Please see cfavenger’s (http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/64543) and joe661’s (http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/88437) write-ups for a background on this special situation. 

To recap, AmBase Corp. (“AmBase”, “ABCP”, “the Company”), was a plaintiff in a legal proceeding seeking recovery of damages from the United States Government for losses related to the Company's wholly-owned subsidiary, Carteret Savings Bank, F.A.  This legal proceeding was commenced in 1993.   On October 11, 2012, the Court of Federal Claims issued an order approving a settlement agreement between the Company, the FDIC and the DOJ. On October 19, 2012, the United States Government paid $180.7 million directly to AmBase. 

After paying a $2 per share special dividend in December 2012, ABCP was left with approximately $1.54 in tangible equity, which was nearly all cash with a minimal cash burn.  However, from June 28-August 29, 2013, instead of giving back the remaining cash to investors, the Company announced that it had formed a JV to buy and develop a retail residential real estate property in midtown Manhattan (more on this below).  What gave us comfort with this announced transaction was (i) our network of real estate advisors who have confirmed that pricing for a residential building in this Manhattan zip code could easily be over $2,800/sqft when construction is finished (we estimate all-in costs of >$1,000/sqft), (ii) Michael Stern of JDS Development has a strong reputation in building residential and commercial buildings; (iii) Richard Bianco (who owns and controls nearly 40% of the stock) has strong experience in residential construction as a former mortgage banker; (iv) the JV agreement is very favorable to protecting AmBase for overruns (i.e. the risk of dumping more money into the JV in the event of going over budget…which always occurs) from estimated/budgeted cost figures. 

Our write-up is to give a quick valuation update, now that the necessary material information regarding the use of its cash is defined and clear.  We believe that a timely investment at current levels could potentially make over 50% returns in the short to medium term.  The stock currently trades at approximately $1.08 per share.  We currently value the stock at near book value and are buyers of the stock below $1.20 per share to give our analysis a sufficient margin of safety.  Due to its low trading volume, we believe that meaningful ownership will be difficult for large institutional investors.  This stock is primarily for retail investors.  Current risk to our thesis includes investment illiquidity, construction delays and dissolution of the J.V. partnership.

Catalysts

Unfortunately, we do not see a meaningful catalyst occurring in the near future as the stock is highly illiquid with a market capitalization of under $50 million.  However, we do believe that some events could provide catalysts: (i) details about the progress of development, (ii) cash burn disclosures for ABCP as investors wait for construction to finish; and (iii) presales with clarity on pricing. 

Situation Update

On June 28, 2013, ABCP entered into a joint venture agreement with Michael Stern of JDS Development Group and Kevin Maloney of Property Markets Group (together, the “Sponsors”).  According to the agreement, AmBase invested $56 million in a real estate development project to purchase and develop real estate property located at 105 through 111 West 57th Street in Manhattan.  This property includes historical landmark Steinway Hall, a vacant lot, and an adjacent building at the corner of Sixth Ave. and 57^th (the “Property”). 

In consideration for making the Investment, ABCP was granted a 59% membership interest in the Joint Venture.  AmBase also contributed $1.25 million to the Joint Venture in exchange for an additional 1.3% interest.  Other members and the Sponsor contributed $37.75 million of cash and/or property to the Joint Venture.  The Joint Venture also intends to purchase additional inclusionary zoning rights for a purchase price of $6.5 million.  The acquisition of the 111 West 57th Property was partially financed by a mortgage and acquisition loan by Annaly CRE LLC for $230 million.  See Table 1 and Table 2 for added details. 

According to 8-K filings, the Property is substantially vacant with only 23% of the building leased and a substantial portion of the remaining tenants vacating the building in less than one year.  The JV intends to fully renovate and partially demolish portions of the existing property and reconstruct the property for a different use with the construction of a new building at the same location for an approximate combined 346,000 gross square foot luxury residential tower, retail and/or hotel project.  As a historical landmark, the Steinway Hall cannot be touched; the rest of the property is to be replaced by Manhattan’s third-tallest residential building, of which at least 26 stories are expected to offer unobstructed views of Central Park.

ABCP shares fell dramatically on the June 21 announcement, perhaps because it eliminated the prospect for a simple liquidation and consequent short-term return -- or perhaps because of a lack of transparency about the joint venture’s ownership and control arrangements.  Either way, there is now clearer detail for use of ABCP’s excess cash.  ABCP now owns a significant position in a promising project, run by highly experienced developers, in a tight condo market, at a prime location -- and trades at a significant discount to tangible book value.

