|Shares Out. (in M):||41||P/E||0||0|
|Market Cap (in $M):||43||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Ambase Corporation (ABCP)
Special situation: Little-known opportunity to invest at a discount alongside well-respected developers in a high-profile, luxury high-rise residential tower under construction at 111 West 57th Street in NYC (website: http://111w57.com)
Debt-free company trading at roughly 60% of book value. Plus, book value may understate realizable value of investment in real estate project
Project can be profitable even if high-end real estate market softens considerably
Near-term catalyst: sales of condominiums (and publicity) begin in next 12-18 months
Ambase lawsuit versus developers has made documents public that help analyze what would otherwise be a very opaque opportunity
Ambase has a contractual Equity Put Right that, if exercised and honored, could result in a near term $100mm+ ($2.44/sh.) pre-tax payment to Ambase for its interest in the JV. Stock currently trading at $1.05/share
CEO and Chairman, Richard Bianco, controls more than 40% of the company
Recent (modest) insider buying
Company is short on cash, but recently listed owned former office building for sale
Federal NOLs: $36.8mm as of 12-31-15
Ambase (ABCP) is trading at a significant discount to book value and our analysis indicates that book value may understate the realizable value of ABCP’s investment in 111 W57th either through sales of the condo units or the exercising of a put right Ambase possesses.
Ambase Corporation currently generates no operating revenue. The company’s assets consist of cash, a Greenwich, CT office building and an equity investment in a joint venture developing a high-rise luxury residential tower located at 111 West 57th Street in New York, NY. The NYC building is financed and construction is underway with anticipated completion in 2018. Located two blocks south of Central Park, the building offers dead-center views of the Park to the North and Manhattan to the South. Each upper floor of the ultra-thin tower will be its own condominium offering 360-degree views of NYC from each unit. Based on a review of filings in the ongoing lawsuit Ambase has filed against its JV partner, the developers, we believe that the construction cost basis of the high-rise will result in a profitable venture even if the luxury NYC condo market softens.
Ambase received a nearly $200mm settlement from the Federal government in 2012 related to its ownership of Carteret Bancorp. With the settlement proceeds, ABCP paid out a special dividend and then, in 2013, made an initial $56mm non-controlling investment in 111 West 57th Partners LLC (“111W JV”) to acquire the Steinway Building on 57th Street in NYC and re-develop it and neighboring property into a remarkably thin, 1,400 foot high, 60 foot wide luxury residential tower. The project secured $725mm in construction financing in June 2015 and is currently under construction with an expected completion date of 2018. Ambase’s Joint Venture partners are the well–respected developers JDS Development (Michael Stern) and Property Markets Group (Kevin Maloney). The project has a total of 60 condominium units for sale – 46 in the new high-rise tower and 14 in the original, but remodeled, Steinway Building.
9/30/16 AMBASE BALANCE SHEET DATA
($ in 000,000s)
Real estate owned, Net: 1.7 (FOR SALE. ASKING $6.75mm)
Investment in 111 West 57th Partners LLC (”111 W57 JV”): 63.8
Other assets: 0.4
Total Assets: $67
Liabilities and equity
AP and other liabilities: 0.6
Stockholders equity: 66.4
Total liabilities and equity: $67
Book value per share: $1.63
The critical analytical question is what is ABCP’s stake in the 111 W57th JV worth?
Prior to Ambase filing suit against its JV partners, there was very little public information regarding the economics of ABCP’s real estate investment. NYC real estate development is a very competitive business and deal economics are held close to the vest. However, once ABCP filed suit in 2016, public court filings revealed the project’s budget, which has been very useful in assessing the value of ABCP common stock. I will discuss important aspects of the lawsuit below, but let’s first look at the budget detail buried in the hundreds of pages of court filings and assess how it informs the value of ABCP’s investment in 111 W57 JV.
111 W 57th STREET – PROJECT BUDGET
The June 2014 budget for 111 West 57th projected a total cost (excluding construction financing interest expense) of: $639,694,892. This included:
($ in 000,000s)
Hard costs: $249
Soft costs: $52
Financing costs (acquisition and construction): $82
Land Acquisition costs: $256
TOTAL June 2014 Budget: $640
Given the expected livable square feet of 252,581 (per NYC filings), the budgeted hard cost is $986/sq. foot and the total cost is $2,532/sq. foot.
