The big news this week that New York REIT had bowed to pressure from dissident shareholders and called off its proposed merger with DC-based The JBG Cos. is being viewed by analysts not as a finale but the beginning of another episode in the ongoing saga involving the beleagured REIT.

Few proposed mergers in the CRE space have met with such withering shareholder and analyst opposition as did this one from the start. The merger would have resulted in a New York City-Washington DC-focused REIT spanning over 14.5 million square feet of office, residential and retail properties with an estimated $8.4 billion enterprise value.

However, the transfer to a new REIT structure was not the outcome that many NY REIT shareholders had been pushing for months and they pressed the REIT’s management to liquidate the assets and distribute the proceeds.

WW Investors LLC, a major shareholder group that includes Michael L. Ashner and Steven Witkoff, New York real estate stars in their own rights, went public with their opposition saying the proposed merger failed to create meaningful long-term value for stockholders, and that the announced combination “would cause material and permanent destruction of NYRT stockholder value if consummated.”

In announcing the decision to call off the merger, NYRT Chairman Randolph C. Read acknowledged the hostile reception, saying, “We respect the views of our stockholders and are committed to acting in their best interest. The board is taking action to realize the value inherent in our business.”

NYRT’s stock price jumped in its biggest gain in three months following news on the merger termination.

Under the termination agreement, NYRT will pay JBG $9.5 million as reimbursement for certain costs.

That, as the REIT analysts at SunTrust Robinson Humphrey noted, is money that NYRT shareholders believe would not have to be spent if the merger had not been put forth.

Along with other grievances, the payout may spur NYRT shareholders to seek changes to the REIT’s board in October, the SunTrust analysts noted.

Leadership Changes Still Possible

“We believe NYRT’s history serves as a cautionary tale for external management structures, as well as this specific leadership umbrella,” the SunTrust Robinson Humphrey analysts wrote in an investor note. “Shareholders could still push for a more trusted board and management team to lead the liquidation. (However,) we suspect it is most likely that current leadership will not go quietly, as the advisor continues to collect roughly $12 million per year in asset management fees and would be entitled to disposition fees,” SunTrust analysts wrote.

Liqidate Piece by Piece, or Wholesale?

The new plan for NYRT now includes selling off individual assets with the net proceeds from any asset sales to be distributed to stockholders.

NYRT owns 22 properties totaling 3.4 million rentable square feet with occupancy of 95.2%. More than 80% of its holdings by square footage is office space. It paid more than $1.88 billion to acquire the properties.

NYRT said that in the last three months it had been talking with “a significant number” of potential buyers who were interested in acquiring individual properties, and that it now plans to reach back out to them.

The REIT also did not rule out accepting an offer for the whole portfolio. However, the piece-by-piece selloff can’t begin until shareholders approve a liquidation plan. Doing so will require replacing NYRT’s existing credit facility, which has $485 million outstanding and, according to analysts, includes covenants that prohibit this type of liquidation.

NYRT will also need capital to exercise its option to buy the remaining 51% interest in Worldwide Plaza, which is expected to require $270 million of additional capital that NYRT does not have, SunTrust analysts said. Worldwide Plaza is a 2 million-square-foot office high-rise in Manhattan.

JBG Could Spinoff into a Sequel

Matt Kelly, managing partner of JBG, said that while both parties believed that the JBG-NYRT combination represented a “clear path” to maximizing long-term value for NYRT stockholders, he acknowledged that NYRT investors made clear their preference to generate near-term cash through liquidation.

“Because we were unable to modify the transaction to the degree that would likely have gained shareholder approval, we decided it was more expedient to simply terminate the agreement rather than proceed with a shareholder vote,” Kelly commented in a statement announcing the termination. “Our agreement to terminate will now permit the NYRT board to proceed with the asset sale plan its shareholders desire and will enable JBG to return to investing through its private fund management business.”

JBG, a mixed-use specialist that invests almost exclusively in urban-infill, transit-oriented real estate, has made secret of its interest in entering the New York City market. It also was looking at options to raising capital in the public markets. It thought a merger with NYRT would accomplish both goals.

No one is counting the firm out from attaining either or both of those goals in the near future.

“We think (JBG) may continue to search for an avenue to enter the public market,” SunTrust said.