 

Table 1: Transaction Sources/Uses

Table 1 ($ in millions, except per sqft figures and where noted)
Uses				Sources				Yield	% of Total
Steinway Hall and Lot			$238.3	Excess cash			-
Inclusionary zoning rights			6.5	Annaly CRE Loan			$230.0	10.0%	64.4%
Adj. purchase price			244.8	Additional debt			32.4	12.0%	9.1%
Construction costs			111.3	New debt issuance			262.4	10.2%	73.4%
Additional working capital			-	Investment LLC			57.2		16.0%
Fees and expenses			1.2	JDS Development/others			37.8		10.6%
Total			$357.4	Total equity capital			95.0		26.6%
				Total			$357.4		100.0%
Transaction Mulitples					Additional Trxn Information
Steinway Building sqft			247,000		Lot Floor Area Ratio ("FAR")			15.00x
Steinway lot sqft			4,322		Max lot addional sqft build			64,830
Additional sqft			99,000		Additional Sqft Purchased			34,170
Total PF sqft			346,000		Est. constr. cost for lot /sqft			$900
					Est. constr. cost for Lndmrk /sqft			$300
Purchase price per sqft			$974		Est. lot dev. construction cost			$89.1
Deal price per pre-constr. sqft			1,422		Est. Steinway Hall renovations			22.2
Deal price per post-constr. sqft			1,033		Total new construction costs			$111.3

 

Table 2: Share Ownership Summary

Table 2 ($ in millions, except per sqft figures and where noted)
Share Ownership Summary
			Post-Transaction Ownership
		Pre-Trxn	Basic	% Total	Fully-Conv.	% Own	FC Act.	% Own
Steinway		244.8	-	-	-	-	-	-
Investment LLC		-	57.2	60.3%	57.3	59.1%	57.3	59.1%
JDS Development		-	37.8	39.7%	37.8	38.9%	37.8	38.9%
Mgmt Opts		-	-	-	1.9	2.0%	1.9	2.0%
Total Shares		244.8	95.0	100.0%	96.9	100.0%	97.0	100.0%
Total Equity Value		$244.8	$95.0
Value / Share		$1.00	$1.00

JDS is Highly Experienced

JDS was formed by Michael Stern for the purchase and development of residential and commercial real estate.  PMG is a NYC based acquisition and development firm founded by Kevin Maloney with a diverse history of developing residential and hotel properties.  Together, the sponsors have developed over 3 million square feet of property nationwide with a market value of over $5B.  Current residential projects in NYC include Walker Tower, 435 West 50^th Street, 50 North 1st St, and 107 West 57th Street.  Additionally, the partnership is developing 95th & Ocean and Echo Aventura in South Florida (http://202eighth.com/team.php). 

It is rumored that, outside of the Steinway Project, JDS has been partnering with known investors, such as the Baupost Group.  According to our research, JDS Development is a respectable, experienced real estate development company, which we believe can execute on the planned ~$350 million project (see Table 1). 

Luxury Pricing Should Hold

We believe that the biggest risk to the development is end pricing whenever the luxury residential apartments are finished and ready for sale.  Currently, JDS has quoted luxury apartment buildings they are working on at a pricing, on average, above $3,500/sqft — almost $4,000/sqft.  This pricing was for their Chelsea property.  According to Property Shark and agents we have spoken to, residential towers along Central Park South, and within the 10019 zip code, command consistent pricing significantly above ~$2,800/ sqft, historically.  We, therefore, decided to conservatively keep this average pricing, not factoring in any inflation or potential pricing for “unobstructed views” of Central Park, when forming our valuation analysis.  We welcome comments here to refute or sustain these assumptions, since we believe this is the critical point for ABCP to achieve adequate returns. 

Construction Cost Protection

According to the JV Agreement, state that cash from the projects will be distributed: (i) first, 100% to the members in proportion to their percentage interests until ABCP’s subsidiary, Investment LLC, has received distributions yielding a 20% IRR; (ii) second, 100% to JDS as a return of (but not a return on) any additional capital contributions made by JDS on account of manager overruns; and (iii) thereafter, (a) 50% to the members in proportion to their respective percentage interests at the time of such distribution, and (b) fifty percent 50% to the Sponsor.  

We interpret this to mean that JDS is on the hook for any construction cost overruns.  According to Manhattan developers we spoke with, there are always overruns with residential and commercial real estate development in New York City.  We believe that this means that ABCP’s $14.2 million of cash should not be used for further investment in this project.  In fact, ABCP is expected to receive first distributions, from apartment sales, until they receive a 20% IRR on their investment.  We believe that, at the very least, this should potentially protect ABCP’s $57.2 million investment. 

Project and Company Valuation

We used a number of assumptions when thinking of valuation for ABCP.  First, we assumed that overruns could potentially run over $30 million.  We arrived at this figure by estimating the potential cost to develop the Steinway properties.  According to public property records, the combined undeveloped properties are approximately 250k square feet.  That means that there is about 99k square feet of new development, in addition to renovations on the existing 250k.  On the high-end, according to our sources, construction could run at about $900/sqft on the new development due to unknowns, delays, miscalculations and inflation.  The existing property is different.  Steinway Hall, which is part of the existing property, is a designated and registered historic and cultural landmark.  As such, it cannot be destroyed, only selectively renovated.  Plans for the majority of this property is for it to function as a high-end hotel.  We therefore, set our renovation costs to the existing real estate to approximately $300/sqft.  For the most part, we believe that the property was most likely purchased, post-construction, for over $1,000/sqft. 