Based on our review of the court filings, the June 2014 budget is not the current budget document. Another budget was developed at the closing of the construction loans in June 2015. Furthermore, based on Ambase’s statements in its court filings, Ambase believes the current budget has increased materially from the June 2015 version. How much it has increased, however, is not clear because budgets more recent than June 2014 have been redacted in the filings.
Therefore, we must make some conservative assumptions based on the data that are available from the un-redacted June 2014 budget. First, let’s assume that between June 2014 and June 2015, all costs grew 5% --perhaps this is too much, but better safe than sorry. This would imply a TOTAL project cost of $672mm or $2,658 per foot. The court filings also contain hints about specific line item changes to the budget data. In particular, in their Second Amended Complaint, Ambase alleges that “hard” costs “exceed 110% of hard costs in the prior approved budget [dated June 2015]” and that the costs related to the project’s sales office are over budget by millions of dollars as well. Let’s assume a $55mm hard cost overage (beyond the June 2015 estimated budget) and a $10mm soft cost overage, which is consistent with Ambase’s allegations. This would increase the total cost of the project to $737mm or $2,917 per foot. Interestingly, this per foot cost lines up with a quote from Kevin Maloney, one of the development principals involved in this project, who commented in April 2016:
“We have a lot of latitude in our [111 West 57th] price structure. If you believe you can complete a project at $3,000 a foot and you believe that the market is even $6,500 a foot, you have a lot of room to make your market where you’re not in jeopardy. So we have a lot more latitude than, say, another project that might be on Central Park South and the 57th Street corridor where the basis is much higher.” Source: Commercial Observer, 4/6/16. https://commercialobserver.com/2016/04/kevin-maloneys-pmg-is-building-empires-in-new-york-and-south-florida/
Now, let’s turn to the market for the condos in the building.
The NYC Luxury Housing market, defined as housing with prices of more than $4mm, cooled in 2016 according to an analysis by Olshan Realty, Inc (source: http://olshan.com/marketreport.php?id=346). In 2016, 751 Luxury condos were put under contract compared to 904 units in 2015 and 891 units in 2014. Interestingly, the number of contracts for units priced above $10mm fell only 5% from 227 units to 215 from 2015 to 2016. The developers of 111 W57 acknowledged the market conditions when they opted to delay the opening of the project’s sales office from 2016 until 2017. In making the decision, a spokesman for the project noted that 111 W57th is “an exceptional property, still in early stages of its development. It will be actively marketed when the time is right.”
In delaying the formal sales effort, JDS and PMG possibly wanted to entice buyers with condos that have more immediate move-in dates. “Buyers in choppy markets often don’t want to bet on projects that won’t be delivered for several years,” said Jacqueline Urgo, president of new development marketing firm, the Marketing Directors in a March 31, 2016 article in The Real Deal.
There are currently several luxury developments in NYC wooing similar buyers to those that 111 W 57th would cater to, including 220 Central Park South (Vornado Realty Trust) and Macklowe Group’s 432 Park Avenue. There are also remaining units for sale in Extell Development’s One57, at 157 West 57th Street.
The developers have filed pricing for 57 of the 60 units to be sold in the 111w 57th project with the NY State Attorney General’s office, as is required under NY law for a condominium offering. In its Condominium Offering Plan filing dated 12/7/15, the developers laid out the asking price for all but the top two penthouses and a high floor two-story unit. Filed asking prices for the units in the old Steinway building aggregate to a total of $107mm for 14 units averaging out to $2,223 per sq. ft. The filed asking prices for the high-rise tower equal a total of $1.18 billion for 43 full-floor units that averages to $6,058 per sq. foot. The three units for which prices are not filed will likely have asking prices in excess of $6,058 per sq. foot. Three recent (fall 2016) high-floor and/or Penthouse sales in the completed luxury high-rise at 432 Park Avenue, which could be considered comparable sales, traded at an average of $7,400 per sq. foot. Assuming a $7,000 per sq. foot asking price for the three premium units, the total “sell out” of the building would equal $1.43 billion.
