Description

Banyan is a REIT that is currently in liquidation. Recent press releases have projected total liquidating dividends of “approximately” $6.00 per share with an initial $4.75 initial dividend that was paid on June 28, 2001 leaving an estimated $1.25 per share for the remaining stub. I believe that this estimate is conservative and there are a number of potential events that could increase the payout by as much as an additional $0.34 per share. At $1.00 with a $.004 commission cost per share my estimated IRR is as follows: 30% using a $1.25 estimated final payout; 38% using a $1.31 payout; 55% using a $1.46 payout and, 68% using a $1.59 payout. I have assigned the respective probabilities for said payouts: 10%, 60%, 25% and 5%. The weighted average result is an expected payout of $1.35 per share yielding an IRR of 42%.

The History:

On May 17, 2001 Denholtz Associates closed on the purchase of 24 of 27 properties owned by Banyan. The original purchase price was $226 million for all 27 properties with Denholtz picking up all assumption and pre-payment fees. Subsequent negotiations resulted in a $2 million reduction in the selling price plus an additional $200,000 closing adjustment in Denholtz’s favor. Based on the original sales price Banyan estimated total liquidating dividends to be $6.20 per share. The above adjustments, which amount to $0.14 per share, should have changed their estimate to $6.06 per share. Management has confirmed that there have been no other known costs or fees that would offset their original estimate of $6.20 per share. By using conservative approximations, Banyan’s recent press releases have underestimated the total expected distributions by $0.06.

Three properties remain to be sold for an aggregate price of $38,750,000. Denholtz is to purchase the University Square Business Center for $10,300,000 on December 19, 2001. This closing was delayed due to an onerous yield maintenance provision in the existing mortgage that expires on December 18, 2001. The premises are 93% occupied and can be easily financed. There is no reason why this deal should not close.

Banyan has a “put” option whereby Denholtz shall be obligated to purchase, within 90 days of written notice, the Riverport (Louisville, KY) and Northlake (Atlanta, GA) properties for $7 million and $21.450 million respectively. Said notice must be given no later than January 9, 2002. Banyan has negotiated to retain the right to sell these two assets to other investors.

Based on conversations I have had with real estate professionals who are familiar with these properties I believe this “put” has value. However, both properties have particular issues that need to be resolved in order to significantly increase the net proceeds from a sale. I believe that management was very prudent when they negotiated this opportunity to create value for shareholders.

The Riverport property is a 322,000 square foot industrial building in Louisville, KY. It is 55% occupied. The other 45% was occupied until July 31, 2000. The property was purchased for $9,945,000 in November 1996. It is on 50 acres, has expansion potential for an additional 300,000 to 350,000 square feet, twenty-eight foot clear roof height and favorable municipal bond financing. A condition of the municipal bond financing waives property taxes until December 1, 2014, or until the financing is repaid. Banyan was marketing the vacant space at $2.85 to $2.90 per square foot NNN (RE taxes are zero) until a few weeks ago when they aggressively lowered the asking rent to $2.50 per square foot. This action clearly demonstrates their focus on being pro-active. The Louisville industrial market is tough as a number of REITS who built speculatively are sitting with vacant buildings. The asking rents for new properties are $3.35 to $3.50/SF NNN without any tax breaks. The Riverport facility seems like an attractively priced alternative. I am familiar with a comp that is within a mile of Banyan’s property and is of similar age (slightly newer and more modern - 1993 vs. 1985). Grubb and Ellis are marketing the comp, which is 328,000 square feet on 28 acres, for $9,600,000 ($29.00 per square foot).

The ideal purchaser for the Riverport property is an owner/user. They will pay more than an investor. The next best scenario is to lease the space and sell to an investor. Cohen Financial, who assisted Banyan with the sale of their portfolio, implied that they will likely start marketing the property for sale sometime in August or September for approximately $8.5 million. The property should reasonably sell at a 10 % cap rate considering the below market financing, tax break and expansion potential. Denholtz’s “put” price equates to $21.75 per square foot or an implied NNN rent of $2.175. I estimate that Banyan will net between zero and $0.09 per share by selling the property for as much as $1.5 million more than the “put” price.

The Northlake property was the only retail property in Banyan’s portfolio. The premises is 321,600 SF and 98% occupied. It is likely, however, that a 27,000 SF tenant, AMC Entertainment, will go dark (I believe the AMC lease runs for 2 to 3 more years). Rightfully, Denholtz has negotiated a price for this center that compensates for this uncertainty. Therefore, Banyan’s current focus is to release the AMC space to another theater. Cohen Financial and Larry Schafran, the Interim President, both mentioned that some Atlanta based theater operators have expressed interest in the space but there are no definite deals on the table yet. If Banyan can successfully resolve this issue the property will be more marketable and more valuable. I estimate the increase per share will be in the range of zero to $0.08 by selling the property for as much as $1.250 million more than the “put” price.

As additional safety on the downside, Denholtz has $1 million ($0.065 per share) in escrow that will be forfeited if they do not close on any of the three remaining properties.

Finally, the fore mentioned liquidation estimates include an off balance sheet reserve for $1.8 million for outstanding litigation between Banyan and its ex-president/CEO. Said amount is referred to as “the maximum potential liability”. If Banyan’s claims are true, the terms of the employment contract clearly support their case. Depending on the eventual outcome of this litigation, the payout could be increased from zero to $0.11 per share.

Assuming cash payments are made within 45 days of any closing (management has stated that “interim liquidating dividends will be distributed as …items are addressed and resolved”), I anticipate proceeds in the amount of $.30 from University Square to be distributed in 6 months, $0.73 from the sale of the other properties in 9 months and a final distribution of $0.32 in 16 months. I am using my best judgment for these estimates and may be off on any specific call, however, there is so much potential value in the Banyan stub that it is extremely hard for me to conceive of any scenario that will not produce satisfactory results.

I have assumed the worse case scenario to be selling the properties at the “put” price. I believe this to be conservative because of the $0.065/share deposit and the potential of winning or favorably settling the lawsuit. For another perspective consider that in order to lose money on this investment Banyan would have to be defeated in the lawsuit and sell the Riverport and Northlake properties for 17 % less than the “put” prices. Considering the asset class, that seems drastic to me. All things considered, the risk/reward profile is very favorable.

Post dividend selling pressure has helped keep the stub price down. During the past 25 days 1,555,100 shares traded between $0.98 and $1.03. The 20 prior days 362,100 shares traded (pre-dividend). I have had success accumulating a position patiently sitting on the bid.

My analysis has relied on discussions with management, various real estate brokers, company press releases and reverse engineering financial statements in an attempt to reconcile the same with press releases. I have done my best to fill in the blanks. The next 10-Q and/or future press releases will likely make the situation much more transparent.

Catalyst

Liquidation