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New York City REIT Lists on the Market -- Should You Invest?

[Updated: Mar 03, 2021 ] Aug 26, 2020 by Matthew DiLallo
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Earlier this month, New York City REIT (NYSE: NYC) made the transition from a non-traded REIT to a publicly traded entity by listing on the New York Stock Exchange. That move opened it up to all investors who have a brokerage account.

However, while all investors can now buy shares of the REIT, that doesn't mean they should rush out to add it to their portfolio. Here's a look at the pros and cons of this recently listed REIT.

The buy thesis for New York City REIT

As the name suggests, New York City REIT owns a portfolio of real estate in the New York City metro area. It currently owns eight mixed-use office and retail condominium buildings with 1.2 million square feet of leasable space. Seven of those properties are in Manhattan, while the eighth is in Brooklyn. It has leased the majority of its space to investment-grade tenants.

The REIT's portfolio has held up relatively well this year. It collected 85% of the rent it billed during the second quarter and is working to collect the remaining rent from its tenants. The company has already reached or is negotiating deferral agreements to collect another 14% of the rent it billed during the quarter.

New York City REIT also has a solid balance sheet. It has a low leverage ratio and no debt maturities through 2023. That gives it the financial flexibility to continue making acquisitions, which have allowed it to rapidly grow its lease revenue over the past few years. Meanwhile, by listing on a major stock exchange, the REIT will have an easier time raising capital from investors by completing secondary stock offerings, giving it even more funding flexibility. As long as it can find good deals, the REIT could grow its FFO and dividend at an above-average rate.

The case against buying New York City REIT

One of the concerns with New York City REIT is its small size. Its 1.2 million square foot portfolio is tiny compared to its publicly traded peers. For example, fellow New York City-focused REITs Empire State Realty Trust (NYSE: ESRT) and Vornado Realty Trust (NYSE: VNO) own 10.2 million and 32.7 million square feet of leasable space, respectively. That greater scale provides them with lots of advantages, such as better property diversification, more exposure to potential tenants, and the ability to spread costs over a larger portfolio.

Another issue facing New York City REIT is the headwinds in the New York City market, which was hit hard by COVID-19. The pandemic forced many office tenants to shift their employees to work from home. That's giving them the freedom to move to cheaper areas outside the city. While this exodus might be temporary, there's growing concern that a long-term work-from-home trend could impact demand for office space in the city. Similarly, retailers in New York are under pressure because of the impact of COVID-19 on leisure and business travel to the region. While these issues will affect all New York City-focused REITs, it could have a greater effect on NYC REIT's smaller portfolio.

Finally, while New York City REIT has been operating for years as a private company, it's new to the public markets. On the one hand, that opens it up to new investors. However, it also makes it easier for existing investors to unload their shares, which seems to be the case as the stock has tumbled 25% since its initial listing earlier this month. One thing worth noting is that the REIT only listed 25% of its available shares so far and plans to list the remaining amount in 25% blocks over the next year. As more shares trade freely, it could cause additional selling pressure as existing investors monetize their holdings.

Seems too early to buy

New York City REIT owns a high-quality real estate portfolio focused on its namesake city. It also has the funding flexibility to continue expanding its asset base, which could enable it to grow its FFO and dividend at an above-average pace.

However, given its smaller size, it lacks the scale of its larger regional rivals, which is a concern given the City's headwinds. Add that to its newness to the public markets, and it's not an attractive buy right now, though it's a name REIT investors might want to add to their watchlist.

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