Description
WRP is an opportunity to buy real estate at as little as 50 cents on the dollar (and at most 61 cents on the dollar), with a plan for value realization in place and virtually no downside. Wellsford Real Properties is a real estate operating company (REOC) and as such its value is in wealth creation rather than earnings distribution. Third Avenue (Whitman's group) has a nice dissertation on why REOC's can be superior to REITs in its latest semi-annual. Third Avenue's also been accumulating this stock.
The stock's at $16.50. Book value is $26.93 and understates true net asset value. For four years others have done the waiting for me (and are likely to sell now in pure disgust), and now I do believe the next couple years will see value realization - and hence a nice return/risk ratio. Here's why:
Wellsford is an incomplete liquidation story now divided operationally into three strategic units:
1) Wellsford Commercial ($10/share book value, liquidating, no recourse debt) - primary asset is a 39% interest in Wellsford/Whitehall, a joint venture with Goldman, valued at 86 million at March 31st. This value will continue to increase. W/W has been in the business of buying up turnaround properties and putting some sweat equity into them, then filling them. This naturally causes book value to drastically understate net asset value. This is important because Wellsford/Whitehall is being liquidated on a 3 year plan at Wellsford Real Properties' insistence. Two recent properties sold at 25% and 40% premiums to book, respectively. Today, the Parsippany announcement - a 43 million book value property sold for 61 million. There was $582 million in assets on W/W's books (213 mill in equity) at last report - but the realizable value is higher.
Just looking at the Parsippany sale, equity in W/W pre-tax will jump over $18M - that's nearly 8 mill to Wellsford. Wellsford only has 8.35 million shares, so that's a pre-tax gain of roughly 84 cents/share on the sale of just one property representing just 6.9% of the JV's assets. With the stock at 16 1/2 and book at 27, you can see where this is headed.
Management certainly considers the $582 million number to understate the true asset value in Wellsford/Whitehall. I've heard management laugh at that number. A 25% premium to book realized on the liquidation of these assets would jump Wellsford's book value nearly $6/share to $33/share. The most recent Parsippany sale went at a 40% premium, and another recent sale went at roughly a 25% premium. Obviously not all will go at such great prices, but it's a good trend. Management told me earlier the 25% premium they fetched earlier was on one of their average properties, and implied there was better stuff to come. Today's 40% premium with the Parsippany sale is consistent, and certainly doesn't make management a liar.
Why liquidate W/W? According the Chairman, "I know real estate. I have fundamental way of analyzing this, and we're in the 9th year of a 7 year boom" and hence he thought it was a good time to start liquidating the Goldman JV. Goldman disagreed. Both offered to buy the other out (Goldman first), but both bid low and neither accepted. So, an arrangement was worked out where WRP sent its employees working on the JV to Goldman and Goldman's man manages it with a newly created company. Goldman has since decided it too doesn't want to expand this business anymore given the stage of the real estate boom. So now, essentially, they're presiding over the liquidation of the JV. Expect good news to come out of this liquidation (like today), with more readily identifiable cash assets appearing on the balance sheet. To be clear, the liquidation is occuring primarily because it is the smart thing to do given the cycle, and a secondary effect is it will make the value more obvious to those reading the balance sheet.
Commercial ADJUSTMENT to book get to NAV: + $3 to $7/share; but again, we've already got a big discount to book, so the key is that there is a liquidation ongoing.
2) Wellsford Capital ($12/share book value; continuing; no recourse debt) -As the real estate market peaks, the Chairman wants to get out of equity, but sees future potential for buying real estate debt on the cheap as things turn sour. So Capital is an ongoing operation with more to come in the future. Management is quite dismissive of "S&L's on steroids," mortgage REITs, and the structure of entities such as CMM. They feel they can be much safer and smarter than using those strategies, and yet by buying smart earn great returns despite not taking on substantial risk.
