Description

Security Capital Group is many things. It is a holding company of publicly traded REITs. It is a real estate developer and operator. It is a mutual fund company. In this complexity there is value to be found.

This recommendation is primarily based on unrealized asset values, but there is much to like about Security Capital as an ongoing concern. The management is focused on owning a few (their emphasis) high return, brandable real estate properties and building shareholder value by simplifying current corporate structure and buying in shares. Let me give you the rundown on the unrealized value.

Security Capital owns sizable portions of four publicly traded REITs. The total value of these holdings is $3 Billion. (See table below.)

Company % Owned Shares Price Value Cost Basis
CarrAmerica CRE 44% 28,600 27.70 $792,220.00 699,905
ProLogis PLD 30% 49,900 20.00 $998,000.00 657,800
Regency REG 60% 34,300 24.26 $832,118.00 759,807
Storage USA SUS 44% 11,800 32.62 $384,916.00 394,362
all data in thousands $3,007,254.00 2,511,874

In addition to these holdings Security Capital has several distinct private realty divisions which when valued at cost total $1.8 billion. They also operate two mutual funds (one of which was the #1 performing REIT fund in 2000) with $2.1 billion under management. A low-ball estimate of asset value derived by adding the value of the public holdings to the cost basis of the private holdings (which most likely underestimates the later), and then subtracting differed tax liability of $.247 billion comes to $5.661 billion.

The total enterprise value of the company is $3.953 billion. This includes 139,000,000 shares outstanding at $19.90 per, plus preferred shares, convertible and long-term debt. This represents a 17% discount from the above stated assets value. These figures include no value for the asset management business. Valuing the private divisions at cost probably understates their worth as well. They are vibrant, unique, high return (for real estate) businesses which management plans to expand. They are using the cash flow from the publicly owned entities to fund the expansion of the privately held developing operations. There is ample information on the Security Capital web site about these operations and their various stages of development.

While a more thorough analysis would take into account look-through earnings for the partially owned entities as well the individual operating models of the wholly owned subsidiaries, a cursory look at these asset values reveals an exploitable discount between the value of Security Capital and its holdings.

Catalyst

The stated goal of Security Capital is to simplify their structure and to “eliminate the gap between public market pricing and the private market value of (the) underlying assets.” They have been achieving this goal by divesting non-strategic assets and using the proceeds to enhance shareholder value. The company has been a big buyer of their own shares, repurchasing 13 million shares for $209 million in 2000. On 4/17/01 the company completed a dutch tender offer for an additional 9.3 million shares. (This repurchase was financed with the proceeds of SCZ’s February sale of Archstone Communities Trust, a REIT in which they had a 26% interest. This is a recent example of the company’s attempts to simplify and enhance shareholder value.)

Security Capital is not easily understood. There is lots of pro forma information to sift through, and they have not done a great job of relating their unique operating model to investors. However, there are now six major brokerages covering the company, laying out essentially this same thesis. The most recent coverage being initiated on 3/16/01 by Salomon, calling SCZ a “blue light special.”

Ultimately the combination of investor awareness and share repurchases should close the value gap described above.