Description

Since the write-up, nearly four years ago, of WRP, a self-described real estate merchant banking firm, the company’s once growing book value premium to market price has pretty much evaporated in a series of recorded impairments and actual losses on sales from WRP’s property portfolio, joint ventures, and debt holdings. The shares were originally issued in 1997 at a reverse-split adjusted $20.60/sh. Today they closed at $13.95, near the eight year low.

What looked like book value of nearly $30/sh at the top has been reduced to $16.85/sh as of the 9/30 10Q. That number includes a $9 million impairment charge on its interest in Second Holding, subsequently sold to one of Holding’s other partners. It does not include a $7.4 million impairment (now realized loss) related to the sale, closed 2/1/05, of many of the remaining Wellsford/Whitehall Group properties. That loss will, by itself, reduce book value to about $15.70.

What may make this an interesting value play from here is the company’s cash and remaining real estate assets. On 12/6/04, according to the chairman, cash and government securities totaled $97 million, or about $15/sh. This does not include restricted cash, most of which is committed to deferred comp. With the shares today at $13.95/sh, there appears now to be a real margin of safety. There are various hard to value real estate interests and associated debt remaining, such as three office buildings and a land parcel left in Wellsford/Whitehall Group (of which WRP owns 35.2%), and an interest in remaining units in the Fordham Tower condo building in Chicago. There is also a $7 million investment in REIS, a company run by the chairman’s brother and providing real estate investment data.
But, by far, the most significant asset is an 86% interest in the large multifamily residential development called Palomino Park in Highlands Ranch, a suburb of Denver. This five phase project is approved for 1707 units. To date four phases have been completed, three of them consisting of 1184 rental units, and the other, Silver Mesa, a 264 unit condo conversion which was nearly sold out as of the 9/30 10Q (probably fully sold by now). The fifth phase is planned for a 259 unit condo development, which the company says will go forward. As a test of values, the Silver Mesa condo sales to date are encouraging, recently approaching $225K/unit against a carrying cost of about $165K plus selling costs. Let’s estimate $40K profit per unit. The 1184 existing rental units could be converted to condominiums, although there would be investment requirements, and there are differences in the units, phase to phase. However, we might assume that sale of remaining units could add $5-6/sh of value to WRP. Because of $58 million in NOL’s, these gains would not be taxed. The approved, but unbuilt, fifth phase is carried at $5 million. It is worth mentioning that a recently filed employment agreement with the VP for Development includes significant incentives for the sale of Palomino Park, either as individual units or in its entirety. It is probably late in the residential real estate cycle, and the Denver property is a concentrated exposure, but there is a margin of safety here.

WRP has recently purchased two single family residential parcels, one in East Lyme, CT and another in Claverack, NY. Development and sales of these projects would also benefit from the company’s large tax loss carryforward. That tax asset is not included on the last 10Q balance sheet.

The larger question, of course, is whether, and for how much longer, WRP continues in its current form. Has management built liquidity simply to start over again at a different point in the cycle, or is this a total liquidation strategy, however painfully slow? In response to pressure from some large shareholders, the company engaged Lazard-Freres a year ago to consider strategies for maximizing shareholder value. That engagement ended recently without issue. At the same time, the Chairman announced that the company would consider returning cash to shareholders, a development which would greatly improve shareholder leverage on any unrealized real estate values in Palomino Park or elsewhere. A constraint on share buybacks or cash distributions has been a net worth covenant with the bank that has provided credit enhancement for a $12.7 million tax-exempt bond issued for Palomino Park. This letter of credit expires in May ’05, and WRP’s cash position should make this easy to handle.

Large shareholders include Third Avenue with~ 25% of shares outstanding; Morgan Stanley & Kensington with ~10% each; and Cardinal Cap and Donald Smith with~5% each.

Catalyst

Shares selling below cash & equivalents
Cash distribution or share buyback
Realization of unit values in Palomino Park
Realization of net value of other assets
Strategy to use $58 million NOL's
Pressure from large shareholders