Jumping on the New York REIT bandwagon

Possible one of the least original value idea’s of 2017 must have been New York REIT (NYSE:NYRT). I always feel uneasy when so many people like something, but I could understand the attraction here. The story previous year was simple. The stock was trading around $10/share, a new manager had taken over with the mandate to liquidate the REIT while NAV/share was above $12 and incentive payments were struck at $11/share. Unfortunately, realizing those numbers proved a bit harder than expected and (adjusted for $5.07 in liquidation distributions already paid) NAV/share is now standing at just $8.03/share. No wonder that people so far have been disappointed with how the story is playing out. But with only a few assets remaining, and not much uncertainty with regards to the value of the remaining assets, I think the stock is currently trading at an attractive discount.

Share price: $2.32
Shares outstanding: 167.9 million
Market cap: $389.6 million
NAV/share: $2.96
Discount to NAV: 21.7%

Reading the latest 10-K you have to do a couple of adjustments to figure out how the current balance sheet looks like. A bunch of buildings have already been sold this year, and some others are under contract to be sold. The only things remaining are the Viceroy Hotel, the 33 West 56th Street Garage and the Worldwide Plaza (WWP) building. Adjusting for the dividend paid after year-end and all the sales already done or in progress the pro-forma balance sheet looks as follows:

It’s important to recognize that New York REIT uses liquidation accounting for the balance sheet, and as such it does recognize expected fees related to selling the building(s) and also expected revenues and expenses till the date of liquidation. For accounting purposes this date has been set at December 31, 2018. Even though this balance sheet is very simple, all the different parts that are important are visible:

  • The assets in real estate and the mortgage notes payable are related to the Viceroy hotel and the 33 West 56th Street Garage
  • The investment in joint venture is the WWP building (net of debt)
  • Cash are funds that should be available for distribution to shareholders
  • Restricted cash in escrow is mostly money set aside of improvements in the WWP building

The only part of the portfolio that really matters is the WWP building. The REIT owns a 50.1% stake that is valued at $1.725 billion and has a $1.2 billion mortgage. Because New York REIT sold the other half last year to SL Green and RXR Realty we can be quite confident about the valuation. Nothing beats an actual transaction price, and last year two knowledgeable third parties were happy to pay $1.725 billion for it. In the SL Green “2017 Annual Institutional Investor Conference” presentation we can find a couple of slides about their purchase, and they think they got a good deal:

To improve and maintain the asset the coming years New York REIT has set aside $90.7 million. They believe that implementing the new business plan will take between two and four years, and if successful, would result in an increase of the property value between $1.9 billion and $2.2 billion (the low-end of that range doesn’t sound so crazy since it’s not much more than the current price plus the cash value of the planned improvements). In addition to the increase in value, the longer holding period would also generate more cashflows since the liquidation balance sheet assumes a sale at the end of this year. This adds approximately $0.10/share in value/year, which is not so bad considering that we are buying the WWP for roughly $1.37/share (the current price of $2.32 minus an estimated liquidation distribution of $0.95/share at the end of this year when all other assets are sold). From the 10-K (emphasis mine):

Management believes that the combined team of SL Green and RXR Realty will add the necessary talent, expertise and capital, along with the capital contributed by us, to bring this Class A asset with its blue chip tenant roster to its full potential. Management believes that implementation of the business plan for Worldwide Plaza will take at least two years and may take up to four years given the size of the building, which is a little over 2 million square feet, the scope and nature of the capital investment and to allow time for the critical milestones in leasing and asset repositioning to take place.

Management believes that if these actions are successful, the estimated value of the property could increase to between $1.9 billion and $2.2 billion, on an undiscounted basis, by November 2021, our estimated sale date of this investment. Assuming additional investment in Worldwide Plaza of $64.0 million, plus a corresponding investment from our joint venture partners, a future value for Worldwide Plaza between $2.0 billion and $2.2 billion would produce a residual value between $2.19 and $2.77 per share, an increase of $0.32 to $0.90 per share over our current carrying value. In addition, we have contractual rents which generate a predictable cash flow from Worldwide Plaza during the estimated four-year hold period which, net of expenses, we estimate would produce an additional $0.43 per share over the four year hold period versus the $0.13 currently accrued.

I can wait a couple of years for a discount to close when getting paid 7%+ in the mean time. If we throw some of these numbers in an IRR calculation we get some pretty decent results. Note that the 1.725B valuation should perhaps have been labeled 1.85B since it’s based on the current valuation, but it assumes that the planned $128 million in capital improvements isn’t money flushed down the toilet. The 2.0B and 2.2B valuations are inclusive of the improvements.

