Description
Investment Memorandum:
Reckson New York Property Trust
Summary
Reckson NY Property Trust ("RNY" or the "Company") is an Australian listed property trust which owns 3.2 million square feet in 25 class A-/B+ office buildings in the suburban New York markets (Westchester, Long Island, Northern New Jersey, etc.).
- Listed on the ASX, market cap of $232 million (USD), and enterprise value of $485 million (USD)
- Security holds 1/3 of assets in Reckson / Marathon JV (bought in recent transaction with SL Green)
- Trades at implied cap rate of 7.2%, and $196 (USD) per foot
- Misvaluation exposed in recent SLG / Reckson transaction; the Reckson / Marathon consortium paid an implied cap rate of 5.9% for the suburban NY assets
- Company created by the management of Reckson Associates Realty Corporation ("Parent") in 2005 in an attempt to arbitrage the higher values at the time attributed to income producing assets in the Australian market; this has since reversed
- Shares were sold 30% to retail investors and 70% to institutional investors
- Retail investors attracted by the high pay-out of current income
- Continues to have a high dividend yield of 6.5% (estimate) as compared to its US office peers of 3.6%.
I believe that the Company has become the typical “orphan” equity:
- Small market capitalization compared to Parent
- Parent is currently in the process of merging with SL Green at an implied equity valuation of $3.5bn or 22x the market cap of RNY.
- Different shareholder base
- Parent was primarily institutional U.S. investors and Company is primarily Australian investors (large portion retail)
- Spartan research coverage
- Three Australian analysts tangentially covers the Company, rarely publishes reports, and are far detached from the suburban NY office market
- Also note that this trust was not sponsored by an Australian bank, such was the case with multiple US REIT / Macquarie listings
- Further, complicated ownership and capital structures makes independent research difficult
- Shareholders are out of touch with fundamental changes in the market
- Both the fundamentals and the valuations for office product have improved in the last year yet the Company has underperformed US Office indices
- Rents in Company's markets have increased between 6 and 15% on average in the last year
- Rapid increase in Manhattan rents, stepped up basis (currently trading at 4% cap rates) will spill over to Suburban NY office market
- Value of large well located office portfolios has been proven out by several large transactions examples include:
- CarrAmerica (6.2% implied cap rate)
- Trizec (5.6% cap rate)
- Reckson (5.2% implied cap rate)
- Glenborough (6.2% implied cap rate)
- These factors are simply not being acknowledged by a retail shareholder base which lives 10,000 miles away from the assets
The management of Parent is now exclusively focused on the Australian LPT’s core markets—Northern New Jersey, Long Island, Westchester, and Connecticut. I believe that management sees a disconnect in the way these assets are being valued and intends to try to close this gap. Perhaps the easiest way to do this would be to simply sell the existing portfolio today (at a 6.5% cap rate giving no value to vacancy there is at least 25% upside to current prices). We believe a lease-up strategy would result in IRR’s north of 20%.
Reckson Sale to SL Green
Controversy over Scott Rechler’s purchase of the suburban New York assets has exposed the value of this security, yet the price does not yet reflect it. Many analysts and buy-siders (Icahn included) believed he was “stealing” these assets. What wasn’t publicized is that this is an investable thesis, as a third of these assets trade on Australian markets in the form of Reckson New York Property Trust. In fact, imputing the cap rate Rechler paid for the suburban assets, yields valuations 50% north of current trading prices for RNY (chart below).
|
Reckson NYPT Valuation |
|
|
|
|
|
|
|
|
Base (1) |
Conservative (2) |
|
Long Island |
5.75% |
6.25% |
|
Westchester |
5.75% |
6.25% |
|
Connecticut |
6.00% |
6.50% |
|
N. New Jersey |
6.25% |
6.75% |
|
|
Weighted avg |
5.88% |
6.38% |
|
|
|
|
|
|
RNY NAV ($A) |
$1.64 |
$1.43 |
|
|
|
|
|
|
(1) Implies a 4.75 cap rate for NYC office assets. |
|
|
(2) Adds 50bps to RNYPT's assets (33% of total Reckson suburban portfolio). |
|
Further validating this is the fact that Rechler was willing to fork over $25mm from his own account to make the deal happen at the eleventh hour.
