TPHS Price: $2.26

Current NAV: $5.50-$8.00

One-year Target Price: $6

Market Cap: $72MM

Trader Pitch - market panic has driven shares to crazy price, very solid asset support for shares at current level, huge upside to pretty reasonable assumptions

Thesis

In the midst of the highest market volatility since 2008, we recommend investment in Trinity Place Holdings (TPHS), a relatively simple “workout”-esque security whose share price has fallen 35% in two weeks despite minimal risk from an economic contraction. The ~$2.25 stock has ~$2.50-$3.00 in easily valued investments and one large other bet that is effectively a liquidating asset: a new build residential construction in lower Manhattan called 77 Greenwich that we believe will yield $3-$5+ in value by year end 2021, yielding a sum of the part (SOTP) of $5.50-$8.00, a 150-250% return in two years. While we understand coronavirus fears, we believe even a bad recession would only push out our timeline for selling the condos a few quarters, not upend our entire NAV.

The critical variable in TPHS’s NAV is what average sales per square foot (PSF) 77 Greenwich ultimately achieves. Our $3-$5+ estimate corresponds to a $2,000-$2,500 PSF sales price. We believe our low end is conservative versus recent comparable sales in the area while the high end of the range represents a rebound in NYC high-end real estate. Construction of 77 Greenwich is nearly finished with completion scheduled for the second half of 2020. Marketing and sales commenced in Spring 2019 and scheduled for completion in 2021. As the building is completed and the cash from the “liquidating” asset hits the balance sheet, we believe the market will reweight the shares. We believe TPHS shares are an opportunity where we stand to lose little, if any, if our thesis is incorrect and stand to make a great deal if 77 Greenwich is sold inline with our projections. Further, we believe management will be good stewards of capital with the proceeds from 77 Greenwich. Management and the board are large shareholders who plan to primarily reinvest the majority of cash in NYC real estate, particularly Brooklyn multifamily, as well as potential dividends and repurchases.

Background

At first glance, investors may find it odd for an NYC residential development to be trading as a listed security. Virtually all NYC new build constructions are private deals, particularly at a sub-$1B size. TPHS’s existence owes to its odd, convoluted story. The stock was originally the old Syms and Filene’s Basement discount chain that filed for bankruptcy in 2011. After the reorganization, TPHS is the successor entity that emerged as a portfolio of real estate assets, NOLs, and one critical property – an old Syms location in the Financial District of Lower Manhattan that would eventually be redeveloped and become 77 Greenwich. Between 2015 and 2017, the company began development of 77 Greenwich and priced several rights offerings between $6-$7.50 per share as well as at-the-market offerings which sold shares with an average priced greater than $9 per share. Through these offering, famed investor Michael Price became TPHS’s largest shareholder with an ~21% stake.

Since the reorganization, TPHS has been a generally known value idea among microcap investors. We tracked the story over time but did not invest until 2019. In Fall 2018, the broader equity markets declined and TPHS rolled over with them. Further, the crack in NYC real estate that began to emerge in 2017 worsened throughout 2018 and 2019, drawing into question the high PSF sales targets of many NYC new developments. While the market has weakened since 77 Greenwich began planning in the mid-2010s, we believe TPHS shares are discounting a further worsening of the NYC real estate market that is unlikely to occur.

Other Assets

Before digging in to 77 Greenwich, we want to go through TPHS’s other current assets, which establish the basis of our downside estimates. Here are our estimates:

We believe our above estimates are conservative. The NYC residential real estate was purchased in last two years into a strong NYC rental market and are located in growing areas: Williamsburg and Gowanus. The 77 Greenwich retail real estate will be street level and, while not exactly on the main corridor, is located next to a large parking garage, which guarantees high foot traffic. As a sanity check, according to REBNY, ground floor retail real estate in Lower Manhattan – Broadway (Battery Park - Chambers St) averaged $411 PSF in Fall 2019 with a $150-$785 PSF range while Harlem averaged $125 PSF, which compared to our estimate of $150 PSF. (https://www.rebny.com/content/dam/rebny/Documents/PDF/News/Research/Retail%20Reports/2019_Fall_ManhattanRetailReport.pdf). We believe there could be upside to our estimates.

