OWENS REALTY MORTGAGE INC ORM
September 29, 2016 - 12:02pm EST by
gman
2016 2017
Price: 16.80 EPS 1.79 0
Shares Out. (in M): 10 P/E 9.4 0
Market Cap (in $M): 172 P/FCF na 0
Net Debt (in $M): 88 EBIT 19 0
TEV ($): 266 TEV/EBIT 14 0

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  • Discount to book
  • REIT
  • Mortgage REIT

Description

Owens Realty ORM                        September 28, 2016

This is an update to a VIC posting that I posted 6/4/2015. There have been two other postings, briarwood988 on 4/24/14 and issambres839 on 3/24/2016 and all of these postings should give you plenty of background on the company.

It is unusual to find a security trading at 66% of fair value, with clearly identifiable catalysts and much of the value in cash. ORM represents an excellent value in a value starved market.

The scenario I laid out in my earlier posting is playing out better than expected and yet the stock, while up 24% since my earlier posting, does not fully reflect the value creation that has occurred over the last 15 months. The stock is a better value than when I made my original recommendation since the discount to book value remains large ($17 stock price vs. $25.64 Estimated Book Value) and the uncertainty of the outcome has diminished by a massive amount with the sale of TOTB and the Tahoe vacant land.

  • The key for ORM was to sell their two main real estate holdings in Treasures on the Bay (TOTB) in Miami Florida and Chateau and Zalanta properties in Lake Tahoe CA.

    • On September 15, 2016, ORM closed on the sale of TOTB for $75.5mm. ORM owned 80.7% of the property so their portion of the gross proceeds was $60.9mm. The sale added $1.52 to book value. I believe ORM was very fortunate to get this deal done given that market for Miami Condo related real estate appears to be falling apart.

    • On September 27, 2016, ORM announced that they are under contract to sell the residential land portion of their Lake Tahoe property for $42.5mm to a Chinese buyer. Based on my conversations with ORM, the buyer wanted to close in 2016 however ORM wanted to defer closing until 2017 because they have a pending sale of their property in Gypsum CO that has a tax loss that they can use to offset the $19mm gain on the sale of the residential land at Lake Tahoe

  • These two sales are significant because of their size (Total sales of $118mm vs. a market cap of $172mm) and also because the land portion of the Lake Tahoe property was by far the least liquid and lowest certainty of sale of any property owned by ORM. This removes a significant portion of the risk from the underlying value creation story for ORM

     

    I’ve attached my calculations for the remaining real estate ORM owns. Unlike many situations, book value is a more valid measure of market value since it consists either of cash, new loans that ORM has completed and the remainder of the real estate, most of which can be fairly easily valued. The nine properties that I’ve labeled “bad” will be difficult to sell and I assume they will take a 50% haircut on these. In total, they make up less than $1 of book value.

     

     

    • Last year, ORM prepared internal calculations that estimated the company would generate a dividend of $1.78-$1.89/share. The calculations were based on conservative assumptions. With the sale of TOTB and the Tahoe Land, ORM’s dividend capacity looks to be even better. This works out to be a yield of 10.5-11.1% based on the current stock price.

    • ORM’s loan portfolio is made up of mortgage loans with an average LTV of 55% with no land loans.

     

     

     

  • Price Target: ORM is an odd security without any exact comps. It will take more than a year for the yield to approach a fully invested level. That being said, the closest comps are:

Company                                                    SYM       Price/BV              Yield     Mkt Cap

Ares Commercial Real Estate                   ACRE     .9                            8%          358

Ladder Capital                                            LADR     1.1                          8%          850

Blackstone Mortgage                               BXMT    1.1                          8%          2799

 

Averages                                                                   1.03                        8%          1335

 

ORM is at least a year away from having a full dividend yield but you could also argue that a lot of ORM’s assets are near cash. Assuming ORM trades at book value, this would indicate a price target of $26/share or 53% appreciation from the current price.

