Why The Underfollowed New York REIT Has More Potential to Delight Investors

Source: Company

With a focus on New York real estate, New York REIT (NYSE: NYRT  ) is an attractive alternative to other, more highly diversified real estate investment trusts.

Benefiting from a low valuation on a P/B and P/AFFO basis thanks to its low public profile, New York REIT is an attractive investment candidate that offers investors a solid 4% dividend yield -- and potentially higher payouts down the line.

Real estate investment trusts don't necessarily have to be highly geographically diversified in order to make a compelling value proposition.

Contrary to many other large-cap REITs in the sector which pursue a strict diversification strategy, New York REIT (NYSE: NYRT  ) follows a succinctly different business plan: It solely concentrates on real estate investments in New York, arguably one of the most promising real estate markets in the United States.

Background
New York REIT is a relatively young REIT that had its public market debut just three months ago on April 15, 2014, and currently has a market capitalization of just below $2.0 billion. The REIT invests only in New York and within New York focuses on Manhattan real estate.

New York REIT has approximately 3 million square feet of real estate in its investment portfolio of which 96% are located in Manhattan. Compared to other REITs in the sector, New York REIT has the highest concentration of Manhattan-based real estate.

Source: New York REIT Investor Presentation 2014

Manhattan is certainly one of the hottest property markets in the country: Due to its top-notch location in New York City, the long-term supply/demand dynamics are certainly attractive.

Demand for Manhattan real estate as well as prices are very likely going to rise over the long-term thanks to the high-paying financial industry which is pretty much lifting up entire New York City.

Focus on office properties
Investors in New York REIT are essentially betting that New York office real estate will continue to do well.

Source: New York REIT Investor Presentation 2014

Since investors in office properties in Manhattan can demand top dollar, I think it is quite reasonable to expect New York REIT can trade at higher public market valuations than its more diversified peers.

Office real estate also reacts more sensitively to overall changes in economic activity as compared to residential real estate where demand usually is inelastic. As such, New York REIT is certainly a riskier selection in the REIT sector giving its strong exposure to potentially highly volatile real estate prices. This exposure could also lead to a more volatile share price of New York REIT in the years ahead.

Valuation
Due to its relatively short life in the public equity market, New York REIT flies largely under the radar.

Compared to other REITs with significant exposure to office real estate in the Northeastern United States, New York REIT trades comparatively cheaply at a 34% premium to book value whereas every other concentrated office real estate players in the peer group below fetch a materially higher valuation.

Empire State Realty Trust certainly takes the cake home with a P/B multiple of 4.15 and is closely followed by Vornado Realty Trust with a P/B ratio of 3.75.

New York REIT's low valuation is likely attributable to a low public profile and virtually non-existent sell-side coverage since the rest of the office REITs in the peer group also trade at materially higher P/B ratios.

Considering a variety of cash flow-based valuation metrics, New York REIT also does not have to shy away from a comparison against its peers. 

Above-average rental and NOI growth is certainly priced into the stocks of publicly traded, concentrated office REITs as evidenced by their high FFO and AFFO multiples.

New York REIT is the cheapest among its peers and trades at approximately 20 times AFFO based on a 2015 AFFO midpoint guidance of $0.54 per share.

Source: New York REIT Investor Presentation 2014

Dividends
New York REIT currently pays investors $0.0383 per share on a monthly basis which equates to a 4.22% dividend yield.

If Manhattan indeed turns out to be a solid net operating income driver over the next couple of quarters, investors will probably see dividend increases down the road and a yield approaching 5%.

The Foolish Bottom Line
Investors who like to get exposure to a Manhattan-focused office and retail player with attractive distribution prospects should consider New York REIT.

The real estate investment trust continues to fetch a relatively low valuation based based on book value and AFFO multiples while its long-term distribution prospects remain bright.

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