AMRESCO Capital Trust AMCT
January 31, 2002 - 4:06pm EST by
ro17
2002 2003
Price: 1.36 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 14 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Background

AMCT is a liquidating mortgage REIT that may pay shareholders $1.71 per share within the next several months. The stock currently trades for $1.36, offering a 25.7% absolute return if the full value is realized.
AMRESCO Capital Trust ("AMCT") was originally formed to take advantage of mortgage investment opportunities generated by AMRESCO INC. At the time of the AMCT IPO, AMRESCO INC., through its subsidiary Holliday Fenoglio Fowler, was the largest commercial mortgage brokerage company in the United States.

AMRESCO INC. (NASDAQ: AMMBQ) is a commercial finance company that owns AMREIT Holdings, which manages AMCT. AMRESCO INC. has been delisted from the NASDAQ and now operates in bankruptcy.

AMCT began operations on May 12, 1998. The company sold 10,000,011 common shares (9,000,000 to the public and 1,000,011 to AMREIT Holdings Inc., a wholly owned subsidiary of AMRESCO INC), raising $126.6 million. All of AMRESCO INC's ownership AMCT (1,500,111 shares) was sold to Farallon Capital Management, L.L.C. as of July 5, 2000.

Due to AMCT's poor stock price performance, it was unable to attract additional capital after the IPO, and the management felt that it was unable to compete effectively. Management decided it would be in the best interests of AMCT shareholders to liquidate the company. On March 29, 2000 AMCT's Board of Trust Managers approved the Plan of Liquidation and Dissolution, and shareholders approved the Plan on September 26, 2000. Liquidation basis accounting was adopted on September 26, 2000.

Liquidation History

Liquidation basis accounting requires that assets are stated at their estimated net realizable value, and liabilities are reported at their expected settlement amounts. Revenues and expenses are reported as changes in net assets in liquidation. During the nine months ended September 30, 2001, AMCT made distributions totaling $99.9 million, or $9.95 per share.

Net Assets in Liquidation

As of September 30,2001, AMCT's assets consist of one mortgage loan carried at an estimated net realizable value of $11.563 million (written down from an outstanding principal balance of $14.7 million), an investment in an unconsolidated subsidiary carried at an estimated net realizable value of $150,000, receivables and other assets of $217,000, and $6.15 million of cash and cash equivalents. All payments are current on the mortgage, and AMCT is actively trying to sell it to finalize its liquidation.

Total liabilities are $869,000, consisting of $123,000 of accounts payable and $746,000 due to the manager. Net assets in liquidation, calculated on 10,039,974 fully diluted shares outstanding, are $17.211 million or $1.71 per share.

The Mortgage Loan

The mortgage loan provides for an interest rate of 10% per annum and an accrual rate of 12% per annum, with the accrual amount due at maturity. The loan is a second lien and is subordinated to a $26.2 million first lien mortgage, with a floating interest rate, provided by an unaffiliated third party. AMCT's loan is scheduled to mature on March 31, 2002 and the first lien loan is scheduled to mature on March 30, 2002. The borrower has the option to extend both loans for one year if it notifies the lenders by March 1, 2002.

Both loans are to Collins Crossing, LTD, a Texas limited partnership, and are secured by a 301,000 square foot building on 1500 North Greenville Avenue in Richardson Texas -- an area known as "Telecom Corridor." The building is 99% rented. 80% is leased to Inet Technologies, Inc. (NASDAQ: INTI) and 19% leased to Macromedia, Inc. (NASDAQ: MACR).

Both tenants are current on their rent payments, and the building is Inet's headquarters. Inet and Macromedia are reasonably financially stable, and each seems to have the ability to remain current on their lease payments. Inet is a profitable company, has no debt, a market value of equity of $475 million, and $145 million in cash and cash equivalents as of September 30, 2001. Macromedia had negative free cash flow of $26.8 for the six months ended September 30, 2001. Macromedia has no debt, a market value of equity of $1.1 billion and $166 million in cash and short-term investments as of December 31, 2001.

The value of the property that secures the mortgage loans is worth more than the combined value of the two mortgage loans. Commercial real estate is currently selling for $150 - $175 a square foot for comparable buildings in Richardson. The 1500 North Greenville Avenue property is one of the signature properties in the area, with good road and highway access. A comparable "Telecom Corridor" building constructed in 2001 and leased by SBC Communications for ten years was sold for $160 per square foot in 2001.

This $150 - $175 per square foot range implies a current value for the 1500 North Greenville Avenue property of between $45.150 and $52.675 million. The first mortgage has a principal balance of $26.2 million. Accounting for AMCT's loan marked at $11.563 million, the first and second mortgages total $37.763 million.

AMCT's current market value of equity is $13.654 million compared to the current estimated net realizable value of $17.211 million in liquidation. $6.517 million of the current estimated net realizable value is cash, cash equivalents and high quality receivables. The current market value of equity implies a value of $7.137 million for the second lien mortgage loan. The combined value of the mortgage loans -- valuing the second mortgage loan at $7.137 million -- is $33.337 million, implying a value of $110.75 per square foot for the property.

If AMCT is unable to sell the mortgage loan, and the borrower exercises the extension option, then the assets of AMCT will be placed into a liquidation trust until the loan expires on March 31, 2003. At that time, if the borrower defaults on the loan, then the liquidation trust will take over the property, either alone or with the lender of the first mortgage loan, and attempt to sell the property.

Risks

Real estate values, which have plummeted generally in Richardson, and specifically in "Telecom Corridor," could continue to deteriorate.
If AMCT is unable to sell the mortgage loan, and the borrower exercises its option to extend the mortgage loan by one year, shareholders in AMCT will receive interests in a trust that will liquidate in 2003. If the borrower defaults on the loan, AMCT or the trust will have to fight to take over the property in Richardson Texas, and then work to monetize the investment. It is unclear how long this process could take, and how much capital would ultimately be returned to AMCT shareholders.
AMCT stock is also very illiquid.

Catalyst

AMCT sells its mortgage and finalizes the distribution of its net realizable assets.
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