This is my largest position and best idea. I've been involved and following the story since early 2010. I figured there would be time to write this up, but Mr. Market is forcing my hand with the shares up sharply on heavy volume since last week. So write MMPIQ up now or forever hold my peace.

 

Speed was more important than detail in writing this up (my apologies), so I'm happy to answer questions and provide more detail in the comments.

 

 

Meruelo Maddux Properties ("MMPIQ") is the largest private real estate owner in downtown Los Angeles with ~$1.75/share of book value as of the most recent 10-K. MMPIQ filed for bankruptcy in March 2009, but both reorganization plans under consideration leave equity holders intact. Bankruptcies are long, complicated, and noisy, so it helps to focus on the clear indications of value for MMPIQ.

Indications of value:

1.       The shareholder reorg plan filed by Charlestown/Hartland Asset Mgmt and backed financially by Global Asset Capital (http://www.gacapital.com/) offered to buy 55% of the company at $0.35/share. Very few shareholders tendered, so if the Charlestown plan is confirmed, shareholders will be pro-rated down until Charlestown gets 55%.

2.       The management plan offered to buy out shareholders at $0.25/sh. However, the tender is voluntary.

3.       The financial backer of the management plan, Watermarke Properties, is funding $15 million as a 5% secured loan convertible into 30 million shares (or $0.50/sh).

4.       During bankruptcy, MMPIQ sold 705 W. Ninth Street residential tower for $110 million to Watermarke Properties. This paid off the $84 million construction loan on the building and netted MMPIQ ~$18 million.

5.       Under the management plan, book value/share is expected to be ~$3 at the end of 2011.

6.       Under the Charlestown plan, book value/share is expected to be ~$1 at the end of 2011.

7.       Both management and Charlestown have reached a settlement with Legendary Investors to exchange $67.8 million of debt held by Legendary for ownership of 7 MMPIQ properties.

8.       MMPIQ's crown jewel is a parcel at the intersection of Grand & 11^th, a few blocks away from Staples Center. This asset obviously has strong development potential.

Background Materials

1.       Both the Charlestown and management plans and disclosure statements are available at http://www.kccllc.net/mmpi

2.       The case is in the Bankruptcy Court Central District of California if you want to follow along on PACER. Case # 09-13356.

Asset Value

This is an asset play and real estate value is a subject upon which reasonable people can disagree. However, it's fairly simple to go through most of MMPIQ's major assets line by line and come up with a valuation which you personally believe is reasonable.

I've shared a Google spreadsheet that goes through 13 of MMPIQ's major income producing properties and accounts for $288 million of balance sheet value. As part of Charlestown's reorg plan/disclosure statement, there were attached recent appraisals of the 13 properties. I've backed into the implied cap rates for the management and appraisal valuations. There is also a cap rate sensitivity table.

https://spreadsheets.google.com/pub?key=0AqXYysw53uW5dHhxeUpQQU9xU0ZCdXlEMzdGUnMtSXc&hl=en&output=html

Current State of BK Affairs

The confirmation trial started last week. There was no clear winner in the voting between the management plan and Charlestown plan. The equity committee supports the Charlestown plan. The creditor committee is basically fine with either, but they think poorly of MMPIQ management. The Charlestown plan replaces current management.

It will be up to the judge to decide which plan better serves the estate. Richard Meruelo (current CEO) is basically a crook. The CFO turned whistleblower (the "Skaggs" letter if you're digging through the PACER weeds). Also see http://blogs.wsj.com/bankruptcy/2011/01/27/shareholders-meruelo-maddux-ceo-using-mother-as-pawn/

I can't see the judge confirming the management plan.