|Shares Out. (in M):||10||P/E||0||0|
|Market Cap (in $M):||165||P/FCF||0||0|
|Net Debt (in $M):||40||EBIT||0||0|
Trading at 64% of Net Asset Value and 82% of its current book value (which is substantially understated), Owens Realty Mortgage (ORM) offers an excellent risk/reward opportunity. With its high profile Miami condo project now under contract and its irreplaceable Tahoe project on the market to be sold, ORM could trade to $25 per share in the next 18 months.
When the Miami project is sold in the second quarter, the company will be flooded with the equivalent of nearly $4 per share in cash after paying off project related debt. The company should continue to buy back shares, could announce a larger buyback and will continue to grow their existing commercial lending business.
With a very conservative balance sheet and a profitable commercial lending arm, paying out a decent 2% yield, why not get paid while you wait for the company to trade higher as its Tahoe project is sold?
From a private commercial real estate fund to a public REIT
From 1998 to 2007, Owens was private mortgage fund, providing loans to developers as they worked on entitling and constructing their projects across the country. The company dutifully paid nice dividends of 8% a year to its private investors.
Then came the financial crisis and suddenly the private fund had lots of loans that were delinquent. The fund foreclosed on the loans and had no income coming in to pay their yield loving investors. With few alternatives, the fund decided to convert into a REIT and go public in May of 2013 to provide liquidity for their investors. The goal of the conversion was to eventually sell the properties while the company slowly returned to its commercial real estate loan business.
For two years, per REIT conversion rules, they could not sell any assets, but that changed in May of 2015.
Owns substantial property holdings after the financial crisis
There have been two principal assets that dominate the underlying value of ORM. The first property is its Miami condo conversion project called Treasures on the Bay that is right on the water. There are two towers and ORM has had to renovate the second tower for the past 18 months to get it into sellable condition. In March, the company announced that it had an agreement to sell the property. The other big asset, is the company’s Lake Tahoe property.
With the recently announced agreement to sell the Miami project, the company can focus on its prime jewel Lake Tahoe project called Chateau at Lake Tahoe that is at the foot of the Heavenly ski resort in Lake, Tahoe, CA.
While the Miami sale is a nice win for the company, the Tahoe project represents even more upside for company. The company carries the three phases of the project at a carrying cost of $59 million. But its tax basis is materially higher at $70.8 million and there was an appraisal done in 2009 that indicates the entire project is worth approximately $105 million.
Tahoe, like many other areas of prime real estate in California, is extremely hard to get new entitlements. Considering zoning challenges, the lack of land and excellent location of the Tahoe project, it is hard to imagine that it is worth less than its tax value, or that this tax value hasn’t gone up significantly in value in the last several years.
The demand to live in this Chateau project is high. How do we know? Check out the website for the first phase of luxury condos called Zalanta:
In December, company started taking deposits for the first 30 condos, and as of two weeks ago 25 of the luxury condos had reservations.
The company is proving out the value that this is not just a conceptual project anymore. There is a ton of value for ORM shareholders hidden inside this property.
Owens updates a detailed presentation of its property holdings on their website with the latest presentation posted here:
Starting last year, the company has been on a selling spree including selling property in Greeley, Colorado, Phoenix, Arizona and Stockton, CA. While the company has been focusing on their easiest to sell properties first. It’s important to note that the sales have been at big increases over book value. Just one property sale alone in Paso Robles, CA announced on January 6th increased book value $0.45 per share to $19.48 per share.
Miami Under Contract
The big recent news that provides an excellent catalyst is the company’s announced agreement to sell its Miami condo project for $82 million. If you assume that there are transaction costs of 3%, and understand that ORM owns 80.74%, the company will receive $64.2 million in cash. After payment of project related debt, the company should see proceeds of approximately $41 million, or $4 per share.
Also, the company has been carrying the value of this asset on its books for $51.9 million, so the increase to its book value will be approximately $1.21 per share, bringing book value to $20.69 per share. This means the company only trades at 77% of its book value.
Growing profitable loan book
With the successful sales of the company’s properties, it has been rapidly returning to its roots and growing its commercial lending book. Just in the last year, loans have increased from $68 million to almost $107 million.
Further, the company announced in March that it increased a line of credit from $30 million to $50 million, with an option to further increase it to $75 million.
With a California focus (77% of loans are in California), the company’s primary areas of focus are office and apartment buildings, followed by loans in retail, hotel and storage. The company’s major areas of focus are ones that should see years of demand and tailwinds to support loan growth and low delinquency.