Notwithstanding what we believe to be this building’s unique attributes, namely a dead-center view of Central Park and a limited number of full floor units, let’s discount the proposed asking prices by 20% across the board to reflect a further softening in the Luxury condo market. The resulting “sell out” would equal $1.14 billion, or an average of $4,510 per sq. foot. To put that in context, data for certain 2016 and late 2015 sales at competitive properties (432 Park Ave and 157 W57th) closed at an average price of $5,564 per sq. foot, with a minimum of $4,034 per sq. foot (37th floor) and maximum of more than $9,000 per sq. foot for two sales (86th floor and 65th floor). (Source: http://streeteasy.com/building/432-park-avenue#tab_building_detail=2.)
SUMMARY REAL ESTATE PROJECT FINANCIALS
ESTIMATED Total Sales Proceeds (@ 20% discount to filed per sq. foot offering price):
- Debt repayment:
($725) face amount
= Net Proceeds after debt repayment:
Assumed equity ownership split at 111W57 JV:
Ambase: 44% **
(**Ambase asserts it is 59%; Developer claims it is 44% - see LAWSUIT)
Developers and Others: 56%
On a discounted cash flow basis (10% discount rate), ABCP’s equity stake in the sales proceeds on a per share basis would be worth between:
BASE CASE: $2.32
HIGH CASE: $3.21
Note: these per share values exclude certain other assets and liabilities that are included in the per share values shown in “The Opportunity” section above.
All 60 Condos are sold over three years beginning in 2018. Twenty units sold per year across all floors (For reference: # of NYC condos priced >=$10mm that went under contract in 2016: 215. In 2015: 227)
Sales prices are 20% below filed asking/offering prices
Construction debt repaid from net sales proceeds first, with only small distributions to equity in JV in Year 1 (5% of net proceeds) and Year 2 (20%). Debt is fully repaid in Year 3 (2020)
Cash flows discounted at 10%
BASE CASE Assumptions
ABCP share of proceeds in JV: 44% (developers’ asserted share for ABCP due to dilution)
ABCP is fully taxed (at 35%) on proceeds above an estimated basis of $66.4mm
HIGH CASE Assumptions:
ABCP share of proceeds in JV: 59% (ABCP’s asserted share, no dilution)
ABCP taxes reduced on proceeds above an estimated basis of $66.4mm due to $36.8mm NOL carryforward
Distributions from the JV will be made according to the non-public construction loan documents and the JV agreement and involve more than a simple percentage allocation, but the point here is to illustrate that the amount of value attributable to Ambase in the above scenarios is considerably in excess of the current book value of the investment ($64mm or $1.63/share), and even further in excess of the recent stock price ($1.05/share.)
Per the 9/30/16 Ambase 10Q filing, Ambase alleges that the developers (Defendants) “engaged in an unlawful scheme to dilute Ambase’s equity interest in the joint real estate venture…”and, more importantly, “that defendants have failed to honor the exercise of Ambase’s equity put right.”
Ambase completed its initial investment in the 111W 57 JV in 2013. Subsequent capital calls from the JV (some of which are at issue in the lawsuit) depleted the company’s cash balances to the point where the CEO invested on the Company’s behalf for one capital call and finally, Ambase just didn’t make two requested capital calls. As a result of the lack of payment, pursuant to JV capital calls, the developers have asserted that Ambase’s stake in the JV has been diluted in accordance with certain provisions of the Joint Venture agreement. The appropriate amount of dilution is at issue in the lawsuit given a variety of allegations from Ambase regarding how the developers funded their own share of the capital calls. The case is in discovery and it is hard to know how the percentage interest matter will be resolved, however in our Base Case scenario we included the lowest percentage (i.e. 44%, the developers’ view of the appropriate Ambase percentage stake) meaning that a decision in Ambase’s favor would increase the value of its stake accordingly.