 

 




Owens Realty Book Value Calculations

           

28-Sep-16

           
             
     

Book

Sales

Increase in

 

Property

Type

Location

Value

Price

Book Value

Comments

Properties recently sold or under contract

           

Chateau at the Village

Res. Land

S. Lake Tahoe CA

        23,216,154

        42,500,000

    19,283,846

Under Contract

Saddle Ridge

Land

Gypsum CO

          2,113,850

          2,300,000

          186,150

Sale of 50% under contract

Pointe at Lake Steilacoom

Condos

Lakewood WA

          4,183,386

          5,425,000

      1,241,614

closed 9/18/16

Piercy Road

Land

San Jose CA

          1,970,448

          3,750,000

      1,779,552

under contract

             
       

Estimated

Estimated

 
     

Book

Sales

Increase in

 

Property

Type

Location

Value

Price

Book Value

Comments

Properties that will be sold in 2017

           

Zalanta Resort at the Village Ph. 1&2

Condos

S. Lake Tahoe CA

        22,412,240

        36,000,000

    13,587,760

30 Condos, have 33 reservations

Chateau at the Village

Retail center

S. Lake Tahoe CA

        22,908,763

        23,000,000

            91,237

100% leased, easy to value

Baldwin Ranch Lots

75 Res. Lots

Auburn CA

          3,878,544

          4,875,000

          996,456

Sold 2 at $100,000 each

Art on R Parcel

Res. Land

Olivehurst CA

              403,200

              500,000

            96,800

Have buyer but def. sale to 2017

Harbor Shores Medical Plaza

Office

Gilbert AZ

          4,720,519

          5,500,000

          779,481

Listed at $6mm

             

Remaining "Good Properties"

           

Oakley Parcel

Res. Land

Oakley CA

          2,334,773

          2,334,773

 

Assume sale at Book Value

Broadway & Commerce

Mixed Use

Tacoma WA

          2,336,014

          2,336,014

 

Assume sale at Book Value

Oaks Assisted Living Facility

Assisted Lvg

Bensalem PA

          5,477,136

          5,477,136

 

Assume sale at Book Value

Pico Ranch Complex

Office

Roseville CA

          3,498,836

          3,498,836

 

Assume sale at Book Value

Melody Hills Bus. Park

Office

Roseville CA

              521,605

              521,605

 

Assume sale at Book Value

1850 De La Cruz (50%)

Industrial

Santa Clara CA

          2,141,342

          2,141,342

 

Assume sale at Book Value

             

Remaining "Bad Properties"

           

9 properties. Assume zero value

various

various

          8,346,835

          4,172,418

    (4,174,417)

Assume Value to be 50% of BV

             

Anticipated Total Increase in Book Value

       

    $33,868,479

 

Shares Outstanding 6/30/16

       

    $10,247,000

 

Anticipated Total Increase in BV/share

       

     $ 3.31

 

Book Value 6/30/16 Including TOTB Sale

       

                $21.33

 

Operating Earnings next 3 quarters

       

$  1.00

 

Projected Book Value 3/31/2017

       

                  $25.64

 






 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Rapid increase in dividend yield over the next year as ORM deploys cash from the real estate sales

According to ORM management, the company is receiving pressure from their largest shareholders to aggresively buy back stock. The blackout period ends in mid November and I expect the company to aggresively buy back stock. Buying back stock at $16.80 with a book value over $25 is highly accretive

Management owns less than 4% of the outstanding shares and Private Equity Firms are sitting on billions of uninvested cash. If the stock price remains at the current level, it makes sense for a PE firm to take ORM over and extract value by liquidating the company.

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    Description

    Owens Realty ORM                        September 28, 2016

    This is an update to a VIC posting that I posted 6/4/2015. There have been two other postings, briarwood988 on 4/24/14 and issambres839 on 3/24/2016 and all of these postings should give you plenty of background on the company.

    It is unusual to find a security trading at 66% of fair value, with clearly identifiable catalysts and much of the value in cash. ORM represents an excellent value in a value starved market.

    The scenario I laid out in my earlier posting is playing out better than expected and yet the stock, while up 24% since my earlier posting, does not fully reflect the value creation that has occurred over the last 15 months. The stock is a better value than when I made my original recommendation since the discount to book value remains large ($17 stock price vs. $25.64 Estimated Book Value) and the uncertainty of the outcome has diminished by a massive amount with the sale of TOTB and the Tahoe vacant land.