The valuation is compelling with little downside now that the Miami sale has been announced. Once the sale is consummated, the company will have a book value of approximately $20.70 per share. But this doesn’t include the fair market value the company’s Tahoe project or other properties.
If we assume that Tahoe is worth $100 million to ORM, the company’s net asset value would be approximately $25 per share, meaning the company sells for 64% of its NAV.
The company has been an active buyer of its stock and its share count has decreased almost 1 million shares from 2013 to 10.2 million shares at last count. With the big sale of Miami soon to close, I expect there to be a lot of pressure from the company’s two big shareholders, Freestone Capital and Nantahala Capital Management to get more aggressive with the share buyback. The most recent one announced was for $7.5 million in January. With the company selling at such a discount to book and NAV, a buyback could create significant upside to the price target as NAV per share could go up quite quickly depending on how many shares the company bought.
With a low amount of leverage, several catalysts looming and the stock selling for a significant discount to NAV and book value, ORM offers an excellent risk/reward opportunity to investors. ORM offers investors an investment with little downside and 50%+ upside, and you get paid a small dividend while you wait for the value to unfold.
Miami project sold
Larger buyback announced
Tahoe sale either in peices or in whole
|Entry||03/28/2016 04:58 PM|
issambres839, thank you for the writeup.
So do you think it takes, say, 3 years for the company to fully liquidate its assets and return every dollar to shareholders? So if the TBV range is $20-$25/share and you discount that at 10%, then ORM is worth $15-$19, today?
Am I thinking about that correctly?
|Entry||03/29/2016 01:49 PM|
No, I don't think that is the right way to think about it. I don't think this is a liquidation play, but a company that is going to get value that is kind of frozen in illiquid real estate into cash flowing assets (loans). The value is there, it just isn't pumping out much money.
Also, I believe those assets are appreciating every year as the real estate recovers or keeps appreciating in value. I think this company is worth around $25 today and with the assets appreciating and the company buying back stock, in 3 years it will be worth more.
The way you are thinking about it, is a worst case scenario, where it takes a really long time to sell, the assets don't appreciate and the company liquidates. This is also why I like the stock so much the downside is very limited at current prices.
|Subject||Re: Third Party Manager/Buyback|
|Entry||06/14/2016 10:49 PM|
These are great comments and questions. Here are my thoughts:
1) Management can't grow the loan book if they can't monetize properties. So, our interest are aligned there.
2) Management has bought back shares, and on the monetization of a big sale like the Miami project, they would have $4 of net cash per share. I would expect them to be more aggressive with the buyback then.
3) There are two large shareholders that will be on management like white on rice, if they don't start aggressively buying back stock on a monetization.
4) There is always the chance of a takeover as well.
5) I think the management payment structure gets revised in the next 12 months, due to shareholder pressure.
|Subject||Miami under contract and money is now hard|
|Entry||06/17/2016 12:01 AM|
There was finally big news today in that the Miami contract has gone hard with a $5 million earnest money, even though it took a reduction in the sales price to get there. Retrades in real estate are both common and kind of expected.
Tangible book should now rise over $20 per share to something around $20.25 per share when this transaction closes which should be in a matter of months and most likely before the end of September.
The company will have close to $4 in net cash per share hit their balance sheet and I expect post-closing, for them to announce a sizable buyback.
With the real NAV including Tahoe's real value at close to $25 per share, management can create serious value with a strong buyback.
The stock after rising to close to $18 on the Miami news has traded back and IMHO offers a very compelling risk/reward opportunity with little downside.
|Subject||Re: Chateau at the Village sale|
|Entry||09/27/2016 07:54 PM|
It is a very positive development. They sold the land for $2 above book and this still leaves the Zalatana condo project and all of the commercial that they have developed and is 100% leased. After this sale, book value is now $23. NAV still around $25.