Portfolio
The Company provides significant property level detail, far more than most US REITs but typical of Australian
listed property trusts, which is summarized in Exhibit I. The Company’s assets are stabilized suburban office buildings, the majority of which are well leased. The value of the properties, based upon our appraisal, is well diversified with only one property accounting for more than 10% of the overall value. The buildings are typically 3 to 4 story and average 132,000 square feet. We continue to diligence the imbedded rent growth potential of the portfolio, but we believe it is significant. As the portfolio has a number of tenants and a relatively short weighted average lease terms, we believe there is significant opportunity to increase in-place income. We are also looking into whether there may be value in excess land surrounding the existing structures. Looking at the ratio of building square footage to site square footage, adjusting for parking, there appears to be some properties that may have developable out-parcels.
Fee Structure
Management (which owns a 25% interest in the US LLC) appears to be aligned with shareholders, as it will have the right to exchange its interest in the US LLC for an equivalent amount of units (or cash value of units) after two years. Therefore management benefits dollar-for-dollar on any appreciation in unit price. Additionally, there are no promote or performance fees payable to Reckson or the responsible entity.
Fees directly or indirectly payable by the trust to the Reckson management company include:
· An annual management fee of 0.45% of the trust’s proportionate interest in the properties
· Fees for acquisitions, dispositions (standard broker fee, or 50% of broker fee if a broker is used)
· Property management fees 3.5% of gross revenues
· Leasing commissions between 3 and 7% depending on the locale (or 50% of the broker fee if a broker is used)
Markets
Long Island (39% of NOI, 98.1% portfolio occupancy)
· A supply-constrained market (trails only NYC in vacancy rates)
· Demand remains strong
· Management suggested rents grew by around 6.5% over CY05 and approx 4-5% over the last 12 months
· TWR anticipates that by year-end 2007, the vacancy rate is expected to fall to 10.2% (currently 12.8% for Q2’06) and market rental growth of 10.6%.
Westchester (23% of NOI, 87.6% portfolio occupancy)
· Lagging due to an influx of new supply
· Some signs of positive momentum
- Lowest availability in White Plains CBD ever
Connecticut (21% of NOI, 80.8% portfolio occupancy)
· Market fundamentals remain strong
· TWR forecasting positive growth in office workers through at least year-end 2007
· Management suggested rents have increased around 15% over the last 12 months
· Long-term fundamentals of this market are likely to be supported by a new $2.3bn 10-yr transportation infrastructure package recently passed by the Connecticut State Legislature to alleviate the present congestion in the Fairfield County.
Northern New Jersey (16% of NOI, 92.1% portfolio occupancy)
· Experiencing an increase in leasing activity, with management suggesting rents have grown 2-3% over the last 12 months
· New York MSA (encompassing Westchester and Northern New Jersey), supply expected to exceed demand in 2007, resulting in higher vacancies
- Despite slightly higher vacancy, rents still expected to show growth of 11.1%, over Q2’06 to Q4’07.
Capital Structure
The company is conservatively capitalized and has a low cost of debt. The company has approximately $339.5 million in fixed rate debt (5.3% average cost), $6.0 million in floating rate debt (6.1% average cost), and $266.1 million in equity. Pro forma debt / total book cap is approximately 56.5%.
