Mea Culpa: RNY Take 2
I made a mistake in my analysis of RNY Property Trust (ASX: RNY). You can find out more about that in my original post. Fortunately, the error occurred halfway through (after the bulk of the original analysis was done) and only the conclusions that I drew from my analysis were affected. I.e., I could cut out the last half of my investment thesis and return to the original data to redraw my conclusions. That is what I have been doing the past few days.
Let me reiterate here that I am bound by the rules I set myself in my disclaimer to hold all companies for 1 month from the date I bought them, except in the event of company fraud or a serious event (e.g. medical emergency). So regardless of what I decide, I will be holding RNY for at least one month, until 7 May 2017.
Here are my current thoughts on RNY Property Trust.
This is the investment thesis in a nutshell. The properties, once sold and used to repay loans, will generate ‘equity’ for the Trust that is greater than the value of the loans. The equity left over, if any, will be distributed to unitholders after fees and costs are accounted for. Here is an overview of the loans and asset values:
Now, I’ve actually written this post twice. I had a big post ready to go last weekend, nearly 2500 words long. It went through the investment line by line and addressed a variety of possible scenarios and their outcomes. It was very in depth and to be frank, it was a bit much. Even I got lost when I re-read it, as it basically forced me to relive the scenario inch by inch in order to (eventually) see what my conclusions were and why I formed them. For a blog that was constructed to record my investment theses in an accessible manner, that kind of defeated the point.
The end result is that I have decided to continue holding my RNY units. The short reason behind this is:
The last remaining ISB asset, Bridgeport, appears much higher quality than the 2nd last asset (now sold) 300 Executive Drive, which required a 17% discount to sell. Bridgeport could sell for up to a 10% discount and still generate ~$1m leftover equity after fees and costs. That is not part of my base case but it is part of the potential upside.
One asset, Charles Lindbergh, has grown in value over TTM and recently saw major tenant Lockheed re-sign and expand its lease. I consider this property’s value to be ‘firm’, i.e., at least equal to its recent valuation.
At least one more asset, 6900 Jericho, should achieve close to its valued price as it has minimal renewals coming up and a good level of occupancy. That leaves 3 other assets.
These assets are in varying conditions but management has done a good job attracting renewals to account for tenant expiries, and I consider that my previous worst case scenario (no tenant renewals) is unlikely to occur. More importantly, another asset, 555 White Plains Road is on the same stretch of road as the held-for-sale 560 and 580 White Plains road. 555 White Plains sold for a 32% discount to its recently assessed value, but it had woeful occupancy and WALE. The other assets are better and, I consider, will require a smaller discount to sell.
Thus this gives me a vague ‘floor’ on 4 of the ACORE assets, with the remaining one, 6800 Jericho, an open question.
There is additional potential upside (well actually, lower downside) if management can secure more leases in the coming months, with significant progress made on this front in the first 2 months of the year.
The bottom line:
The obvious worst case scenario is a 100% loss, if properties fail to sell for enough $$ to pay off the loans and leave money leftover. I do not believe this is likely. I consider a likely downside scenario resulting in a 30%-40% loss if larger discounts are required than I expect, or if I’m wrong about some asset values like Charles Lindbergh.
A ‘safe’ estimate of upside is, in my opinion, around 50% (post fees, and excluding Bridgeport) with the potential of up to 300% or so (pre fees but including all assets sold at full value). Based on my research I believe the upside result is more likely than the downside, with an outside chance at the really good upside scenario. I have decided to stick with my RNY shares for the time being. The thesis should play out relatively quickly, within a year or so, as management intends to market the properties soon with a view to settling in Q4 CY17.
One final note:
I have been working long hours this month, around 2x my normal workload. This contributed to fuzzy thinking and fatigue that were a direct cause of the errors carried through in my first RNY thesis. It is entirely possible that there are more errors in the above, despite my best efforts. For readers I say again, this is not a recommendation, just my own record of the thought process I followed. If you’re looking at RNY, please do your own research, and also take the time to read my disclaimer.
Disclosure: I hold shares in RNY Property Trust.