|Shares Out. (in M):||43||P/E||0||0|
|Market Cap (in $M):||719||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Amerant Bancorp Inc. (“Amerant”) - September 6, 2019
Amerant Bancorp Inc. (“Amerant”) is a $719MM market cap southeast Florida focused bank that trades at 0.92x TBV, earns a normalized 10.4% adj. RoTE (8.2% adj. LTM RoTE) and trades at 8.8x adj. P/E (11.2x adj. LTM P/E) presenting 50-90% upside, inclusive of the RoTE, if it rerates to a peer regional bank multiple of 13.0x P/E and 100+% upside in an upside case of a sale to an acquirer at recent Florida regional bank acquisition multiples of ~1.80x TBV and ~22x P/E.
We believe that Amerant trades at a very low multiple of tangible book value and earnings, that Amerant’s asset portfolio is a simple, underwritable, and conservative book of commercial real estate (“CRE”) and commercial loans mostly in the Miami area, and that Amerant’s return on tangible equity (“RoTE”) will improve from current levels as it reduces overhead costs, redeems its expensive trust preferred securities (“TruPS”), redeploys its low-yielding foreign loans, securities portfolio, and excess capital, and normalizes its domestic deposit cost structure. The opportunity exists because of the market’s misunderstanding of Amerant’s exposure to Venezuela, the risk to earnings from a shift in funding mix, and the probability of success of Amerant’s strategic plan. Additionally, Amerant has been a forced seller of stock even at a discount to tangible book based on its obligation to repurchase shares from its former parent company, the Venezuelan bank Mercantil Servicios Financieros (“MSF”). The US bank Amerant IPO’ed on the Nasdaq in December 2018 after MSF distributed 80% of Amerant shares to its shareholders and retained 20% in August 2018. Amerant was forced to repurchase MSF’s remaining 20% stake by the Federal Reserve with proceeds from its IPO and a February 2019 private offering.
The primary investment risk is Amerant’s ability to economically replace the declining low- or non-interest-bearing deposits from Venezuelan nationals who are living in the US, have businesses in the US, or want to keep money outside of Venezuela. Venezuelan deposits were 74% of total deposits in 2013 and are 45% of deposits today. As the situation in Venezuela has deteriorated these deposits have been declining at a rate of ~13% YoY. The company has already proven its ability to replace Venezuelan deposits with US time and demand deposits and we believe it will continue to be able to do so. Eventually, even accounting for several years of declines in Venezuelan deposits, we believe that as the bank executes on its strategic plan and normalizes its RoTE it will trade in line with market multiples or in an upside case sell itself to an acquirer at an above-market multiple.
Business Overview and History
Amerant is a southeast Florida focused bank with a market cap of $719M, $7.9B in assets, 9.9% tangible common equity / tangible assets, and 12.1% CET1 Ratio that was founded in 1979 and 100% acquired by Mercantil Servicios Financieros (“MSF”), a Venezuelan bank, in 1987. At the time of the purchase, Amerant had ~$50M of assets and it has grown organically through a significant inflow of deposits from Venezuelan citizens. Today, Amerant operates 23 branches comprising 15 in South Florida and 8 in Houston, as well as loan production offices in Dallas and New York City. The company is headquartered in Coral Gables, Florida.
Given the recent turmoil in Venezuela, MSF put Amerant Bank (the US entity) into a Florida trust called the “Distribution Trust” in March 2018 and spun off 80% of its stake to shareholders in August 2018. Amerant IPO’ed in December 2018 to buy out the remaining 20% of MSF’s stake. Amerant has two share classes: Class A shares with 1 vote (AMTB) and Class B (AMTBB) shares with 0 votes. Both have the same economic interest and 67% of shares outstanding are Class A and 33% are Class B.
Amerant’s ownership has active and/or concentrated owners, including three Venezuelan families who own 27.7% of Amerant’s stock and a banks-focused private equity fund, Patriot Financial Partners, who owns 4.6% and has a board seat. These shareholders are likely to push for an aggressive implementation of the strategic plan outlined below and to potentially sell the business in the future to realize shareholder value.
Loan Book and Geographic Focus
Amerant’s loan book is predominantly commerical loans (87.9% of gross loans), which are composed of commercial real estate (51.4% of gross loans) and commercial and industrial loans (36.4% of gross loans). Within CRE loans, 35.5% are retail loans at ~60% LTV with most of the exposure to open air, central business district (“CBD”), infill, retail “lifestyle” centers with no big box / mall exposure. Overall, NPLs are very low at 0.31% of gross loans giving us comfort in addition to our macro and Amerant-specific diligence that the company are conservative lenders. Full detail of asset exposure and NPLs are below.
In terms of geographic focus, Amerant’s CRE book is 54.8% south Florida, 22.3% New York City, and 18.0% Houston. The company has a loan production office in New York City and has also recently opened a loan production office in Dallas to expand into that market.
High Quality Assets
The asset book at Amerant is simple and reasonably high quality and we are comfortable with the lending risk they take.
Amerant’s assets are mostly residential and commercial real estate loans in the greater Miami area. 51.4% of total assets are Commercial Real Estate (“CRE”) which is a higher concentration than many banks nationally. The four-year average loss rate at Amerant is 13bps vs. peers at 20bps and current NPLs as a percent of gross loans is 31bps vs. peers at 55bps. The LTVs of the loans which average ~60%, our third-party calls on Amerant’s underwriting standards, and our property-level review based on public lien data have led us to believe that risk is not high and underwriting standards are appropriate. Of the CRE loans, 35% are retail, 30% are multifamily, 15% are office, 11% are land and construction, 5% is hospitality, and 4% are industrial and warehouse. The retail exposure is all open air, CBD, infill, retail “lifestyle” centers with no big box / mall exposure. The multifamily is not luxury towers but all low apartment complexes or 1-4 unit rental properties. The relatively low exposure to land and construction and to hospitality, CRE areas which performed poorly in Miami in the 2008 real estate crisis, is positive for the asset risk.
Current Miami CRE prices look reasonable relative to rates implying that 65-70% LTV loans are not unduly risky. Miami cap rate spreads vs. 10-year treasuries do not look especially tight relative to history and pre-crisis lows, so we are not concerned that Miami is an especially over-valued CRE market. Obviously, the current lending environment is very benign: current Florida foreclosure actions of 11,440 (1Q19 annualized) are far below peak year 133,250 in 2009. The other markets to which Amerant lends, Houston and NYC, also look reasonable under the same historical cap rate spread analysis.