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No Bridge and Tunnel: This REIT is Manhattan Only
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No Bridge and Tunnel: This REIT is Manhattan Only


NY Residential REIT Lets Regular Investors Speculate on Manhattan Property


It’s no secret that prime Manhattan property is a favorite spot for the wealthy to park their cash. Now, a pair of enterprising real-estate executives have created a vehicle that offers a similar play for those with more modest checkbooks.

Jesse Stein and Janine Yorio have harnessed the often-unimaginative REIT structure to bet on some of the world’s most vibrant and coveted property. Their plan: NY Residential REIT (future ticker: NYCR) will raise up to $50 million, apply leverage, and potentially invest over $100 million into Manhattan residential property. As in a typical REIT, investors share in distributions from net rental income along with potential capital appreciation.

But this may not be a REIT designed for your grandmother. While REITs often provide generous dividends for retirees seeking a steady income product, NYCR probably won’t because Manhattan rents as a percentage of property value are about as low as they come. Manhattan’s capitalization rate (cap rate), a measure of income to asset value, averages 3.25{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} in prime locations compared with an average of 4.93{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} for prime locations across the country, according to Cushman & Wakefield. Cap rates in second- and third-tier locations can be several hundred basis points higher.   

So even though 90{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of NYCR’s taxable income will be paid to shareholders, it won’t amount to a great deal by REIT standards. The flipside, however, is that Manhattan cap rates tend to hold steady rather than track interest rates. Consider the relationship between the 10-year Treasury yield and Manhattan residential cap rates. Between 2007 and 2017, cap rates have actually had a negative 11{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} correlation with 10-Year Treasury yields, according to RegAResearch calculations using data from JLL Research.

That’s very important given expectations for rates to rise in coming years. If cap rates rise and income holds steady, valuations fall. While there’s certainly no guarantee against short-term valuation swings, steady cap rates should support the long-term appreciation trend in Manhattan real estate.

Indeed, recent softness in the Manhattan condominium market may not last long. Third-party data show that condominium prices in New York have risen very steadily over time, with the notable exception of the financial crisis, when prices fell but subsequently recouped those losses. NYCR argues that the market decline is due to an increase in supply and that it has expertise to help identify properties that will appreciate.

What’s NYCR’s competitive edge? While Mr. Stein and Ms. Yorio, CEO and President of NYCR respectively, haven’t closed such an IPO in the past, they have spent their entire careers in New York and executed on over $2 billion in real-estate transactions. They, along with an advisory board of three New York real estate experts, will bring institutional experience to a market that’s generally dominated by non-institutional buyers.

NYCR also has some unique advantages through its sponsor, Compound Asset Management, which controls the REIT’s manager. Compound relies on technology to improve the real-estate business model, utilizing extensive data to inform decisions. Compound also has financial backing from prominent venture-capital firms such as Founders Fund, an early investor in Facebook and Airbnb.

One of Compound’s potentially valuable assets is its rental platform formerly known as StayAWhile that specializes in medium-term rentals, similar to Airbnb but for months rather than days. If Compound has success with that model, it could generate significantly higher rental income than one-year leases tend to command. The manager also charges an annual fee of 50 basis points, lower than most REITs.

One hangup for investors may be that NYCR doesn’t yet own any properties, leaving some degree of uncertainty about what it will eventually own. But at least for now, time has been on NYCR’s side, with New York residential prices falling again in the first quarter. And other specialized REIT IPOs such as Innovative Industrial Properties (ticker: IIPR) have been successful with similar models. IIPR, which owns industrial warehouses for cannabis farming, priced at $20 per share in December 2016 and now trades above $33 a share.

In the current trading environment, it’s understandable for investors to be wary of Reg A companies that rush into a public listing. Companies that have listed with small floats of shares available to trade have seen low trading volumes and price declines. But NYCR is actually in no hurry. The company doesn’t plan to list until it raises a full $50 million, which could take some time. But given its focus on long-term capital appreciation and the benefits of a healthy trading float, investors should be rewarded for the wait.

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