Of course, between now and 2021 a lot can happen. Given that the LTV-ratio on the WWP building is ~70% a relative small change in valuation can have a relative large impact on the eventual financial result. You can still have a decent single digit IRR if the WWP building declines by ~10% in value, but around ~15% you are already around break even and above that you are quickly going into negative territory.


New York REIT isn’t the kind of investment that will make you rich, nor is it the kind of investment that doesn’t have downside. It’s not going to be a ten-bagger, and if New York real-estate for one reason or another doesn’t do well the next couple of years this investment will not work out. That’s okay with me. I know Warren Buffet has famously said: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”, but that has always been something I deeply disagree with. The possibility of losing money is part of investing and if you think you have found something with almost no downside you are probably just fooling yourself. What’s more important is that you bet when to odds are in your favor, and that you size your bet appropriately compared to the amount of risk that you’re taking. But perhaps that idea is harder to turn into a catchy folksy wisdom phrase…

But to circle back on topic: I think the New York REIT offers an attractive risk/reward profile. While the investment is sensitive to the value of the WWP building in four years time, it’s not what I would call a high-risk bet. Perhaps I should have saved my rant in the previous alinea for something that could actually be a zero ;). Between the cash already on the balance sheet, the buildings that soon will be sold and the rent income that will be generated I expect to at least get a fair amount of my invested capital back, and hopefully more than that…

Assuming that the building in four years time will be worth just as much as today (plus the value of the capital improvements) is in my mind a reasonable conservative base case scenario. Getting paid a double digit rate on return  sounds pretty good to me,  and if they would be able to execute on their plan to increase the value of the property, that would just be the icing on the cake. It’s going to take 4 years before the rest of the story plays out, and not everybody might have the patience for that, but that might exactly be why there might be an opportunity.



AviaAM Leasing being taken under at PLN 5.62

Last year I initiated a small position in AviaAM Leasing AB that is now being taken under at PLN 5.62/share. While I never wrote about the company on my blog, I got a fair number of emails from people asking what the implications are and if there are any alternatives like I’m some expert on Polish securities laws (hint: no). Unfortunately, I don’t think there are any good options here. The group of insiders control 78.27% of the outstanding shares right now. Hitting the 80% threshold in Poland is enough to delist the shares from the stock exchange, and after hitting 90% ownership they can initialize a squeeze-out. I don’t know if there are even appraisal rights available for shareholders in a squeeze-out, but it’s a fair guess that it’s not worth the trouble for small foreign holders to go through that process.

So, as a (small) shareholder you can elect not to tender your shares in the tender offer. But the most likely result is that the only effect of that action is that you delay the payment for your shares. Additionally, sometimes getting paid through a squeeze-out procedure has negative tax consequences since in some countries it can be treated like a dividend (no idea how this works in Poland, but it is certainly a risk). So to summarize: I think we just got screwed and there is little we can do about it…

The only positive is probably that this confirms that it was indeed a cheap stock…


Author is long AviaAM Leasing

Safeway sells interest in Casa Ley

Just before hitting the three year deadline after which Albertsons would be required to pay CVR holders fair value for their stake in Casa Ley they announced that it was sold for approximately US$345 million. The transaction is scheduled to close by February 28, and CVR holders are expected to receive a payout between 87 to 90 cents per CVR six weeks later. It’s a slightly disappointing result since the CVR was valued at $1.0149 at the time of the merger. Albertson is quick to point out that since then the Mexican peso depreciated 20% against the dollar, but on the other hand we have been in a raging bull market for three years as well. Not the best outcome possible, but still pretty decent I think. Now that we know how big the final payout will be we can calculate what kind of return my first ever CVR-trade generated:

DateDescriptionCash flow
 1/27/2015Buy one SWY share(35.12)
 1/27/2015Buy one put as hedge(0.12)
 2/3/2015Receive cash consideration merger34.91
 5/11/2017First payment PDC CVR0.017
 4/11/2018Midpoint estimated payout Casa Ley CVR0.885

As you can see the trade generated a return of 23% over a more than three year time period which is obviously pretty good, although I believe this understates its profitability. I basically paid 33 cents in 2015 to get paid 90 cents three years later. Looking at it from that perspective the internal rate of return sounds low, but that has to do with the large amount of capital that needed to be tied up in this trade for a week. But thanks to a cheap margin loan it was almost free capital, and accounting for this leverage the internal rate of return would be way higher.