Second, we assumed that overruns would come out first at a 12% interest rate charge.  Even though JDS is technically responsible for overruns, we believe that it would most likely finance such costs with debt.  We assumed interest rates should be higher than Annaly’s 10%, $230 million loan. 

 

Table 3: ABCP Market and Balance Sheet Summary

Table 3
($ in millions, except per sqft figures and where noted)
Investment LLC ownership							100.0%
Shares oustanding							42.2
Price per share							$1.08
Market capitalization							$45.6
Shareholder equity							65.1
								Price/shr
Investment LLC							$57.2	$1.36
Cash and equivalents							14.2	0.34
Investment securities							9.5	0.23
OREO, net							1.8	0.04
Other assets							0.3	0.01
Total tangible assets							$83.1	$1.97
Less liabilities							(18.0)	(0.43)
Tangible equity							$65.1	$1.54
Price to tangible assets							0.55x
Price to BV - Pre Transaction							0.70x
Price to TBV - Post Transaction							0.70x

 

 

Table 4: Project and Investor Return Summary

 

Table 4
($ in millions, except per sqft figures and where noted)
Expected sales price per sqft of new Steinway residential homes						$2,800
% of Steinway development available for sale						70.0%
Steinway square footage available for sale						242,200
Years to develop						5 Years
Enterprise value of Steinway new residential						$678.2
Less existing debt						(262.4)
Less interest paid						(90.1)
Equity value of Steinway new residential						$325.7
Investment LLC						$192.4
Ambase ownership interest						192.4
IRR on project						27.4%
RWR discount rate						15.0%
Effective tax rate						35.0%
PV of Ambase ownership interest in Investment LLC						$72.1
Ambase fair value of tangible equity						$80.0
Less: PV of cash burn						(4.4)
Less: 15% illiquidity discount						(11.3)
Fair value of equity						$64.3
Ambase intrinsic tangible equity value per share						$1.52
Upside / (downside) to current share price						41.1%

 

Third, we assumed that it would take, at least, five years until distributions would be available to investors.  We also assumed, in the interim, that ABCP’s cash burn would be ~$1.3 million per year (which is latest annualized six months burn of $0.65 million).  Fourth, we assumed an average selling price of $2,800/sqft.  Lastly, using a 15% discount rate and a 15% illiquidity discount, we arrived at a present value valuation of $1.50 per share, which is not too far off the current tangible book value per share. 

Interestingly, and understandably, our valuation analysis was much more sensitive to end pricing then initial acquisition and construction costs.  According to our analysis (see Tables 5 and 6) we found that changing initial costs by $300/sqft only changed valuation by 10%, whereas, changing end sales pricing changed valuation by nearly 20%.  Therefore, we believe that most critical question for management to answer over the next six months to a year is understanding their targeted sales pricing for the properties.  We believe that any new disclosure of pre-sales would help to solidify valuation.

Table 5: Implied Intrinsic TBV per Share Sensitivity

Dev Cost	Sales Price / sqft
/sqft	$1,800	$2,300	$2,800	$3,300	$3,800
$500	$0.81	$1.27	$1.74	$2.20	$2.67
600	0.75	1.22	1.68	2.15	2.62
700	0.70	1.16	1.63	2.10	2.56
800	0.65	1.11	1.58	2.04	2.51
900	0.59	1.06	1.52	1.99	2.46
1,000	0.54	1.00	1.47	1.94	2.40
1,100	0.49	0.95	1.42	1.88	2.35
1,200	0.43	0.90	1.36	1.83	2.30

 

Dev Cost	Sales Price / sqft
/sqft	$1,800	$2,300	$2,800	$3,300	$3,800
$500	(25.4)%	17.7%	60.9%	104.0%	147.1%
600	(30.4)%	12.8%	55.9%	99.1%	142.2%
700	(35.3)%	7.8%	51.0%	94.1%	137.3%
800	(40.2)%	2.9%	46.0%	89.2%	132.3%
900	(45.2)%	(2.0)%	41.1%	84.2%	127.4%
1,000	(50.1)%	(7.0)%	36.1%	79.3%	122.4%
1,100	(55.1)%	(11.9)%	31.2%	74.3%	117.5%
1,200	(60.0)%	(16.9)%	26.3%	69.4%	112.5%

 

 

Recommendation

We believe that at current levels, of ~$1.08 per share or below, should provide an adequate margin of safety for an investment in ABCP’s stock, as this valuation should capture the potential uncertainties in end unit pricing for the Steinway Project.  We currently value the stock at near book value and are buyers of the stock below $1.20 per share.  Given the illiquidity and size of the stock, we recommend this investment as a retail investor trade and patiently buying as shares become available. 

Additional Unanswered Questions for Management

1)      What is the average exit pricing per square foot that are you targeting?

Unfortunately, we do not see a meaningful catalyst occurring in the near future as the stock is highly illiquid with a market capitalization of under $50 million.  However, we do believe that some events could provide catalysts: (i) details about the progress of development, (ii) cash burn disclosures for ABCP as investors wait for construction to finish; and (iii) presales with clarity on pricing.