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Sunday, 06/17/2018 10:20:53 AM

Sunday, June 17, 2018 10:20:53 AM

Post# of 79
Micro Caps: It's All About Where You Look (6/16/18)

SA: I noticed you're following New York REIT (NYRT). This was a very popular special situation trade a couple years ago, but a lot of the air came out of it. What's the updated case for the company?

SIV: New York REIT is one that has been a disappointment for many special situation investors. The liquidation estimate for the company has come down a number of times, as they haven’t been able to sell the properties for the prices they originally estimated. That is at least partially due to increases in cap rates for NYC real estate.

However, the situation has gotten much simpler as of late, and there are a number of catalysts for a future increase in value. The current liquidation estimate is $25.09 compared to a share price of $17.80. That liquidation estimate doesn’t include the fact that they will be able to avoid New York City transfer tax by holding their biggest asset longer, and any potential upside from the already allocated funds to be spent on repositioning the building. This money could be spent either on capital improvements or on incentives for lease extensions/renewals, and either should improve the building’s value.

I also always like to ask why a stock is trading below intrinsic value. While I’m not a believer in the efficient market theory, the market is usually pretty smart. In this case, I think there are two primary reasons why the market is undervaluing the firm. The first is that this was a very popular trade that burned a significant amount of special situation investors. Special situation funds are run by people, and once a manager has sold a position at a loss I think they’re much less likely to re-enter.

It can be hard to defend losing money on the same idea twice to investors, which creates the potential for career risk. The second is that the company will form a liquidating trust, and will no longer trade. That means there will be no liquidity or ability to mark a position to market. That is both a risk and a hassle for fund owners, further reducing the number of potential investors in the name.

"Someone said it takes 30 years to be an instant success" - Gabriel Barbier-Mueller, CEO of Harwood International