Description

Owens Realty ORM                        September 28, 2016

This is an update to a VIC posting that I posted 6/4/2015. There have been two other postings, briarwood988 on 4/24/14 and issambres839 on 3/24/2016 and all of these postings should give you plenty of background on the company.

It is unusual to find a security trading at 66% of fair value, with clearly identifiable catalysts and much of the value in cash. ORM represents an excellent value in a value starved market.

The scenario I laid out in my earlier posting is playing out better than expected and yet the stock, while up 24% since my earlier posting, does not fully reflect the value creation that has occurred over the last 15 months. The stock is a better value than when I made my original recommendation since the discount to book value remains large ($17 stock price vs. $25.64 Estimated Book Value) and the uncertainty of the outcome has diminished by a massive amount with the sale of TOTB and the Tahoe vacant land.

• The key for ORM was to sell their two main real estate holdings in Treasures on the Bay (TOTB) in Miami Florida and Chateau and Zalanta properties in Lake Tahoe CA.

• On September 15, 2016, ORM closed on the sale of TOTB for $75.5mm. ORM owned 80.7% of the property so their portion of the gross proceeds was $60.9mm. The sale added $1.52 to book value. I believe ORM was very fortunate to get this deal done given that market for Miami Condo related real estate appears to be falling apart.

• On September 27, 2016, ORM announced that they are under contract to sell the residential land portion of their Lake Tahoe property for $42.5mm to a Chinese buyer. Based on my conversations with ORM, the buyer wanted to close in 2016 however ORM wanted to defer closing until 2017 because they have a pending sale of their property in Gypsum CO that has a tax loss that they can use to offset the $19mm gain on the sale of the residential land at Lake Tahoe

• These two sales are significant because of their size (Total sales of $118mm vs. a market cap of $172mm) and also because the land portion of the Lake Tahoe property was by far the least liquid and lowest certainty of sale of any property owned by ORM. This removes a significant portion of the risk from the underlying value creation story for ORM

   

  I’ve attached my calculations for the remaining real estate ORM owns. Unlike many situations, book value is a more valid measure of market value since it consists either of cash, new loans that ORM has completed and the remainder of the real estate, most of which can be fairly easily valued. The nine properties that I’ve labeled “bad” will be difficult to sell and I assume they will take a 50% haircut on these. In total, they make up less than $1 of book value.

   

   

  • Last year, ORM prepared internal calculations that estimated the company would generate a dividend of $1.78-$1.89/share. The calculations were based on conservative assumptions. With the sale of TOTB and the Tahoe Land, ORM’s dividend capacity looks to be even better. This works out to be a yield of 10.5-11.1% based on the current stock price.

  • ORM’s loan portfolio is made up of mortgage loans with an average LTV of 55% with no land loans.

   

   

   

• Price Target: ORM is an odd security without any exact comps. It will take more than a year for the yield to approach a fully invested level. That being said, the closest comps are:

Company                                                    SYM       Price/BV              Yield     Mkt Cap

Ares Commercial Real Estate                   ACRE     .9                            8%          358

Ladder Capital                                            LADR     1.1                          8%          850

Blackstone Mortgage                               BXMT    1.1                          8%          2799

Averages                                                                   1.03                        8%          1335

ORM is at least a year away from having a full dividend yield but you could also argue that a lot of ORM’s assets are near cash. Assuming ORM trades at book value, this would indicate a price target of $26/share or 53% appreciation from the current price.

Catalyst

Rapid increase in dividend yield over the next year as ORM deploys cash from the real estate sales

According to ORM management, the company is receiving pressure from their largest shareholders to aggresively buy back stock. The blackout period ends in mid November and I expect the company to aggresively buy back stock. Buying back stock at $16.80 with a book value over $25 is highly accretive

Management owns less than 4% of the outstanding shares and Private Equity Firms are sitting on billions of uninvested cash. If the stock price remains at the current level, it makes sense for a PE firm to take ORM over and extract value by liquidating the company.