Author Topic: NYRT - New York REIT  (Read 31036 times)

bizaro86

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Re: NYRT - New York REIT
« Reply #140 on: October 28, 2018, 02:20:48 PM »
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

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Re: NYRT - New York REIT
« Reply #141 on: October 28, 2018, 05:38:06 PM »
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

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Re: NYRT - New York REIT
« Reply #142 on: October 28, 2018, 10:48:51 PM »
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

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Re: NYRT - New York REIT
« Reply #143 on: October 28, 2018, 11:09:05 PM »
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

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Re: NYRT - New York REIT
« Reply #144 on: October 29, 2018, 03:13:42 AM »
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.
« Last Edit: October 29, 2018, 05:58:11 AM by writser »
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given2invest

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Re: NYRT - New York REIT
« Reply #145 on: October 29, 2018, 08:52:15 AM »
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

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Re: NYRT - New York REIT
« Reply #146 on: November 02, 2018, 01:24:55 PM »
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

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Re: NYRT - New York REIT
« Reply #147 on: November 03, 2018, 02:56:23 PM »
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.