After this sale, they will have something like $8 plus in cash per share. Its rather shocking to see the stock at this level still, I'm guessing after people process this latest sale, the stock jumps.
|Subject||Re: Re: Chateau at the Village sale|
|Entry||09/28/2016 08:27 AM|
they have a pretty expensive external mgmt contract - how much does that add/subtract from your thoughts re valuaiton of hte ongoing business. what net yield can they currently create putting cash to work in lending portoflio and what are your thoughs on that outlook?
also curious re your thoughts on how they may balance thoughts on buyback vs the lack of liquiidty in the stock. Wouldnt htey ultimately want to increase the liquidity over time as they grow the lending book as fixed fees and incentive to manager are pretty juicy.
guess im asking what is value of incremental dollar to external manager of buyback vs new loan
thanks for your thoughts and for posting this
|Subject||Re: Re: Re: Chateau at the Village sale|
|Entry||09/29/2016 05:25 PM|
There is hope among shareholders that they will restructure the fee sstructure to be a little more shareholder friendly. But the basic economics are pretty good, borrow at 2%, lend at 8%. lever 3.5 times. Should spit out a nice dividend to shareholders once they start getting that capital out in terms of loans.
I expect that when they announce the quarter, they will announce a new buyback program. With book value now $23 post closing of Tahoe and really NAV of close to $25 per share, they are inviting a shareholder revolt if they don't take advantage of the stock price. They can create enormouse value for shareholders at current prices.
I think they will strike a balance. Crazy thing is, even a $17 million share buyback, eliminates 1 million shares at current prices. The risk/reward is just really compelling at current share prices.
|Entry||09/30/2016 04:05 PM|
I answered the question on the value of the remaining Tahoe Holdings on my re-post yesterday. ORM is in the process of reducing the management fee to market levels. It wasnt a factor until they crossed $100mm in mortgage loans. As of 6/30/16, they were at $118mm.
|Subject||Tahoe land sale complete, book value jumps|
|Entry||04/23/2017 11:02 PM|
ORM announced on Friday that the sale of their Tahoe property closed. Book value is now $22.32 per share. NAV is still $24-$25 and the stock is around $18 per share. There is simply no reason for the stock to trade at 80% of book value and 75% of NAV at this time.
Hopefully, we will see a new buyback and the stock climbs into the $20s. Micro caps are notorious for processing really good information right away and I think this is the case. This stock is really cheap.
|Subject||Value in Plain Sight|
|Entry||04/25/2017 10:32 AM|
the massive move towards indexing creates opportunities like ORM. With the sale of the Tahoe land, the stock has an up to date and mostly near cash book value of $22.30 and yet the stock continues to trade a a large discount. at a $185mm mkt cap and hardly any index weighting, I predict we are going to see more and more companies like this that are "index orphans" Shareholders are getting restless and I think there will be increased pressure on management to buyback a significant amount of stock with the $42mm the company received from the Tahoe sale. Management's excuse before was they need the cash to make more loans however the valuation gap is too large to ignore and it is a terrible time to make more loans today. It is pretty clear that you want to make real estate loans when: 1) interest rates are high and 2) when collateral values are low. Currently we have just the opposite set of conditions. In any event, it is difficult to find investments today that sell at any discount to real book value and ORM is one of these.
|Entry||04/25/2017 11:47 AM|
Leaving aside the discount which you guys have clearly laid out here let's talk about the actual operating business which should continue as a going concern as far as I can see and I think we do need to have a feel for it to make any investment. I have seen way too many discounts to book remain discounts to book for a very long time so I like to see the company can also grow over time.
What I see is:
So net net they are going to make $4M a year (FFO last year was 2.5M) so it's a bump. They've also got this remaining land which is about $70M + whatever they do with the Tahoe Money. At some point that is going to be converted.
How do you square this in terms of your pro-forma earnings. Maybe it's a wait around and see if the BV gap closes but we've all been there before.
|Subject||Re: Operating business|
|Entry||04/26/2017 11:40 AM|
it's worth book at least, stock's gone.
|Subject||Re: Re: Operating business|
|Entry||04/26/2017 11:43 AM|
I'm sorry I don't understand the second part of your comment
|Subject||Re: Re: Re: Operating business|
|Entry||04/26/2017 11:51 AM|
yeah sorry. i think it's going to be a difficult one to chase, and i don't think the upside is so compelling to do so.