Author is still long two SWY CVR’s

2017 end-of-year portfolio review

With the last trading day of 2017 behind us it’s time to tally up the results for the year. What I’m writing here is starting to get repetitive, but it was once again an excellent year with my portfolio up 30.12%. For US-based investors this might not sound so extraordinary given how markets performed worldwide, but remember that these results are in euro’s. With the euro appreciating 14.6% during the year I faced a significant currency headwind. Measured in dollars my portfolio is up a whopping 49.19% (while the MSCI ACWI is up 23.97% in dollars versus “just” 8.89% in euro’s). Volatility in exchange rates has a large impact on my results in the short-term, but in the long-run I expect positive and negative moves to cancel each other to a large degree.


* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

It’s also becoming a tradition that I complain in these posts about how difficult it sometimes can be to track something so basic as your investment returns. I have complained about how CVRs, liquidation receivables and other esoteric assets make this process less than straightforward.

Another complication are taxes. I only care about after tax returns, but that is not the number that I report here. What I report is basically the aggregate of the returns as reported by my brokers, sometimes adjusted for items that they got very obviously wrong. Since we don’t have short-term or long-term capital gains taxes in the Netherlands this number matches my after-tax return pretty well. However, a large part of the dividend taxes that I pay during the year can be used as a tax credit. Normally this is all pretty small potatoes, except for this year when I had a large position in Sapec that paid a huge E150/share dividend. Not only generated this a sizable tax receivable in Belgium, it also generated a big tax credit in the Netherlands. I basically valued the Sapec tax assets in a way that they payment of the dividend didn’t generate a gain or loss compared to the previous day trading price. I think this is the most sensible approach, except now I report my performance after dividend withholding taxes with the exception of Sapec. Not a nice and clean situation, but I also don’t want to restate all my results to retroactively recognize the value of tax credits generated by dividend taxes in previous years.

As you can see there isn’t a lot I can complain about this year. Almost all positions performed pretty well, including my basket of Japanese companies and my basket of Italian real-estate investment funds. Inside the special situation basket there were a couple of big losers, but nothing too drastic. The Destination Maternity merger failed spectacularly, causing a 308bps loss while “undisclosed merger B and C” subtracted another 152bps and 52bps from the result. This was more than offset by a 788bps gain in the Sapec going private transaction and a 495bps gain in “undisclosed merger A”. I talked about all these outliers before in my half-year report, although at that point in time the Destination Maternity loss was at “just” 172bps and the merger was supposedly still on track to close. The second half of the year was characterized by smaller and steadier gains in the special situations basket.

My portfolio doesn’t contain any big surprises I think. It’s a fairly standard (for me) split between long-term value stocks and special situations. You can see a big position called “various receivables” that contains among other things the Sapec tax assets, delisted Tejoori shares and some CVRs that I managed to pick up during the year (for example, Ocera Therapeutics). My cash position is at the moment pretty big, but that’s mostly the result of a couple of deals that were completed just before the end of the year. Less than a week ago my portfolio was actually slightly leveraged, and I hope to be able to reinvest this cash soon. As you can see from the results above, focusing on special situations is proving to be a profitable activity for me, but the downside is a high portfolio turnover. You always need to find new situations to replace those that get completed. Hopefully 2018 will have a couple of nice ones in store for us! Have a happy new year, and may next year be just as profitable for you as this year was for me!


Author is long everything in the portfolio overview

PD-Rx Pharmaceuticals reports FY2017 results

PD-Rx Pharmaceuticals posted their 2017 annual report online yesterday. Last year was a pretty solid year with revenues increasing by 21% from $21.5 million to $26.0 million. Net income saw a similar percentage increase and went from 0.30/share to 0.36/share. Given that PD-Rx’s past revenues have been somewhat volatile I don’t think we should put to much weight on this growth, they are now basically back to the level they achieved in 2013. As always, the company provides a nice overview of historical annual sales in a “classic” PowerPoint look:

Besides good operating performance there were two positive developments during the year. First of all, the company paid its first ever dividend in June this year. Compared to PD-Rx’s cash balance of $4.85/share the dividend of $0.30/share was not very big, but it does represent a 82% payout ratio for the year. Hopefully this wasn’t a one-off occurrence.

Secondly, the passage of Trump’s tax bill should provide a nice boost to earnings in the years to come. PD-Rx Pharmaceuticals, like many US micro-caps, pays the full US corporate tax rate, so the drop from 35% to 21% should boost earnings by approximately 22%. If we crudely value PD-Rx at the value of its cash balance plus ten times 2017 earnings, value per share jumps from $8.49 to $9.33 if we adjust for the lower tax rate. Given that shares currently trade at $5.65 I still think they offer a pretty compelling opportunity.


Author is long PDRX