Description

DuArt Film Laboratories, Inc (DAFL) is an illiquid micro-cap stock that almost never trades. Needless to say, this is a PA idea. There are 152,797 shares of DAFL outstanding, which at the recent quote of $170/share makes for a $25.9mm market cap.

Among other assets, DuArt owns a 61,828 sq. ft. building sitting on a 6,025 sq. ft. parcel of land. How much is this building worth? “Well, where is this building?”. As they say in real estate, “location, location, location”. William Safire explored the origin of this eternal truth in a New York Times Magazine article and apparently it first appeared in print in a 1926 Chicago Tribune real estate classified ad. Incidentally, 1926 was a full four years after DAFL was incorporated in New York.

DAFL’s building is located at 245 W 55th St in Manhattan between 8th and Broadway (New York block 1027, lot 7). The DuArt Realty Corporation purchased the land and building from a Mr. Stanley Stern in 1970 for an unknown amount of cash (presumably there was a cash component), the assumption of a $572,868.32 first mortgage, and a seller financed $457,131.68 second mortgage. Mr. Stern likely regrets selling this property, but don’t feel too bad for him. His listed address on the deed transfer was 950 Fifth Ave.

DuArt Realty Corp transferred ownership of DuArt Film Laboratories in 1976. Then, in 1990 the mortgage on the building that was originally taken out by one Ruth Wallace on April 11, 1921 and consolidated/refinanced through all subsequent owners was finally paid off by DAFL. There have been no other mortgages recorded on the property since then.

I’m sure you have figured out by now that the DAFL building is probably worth more than the company’s $25.9mm market cap. How much more? It’s hard to come up with an exact answer, but “a whole lot more” is probably a reasonable statement. Looking through commercial real estate listings, the best comparable I could find is a $17.5mm listing (I wrote this a year ago, so the listing is no longer active, but other commercial listings around Manhattan are easy to find – I’m keeping this listing because it’s funny, you’ll see) for 216 W 50th St. (block 1021, lot 49). Instead of simply linking you to the Google Street View, I will paste a screenshot below because… reasons.

Here is the listing description: “Development site for many uses. 5,504 SF on 3 floors. Unlimited Use restaurant/eating and drinking establishment/cabaret/adult venue currently built 3 stories with 5,507 SF and unused air rights of over 20,000 SF and an FAR of 14. No leases. Zoning is C 6 - 7 T.”

So $17.5mm divided by 5,504 sq. ft. is $3,180/sq. ft.

DAFL’s $25.7mm market cap divided by the DuArt Building’s 61.828 sq. ft. is $416/sq. ft.

Let’s assume 216 W 50th is a tear down – it is after all listed as vacant land of ~0.05 acres (2008 sq. ft.) with a 14 floor area ratio, which means there are 28,112 sq. ft. of air rights (2008 sq. ft. lot * 14).

If the DuArt Building is a tear down as well, the lot is 6,025 sq. ft. and the zoning allows for a 15 floor area ratio, for a total of 90,375 sq. ft. of air rights.

216 W 50th is asking $623/sq. ft. of air rights, while DAFL is valued at $284/sq. ft. of air rights. Of course, the DuArt Building is unlikely to be a tear down.

We could also look at 216 W 50th on a $/sq. ft. basis for the lot, so $17.5mm divided by 2,008 sq. ft. is $8,715/sq. ft. That appears to be the going rate for prime Manhattan land. According to this WSJ article, the co-op board at the Trump Plaza (E 61st and 3rd Ave) paid $185mm for the 0.5 acre of land upon which the building sits ($8,494/sq. ft.). On this basis, DAFL’s 6,025 sq. ft. lot is valued at $4,260/sq. ft.

So to sum up, the DuArt Building is probably worth at least twice DAFL’s current market cap.

The rub, of course, is that DAFL is a non-reporting closely held family business. I can sit around all day looking up real estate comps that show DAFL is worth say $400/share, but that value is at the whim of the controlling shareholders. The son of DAFL’s founder, Irwin Young, owns 41% of the stock. His brother, Robert Young, owns 13%, and his daughter, Linda Young owns 4%. That is your controlling block right there.

We know these ownership percentages from FCC broadcast ownership disclosures. DAFL also owns 64% of the Western Broadcasting Corporation of Puerto Rico, which operates WOLE-DT, the Univision affiliate in Puerto Rico. Here are the changes in DAFL ownership through the years.

A brief overview of the family tree. Irwin and Robert are brothers and well into their 80s. From the news articles about him, Irwin has lived a generous and meaningful life, and people like that tend to live for a long time. Diane was Irwin’s wife and passed away in 2004. Linda and Nancy are Irwin’s daughters. Andrew is Robert’s son.

At some point in the future, both Irwin and Robert will pass away. Irwin’s 41% will presumably pass to his daughters and Robert’s 13% stake will pass to his son. The ownership will then be Linda Young at 24.5%, Nancy Young at 20.5%, and Andrew Young at 13%. Linda is the CEO of DAFL and Andrew is on the board.

Perhaps the status quo will continue. As I mentioned, Linda is involved in the business. Andrew is a filmmaker and is on the board. Nancy is a doctor and does not appear to be involved in the business. However, as sometimes happens with generational transfers of assets, there are tax issues/benefits that arise, competing interests, etc… that may drive the need for some sort of corporate change or monetization event. The change may be helped along by the 29% ownership attributed to Cede & Co, who presumably are outside shareholders holding shares in street name.

In the meantime, DAFL uses the building in its current business:

DuArt, known as one of the leading film labs on the East Coast for decades, still does high quality Spirit transfers of 16mm and 35mm film (also 8mm and Super 8) and tape archiving of ½”, 2” and 1” tape to all SD and HD formats.

Within DuArt’s own 12 story building (which also houses 21 independent production companies that use our finishing services), we rent edit suites (Avid and Final Cut) all connected to fiber based centralized storage. For finishing services, we provide HD color correction via a DaVinci 2K/4K and Nucoda Filmaster, online HD/3D post, sound record/mix/sound design, closed captioning, high-end QC sessions, and offer a full slate of HD/3D (Blu-ray) deliverables. DuArt’s edit suites include latest version Avid Symphony, Avid DS, Final Cut, and Digital Vision Film Master (within a DI suite with a 4K projector).

In addition, we do localization of international television series (such as Pokemon) and Audio Book recording for the blind.

Construction has just been completed on ten new rental editing suites (with latest version Avid/Final Cut)…with six more on the way. These new windowed ‘4-wall’ suites, for use with client editors, will include centralized storage, phone and internet.

You can get financials by becoming a registered owner of the stock and then calling the company. From my interactions, it does not seem the company would appreciate public disclosure of the financials, so I will respect their wishes.

I forget I own this stock most of the time. However, it is fairly evident that the intrinsic value of DAFL is far higher than the market price. Perhaps one day I will wake up and find something good has happened.

Catalyst

Patience