    Company                                                    SYM       Price/BV              Yield     Mkt Cap

    Ares Commercial Real Estate                   ACRE     .9                            8%          358

    Ladder Capital                                            LADR     1.1                          8%          850

    Blackstone Mortgage                               BXMT    1.1                          8%          2799

     

    Averages                                                                   1.03                        8%          1335

     

    ORM is at least a year away from having a full dividend yield but you could also argue that a lot of ORM’s assets are near cash. Assuming ORM trades at book value, this would indicate a price target of $26/share or 53% appreciation from the current price.

     

     




    Owens Realty Book Value Calculations

               

    28-Sep-16

               
                 
         

    Book

    Sales

    Increase in

     

    Property

    Type

    Location

    Value

    Price

    Book Value

    Comments

    Properties recently sold or under contract

               

    Chateau at the Village

    Res. Land

    S. Lake Tahoe CA

            23,216,154

            42,500,000

        19,283,846

    Under Contract

    Saddle Ridge

    Land

    Gypsum CO

              2,113,850

              2,300,000

              186,150

    Sale of 50% under contract

    Pointe at Lake Steilacoom

    Condos

    Lakewood WA

              4,183,386

              5,425,000

          1,241,614

    closed 9/18/16

    Piercy Road

    Land

    San Jose CA

              1,970,448

              3,750,000

          1,779,552

    under contract

                 
           

    Estimated

    Estimated

     
         

    Book

    Sales

    Increase in

     

    Property

    Type

    Location

    Value

    Price

    Book Value

    Comments

    Properties that will be sold in 2017

               

    Zalanta Resort at the Village Ph. 1&2

    Condos

    S. Lake Tahoe CA

            22,412,240

            36,000,000

        13,587,760

    30 Condos, have 33 reservations

    Chateau at the Village

    Retail center

    S. Lake Tahoe CA

            22,908,763

            23,000,000

                91,237

    100% leased, easy to value

    Baldwin Ranch Lots

    75 Res. Lots

    Auburn CA

              3,878,544

              4,875,000

              996,456

    Sold 2 at $100,000 each

    Art on R Parcel

    Res. Land

    Olivehurst CA

                  403,200

                  500,000

                96,800

    Have buyer but def. sale to 2017

    Harbor Shores Medical Plaza

    Office

    Gilbert AZ

              4,720,519

              5,500,000

              779,481

    Listed at $6mm

                 

    Remaining "Good Properties"

               

    Oakley Parcel

    Res. Land

    Oakley CA

              2,334,773

              2,334,773

     

    Assume sale at Book Value

    Broadway & Commerce

    Mixed Use

    Tacoma WA

              2,336,014

              2,336,014

     

    Assume sale at Book Value

    Oaks Assisted Living Facility

    Assisted Lvg

    Bensalem PA

              5,477,136

              5,477,136

     

    Assume sale at Book Value

    Pico Ranch Complex

    Office

    Roseville CA

              3,498,836

              3,498,836

     

    Assume sale at Book Value

    Melody Hills Bus. Park

    Office

    Roseville CA

                  521,605

                  521,605

     

    Assume sale at Book Value

    1850 De La Cruz (50%)

    Industrial

    Santa Clara CA

              2,141,342

              2,141,342

     

    Assume sale at Book Value

                 

    Remaining "Bad Properties"

               

    9 properties. Assume zero value

    various

    various

              8,346,835

              4,172,418

        (4,174,417)

    Assume Value to be 50% of BV

                 

    Anticipated Total Increase in Book Value

           

        $33,868,479

     

    Shares Outstanding 6/30/16

           

        $10,247,000

     

    Anticipated Total Increase in BV/share

           

         $ 3.31

     

    Book Value 6/30/16 Including TOTB Sale

           

                    $21.33

     

    Operating Earnings next 3 quarters

           

    $  1.00

     

    Projected Book Value 3/31/2017

           

                      $25.64

     






     

    I hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Rapid increase in dividend yield over the next year as ORM deploys cash from the real estate sales

    According to ORM management, the company is receiving pressure from their largest shareholders to aggresively buy back stock. The blackout period ends in mid November and I expect the company to aggresively buy back stock. Buying back stock at $16.80 with a book value over $25 is highly accretive

    Management owns less than 4% of the outstanding shares and Private Equity Firms are sitting on billions of uninvested cash. If the stock price remains at the current level, it makes sense for a PE firm to take ORM over and extract value by liquidating the company.

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