The Real Deal New York

New York REIT: A tumultuous 20 months

SL Green’s impending takeover of NYC-focused REIT would cap hectic period

December 09, 2015 09:02AM
By Rey Mashayekhi

Marc_Holliday copy

From left: Marc Holliday, Nicholas Schorsch and Michael Happel

At the Schack Institute’s REIT symposium last year, Nicholas Schorsch was the man of the moment. Not only did his panel draw big crowds, but many of his fellow speakers touted his remarkable New York acquisition spree — over $1.7 billion worth of properties in 2013 alone through his firm, New York REIT.

Just a few months later, however, Schorsch’s empire began to crumble. An accounting scandal at the Schorsch-led American Realty Capital Properties unsettled investors and caused share prices at New York REIT, as well as other Schorsch-affiliated companies, to take a hit.

The scandal prompted a quick turn of events for New York REIT, with high-profile activist investors questioning the company’s leadership and demanding changes. The company, which went public in April 2014 and is now led by CEO Michael Happel, did try several things, though they didn’t bear fruit.

A proposed $150 million share buyback plan was never carried out, while the appointment of Apollo Global Management co-founder Marc Rowan to New York REIT’s board — an attempt to stabilize and see through a entity-level sale of the company, according to sources — came to an abrupt end after Apollo’s $378 million deal to acquire AR Capital fell through.

Worldwide Plaza

Worldwide Plaza

Despite a portfolio valued at roughly $3 billion – including the 49-story One Worldwide Plaza office tower in Midtown, which the company holds a purchase option to acquire outright from its partners in 2017 – New York REIT’s market capitalization stood at just under $1.9 billion as of last month, with the company’s shares trading at a 13.5 percent discount to its net asset value, according to Evercore ISI, an investment banking advisory.

But there is hope among investors that an impending takeover by SL Green Realty, the city’s largest office landlord, would stabilize and bring new direction to a company that controls a 23-building portfolio spanning around 3.4 million square feet.

The transaction could also hold good value for the Marc Holliday-led SL Green, with the publicly-traded REIT sector widely reported to be trading at a discount to what investors would pay for their individual, high-priced real estate assets.

“I’ve only read the reports [about the SL Green deal], like everyone else,” Michael Ashner, CEO of Boston-based First Winthrop Corp., told The Real Deal. First Winthrop, alongside the development firm Witkoff, offered to become New York REIT’s external advisor in an open letter published earlier this year.

“I’m hopeful that there’ll be some clarity or resolution shortly,” Ashner added, saying he would “absolutely” support SL Green’s acquisition of New York REIT. He pointed to the company’s “awful” governance — including executives and directors who also work for other AR Capital-affiliated entities — as the key factor behind its struggles.

As investors wait for more details about the SL Green deal, TRD put together a timeline of key happenings at New York REIT since it went public in April 2014. It’s only been 20 months, but there’s been enough drama to last a lifetime.

April 2014

New York REIT, led by American Realty Capital CEO Nicholas Schorsch, lists on the New York Stock Exchange. Since it was founded in 2010, the company spent more than $2.7 billion on New York City properties, mostly in Manhattan. This includes the $529 million acquisition of 1440 Broadway in Midtown.

October 2014

Anthony Malkin’s Empire State Realty Trust is reportedly among several prospective buyers in talks to acquire New York REIT, which had hired Realty Capital Securities and Barclays Capital to advise on “strategic options to enhance long-term shareholder value.” At the time, New York REIT is valued at $1.75 billion, the Wall Street Journal reports.

December 2014

Nicholas Schorsch

Nicholas Schorsch

In wake of an accounting scandal at American Realty Capital Properties, Schorsch steps down from the board of that company and 13 others affiliated with AR Capital – including New York REIT. Happel, previously president, becomes New York REIT’s CEO.

May/June 2015

New York REIT ceases the process, led by RCS and Barclays, exploring a possible sale of the company. “We felt none of the proposals received reflected fair value,” Happel tells an audience at REIT Week in June.

Happel also addresses concerns regarding the company’s ties to AR Capital, noting, “It does feel like an accounting problem at a different company has wreaked havoc on my company.”

Meanwhile, two shareholders – investment management firm Sorin Capital Management and activist shareholder Gregory Cohen’s Rambleside Holdings – pen open letters to the New York REIT board expressing concerns over the company’s direction.

Sorin’s letter refers to “a continuing deterioration” of the company’s stock price, criticizes its decision to suspend the strategic alternatives process that could have resulted in a sale of the REIT, and recommends that the company “sever all ties” with AR Capital, with which it holds a “close relationship”

Rambleside’s letter describes the company’s share price as “shocking” given its portfolio of Manhattan assets and proposes a sale of Worldwide Plaza – noting that it saw “no reason this asset could not fetch $2.5 billion” in the present market.

In addition, Michael Ashner’s First Winthrop and Steve Witkoff’s eponymous firm write an open letter to New York REIT outlining an offer “to be engaged as NYRT’s external advisor.” The offer is rebuffed by the REIT, which says it is “not in the best interests” of the company.

New York REIT responds to the shareholder concerns by announcing a $150 million share buyback initiative and tapping Cushman & Wakefield and HFF to market five “non-core assets” in the outer boroughs.

It also announces that AR Capital co-founder William Kahane has stepped down as chairman of New York REIT’s Board, though Kahane will continue to serve as a director.

August 2015

Leon Black

Leon Black

Private equity giant Apollo Global Management announces it has agreed to acquire AR Capital’s asset management business for $378 million. The deal would include AR Capital’s sponsorship of New York REIT.

In New York REIT’s second-quarter earnings call, Happel says the Apollo deal is “extremely positive” for New York REIT and will bring “incredible resources” to the company. He adds the “non-core” asset sale initiative will bring the company between $120 million and $130 million in gross proceeds, while adding that New York REIT has yet to initiate the planned $150 million share buyback.

September 2015

New York REIT kicks off its “non-core asset” disposals with the $38 million sale of a 16-story rental building in Clinton Hill.

Jonathan Litt, of hedge fund Land and Buildings Investment Management, becomes the latest activist shareholder to question the company’s share performance and calls on the company to replace half its board with new independent directors. He notes that all four members of New York REIT’s board “are employed by [AR Capital} and/or are currently serving on other boards of entities advised by AR Capital.”

October 2015

Marc Rowan

Marc Rowan

New York REIT appoints Apollo co-founder and real estate investor Marc Rowan to its board of directors. The company also taps Eastdil Secured to advise on “potential strategic transactions” that could include an entity-level sale of the company.

November 2015

In the company’s third-quarter earnings call, Happel says he would “fully support” an entity-level sale of New York REIT, should such a deal come to pass.

After Apollo’s acquisition of AR Capital falls through, Rowan steps down from New York REIT’s board.

December 2015

SL Green is close to finalizing a deal to acquire New York REIT, according to Bloomberg. It remains unclear how much SL Green is paying for the firm, though it’s likely it will trade at a steep discount relative to its sizable portfolio.

New York REIT announces that, in light of its “strategic review process” led by Eastdil, the company is pushing back its annual shareholders meeting from June 2016 to October 2016 “to allow it to focus all of its attention on the process.”