Description

This is a small company with an illiquid stock and is only suitable for PA accounts.

First Real Estate Investment Trust (FREVS) was written up on 2/8/20 as an arbitrage. The shares were then $24.40. They are now $18.27.

In 2019 FREVS set up a special committee to look into strategic alternatives for the company. The company decided that a liquidation was the best course. It sought bids for its properties. In January 2020 it entered into a contract to sell seven apartment buildings and was seeking bids on the rest of their holdings which include strip centers, office space, undeveloped land and a mixed-use development. The company proposed to liquidate and distribute the proceeds of the sales to its shareholders. The expected per share liquidation value was estimated to be between $25.64 and $31.71. A proxy was filed to adopt a plan of liquidation on 3/9/20. The plan was approved. However, the apartment sale never closed. On April 30, 2020 the sale was canceled for nonperformance and the plan of liquidation was called off.

The cornerstone of the plan of liquidation was the sale of seven apartment buildings to the Kushner organization. The Kushner organization is a large real estate investor with extensive holdings in New Jersey. It is controlled by Charles Kushner who served time for witness tampering, illegal campaign contributions and tax evasion. He is also is the father of Jared Kushner who is married to Ivanka Trump. (You can't make this up) The sales contract was amended to six buildings when a lender would not agree to the assumption of its mortgage on the Pierre Towers property. The net proceeds to FREVS from the six were expected to be $80 million. The bid on the Pierre Towers would have netted $32 million to FREVS. Altogether, the seven apartment buildings had a bid which would have netted $110 million to the company. The market for real estate is robust as the discussion on AIV points out. I believe that FREVS's apartments are still probably worth around $110 million. FREVS retains Kushner's $15 million deposit. There is ongoing litigation and nothing will be done until that is decided.

FREVS's 1st quarter ended 1/31/21. The comany's results were reasonably good with $0.05 a share of earnings and $0.50 of AFFO. Residential occupancy was 96%. The company ended the quarter with cash of $39 million - $5.50 a share. If the company closes the sale to Kushner, the proceeds are $11.40 a share. The Pierre Tower is an attractive high-rise and should still be worth around $30 million net to the company which is $4.25 a share. Cash and proceeds at the prior bid level total $21.15. As Ronald Popeil would say, "But wait! There's more!"

FREVS's largest property is the Grande Rotunda in Baltimore in which the company has a 60% interest. The Grande Rotunda is a mixed-use project with 379 apartments, 157,000 sq ft of retail, 137,000 sq ft of office and 864 above ground parking slots.It was originally purchased in 2005 for $31 million. Redevelopment of the property began towards the end of 2015 and was completed towards the end of 2016. It was a probably a mistake for FREVS to take on such a large redevelopment, but they did. By the end of 2018, residential occupancy (Icon Apartments) reached stabilization at 94%. As these apartments appeal to the Loyola and Johns Hopkins communities, occupancy declined to 91.5% in 2020 but has since rebounded to 93.1% at the end of the 1st quarter. Retail and office occupy have lagged behind at 80.9% at year-end 2020. Financing on Grande Rotunda is $118 million at 2.99% and is due in 2 years. The loan is broken into two parts. The Icon Apartment loan is for $65 million against an appraised value of $104 million. The Grande Rotunda office and retail portion is for $53 million against an appraised value of $85 million. The lender has the right of appraisal to ensure that the loans are not more that 62.5% of appraised value. In February 2021 the loan was extended for one year with a further one year extension. In return for the extension the lender will receive quarterly pay downs of $500,000 for the 1st 4 quarters and pay downs of $750,000 for the subsequent 4 quarters. With in person classes taking place at Loyola and Johns Hopkins, the Icon Apartments and the associated retail and office should do better. There is $80 million of equity in the Grande Rotunda - $11.4 a share. I believe that some or all of that will come to the shareholders.

Sadly, FREVS owns strip mall retail properties.

1) Franklin Crossing, Franklin Lakes, NJ - 87,000 sq ft - No mortgage on the property. A bid of $26.5 million was received on 3/13/20. The buyer (wisely walked away) Worth today? $10 million for land and structures? $1.40 a share

2) Westwood Plaza, Westwood, NJ - 174,000 sq ft - $18.7 million mortgage. A bid of $26 million was received 2/18/20. The buyer walked away (wisely). Worth today? $0.00

3) Westridge Square, Frederick, MD - 252,000 sq ft - $21.8 million mortgage. Worth today? $0.00

4) Preakness Center, Wayne, NJ - 322,000 sq ft - $23.3 million mortgage. Worth today? $0.00

5) Rockaway, NJ Land Lease - 1 acre - No mortgage. Worth today? $0.50 a share

6) Seven acres of vacant residential land in Franklin Lakes, NJ (4.25 acres), Wayne, NJ (2.1 acres) & Rockaway, NJ (1 acre) Worth today? $0.50 a share.

The original liquidation plan thought that the sale of the company's assets would generate between $25.64 and $31.71 a share. I think that the low side is doable. That is a 40% return with another 5% coming from operations over the next two years. The crux of the matter here is that FREVS owns 7 nice apartment buildings worth about $21 a share, so my downside should be covered.

Catalyst

A settlement or victory in the Kushner suit.