Atlantic Realty Trust ATLRS W
May 23, 2001 - 4:27pm EST by
2001 2002
Price: 8.25 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 30 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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ATLRS, a shopping center REIT, is a liquidaton in progress. Net assets are $59.2 million, or $16.63 per share. The liquidation is awaiting the resolution of a dispute with the Internal Revenue Service. Upon resolution of the dispute, ATLRS is expect to promptly work towards completing the liquidation. ATLRS paid an annual $.86 dividend for the year 2000.

ATLRS is a REIT which is the result of a spinoff from RPS Realty Trust completed in May 10, 1996. Under the provisions of its Declaration of Trust, ATLRS was to continue for a period of 18 months from May 10, 1996, during which time it was to reduce cash and either (i) make a liquidating distribution to shareholders or (ii) agree to merge or combine with another real estate entity. The Trust has continued its business past the 18 month period because the tax issue relating to RPS assumed by the Trust has not yet been resolved. More detail on the tax issue will be provided below.

The assets of the Trust consist primarily of cash and one shopping center, the Hylan Shopping Center in Staten Island, NY. The Trust estimates the net realizable value of the shopping center at $38.5 million, or $10.80 per share, based on 3,561,553 shares outstanding. The Trust has cash and equivalents of $24.5 million ($6.90 per share) and other assets of $.8 million ($.24 per share). The only liabilities on the balance sheet are “estimated costs of liquidation” of $4.7 million, or $1.32 per share. As stated above, Net Assets per Share are $16.63. The company presents its financial statements using Liquidation Basis of Accounting. All data above is from the 10-Q for the quarter ended March 31, 2001.

The Hylan Center Shopping Center has 349,000 of leasable space and is approximately 99% leased. Tenants include K-Mart, Pathmark and Toys “R” Us.

Milton Cooper, the “dean” of the shopping center REIT industry, through KIMCO Realty, owns 19.3% of ATLRS. He has steadily increased his stake in the Trust, as can be seen from his many 13-D filings.

During the third quarter or 1994, ATLRS’s predecessor, RPS, held more than 25% of the value of its gross assets in overnight Treasury Bill Repos, which raised an issue with the IRS as to RPS’s REIT status. RPS attempted to obtain an agreement from the IRS clarifying that the issue would not impact RPSs status as a REIT. The IRS declined and initiated and audit of RPS's 1991-1995 income tax returns. RPS’s tax counsel at the time opined that RPS’s investment in the Treasury Bill Repos would not adverely affect its REIT status, although that opinion is not binding on the IRS.

ATLRS assumed all tax liability arising out of the RPS tax issue pursuant to a tax agreement between the two entities. On March 1, 1999 the IRS revenue agent conducting the examination issued his report. In his report he set forth a number of positions which Special Counsel to the Trustees of the Trust believes are inconsistent and contrary to law. For example, the agent has proposed to disallow the deductions for bad debt and certain other items claimed by RPS in the years under examination. Yet in reaching his conclusion with respect to the the deduction for bad debts, the IRS agent has disregarded the fact that the values actually obtained for the assets corresponded to the values used by RPS in determining its bad debt deductions!

If the revenue agent’s positions were to be sustained, the Trust could be responsible for deficiency distributions by RPS of $16.5 million. Additionally, the Trust could be subject to taxes, interest and penalties of up to $31.8 million. My discussions with ATLRS management lead me to believe the likelihood of the Trust being responsible for amounts anywhere near these numbers is extremely low. The issuance of the revenue agent’s report is only the first step in the IRS administrative process. The revenue agent’s determination is subject to administrative appeal with the IRS and, thereafter, to judicial review.

The Trust has filed an administrative appeal with the IRS challenging the findings of the revenue agent. The appellate conferee to whom the appeal was assigned has returned the case to the revenue agent for further factual development. In other words, the appellate body has told the revenue agent to get his facts straight! The revenue agent has requested information as directed by the appellate conferee, and although much of the information was previously examined by the agent, the Trust has responded to the new request. At this point, the revenue agent is expected to send his revised report back to the appellate conferee in the 30 days, and the Trust anticipates meeting with the appellate conferee and getting more clarity on where things stand this summer.

In conversations with the management of the Trust, it is clear, at least to me, that the revenue agent is borderline incompetent and has a weak basis for his findings. The sense the Trust got in its meetings with the appellate conferee were that the appellate conferee didn’t feel the revenue agent had a compelling case. While ATLRS management expresses confidence in eventually winning the dispute (as backed up by the opinion of two separate law firms), it is possible that ATLRS “settles” with the IRS for the sake of expediency. I anticipate that if a settlement were to occur, ATLRS might be willing to make a payment in the neighborhood of $5 million to bring things to closure. Using a $5 million settlement figure, the Trust would be able to distribute approximately $15.23 per ATLRS share. In the meantime, the Trust’s considerable cash holdings continue to earn interest, and its shopping center property experiences increases in rents as leases are renewed as higher rental rates. All in all, a safe, low beta investment with a clear event (victory or settlement with the IRS).


ATLRS was formed to liquidate certain assets of its former parent, RPS. The liquidation has been delayed due to tax issues relating to RPS, for which ATLRS is responsible per the parties’ tax agreement. The IRS revenue agent examing the case has reached conclusions inconsistent and contrary to law. I expect ATLRS to be victorious on appeal, in which case net assets with a present value of $16.63 can eventually be liquidated and distributed to shareholders, or alternatively, I expect ATLRS to settle with the IRS and distribute at least $15.23 per share to shareholders on a more expedited basis.
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