In the video above, Steve Johnson and Greg Hoffman discuss RNY Property Trust (RNY), which Forager’s Australian Shares Fund first invested in during 2010. Bristlemouth readers might remember that this suburban office landlord, currently Forager’s largest investment, was severely hamstrung by the global financial crisis. It was overleveraged and faced a battle to refinance big chunks of expiring debt.
Though it was battered, we knew that even if a few properties were repossessed by lenders, RNY’s other assets were worth far more than its unit price. That’s proved to be a good call. Not only has the unit price since doubled, but RNY’s net asset value, aided by a stronger US dollar, has done the same, climbing from a low of $0.28 per unit in 2011 to around $0.63 at today’s exchange rate. That’s been an unexpected bonus.
However, the process to realise value has also dragged out. Activity in the New York suburban market remains slow with very few properties changing hands. Occupancy has declined from greater than 90% to less than 80% as management has struggled to retain tenants and replace those who leave.
That’s partly because the economic recovery has been slow to spread to smaller businesses. But there’s also been a shift in demand away from suburban office parks in favour of downtown office space that is close to public transport (living in New York City and “reverse commuting” to the suburbs has become increasingly popular apparently).
That mean’s RNY produces no free cash and investors aren’t being paid to wait. So is it time to take our gains and move on? Or press management to sell the properties and wind-up the trust?
We don’t think so. For starters, at today’s unit price there’s a 130% return available for an investor who can realise RNY’s net asset value. Of course there’s no guarantee the assets will actually be realised for net asset value, but that’s a nice attractive gap. Secondly, to get the best sale price, an orderly process is essential. If the properties are taken to market too quickly, with poor occupancy, too many imminent lease expirations, or without clean financing, they won’t attract a good price.
So we wait. It requires patience, but that’s what long-term investing is all about—delaying gratification today for better rewards tomorrow. In the meantime, management has plenty to do. RNY is starved of the cash it needs to invest to attract tenants. A couple of assets could be sold in the next six months, and one tranche of debt expires in January. It’s likely that more money when this facility is refinanced, which will release much needed cash.
There’s no telling the exact finish date for Forager’s investment in RNY. Most of the remaining debt expires in 2017, so it’s not likely to be earlier than that. But in the next six months we’re likely to see the first steps of the end-game.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.