|Subject||Re: Operating business|
|Entry||04/26/2017 12:01 PM|
When i talked with management in January, they mentioned that they are working on internailizing the management company and reducing the fee structure to a market level. As the company is set up currently, there is a large conflict of interest since the management company is owned by insiders, mostly Bill Owens. They retained consultants to figure out the pricing so we will see what comes out of this. The legacy fee structure wasn't a factor until the company exceeded $100mm in mortgage loans which occurred in Q4 2015. There is no doubt that management is sleepy and continues to run the company more like a private company which it was until the GFC. Company can't buyback stock until May 13 so we will see what they announce after that. This is not the best time to make new loans since interest rates are low, and collateral values are high. the best use of capital would be to spend the $40mm to buyback shares below BV. Doubt they will spend the entire $40mm but it would make sense to do this until the stock approached BV. Next meaningful property sales would be 30 condo units they developed in Tahoe called Zalanta ($34.5mm BV). They had sold a few the last time i talked with them but if you can't sell this sort of thing now, then i am not sure when you will be able to unless the bubble continues. They also have a retail center that is fully leased at Tahoe called Chateau at the village, Retail (BV $16.8mm) which should be easy to sell since it is fully leased. At least they are getting good cash flow currently. I assume that the other remaining real estate consists of less desireable assets but we will see how this plays out. In any event, at the current price, ORM remains pretty attractive in an enviroment where it has been difficult to find good values with identifiable catalysts in the next 1-6 months.
|Subject||Re: Re: Operating business|
|Entry||04/26/2017 01:14 PM|
Understood thank you for the color.
For what its worth I think we all get in trouble when our mindset drifts towards invsetments that seem to be attractive vs. everything else. At least I do.
|Subject||Re: Re: Re: Operating business|
|Entry||04/26/2017 03:00 PM|
Very true. Relative value is not nearly as good as absolute value.....
|Entry||05/10/2017 04:01 PM|
The conference call was comical.
They are taking two years to internalize management (even though they claim they didn't talk about internalizing a year ago), with lots of conflicts of interest. The longer they drag out the process, the more money management continues to make, and potentially the higher the value for the management company (bigger loan balance, rosier projections, etc).
I can only imagine the money they're spending on lawyers and comp consultants given all the hours they're spending on this.
|Entry||05/10/2017 05:50 PM|
Agree on the conflict of interest and that the current cost structure doesnt warrant new loans given the current market conditions. Anyhow I am surprised that the larger shareholders have not being more active given mgmt's low ownership strcuture. I suspect this will change now.
|Subject||Re: Re: Hilarious|
|Entry||05/10/2017 08:16 PM|
They have upset their largest shareholders not to mention others. I think they have been put on notice and the pressure will start to ratchet up.
|Entry||05/15/2017 02:34 PM|
My guess is $15 to $20 million in stock. But it is just a guess. Remember, they need shareholder approval for it. Anything above that amount and it is unlikely it would be approved.
|Entry||05/30/2017 07:42 AM|
I recently listened to the conference call. so let me get this straight: they are going to take until the end of the year to figure out this mgmt. company situation, meanwhile they are going to sell everything and re-deploy the capital into loans at the dumbest time since 2007. no one is happy about this, including funds who have 2x (each) of the mgmt. / BoD's 3.5% of the company, but it's happening anyway?
|Subject||Largest owner files 13D|
|Entry||06/02/2017 11:23 AM|
Freestone Capital just filed a 13D on ORM:
|Subject||Re: Re: Largest owner files 13D|
|Entry||06/02/2017 07:10 PM|
Does the company have a poison pill, staggered board, Class B shares which gives management control or other obstacles for the activists? How do you handicap the ability of the activist to unseat managment? The firm that filed the letter I doubt has the toolkit to get management out without teaming up with other activists who may or may not be itching for a fight with an adequate toolkit. What are your thoughts?
|Subject||Re: Re: Largest owner files 13D|
|Entry||06/02/2017 07:46 PM|
It's never easy and it always takes longer than you'd think.
|Subject||Re: Re: Re: Largest owner files 13D|
|Entry||06/02/2017 07:52 PM|
I totally agree Shoobity. My impression is most of the float is retail held which makes me very skeptical the activists are likely to have any success. But I am open to being convinced otherwise.
|Subject||Announces $10m buyback and increase in divvy|
|Entry||06/13/2017 04:18 PM|
The pressure clearly worked. This is really good news.
|Subject||Re: Re: Announces $10m buyback and increase in divvy|
|Entry||06/13/2017 07:15 PM|
This is positive because it shows that management is not digging in their heels, but in fact moved very quickly to add shareholder friendly actions after just one 13d filing. They realize to get approval for the internalization they need a happy shareholder base and a higher stock price.
|Subject||60% increase in dividend, new share buyback, lower fees|
|Entry||03/14/2018 06:55 PM|
Good news for shareholders. The company appears to be under pressure to perform.
|Subject||Re: Re: 60% increase in dividend, new share buyback, lower fees|
|Entry||03/15/2018 07:39 PM|
I very much agree with your thoughts.