Sunday, December 5, 2021
HomeValue InvestingClark Road Worth: HMG/Courtland Properties: Microcap REIT Liquidation

Clark Road Worth: HMG/Courtland Properties: Microcap REIT Liquidation


*Disclaimer: Please word that’s this a $18MM market cap that’s carefully held and illiquid*

HMG/Courtland Properties (HMG) is a tiny REIT that not too long ago introduced intentions to carry a vote early subsequent yr to approve a plan of dissolution and liquidate.  HMG was based in 1974 by Maurice Wiener, he’s 80 and remains to be the CEO of the corporate (technically that is an externally managed REIT, however there is no such thing as a incentive payment), he controls 56% of the shares via numerous entities leaving little doubt the liquidation proposal can be adopted.  

The corporate’s belongings are a little bit of mess (this liquidation will in all probability take a number of years), however the largest asset is a 25% fairness possession in a newly constructed Class A multi-family residence constructing (“Murano at Three Oaks“) in Fort Myers, FL.  Development started in 2019, the constructing was accomplished in March and is already 97% leased as of the not too long ago launched 9/30 10-Q.  With inflation working scorching and migration to the solar belt, cap charges on multi-family belongings like this one are being quoted beneath 4%.  This can be a hidden play on the craziness in multi-family M&A.  

Disclosure on the property is restricted.  However checking the constructing’s itemizing on residences.com, it seems the going price for his or her items is round $25 yearly per sq. foot, there are 318 items and 312,000 sq. toes of rentable house.  Let’s spherical down a bit for some emptiness to $7.5MM prime line income, once more again of the envelope, let’s use 40% of gross hire goes to some mixture of property administration, working bills and taxes (I spot checked a number of multi-family REITs for this, may very well be off!), that will get you an NOI of $4.5MM on the property.  

I am positive I will get the remark that this asset would go for lower than a 4 cap however let’s use that for now too, because it simply began leasing this yr, guessing there’s not quite a lot of rents that want be reset to market as leases rollover like different properties.  There is a $39.5MM building mortgage on the property, so the web worth to the fairness below my math is ~$73MM with HMG’s share of that being $18.25MM, or roughly the market cap of the corporate.  Their fairness funding within the residence three way partnership is held on the stability sheet at $3.3MM (HMG put in $3.6MM into the mission, however as a consequence of fairness technique of accounting, HMG acknowledges the proportional losses of the mission has skilled because it has been in lease up mode).  Once more, sounds a bit loopy, the asset was constructed for $54.1MM and now seemingly price double that or extra.  Given the debt here’s a building mortgage and the asset is freshly stabilized, even when the fairness group would not promote it outright, they’re going to probably refinance and pull a good amount of money out that may very well be used for an preliminary liquidation dividend.

The remainder of the REIT kind of appears like somebody’s private portfolio/household workplace, on this case the CEO’s:

  • The exterior advisor’s “Govt Places of work” at 1870 South Bayshore Dr in Coconut Grove, FL.  This seems to be a single-family residence (unclear if the CEO makes use of it as his major residence) that has a Zestimate of $2.5MM, it has a tax evaluation of $1.5MM and a e book worth of $590k (it was bought within the 90s).  There is not any debt on the property, let’s name it $2MM internet to HMG or roughly one other $2/share in worth.
  • 28% curiosity in a 260 River Road in Montpelier, VT, carrying worth of $870k.  Tough to inform what this actually is however that they had some environmental abatement points which can be seemingly behind them, a brand new tenant took possession of the property in March.
  • About $4MM in internet money (after subtracting out ~$800k of present liabilities)
  • $2.8MM of marketable securities, a lot of which is equities and most popular inventory in undisclosed giant cap REITs

Then it will get a bit unusual (if it hasn’t already), there’s $4.85MM (as of 9/30) in carrying worth in 46 particular person personal investments, it seems like most of those are actual property associated (together with some multi-family which might have embedded features) but in addition contains non-real property associated stuff like expertise and there is an vitality funding hidden in right here someplace too.  Under is the breakout from the final 10-Okay, the carrying values have moved round a bit however provides you a way of the asset lessons.  

These investments are carried the decrease of price or truthful worth, there may very well be some diamonds within the tough, a number of excerpts from current monetization occasions: 

“Throughout the 9 months ended September 30, 2021, we acquired money distributions from different investments of roughly $1.03 million. This included distributions of roughly $584,000 from our funding in a multi-family residential property situated in Orlando, Florida which was bought throughout this quarter. We acknowledged a acquire of $315,000 from this funding.” 

And this one: 

In August 2021, considered one of our different investments in a personal financial institution situated in Palm Seashore, Florida merged with a publicly traded financial institution, and we exchanged our unique shares for shares within the publicly traded financial institution. Accordingly, we’ve reclassified this funding as marketable securities, and as of September 30, 2021 this funding with historic price foundation of $35,000 has an unrealized acquire of roughly $128,000.

But additionally this one:

The opposite OTTI adjustment in 2020 was for $175,000 for an funding in a $2 billion international fund which invests in oil exploration and manufacturing which we dedicated $500,000 (plus recallable distributions) in September 2015. So far we’ve funded $658,000 and have acquired $206,000 in distributions from this funding. The write down was based mostly on internet asset worth reported by the sponsor and takes into consideration the present disruptions within the oil markets due to the financial fall out of the pandemic.

Even stranger there are some ~$1.5MM in loans they’ve made, apparently principally all to the identical particular person.

On the minus aspect of the ledger, there’s a couple of $1MM in annual bills between the administration payment and G&A, we must always in all probability capitalize that for not less than 4 years given it will take time to unwind all of the mess right here and I get roughly ~$30/share in worth and it trades for about ~$17.25/share right now.  

The important thing with any liquidation is the timing of the money flows.  Right here it may very well be a fairly enticing IRR because the largest asset simply stabilized and it could make sense to both promote or refinance money out of it within the close to time period.  As soon as most of your foundation is out of the inventory, it is simpler to be affected person on later monetization occasions.

Disclosure: I personal shares of HMG

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