Estimating the NOL is an odd endeavor as the result is reflexive. The NOL will be used to offset any gains from the 77 Greenwich project, thus if 77 Greenwich sells well, the NOL will be worth a lot, and if it sells poorly, the NOL will be worth very little. In the above NAV, we value the NOL at zero.

77 Greenwich

Visit Website Here: https://77greenwich.com/

77 Greenwich is a new development luxury residential building located in Manhattan’s Financial District. The asset will have 90 condominiums, gym facilities, a roof top terrace with sweeping city and harbor views, and a school on the lower levels. From the company:

“77 Greenwich, a new residential condominium with a boutique approach to upscale urban living. 77 Greenwich was envisioned by a world-class team of New York-based architects and designers including FXCollaborative, the celebrated architectural firm behind acclaimed New York City residential developments including The Greenwich Lane and Circa Central Park as well as the new Statue of Liberty Museum; with interiors by Deborah Berke Partners of 432 Park.

77 Greenwich is a sculptural tower of reflective glass rising from a cast stone base. Topping out at 500’, the 42-story building features a pleated glass curtain wall façade that provides sprawling water views from each of the homes, which begin on the 15th floor located nearly 150 feet above street level, and offers a graceful juxtaposition to the heavy masonry of its historic neighbors. Designed to exacting LEED standards, the homes at 77 Greenwich are both environmentally sustainable and luxurious.”

While pretty pictures and elegant descriptions are nice, the real question is “what is it worth?” which in all honesty is a mixed bag. The bad news is that the market is definitely worse than when 77 Greenwich was originally planned. In the mid-2010s, a dearth of new construction following the Great Financial Crisis mixed with a strong NYC housing recovery to cause a surge in new development profits. Developers including Trinity began to dream of $3,000 PSF pricing, a previously unheard-of level. However, the market did what markets do and a surge of supply began construction a few years ago, which is leading to a supply glut at present. The Manhattan market has cooled significantly, with $1-$5MM homes down 10-20%, while certain high-end real estate is even worse.

The good news is that the market is not crashing like South Florida or Vegas in 2006-2009 and TPHS stock is already discounting a significantly worse outcome than we believe is likely. In particularly, the lower end of our NAV corresponds with $2000 PSF, a draconian outcome barely above construction costs, while the high end our NAV is $2500, which we believe is achievable if high-end NYC residential rebounds.

We believe the best comparable for 77 Greenwich is 50 West, the luxury tower right down the Street in the Financial Distract featured in the photo at the beginning of this report. 50 West closed with an average selling price of roughly $2,250 PSF. However, there are a handful of critical difference between the two building. First, 50 West sold the first dozen or so floors of their development as condos, while 77 Greenwich sold them to the New York City school district. As the lower floors have worse views – think looking across the street into someone’s apartment versus looking across the skyline at the river – they sold for much lower prices PSF than comparable higher floor. Further, 50 West has larger floors and not all apartments have views facing the water, whereas all apartments at 77 Greenwich have at least a partial river/harbor view. In addition, we believe 77 Greenwich has a product better suited to the market. 77 Greenwich’s condos are on the smaller side but well optimized, at roughly 900 SF for a one bedroom and 1300 SF for a two bedroom.  This helps to lessen the “sticker shock” when comparing to non-luxury, yet high square footage Manhattan real estate.

Putting it together, we believe our $2,000-$2,500 PSF range for 77 Greenwich is adequately conservative. Trinity began selling apartments in Spring 2019 and expects to complete construction in late 2020 with closings occurring in a similar time frame.

Capital Strategy

Going forward, we believe TPHS plans to liquidate the 77 Greenwich property and reinvest primarily in Brooklyn residential real estate. In December 2019, TPHS secured a $70MM revolver. While the terms are relatively steep at ~9% (4% cash + 5.25% PIK) and a theoretical 20% dilution from warrants if the stock price is >$6.50, we think the financing is favorable. TPHS effectively owns a liquidating asset in 77 Greenwich where they can conservatively estimate a “worst possible worst” case scenario and now have financing in place to deploy that capital 12-24 months before the liquidation is complete. The revolver will be used to fund the equity portion of any purchases TPHS makes. In our discussions with management, they are open to various assets but favor expanding their presence in Brooklyn multifamily, which we consider a relatively low risk strategy.