Valuation
|
|
Reckson NYPT (USD $MM, except per share amounts) |
|
|
|
|
|
|
Net Asset Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
Per Share |
Per Foot |
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate by market: |
|
|
|
|
Exchange rate |
|
0.7618 |
|
|
|
|
|
Long Island |
186 |
$0.71 |
$196.1 |
|
Current unit price |
|
$1.16 |
|
|
|
|
|
Westchester |
117 |
$0.44 |
$187.7 |
|
Cap rate relative to appraisal |
|
(70) bps |
|
|
|
|
|
Northern NJ |
77 |
$0.29 |
$196.8 |
|
Appraisial cap rate |
|
7.7% |
|
|
|
|
|
Fairfield |
109 |
$0.41 |
$213.5 |
|
Forward NOI growth |
|
2.0% |
|
|
|
|
Value of Real Estate |
489 |
$1.86 |
$197.7 |
|
Ownership in properties |
|
75% |
|
|
|
|
Cash |
0 |
$0.00 |
|
|
|
|
|
|
|
|
|
Accounts Recievable |
7 |
$0.03 |
|
|
|
|
|
|
|
|
|
Other Assets |
32 |
$0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
528 |
$2.00 |
$263.0 |
|
Sensitivities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
266 |
$1.01 |
$132.7 |
|
|
|
|
|
|
|
|
Accounts Payable |
1 |
$0.00 |
|
|
|
Cap rate (weighted average) |
|
Dividends Payable |
6 |
$0.02 |
|
|
|
6.0% |
6.5% |
7.0% |
7.5% |
8.0% |
|
Other Liabiliites |
19 |
$0.07 |
|
|
Implied NAV/unit (AUD) |
$1.59 |
$1.36 |
$1.18 |
$1.01 |
$0.87 |
|
|
Total Liabilities |
292 |
$1.11 |
$145.4 |
|
Implied NAV/unit (USD) |
$1.21 |
$1.04 |
$0.90 |
$0.77 |
$0.66 |
|
|
|
|
|
|
|
Trading value % of NAV |
72.9% |
84.7% |
98.3% |
114.2% |
133.0% |
|
|
|
|
|
|
|
Price per foot |
$231 |
$213 |
$198 |
$184 |
$173 |
|
|
Net Asset Value |
236 |
$0.90 |
$117.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current market value (USD) |
232 |
$0.88 |
|
|
|
|
|
|
|
|
|
|
Difference |
4 |
$0.02 |
|
|
|
Unit trading price (AUD) |
|
|
% of NAV |
98.3% |
98.3% |
|
|
|
$1.05 |
$1.10 |
$1.15 |
$1.20 |
$1.25 |
|
|
|
|
|
|
|
Implied cap rate |
7.5% |
7.3% |
7.2% |
7.0% |
6.9% |
|
Units Outstanding |
263 |
|
|
|
Trading value % of NAV |
89.4% |
93.6% |
97.9% |
102.1% |
106.4% |
|
|
Market Capitalization |
232 |
|
|
|
Price per foot |
$188 |
$192 |
$196 |
$200 |
$204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabiliites and Prefereds |
292 |
|
|
|
|
|
|
|
|
|
|
Cash and Equivalents |
(39) |
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value |
485 |
|
$196.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate of Run Rate NOI |
35 |
|
|
|
|
|
|
|
|
|
|
|
Implied Cap Rate |
7.16% |
|
|
|
|
|
|
|
|
|
|
Management
Scott Rechler
Chairman and Chief Executive Officer
· CEO of Reckson since December 2003, Chairman since November 2004.
· Architect of Reckson's public offering in June 1995.
· Has overseen in excess of US $4.0 billion in acquisitions and developments since joining Reckson
· Member of the Board of Governors of NAREIT
Michael Maturo
Chief Financial Officer
· CFO since 1995. Chairman of Reckson's Investment Committee in May 2004
· Has led efforts to raise over US $2.0 billion of additional debt and equity capital during this time period
· Member of NAREIT
Jason Barnett
Executive Vice President/General Counsel
· Joined Reckson in 1996
· Responsible for the coordination of all legal and compliance matters for Reckson
Philip Meagher
Executive Director
· Over 30 years' experience in property trust management
· Business Development Manager from 2003 to 2005 of the Trust Company of Australia Ltd.
William Robinson
Independent Director
· Over 40 years' experience in finance, mining and property
· Currently a director of the ASX listed Unwired Australia Group
Mervyn Peacock
Independent Director
· Over 35 years' experience in investmenting
· Previously Chief Investment Officer and director of AMP Capital Investors
Francis Sheehan
Fund Manager
· Served as VP, Legal-Corporate of Reckson since October 2004
· Responsible for corporate legal responsibilities of Reckson
Catalyst