*Equity Put Right*
A very interesting aspect of the lawsuit is the equity put right mentioned above. Ambase negotiated the right to put its stake in the Joint Venture back to the developers at a price that provides Ambase with a 20% IRR on its invested capital if the budgeted hard costs for the project increase by more than 10% from one budget to the next. The developers last presented a budget to Ambase for “approval” in June 2015. Since that time, despite a requirement in the JV Agreement for the Developer to provide at least an annual budget, no new budgets have been provided to Ambase. Ambase has requested budget info, but the developers have not complied with the request. Ambase believes that hard costs have increased by greater than the aforementioned 10% threshold and have therefore notified the developers of their desire to exercise the put right. Based on our review of the legal filings, the developers do not dispute that they have not provided a budget “for approval” since June 2015. Nevertheless, the developers have stated they will not honor the put right at this time under current circumstances. As a result, Ambase amended its initial formal legal complaint to bring the exercise of the put to the forefront of the lawsuit. Should the court find in Ambase’s favor with respect to the put right, Ambase could conceivably pocket a 20% IRR on the $64mm it has invested in the JV without waiting for construction to be completed and the condos to be sold. It is not clear how the developers would finance the exercise of the put right, but the put right’s very existence likely strengthens Ambase’s hand as they pursue this lawsuit and any potential settlement.
On 1/18/17, the developers counter-sued Ambase alleging that Ambase withheld “consent to necessary project refinance unless [the developers] agree to pay [Ambase] a sum of money to which [Ambase is] not contractually entitled. This “sum of money” reference is, I believe, a reference to the Equity Put option. Ambase has yet to respond to this allegation.
AMBASE’S CASH NEEDS
Ambase is short of cash and raised the question of its ability to remain a going concern in the 9/30/16 quarterly filing. The Company did announce that it had secured a “$1mm or additional amounts as may be necessary” line of credit from its CEO and Chairman, Richard Bianco. Bianco also owns or controls 40% of the common equity. In addition to the LOC, the company owns an office building in Greenwich, CT which it listed for sale in November 2016 for $6.75mm with no 8k announcement (http://www.loopnet.com/Listing/20044008/100-Putnam-Green-Greenwich-CT/). The office building’s book value at 9/30/16 is $1.7mm net of depreciation. Finally, Ambase alleges that it is entitled to a greater share of a July 2015 JV capital distribution ($26.7mm in total) than it received due to its disputed JV equity interest percentage. Should the lawsuit go Ambase’s way, more cash could be realized from this distribution.
We believe the company can solve its near term cash problem with the assets it controls. Recent insider buying by the Company’s treasurer suggests the liquidity problem is not fatal.
WHY IS IT CHEAP?
No publicity for Ambase’s ownership stake in 111 W57th. Articles about the project have only very rarely mentioned Ambase and even fewer, if any, have mentioned that Ambase is publicly traded.
Ambase has no operating business, it is strictly a single asset play and company has identified liquidity issues. No public announcement of listing of office building for sale.
Assessing value of ABCP’s investment in 111 W57th is difficult strictly from the ABCP filings as they provide very little detail. Analysis requires seeking out and reading court filings and other documents.
Micro-cap, trading on the OTC markets
Volume in ABCP has been limited. Price fell by more than 50% in last 12 months and only 10% of the public float traded hands
The downside risks are Ambase’s limited liquidity and the concentrated exposure to the ultra-high-end NYC real estate market. As mentioned above, we believe Ambase has options to solve its liquidity issues. The company is running on a small staff of 3 or 4 and the largest expenses beyond salaries (which we frankly think should be cut) are legal related to the lawsuit. With respect to the NYC real estate market, we have attempted to model conservative sales prices for the 111W 57th condos. Our analysis also indicates that Ambase’s equity in the JV would not be impaired even at a 30% discount to filed asking prices. If Ambase were to recover only book value for the JV equity, the stock would be worth nearly double its current market cap. Nevertheless, there are a limited number of buyers for $20mm+ condos in the world. We are comforted by the fact there are only 46 units in the tower to sell and, as we have mentioned earlier, we don’t believe there is a better location for high-rise views of Central Park and NYC.