a) $35.4 mill direct investment in 11.5% meezzanine loand, 277 Park Avenue (DLJ's building, well known to some of you I'm sure 'hedge fund hotel')
b) 51% interest in Second Holding, LLC, another JV that invests in real estate debt. They have been ramping this up. Carried at equity method and equity in Second Holding is roughly $27 mill. That's the limit of their liability. Debt/equity in Second Holding at 12X but of course debt within the JV is non-recourse to WRP. This is the current main vehicle for investment in debt, and it has recently raised several hundred million, which for now is just sitting, earning slightly more than its cost. How this will be used is an unknown, but presumably they'll be smart about it. The stock hasn't been recognized, but management has been creating value, and Capital is a bet they ought to be able to in the future. Again, the equity value at risk herre is only a little over $3/share.
c) $7 mill investment in REIS, a real estate information services company - I write this down simply because there's a family relation behind this investment, but it is possible the 6.9 million may even underrepresent the value of that asset.
d) VLP is being liquidated - another $11 million or so to come.
Capital ADJUSTMENT to book to get to NAV: -1 buck for the nepotistic investment in REIS, though it might work out. One only need look at Homestore.com to see that real estate e-commerce ventures have not been the terrible bombs so characteristic of the .com genre. REIS is not infrequently cited in respectable press, and may have a niche.
3) Wellsford Development ($4/share book value; liquidation?; $99 mill mortgage debt) - 86% interest in an JV with Equity Residential (EQR) which is an 1800 unit multifamily development in a nice area south of Denver. 760 units being rented. Converting 264 more units to condos, and first sales have gone well at nearly $200K/pop (they cost about $166K/pop to build). Sold a 344 apartment project for 22.5 mill last year, for a gain of 3.5 million. Totalling up the value of the various pieces here and I get a small premium to book value. The key is that portions of it are being liquidated at a slight premium.
Development ADJUSTMENT to book to get to NAV: none, maybe +1 buck/share on the upside. Chairman talks this one up as a "no-brainer" but I'm unwilling to give much credit yet.
That's it; because of the nature of the turnaround properties, I don't anticipate much long-term downside there from the book level. Potential losses in Capital are maybe $3/share in book value. Face value of a $25 mill convertible preferred is more than offset by cash on hand. As time goes by, earnings will add about $1.25 to $1.50 per share to book value each year as well.
The company has been buying back shares when blocks become available, retiring 2 million shares in this fashion in the last couple of years. The Chairman vows to continue doing so, claiming the illiquidity of the stock is the greatest impediment - he doesn't want to run it up. BTW, a strong advocate of share buybacks in undervalued securities, I have never found myself on the receiving end of a management lecture on why buying back stock is such a good idea. That's what I got from this Chairman. "Look, I know what I got..." He gets points for mentioning Berkshire Hathaway in his annual letter, too: "Our business strategy model, based on the Berkshire Hathaway model of net asset value growth being reflected in share price, has thus far not been transferable to the real estate industry."
The history of Wellsford is that management presided over Wellsford Residential Property Trust - of which WRP was a subsidiary - from 1992-1997. The Trust merged with Equity Residential Properties at a price that gave a 23% annualized return since inception to shareholders. The stock had done nothing for years and then ran up for the buyout. Still, that's a source of pride for the Chairman, who points to the annualized return rather than the long stagnation, and I don't believe he is adverse to selling out again so he can have a similar "achievement" here. He is not comfortable with the lack of recognition in the public markets. In any case, WRP was a subsidiary of the Trust, and was spun off immediately prior to the merger. A private placement for 6,000,000 shares at book value ensued the next month. And the stock hasn't done anything since, even though value has been created.
Franklin Mutual (Beacon, Qualified) owns 24% of the common from the initial private placement, and Morgan Stanley owns 17% of the common from the same. Neither have been buyers recently. MJ Whitman Advisors upped its position 25% during the 1st Q.
A decent sized seller (probably Fleet or Advisory Research or both) has been offering shares whenever a decent-sized order comes up to buy, so in my experience at least the illiquidity is less a problem than it appears.
Catalyst
Liquidation of real estate per plan with $200 million in properties being marketed for sale right now; possible sale of whole company; commitment to share buyback at deep discont to intrinsic value; dollar on sale for 50-60 cents with no significant downside; possible Russell 2000 inclusion on June 30th but is one of the few such candidates that hasn't really moved yet.