Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
HMG/Courtland Properties (HMG) is by no means my typical investment. Sometimes however when you stumble across something unusual in the smallcap world, you can find some real great opportunities.
This company is a tiny REIT with a market cap of under $17m and is currently a balance sheet bargain. The company has clear tangible asset value in the form of cash and investments worth at least $24m, meaning that investors at today's prices could net a return of at least 35%. The company has sold off all revenue generating assets in 2013 and seems to be "closing shop" so to speak, as management is at or past retirement age, and starting in November they have paid out a large special dividend (25% yield) which seems to be the start of returning all remaining assets to shareholders. I expect they will continue to pay out remaining cash in the next year, and they will burn a minimal amount of resources on operating expenses as this is mostly offset by dividends and income from current investments and minority interest. As a result astute investors today have a clear path to generating what is likely to be significant alpha.
Business Primer and Recent Events
To give a quick primer on HMG - the company is a nano-cap REIT based in Florida, that until early 2013 had been the principal investor/owner in a couple of real estate interests. These properties consisted of marinas, yacht clubs, a few restaurants and a hotel. Other than this the company also maintains a small investment portfolio in various equity funds, marketable securities, and a 49% ownership in a smaller Texas affiliate. These additional assets are collectively worth about $10m.
Now in a period of 1 month during February and March 2013, the company sold its two major real estate interests in Florida for more than $25m in cash, the majority of this coming from what was known as the "Grove Isle Property". Also in the past year they have sold all other real estate interests (the company owned a small piece of land in Rhode Island and a commercial building in Vermont, but these were immaterial in value). Amazingly, before these big sales the stock had been only trading for a measly market cap of $5m. Talk about mis-pricing; apparently Mr. Market didn't realize the valuable Grove Isle asset was worth significantly more than its carrying value on the balance sheet. One look at the place with its location in Coconut Grove in Miami (including hotel, spa, restaurant, yacht club, etc) should have been a good clue (I wish I happened upon this company last year!):
In fact even at the end of 2012 the company listed all investment properties + associated goodwill at $16m, but for some reason the stock price didn't reflect this. Once the sale of the Grove Isle Property was announced earlier this year, the stock more than tripled in value overnight:
(click to enlarge)
It's not entirely surprising that the company is virtually unknown in the market which probably partially caused this mis-pricing - with such a tiny market cap the company had no interest from Wall Street, and in fact management seemed to have liked it this way. Take a look at the company website - I've never seen anything like it. The company even states the only purpose for having it is that they are required to by SEC rules, and there is no more information there than only the required filings.
Valuation of the Remaining Assets
Fast forwarding to today at the end of 2013, and we can see the company now is priced just under $17m. The only property that the company still owns is its 5000 sq. ft corporate office, and the company no longer has any active revenue streams. In November the company paid out a $4.00/share dividend (~$4m), good for a 25% yield, and this caused the stock price to drop from the low 20s down to the mid teens where it stands today (the noticeable drop in the chart above). It seems that the company is now "closing up shop", as the management team are basically all at or past retirement age, and insiders collectively own 75% of the company via direct and indirect ownership. My assumptions here are that they are simply cashing out, and my assessment of this situation is that we can expect several more of these special dividends until the stock is essentially at 0 and all of the assets are depleted. However what is exciting about this, is that the company still has a tangible book value of near $23m, yet the stock is trading under $17m. This is because not only is there still $18-19m in cash remaining after the asset sales (and after the recent dividend), but the company also maintains its investment portfolio that can easily be liquidated for another $10m or so, and it also still owns its 5000 sq. ft office building in a very high priced area of Miami Florida (Coconut Grove). Here is a quick look at the assets on the balance sheet from September 30th:
(click to enlarge)
Now some interesting things to note here. The $813k is for the office building in Coconut Grove. This property is just down the street from the Grove Isle Property which was sold for more than $20m. A quick check on real estate sites such as here, show one property in Coconut Grove with similar indoor space (5000 sq. ft) on the same street that is for sale for $5.5m. Now of course this is the asking price and exact location can make a big difference in price (does it have water view for example), but it seems highly likely that, similar to the Grove Isle Resort, this remaining property could be worth significantly more than its carrying value on the balance sheet.
Another point to realize is that the company paid out $4.00/share in a dividend in November. There are almost exactly 1m shares outstanding, so for simplicity we can estimate this as $4m in cash, which brings the cash and cash equivalents balance down to $17.5m approx. The company's $3.3m in "other investments" consists mostly of equity funds in technology, real estate and a few diversified businesses. These assets combined with the affiliate investment do generate some income. In the last quarter there was income received of $175k from all investments including minority interests and regular interest/dividends.
Total Liabilities stood at only $6.6m as of September, so if you subtract this together with the $4m paid out in dividends, there is still tangible asset value of $24m, which is a full 35% upside from today's market price, and this doesn't even include the likelihood that the office building property is worth several million.
A Note on Expenses
The company has been running operating expenses of about $400k per quarter in 2013. This is a combination of fees paid to what the company refers to as the "Advisor", which is essentially the management team, directors' fees, general expenses and some consulting fees presumably to help with corporate filings. The Advisor had a yearly contract for fees of $255k per quarter, however this has just been reduced to $165k for 2014. So we should expect that these expenses will drop to about $300k per quarter or $1.2m/year for next year, and this is partially offset by operating incoming still coming in from the investment portfolio. All told and I think the company will only be burning about $150k per quarter in 2014 assuming status quo. So I think this has very minimal impact on the company's valuation, and I still think the company should be worth at least $24m.
Management
The CEO of HMG Courtland is Maurice Wiener, who at the age of 71 is likely thinking about retirement. In fact one look at the board of directors and management, and we can see that the youngest member is 52, and one is even in his 90s!:
(click to enlarge)
It seems that the day to day financial management has been done by Larry Rothstein and Carlos Camarotti, who are the 2 principal members of the "Advisor" organization that was managing the company's assets. The 3rd member was the CEO Maurice Wiener. All of the management team have been with the company for many years with the exception of Richard Wiener (not related to Maurice), who was brought onto the board a few years ago as a New York lawyer specializing in real estate transactions (this should have been the first clue about the company's intentions). The company has never done conference calls or any press releases other than standard required SEC filings, so there is little other information to go on. But just judging by recent actions starting with the real estate sales and the recent dividend, it seems to be a sure sign that the company is liquidating and distributing all remaining proceeds to shareholders. The insider group listed above owns almost 75% of outstanding shares either directly or through their controlling interest in affiliated companies, so it seems logical that they stand to benefit financially from this approach.
The Bottom Line
HMG Courtland is a clear cut asset play in my book, with tangible value on the balance sheet in excess of 35% from today's market price. There is minimal risk to this investment as the cash alone is close to the current market cap, and investors today should receive several more large dividends as the company depletes its remaining assets. It seems this thinly traded tiny company is completely under the radar of bigger investors and Wall Street in general, and that is just the way I like it, as it allows investors today to scoop up some shares with a good margin of safety.
Disclosure: I am long HMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
Aucun commentaire:
Enregistrer un commentaire