Nicholas Schorsch has been snapping up properties, including 367-369 Bleecker St. in New York.
Keith Bedford for The Wall Street Journal
For the past year,
one of the country’s most active real-estate investors, has been snapping up marquee New York commercial properties in the hope that Wall Street would bestow on them a rich valuation.
The early results are in, and investors seem to like what they see.
Shares of Mr. Schorsch’s latest real-estate investment trust, American Realty Capital New York REIT, listed Tuesday on the New York Stock Exchange and closed trading at $10.75 a share, rising close to 3.8% in the last hour of trading. Before Tuesday, the shares were valued at $10 each.
To be sure, New York REIT’s prelisting marketing materials say the 23 retail and office properties owned by the company are actually worth $12.47 a share. But it isn’t unusual for REITs to trade below their net asset values, especially new companies.
Mr. Schorsch previously said that it would be a “victory” if share prices traded at $10.75 the first day of listing.
In an interview after markets closed Tuesday, Mr. Schorsch said New York REIT was the “most successful listing” of any company he has taken public. “I had hoped that we would exceed the opening price of $10.70, and it did. That’s the definition of a good opening day for a stock.”
Keith Bedford for The Wall Street Journal
The pricing of New York REIT has been closely watched in the real-estate industry. Mr. Schorsch has built a large property-buying operation based on his ability to raise billions of dollars mostly from small mom-and-pop investors through companies known as nontraded real-estate investment trusts.
The nontraded REIT industry has attracted some critics as well as regulatory scrutiny over issues such as disclosure and high broker fees.
Mr. Schorsch has countered critics by pointing to the good returns that he has produced for many of his investors.
Nontraded REITs technically are public companies, but their shares aren’t listed on any stock exchanges; instead, they are sold directly to retail investors through a network of broker-dealers, typically by promising high dividends.
Over 100 nontraded REITs have raised over $100 billion since the industry got going in the early 1990s. But fundraising has intensified in the past few years as investors have looked for yield in a low-interest-rate environment.
Mr. Schorsch, who has developed 18 nontraded REITs in total, has been by far the biggest player in the industry. Last year, companies under his sponsorship raised $8.1 billion, about 41% of all the funds raised by nontraded REITs in 2013, according to Robert A. Stanger Co., a New Jersey investment bank.
But for the investments to work, at some point the nontraded REITs have to liquidate. They do this either by selling their properties, merging with another company, going public in an initial public offering or changing their nonlisted shares to listed shares, which is what Mr. Schorsch did Tuesday with New York REIT.
The goal of the companies is to value the shares in these so-called liquidity events at a high-enough price to produce a good return for the original investors in the nontraded REITs.
As a nontraded REIT, New York REIT raised funds between 2010 and 2013 from investors who paid $10 a share and have received 6% annual dividends. Its biggest transaction was its purchase of a 49% stake in Worldwide Plaza, a 50-story office tower in Midtown Manhattan. The deal valued the building at $1.3 billion.
Some analysts have questioned Mr. Schorsch’s valuation of the company’s assets, pointing out that 80% of the company’s assets were acquired in 2013.
Green Street Advisors, a real-estate stock research firm, estimates that Manhattan office property values have risen about 8% since then. “To accept American Realty Capital’s suggested net asset value, investors would have to believe that the assets New York Recovery REIT acquired in 2013 have since appreciated meaningfully in value,” says John Bejjani, an analyst with Green Street.
In conjunction with Tuesday’s listing, existing investors in the New York REIT also were offered a tender offer of $10.75 a share, up to $250 million, on a limited basis.
Bruce Cassidy, a retired pulmonologist who lives in Atlanta, started buying shares of the New York REIT at $10 around the end of last summer. He and his wife now own about 19,000 shares, and he said he doesn’t plan to sell them right away because he thinks the company’s value will rise in the coming months.
“I’m not a stock guru, but I think there’s room for the price to go up,” he said. “Sure, I’d love it to be at [$11.50], but looking at everything, I’ve already got a gain, and I do have some confidence that it’ll go a little higher. I’m certainly willing to wait 30 to 60 days.”
Write to Robbie Whelan at firstname.lastname@example.org