Gyrodyne GYRO
December 31, 2008 - 1:44pm EST by
roc924
2008 2009
Price: 24.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 31 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

At $24, GYRO is a heads you about tie, tails you receive up to 6x of your original investment and this upside is mostly independent of market performance or the economic environment. Investors could be awarded with as much as an additional $97 per share in as little as a year. The stock was the subject of three prior VIC reports from 2004-2006. The investment case remains about the same as the authors chronicled in those reports, except the timeframe to realize a payoff is far shorter and you can buy the stock for much less than in 2004-2006.

The opportunity exists due to the market’s revulsion of anything real estate related and tax loss selling. However, the largest component of the company’s potential value is not tied to current real estate values. GYRO has a claim for $98.7m plus interest of about $27m, against the State of New York. That’s $97 per share, all of which would be tax free to GYRO as a REIT.

Importantly GYRO does not need to raise capital and should be close to cash flow break even in the future. The company has $10m of cash and $10m of mortgage debt, or zero net debt.

GYRO has five principal assets worth from $18 to $147 in total per share:

1.      Claim against the State of NY for $98m plus interest at 9% per year from November, 2005 when the State, under eminent domain, appropriated 245 acres of GYRO’s Long Island, NY property.

2.      Remaining 68 acres on Long Island (Smithtown, NY)

3.      10.93% LP interest in Callery-Judge Grove, a development west of Palm Beach, FL

4.      Medical office buildings

5.      $10m cash and marketable securities

First a brief overview of the Long Island property. You can find more detail in the prior VIC reports and GYRO’s filings and I’d be happy to answer questions in the message section. GYRO owned about 313 acres located in both the Town of Smithtown and the Town of Brookhaven. Both towns are in Suffolk County, which is on Long Island, NY. The State of NY appropriated 245.4 acres under eminent domain in November, 2005 for $26.3m ($107k/acre) for use by Stony Brook University. There are no comps that remotely support $107k per acre. The remaining acreage consists of a 62.4 acre contiguous parcel zoned light industrial and a separate 5.2 acre parcel zoned residential. GYRO has applied for rezoning of the 62.4 acres from light industrial to residential.

There have been two important actions since Max’s last VIC report in 2006: GYRO converted to a REIT and in November, 2008 the State of NY and GYRO filed their appraisal reports for the 245.4 acres the State appropriated. REIT status means most of GYRO’s asset proceeds will be tax free at the corporate level. The appraisal reports strongly favor GYRO receiving a substantial award from the State of NY.

GYRO appraisal report: http://www.gyrodyne.com/documents/home/4215_001.pdf

State of NY appraisal report: http://www.gyrodyne.com/documents/home/4216_001.pdf

The State’s appraisal completely hinges on the faulty assumption that GYRO would not have been able to rezone any of the 308 acres (neither the 245.4 taken, nor the 62.4 remaining) to residential.

A zoning analysis prepared by the Deputy Director of Planning, Suffolk County Planning Department does a good job explaining why the property was highly likely to be rezoned to residential. This zoning analysis is at the end of the GYRO appraisal. Recall that the appropriated land is in Suffolk County. Furthermore, GYRO is in the middle of the application process to rezone the remaining 62 acres to residential from light industrial and the Smithtown Planning and Community Development department flat out told me GYRO will get rezoning to residential.

The State appraiser also makes other critical errors. He values GYRO’s 62 acres based on income from existing buildings, which are clearly under improvements. He uses a comparable sales approach to arrive at a valuation of $75/sqft for the industrial buildings and underlying land, but does not properly account for the fact that GYRO has HALF the density of buildings to land as the comparables. (GYRO’s land/bldg ratio is 6.3, which he does not clearly note, versus the comps at about 3.0, and the appraiser only uses an adjustment factor of 5-10%). In the appraisers discounted cash flow analysis under a development scenario he uses the price of raw land in his model, but subtracts all the costs as if GYRO were selling fully developed property.

