Acknowledgement: this trade idea was presented to me by various colleagues, and is very well documented by Forager Funds. I've honestly no idea who came up with this idea first - however for ethical purposes I want to disclose it is not my original idea. It does however fit my cigar-butt style, and therefore I am an owner of the stock.
With a stock price of ~28c and NTA of AUD 51c (30 June) the discount-to-value is straightforward to see. There are however issues namely a flat suburban commercial office market in the US, no distributions (and none likely until 2016), restrictive debt covenants and CAPEX requirements to reduce the vacancy rate. Some of my colleagues think it is a value-trap, and they are potentially correct. I have been a buyer given the big discount, and expecting the discount should close when conditions improve at the fund and a way to get some USD exposure.
I visited RNY following a visit management (RXR Realty) in Long Island November last year, and I also just visited New York / Long Island - not to meet management but to snoop around a bit more to get some scuttlebutt.
Here is some of the information I found:
As background, RNY owns commercial office properties in the suburban markets of Long Island, Connecticut, New Jersey and Westchester. The problem with this geographical spread is that it is still dormant despite inner New York such as Manhattan and Brooklyn performing well (both residential and commercial). The ripple effect for commercial offie hasn't spread out to the suburbs. This appears to be the case across the US, as it appears to be for Australia (I suspect true of many countries).
On the flip side, minimal new supply is coming on-line and developers simply don't build commercial property without securing committed sales or leases. Incentives are still aggressive - even up to 1 year in the case of 5-6 year leases. The consistent message was the commercial suburban leasing market is recovering, but ever so slowly. You're not going to make a ton of money quickly from RNY in the short term due to an influx of new tenants to soak up vacant stock.
I visited RNY following a visit management (RXR Realty) in Long Island November last year, and I also just visited New York / Long Island - not to meet management but to snoop around a bit more to get some scuttlebutt.
Here is some of the information I found:
As background, RNY owns commercial office properties in the suburban markets of Long Island, Connecticut, New Jersey and Westchester. The problem with this geographical spread is that it is still dormant despite inner New York such as Manhattan and Brooklyn performing well (both residential and commercial). The ripple effect for commercial offie hasn't spread out to the suburbs. This appears to be the case across the US, as it appears to be for Australia (I suspect true of many countries).
On the flip side, minimal new supply is coming on-line and developers simply don't build commercial property without securing committed sales or leases. Incentives are still aggressive - even up to 1 year in the case of 5-6 year leases. The consistent message was the commercial suburban leasing market is recovering, but ever so slowly. You're not going to make a ton of money quickly from RNY in the short term due to an influx of new tenants to soak up vacant stock.
RXR have a great reputation on Long Island according to the people I spoke to (who have been dealing with RXR for years). My own observation is that while they appear to be good operators, they have bigger fish to fry (Manhattan) for the time being and RNY is not a high priority until vacancies drastically reduce and/or the re-financing is complete (long story: debt covenants restrict distributions and spending on CAPEX which in-turn is holding back attracting good tenants - a catch 22 that is not easily solved in the short term).
The average cap rate across the RNY portfolio is 8%, however anecdotally I heard that cap rates are starting to compress to less than 8%, although I did not receive firm data to back this view up.
In summary, I didn't find information that was in conflict with RXRs position. This situation could take a while (18 months) to work out, however the share price allows for that. If we do happen to get a strengthening USD and/or improved property prices then the upside is even bigger (or reverse).
The average cap rate across the RNY portfolio is 8%, however anecdotally I heard that cap rates are starting to compress to less than 8%, although I did not receive firm data to back this view up.
In summary, I didn't find information that was in conflict with RXRs position. This situation could take a while (18 months) to work out, however the share price allows for that. If we do happen to get a strengthening USD and/or improved property prices then the upside is even bigger (or reverse).
Kristian
Disclosure: own RNY
How do you think about the re-leasing spreads and where rents end up in, say, 3-5 years from now? If I recall, they're coming off quite aggressively given relatively lower occupancy rates and what seems like a decent supply of existing stock (without new offices being built).
ReplyDeleteHi,
DeleteRents (psqf) are holding up okay. Yes you are correct - there is plenty of existing stock and it will take some time to soak up the existing supply. Getting vacancy down in the portfolio is the key task for management. You wouldn't pay anything close to NTA at the moment. It could easily be a few years before distributions re-start and we need to be heavily compensated for that.