April 15 (Bloomberg) -- A New York landlord led by Nicholas Schorsch became the first publicly traded real estate company focused solely on the city with its listing on the New York Stock Exchange today.
New York REIT Inc. has bought properties valued at about $2.7 billion, mostly in Manhattan, since 2010, when it began as a nonlisted real estate investment trust sponsored by Schorsch’s AR Capital. Schorsch is the biggest fundraiser in the nontraded REIT industry. About $350 million in purchases are planned for this year as the company expands its holdings, which include a stake in Worldwide Plaza, a 49-story office tower on Eighth Avenue in Midtown. The shares began trading at $10.70 and closed at $10.75.
New York REIT, formerly American Realty Capital New York Recovery REIT Inc., started buying property during the earliest stages of the city’s comeback from the financial crisis. Since then, investor demand in Manhattan, perceived as one of the world’s safest real estate markets, has pushed up values of commercial buildings, which have recouped most of their value lost in the crash.
“There should be some nice locked-up gains in those properties,” said Dan Fasulo, a managing director at New York-based research firm Real Capital Analytics Inc. The REIT was “able to pick up some properties in some pretty hot submarkets in Manhattan just before things took off.”
In the first quarter, Manhattan office prices averaged $696 a square foot, up from $314 a square foot in the second quarter of 2010, when New York REIT began operations, according to Real Capital. In the same period, the average capitalization rate, a measure of yield for real estate investors, dropped to 4.4 percent from 6.6 percent. A cap rate, derived by dividing a property’s net operating income by its purchase price, falls as prices rise.
New York REIT focuses on owning high-quality office and retail properties that are 80 percent or more occupied at the time of purchase, according to its annual report.
The company has an option to buy the rest of Worldwide Plaza and is seeking more retail real estate, office buildings that have space for stores, and parking garages, according to Schorsch, who is chairman and chief executive officer. The REIT won’t be competing with investors including sovereign-wealth funds for Manhattan’s most sought-after skyscrapers, he said.
“We’re not trying to buy trophy buildings on Park Avenue,” Schorsch said in an interview. “There’s no money in that.”
While other public REITs are heavily invested in New York, Schorsch’s company is the only one that exclusively owns buildings in the city. Ninety-six percent of its 3.1 million square feet (288,000 square meters) of real estate is in Manhattan and the rest is in Brooklyn and Queens, according to a March 31 regulatory filing.
The beginning of share trading is “one of the most unusual deals because there’s only been three New York-centric REITs ever listed,” Schorsch said, referring to SL Green Realty Corp. and Empire State Realty Trust Inc., which both own buildings outside the city. “There’s plenty of room in every market for three top players.”
The companies have outperformed the broader U.S. REIT market. Empire State Realty, owner of Manhattan’s iconic Empire State Building, climbed 14 percent since its initial public offering in October 2013. SL Green rose 13 percent in the same period, compared with a 6.7 percent advance for the 141-company Bloomberg REIT Index.
Among New York REIT’s $1.8 billion of deals last year was the purchase in December of 1440 Broadway, a 25-story office building near Times Square, for $528.6 million.
In October, it bought a 49 percent stake in Worldwide Plaza for $220 million in a transaction that gave the REIT an option to acquire the remaining share in three years. The 1.8 million-square-foot tower, between West 49th and West 50th streets, is about 91 percent leased to tenants such as Nomura Holding America Inc. and law firm Cravath Swaine & Moore LLP.
New York REIT has overvalued its portfolio, given the location and age of the properties, according to Ian Goltra, a money manager at Forward Management LLC in San Francisco. Investors may have more success buying shares of other REITs that have buildings in New York, such as Boston Properties Inc. and Vornado Realty Trust, he said.
“The stock is fully priced where it trades today,” Goltra said in a telephone interview. “The upside in the New York market can be better captured in SL Green or Boston Properties or Vornado.”
Forward, which has more than $5 billion of assets under management, owns shares in those three companies and none in New York REIT, Goltra said.
New York REIT plans to boost income by increasing occupancies at its properties and raising rents where leases are below market rates, according to Schorsch.
“It’s an extraordinary time in the market,” he said. “We think there’s a lot of upside.”
Office rents in Manhattan are climbing as employment improves and growing technology and media companies seek more space. Landlords sought an average of $65.10 a square foot in the first quarter, up 8.6 percent from a year earlier, according to brokerage Studley Inc. The availability rate, a measure of empty space and offices scheduled to become vacant in the next 12 months, was 11.4 percent, down from 12.6 percent.
New York REIT, which will be listed under the symbol NYRT, has diversified in Manhattan by buying in submarkets that have good growth potential, said Woody Heller, an investment-sales broker at Studley, which arranged the purchase of an office building on West 38th Street for Schorsch’s company.
Among the landlord’s properties is 218 W. 18th St., an office building in midtown south, the area where demand from technology firms has helped tighten vacancies and push up rents. The 166,000-square-foot property is 84 percent occupied.
Buying real estate in New York isn’t without risk. Office-building values in Midtown fell 55 percent from the highs of the commercial-property boom to the bottom in 2009, according to an index by Newport Beach, California-based research firm Green Street Advisors Inc. The gauge has gained back most of those losses, coming within 9 percent of its 2007 peak last month.
REITs performed poorly in the real estate crash and recession, including those focused on New York. SL Green, the city’s largest office landlord, is trading 35 percent below its February 2007 peak of $156.10. The Bloomberg REIT index has lost about 20 percent since then.
Nontraded REITs, which mainly attract money from individual investors, have a finite life and eventually have to provide liquidity to shareholders. That can happen through a sale of the company or a stock-exchange listing.
American Realty Capital Healthcare Trust Inc., an owner of senior housing, medical-office buildings and hospitals, began trading on April 7 on the Nasdaq Global Select Market after starting out as a nonlisted REIT sponsored by AR Capital.
Schorsch is also chairman of American Realty Capital Properties Inc., which first sold shares to the public in September 2011 and had a stock-market value of $67 million at the end of that month. Through acquisitions, the company grew to become the biggest U.S. landlord of single-tenant buildings -- those leased to businesses such as drugstores and fast-food restaurants -- with a market value of $10 billion.
American Realty Capital Properties plans to spin off to shareholders its multitenant shopping center business, which will own 11.8 million square feet of properties initially. The new publicly traded company, American Realty Capital Centers Inc., will seek to expand through individual and portfolio purchases as well as mergers and acquisitions, according to David Kay, president of American Realty Capital Properties.
“There’s plenty of product out there,” Kay said in an interview. “You’ll continue to see us grow that portfolio at a pretty aggressive pace.”
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