Recent trading prices for Ambase value the Company’s equity stake in the 111 West 57th Street development joint venture at less than $0.65 on the dollar. Our analysis not only finds no basis for this impairment, but instead shows evidence to demonstrate that the stake is worth a premium to book based conservative assumptions about the project budget and the realizable sales proceeds for the condos. Even assuming Ambase loses on all counts with respect to its lawsuit against the developers, we believe the stock price at these levels still provides significant upside as sales for the condos begin in earnest in the next 12 months. Should Ambase prevail on some or all matters in the lawsuit, and our review finds that Ambase has a reasonable argument that the equity put right should be honored, there could be considerably more upside in the stock price. Finally, this is a rare opportunity for an investor to effectively co-invest – at a discount – with respected NYC developers on a high profile project.
|Subject||Re: Good writeup|
|Entry||02/03/2017 11:40 AM|
That is a fair question. My short reply is that, for the most part, shareholders are currently alinged economically with Bianco and family. My bottom line is that if he works to maximize the value of his 40% stake, shareholders should benefit as well.
|Subject||Re: Re: Re: Good writeup|
|Entry||02/03/2017 12:18 PM|
I don;t know. I would certainly hope so.
|Entry||02/03/2017 05:12 PM|
Good write up.
Any thoughts on the Trump effect on New York real estate? I haven't quite been able to figure that out. People that typically buy these apartments are cash buyers so not necessarily hurt by rising rates. Buyers are often foreigners, usually Chinese and Russian which is sort of a wash. His personal economic interest and that of his friends is more or less aligned. I don't want to overstate the effects. Just curious for your thoughts.
A more specific Trump effect that I've been considering is the proximity to Trump Tower. Traffic has been a mess but living near the White House north may be good. On the other hand, he seems to be alienating the people with money to burn.
Again, not to overstate the effects of Trump. I just think there is more upside since it's a highly levered equity with modest downside. A small increase in the per square value is incredible for the equity value. Also, did I read correctly that any cost overruns from change orders, etc will be born by the developers on a subordinated basis? Any thoughts on that?
|Entry||02/03/2017 10:11 PM|
No real insights on any Trump effect. It would ceratinly hurt his ego and his wallet if NYC real estate was to crash on his watch.
The JV Agreement calls out and defines Manager Overruns which are to be recovered only after the members have received a 20% IRR. I suspect there will be some vigorous debate about whether overruns are strictly speaking Manager Overrun as defined, or Cost Overruns, which are treated differently.
I agree with you on the leverage and the sensitivity to improved sales prices. The leverage can certainly cut both ways, however.
|Subject||Re: Re: Trump|
|Entry||02/04/2017 05:46 PM|
True, but that's where the put right comes in. Having said that, I have no sense of the equity partners' ability to finance the put if exercised. My sense is that, if bad, the put works. If really bad, the put is worthless.
|Subject||Re: Re: Re: Trump|
|Entry||02/04/2017 07:38 PM|
I love the put too...time will tell.
|Subject||Re: Doc 225 : Covenant breach / Baupost USD 100m mezzanine loan @ 17%|
|Entry||02/12/2017 08:31 PM|
This info came to light after my post, but I believe the thesis still holds, perhaps with smaller upside.
If you read the transcript of the court appearance, it does appear that there is (and has been) a covenant problem and it also appears that Baupost has been lined up to provide "Financing" that a lawyer said was at 17%. What is not clear is what covenant has been breached, as I have not been able to find the loan docs (which I suspect are confidential), and it is also not clear if the project will have to draw the 17% "financing" immediately or if the mezz/senior lenders just want a committment of additional capital below them. Regardless, for conservatism - one could assume $100mm is drawn at 17%.
Looking at the thesis -
1. I believe the Equity Put is still in play, regardless of the new Baupost financing, at least i have found no evidence in the documents that the equity put right would be elimiated due to this. Importantly, it looks as though ABCP has finally received an updated budget (as of Dec 2016). So perhaps the judge will consider and rule on the ABCP request to honor the put if in fact it has been triggered due to overruns as ABCP alleges. How the developers would finance the Put remains an open question, as i pointed out in the write up.
2. In my writeup, the model assumed Net Proceeds after Debt Repayment of $345mm given an assumed cost of construction of $737mm ($2,900/sq ft). IF one was to assume an additional $100mm of debt repayment and two years interest at 17%, that would be roughly an additional $137mm to be repaid *IF AND ONLY IF* all of the new $100mm was needed to complete the project (an additional $400/sq ft.). I think this is a big IF given that the Apollo (lender) mentioned in a June 2016 earnings call that the all in cost of the building will be $2700/ sq ft which equates to roughly $680mm - which is nearly 7% less than my model assumed. Given the publicly available information, the precise revised budget is unknown. The other publicly unknown variables are the interest rates and drawdown schedules on the Senior and Mezz debt.
