Presidential Realty Corp. PDLB
February 05, 2008 - 2:53pm EST by
max685
2008 2009
Price: 4.65 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 18 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Presidential is worth a look for investors who like small real estate companies and who don’t mind situations where GAAP results may be as much misleading as helpful.  The company has a long history, stretching back to 1911.  It has been public since 1961 and has been a REIT since 1982.  At some point, it should be sold or go private, but there is no indication that such a development is in the immediate future.

Nonetheless, recent selling pressure may be creating an attractive opportunity.  Both the Class A and Class B stocks (473,000 and 3,476,000 shares, respectively) generally trade in low volume.  In recent days, however, the volume has been very heavy.  It’s possible that the selling is driven by liquidity needs of an institutional seller, rather than by company fundamentals.  If this theory is correct, Presidential’s stock is attractive and could rebound quickly.  See my recent note on Barnwell Industries (BRN) for a situation that could be similar.

As noted, Presidential’s financial statements are rather murky.  It can best be viewed, I believe, as a collection of assets – mostly real properties and mortgages.  I believe the potential value of these assets totals approximately $13 per share.  Fair value today is certainly below that figure, but probably well in excess of the current market price of $4.65 per share.  At the current dividend rate of $0.64 per share – which is unchanged since 1999 – the yield is 14%.

Following is a summary of the principal assets, along with potential values:

$25.9 million – face amount of mezzanine loans to three entities controlled by The Lightstone Group, a major real estate group controlled by David Lichtenstein.  These long-term loans earn 11% and also have a profit participation in the entities.  The entities own eight shopping malls in eastern and southern states.  Obviously, with weakness in the retail sector, there is risk in these loans.  However, Presidential has not yet reported any problems with payments on these loans.

$7.8 million – mortgage portfolio secured by various apartment buildings.  About half of these mortgages are secured by properties that were previously owned and the other half were originated as investments.  Presidential has reported that all are performing and are adequately secured.

$3.2 million – 60% partnership interest in the Hato Rey Center, a 210,000 square foot office building in San Juan, Puerto Rico.  This equity value is calculated based on Presidential’s most recent purchase of a minority interest in the partnership.  Presidential has loaned the partnership $2 million to renovate and remarket the building following several large tenant departures and the building has a $15.8 million mortgage.  The total capitalization of the building is therefore approximately $23 million or $110 per square foot.  Presidential believes the building could be worth $36 million when fully occupied.

$2.0 million – loan to Hato Rey Center.  See above.

$3.9 million – Mapletree Industrial Center in Palmer, MA.  This is an old, 385,000 square foot industrial building that Presidential has owned since 1974.  We estimate the value at approximately $4 million, subject to a $120,000 mortgage.

$2.7 million – Crown Court apartments, New Haven, CT.  This 105-unit building is leased to a third party on a triple net basis.  The lessee has an option to buy the building (at an undisclosed price) in 2009.  We roughly estimate the value at $5 million, subject to a $2.3 million mortgage.

$3.0 million – Towne House apartments in New Rochelle, NY and other units.  Presidential owns a total of 50 cooperative apartment units in New York and Connecticut.  With very little disclosure on these assets, we ballpark the value at $60,000 per unit.

$1.9 million – Building Industries Center, a 23,500 square foot commercial building in White Plains, NY.  Presidential has owned this building since 1966.  We estimate the value at $3 million, subject to a $1.1 million mortgage.

$2.6 million – cash balance at September 30.

$3.5 million – prepaid and other assets, including an estimated $500,000 value of notes due from Ivy Properties, a related entity that shares in the earnings of productions of Hairspray and The Producers.

$1.0 million – investment in Broadway Partners, an unrelated real estate investment company.

Total potential asset value:  $57.5 million, net of mortgages

Liabilities other than mortgage debt:  $6.9 million at September 30

Estimated potential net asset value:  $50.6 million or $12.90 per share

Unfortunately, valuing Presidential is not quite so easy, or so pleasant.  In particular, it’s extremely difficult to estimate a fair market value for the mezzanine loan portfolio at this time.  Management acknowledges that these investments have not progressed as well as had been hoped, but continues to express optimism about the ultimate outcome.  The $9.5 million loan to the Macon/Burlington properties is perhaps most at risk because these malls are losing anchors and must be retenanted.  The redevelopment of the Shawnee/Brazos properties has reportedly been slower than planned, but Lightstone has invested approximately $18 million in a subordinate position to Presidential’s $7.8 million loan.

Presidential’s financial statements are of limited help in developing value estimates.  In particular, Presidential flows through its share of the GAAP losses of the Lightstone joint ventures.  As a result, Presidential reports losses in many periods and its investment in the Lightstone loans has been written down to $14.6 million at September 30.  Presidential does not report sufficient information about the individual ventures to allow a solid analysis of each property's performance, in my opinion.  Presidential also reports no detailed cash flow information for its owned properties.

On the positive side, Presidential’s current market value of $18 million discounts a substantial amount of potential impairment to its portfolio.  Also, the company repurchased 33,000 shares of stock in the first nine months of 2007 at an average cost of $7 per share.  Management owns about 15% of the total outstanding shares, including nearly half of the Class A stock that elects two-thirds of the board.

There is ample risk and uncertainty in this situation, but I believe there is a comfortable margin of safety.  My firm owns stock in Presidential but, of course, our position or views could change at any time.  I would welcome input from other investors who like to dig around in companies such as this.

Catalyst

1. Cessation of the selling presure
2. Announcement regarding 2008 dividends
3. Company stock repurchases
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