussion, especially BG (could have come in a bit earlier though).

 

I'm more or less sold out, although I think I'm going to be going into liquidation with like a hundred shares, which maybe will be educational or something. I'll keep the thread updated with whatever happens.

 

At the end of the day I had a few things that kept me from sticking with this.

 

1. I wasn't able to confidently model how the asset would be handled if the bids in 2022 weren't attractive. Obviously they wouldn't sell for $1.2B or anything absurd, but I really wasn't sure how hard they'd fight for something better than their 2018 projections--in other words I suspect the upside might be a bit more capped than I originally modeled.

 

2. For me this was very much a "relative real estate" value thing--I'm not personally interested in RE at 4.5%, and I'm not really interested at 5.5%. I was okay buying at 6%, only to the extent I thought the market was -actually- at 5%. But I think the actual spread here has narrowed because of some movement on both ends.

 

3. I don't understand why they're going into liquidation with the extra cash, beyond mandated reserves (which, again, were themselves supposed to be substantially in excess of anticipated Capex). In the grand scheme of thing it's not a big deal, but if they don't need that cash, it suggests they're not concerned with squeezing every last drop of IRR out of this for me (which feeds into my #1 concern). And if they do need the cash, and I don't know why, that's self-evidently bad.

 

4. I really suffered from thesis drift. I went from talking myself into a position that was a one-year expected hold and liquid, to putting the exact same upside into a new situation that was a 3-4 year hold and totally unchangeable. The opportunity cost argument here is substantial, I decided. If I want to be exposed to low cap rate stuff for 4 years, I'd like at least the prospect of management being able to take advantage of distress in the space. Not only is WWP constitutionally incapable of doing that, they're in fact structurally vulnerable to being on the opposite end of such activity (Again...#1).

 

5. I don't think Cravath is going to downsize, despite our earlier talks about sqft/JD. But they do know everything that we know: they know a half-owner of the building really needs to sell in 4 years. When I put myself into Cravath's shoes, I can't see why they wouldn't drive a very hard bargain here. Considering how bad their last deal was, and how almost immediately the firm ended up in a very painful place, doing shadow layoffs and stuff that I imagine was very traumatic for the associates of that era, who are now partners today...I almost imagine they'd feel some sort of karmic obligation to squeeze as much out of the building as possible. Maybe I'm going off the rails here; I just watched the Haunting of Hill House so people anthropomorphizing buildings strikes me as Very Normal and Common Behavior.

 

I don't think this was a totally obvious sell, but that shouldn't be my bar for a situation like this that I'm totally unfamiliar with. I'm sort of lucky I had it mostly in retirement accounts, because I'm incredibly lazy and would have probably rolled into this thing with an absurdly oversized position if I'd been able to just sleep through it.

[given2invest]

Johnny,

 

I think very good recap.  I don't think they left a lot of cash on balance sheet, just something like 50 cents/net share.  I agree I don't get it but it is what it is.

 

I think idea was much better a couple months ago before markets went to crap.  I think it's good for the right kind of investor but not for everyone.  Will be interesting to see how it plays out.  I'd bet they sell in 4 years not 2 years and the cap rate will be fine.

 

 

[johnny]

Twist/Update: not only am I not actually out of this, I accidentally left a chunk of this in an IRA. Not a massive position, but enough that I'm going to get UDFI-rolled in a few years, assuming management doesn't miss the mark by too much.

 

Did anybody end up riding this thing into liquidation (deliberately or otherwise)? Looking for some K-1 forensics penpals.

[Foreign Tuffett]

Cravath leaving Worldwide Plaza

 

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