In summary, is the potential Baupost Loan good news, no. But without seeing the convenant(s), it is hard to know the full impact of it. Is the new Baupost financing fatal to the thesis? I don't think so, but reasonable minds can differ.
|Subject||Re: Re: Re: Doc 225 : Covenant breach / Baupost USD 100m mezzanine loan @ 17%|
|Entry||02/13/2017 09:02 AM|
I, too, appreciate the discussion. Thanks.
Implicit in your $1.16 analysis, I believe, is that the costs of building the building have increased significantly over my estiamte of $2900/sq ft. Note that the $2900/sq ft cost estimate includes an "interest reserve" line item of $16.7mm AND a construction contingency of $26mm (which together total $168/sq ft). Overall, the $2900/sq ft estimate, as I mentioned, is already 7.5% higher than the per square ft estimated costs the Apollo CEO quoted in June 2016 conference call. Now, perhaps the cost of construction has increased dramatically above $2900/sq ft, but I do not see evidence of that in the Maloney comments or the Apollo CEO comments.
The building is now at about 15 stories (+/-) which should mean the cost estimates are firmer now than at the outset. Ambase has no excess cash, and I am not sure the Developers do either - hence the need for Baupost (who did partner with JDS on at least one earlier development project in NYC).
Assuming a full $100mm draw on the Baupost note, here is how I see the Sources and Uses play out if one stays with my estimate of $2900/sq ft and one makes quite conservative interest expense assumptions.
Revised Sources and Uses with New Baupost Loan:
If this is the rough Sources/Uses, the result would be the following Net Proceeds at the discounted sales prices
This Net Proceeds amont could then be added to a DCF.
|Subject||Put Right is against "Sponsor"|
|Entry||02/13/2017 09:48 AM|
Just another quick point on the Equity Put Right. It is against "Sponsor", which is defined as "111 West 57th Sponsor LLC", as shown below.
|Subject||Brief update on 111 W57th from Lender - Apollo|
|Entry||02/28/2017 11:03 AM|
You can hear a brief update from 111 W57th lender, Apollo Commercial Estate Finance, at the end of the earnings call linked here
|Subject||ABCP 10K filed|
|Entry||03/30/2017 04:07 PM|
10K filed today.
|Subject||Re: Re: ABCP 10K filed|
|Entry||04/10/2017 09:29 AM|
Hi RoyalDutch -
The Going concern warning was in the last 10Q as well - it is not unique to the 10K.
It will be interesting to see the transcript of the upcoming Compliance Conference in court. What i found interesting was what was absent from the 10K: namely any mention of additional capital invested in 111 W57 or any reference to covenant violations. As you may recall, there was some URGENCY from the defendants in the last court apperance about the need for the Baupost "loan" and yet, two months later, ABCP makes no mention of it in the 10K. Granted, ABCP provides a ridiculously unstatisfying amount of info in their filings, but one would think a convenant default, actual or imminent, would rise to the level of needed disclosure. I take the Bianco "capital call" commitment of $10mm as indicating that an additional raise of some kind may be imminent - or at least the lenders wanted to know $$ was there. Hopefully the next court transcript will shed some light. If you look at the JV balance sheet disclosure, the JV clearly has more debt capital avaialble from AIG and Apollo which supports the hypothesis that new capital (at least at this stage in the project) would be convenant related, not cash related.
As for you last point about hurting the litigation case, i disagree. Bianco, through an affiliated entity, provided capital to the JV without objection (apparently) in the past, prior to June 2015. In fact, when the JV made the now ill-advised capital distribution in June 2015, the company received a return of captial and promptly re-paid the Bianco entity. There was no disclosure at the time that Bianco's support would lead (or led) to any dilution for ABCP. The thrust of ABCP's allegation seems to related to the contribution of capital by uaffiliated third parties to the Sponsor. The record would seem indicate that Bianco is an acceptable source - at least he was historically.
As a final note, ABCP made no mention, that I saw at least, that their office building was for sale in Greenwich and it is listed. If sold, this could provide a welcome $5mm+ cash infusion.
|Entry||05/11/2017 04:49 PM|
|Subject||Re: 3-31-17 10Q|
|Entry||05/11/2017 05:08 PM|
Thanks for the updates.