The State’s appraisal notes that “As vacant land, the subject property is a major development opportunity which would excite a number of developers. It is unusual to find such a large, attractive and buildable parcel in such a populated and affluent market. The property is reasonably close to commuter trains, major highways, shopping, services, beaches and a university campus.” Contradicting this statement, the appraiser applies a discount because it is a large tract of land. The appraiser wishes this residential development scenario away because “these risks [long approvals process] would encourage an experienced developer toward developing this land as it is currently zoned; for light industry.” He does not analyze a situation where the approval process for a residential development is long, so with his appraisal we do not know if residential, with or without a long approval process, may have been the highest and best use.

If the case does not settle, the outcome will be decided at trial, probably within the next year to year and a half. There is always a risk of an irrational outcome, but it seems highly likely that GYRO will be awarded significant additional damages and interest and at $24 you are not paying for any of this upside.

 

 

 

 

 

 

 

 

 

Valuation

The most likely outcome is somewhere between the below two scenarios. The worst case seems highly unlikely since the likelihood of GYRO receiving nothing from the State of NY appears very low.

Worst Case?

 

Value

$Millions

Per Share


 

Cash

10.2

 $       7.91


 

Mortgage debt

 (10.6)

        (8.22)


 

Medical office buildings

    9.3

          7.21


$9.3m value based on a 15% cap rate on net operating income; Gyrodyne paid $8.9m for one medical office building in 2007 (8% cap rate) and in June 2008 paid $7.0m for a medical center (10% cap rate)

10.93% LP interest in Callery-Judge Grove

       8.3

          6.41


Assumes 30% discount to June 2008 appraisal value of $180m, which does not include added value from recent development approvals; $180m less 30% is $34k per acre; GYRO's partnership interest is held in a taxable subsidiary; assumes 40% tax rate

67.6 acres in Smithtown, NY

        10.1

          7.86


$150k per acre; assumes no rezoning to residential; the State's low ball appraisal valued the land and buildings at $15m. Gyrodyne estimates its 152k sqft of industrial buildings, which sit on 16 of the 68 acres, will generate $1.0m in net operating income next year, so using a 10% cap rate the value of this income is $10m and the remaining vacant land is worth zero under this scenario (probably too conservative).

Total without claim

    27.3

 $     21.17


 

Litigation claim

       (3.8)

 $     (2.95)


Court orders GYRO to refund difference of amount the State already paid ($26.3m) and State's appraised damages ($22.5m)

TOTAL

        23.5

 $     18.22


 

 

 

Homerun

 

Value

$Millions

per share

 

Cash

      10.2

 $       7.91

 

Mortgage debt

     (10.6)

        (8.22)

 

Medical office buildings

       15.6

        12.09

$15.6m based on 9% cap rate

10.93% LP interest in Callery-Judge Grove

       11.8

          9.15

Assumes June 2008 appraisal value of $180m, which does not include added value from recent development approvals; $180m is $49k per acre; GYRO's partnership interest is held in a taxable subsidiary; assumes 40% tax rate

67.6 acres in Smithtown, NY

        37.5

        29.07

300 units at $125k per unit per GYRO appraisal

Total without claim

      64.50

 $     50.00

 

Litigation claim

      125.3

 $     97.17

Court awards GYRO its appraised value of damages of $98m plus interest at 9% per year

TOTAL

    189.85

 $   147.17

 

 

Insider Ownership and Management

Management and directors own 10% of the 1.3m shares outstanding. The CEO owns 6%. Management salaries are reasonable and there have been no stock options or share grants in the past few years. Management has done a reasonable job keeping costs low.

 

Risks

There is a lot of uncertainty in this investment but there does not appear to be a lot of downside risk. The Court could order GYRO to refund a small portion of the proceeds but I’d give this less than a 1% chance.  You likely will have to be patient to realize the Callery-Judge Grove valuation since this development is in the Palm Beach, FL area.

Catalyst

Court award of up to $97 per share.
Smithtown land rezoned to residential.
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