|Shares Out. (in M):||3,629K||P/E||10||10|
|Market Cap (in $M):||38||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Regency Affiliates, an obscure name to some, but maybe a household name to many value curmudgeons is a classic value stock. Surprisingly it has never been written up on VIC, until now. Regency Affiliates trades on the OTC Market under the symbol RAFI. There are 3,628,559 shares outstanding which at the most recent price equates to a 37.5 million dollar market cap. The most recently available proxy from 2010 stated that Directors and Executive Officers as a group (Primarily CEO Laurence S. Levy) beneficially own 60% of the outstanding stock. So the float might be closer to $15 million, and thus perhaps only suitable to PAs and small funds. Part of the reason I have selected RAFI as an idea to submit is that the stock volume recently has been higher than normal, which may allow the VIC community the opportunity to make a more sizable investment.
Regency is a simple holding company of sorts that owns two 50% interests in two stable, consistent, income producing assets. It has $8 million in cash currently with no debt, and investments in two partnerships valued on the books at $27 million. I think the two partnerships are conservatively worth $48 million. The stock trades thinly at approximately 10.35 per share under the symbol RAFI on the pink sheets. I believe that using a conservative approach the shares are worth $15 per share. If I was to speculate a little bit further, I think that a reasonable value for the company may be as high as $30 per share.
Regency's primary asset is a 50% ownership of Security Land and Development Company LP, acquired in 1994. Security Land and Development owns a 2 story office building and a connected 6 story office tower located in Baltimore, Maryland. The 34 acre, 717k SF complex called Security West is occupied by the US Social Security Administration (“SSA”) under a lease that runs through 2018. Security West produces net operating income of $9 million per year which is used to aggressively pay down debt rather than being distributed to the partners. Security West thus generates taxation for RAFI without producing income, as all of the cash flows are dedicated to paying off the debt on the building. For many years, RAFI was sheltered from the taxable income by an NOL carryover, but that carryover was recently exhausted. For several years going forward, RAFI can expect a significant income tax bill related to this investment with no corresponding source of cash.
Detailed information is available here in this 2010 “going private” proxy. In 2003 the building was appraised at $110.5 million. If we conservatively use the same $110 million valuation for the building, and the current LP balance sheet including mortgage debt of $40 million, Regency's half is worth $38 million or more than the market cap of the stock. Of course the building may be worth considerably more in this low interest environment. Informed conjecture is that the lease will begin to be renegotiated sometime in 2016. There will likely be some allowances for maintenance and improvement. That being said, my personal opinion is that the odds of the SSA renewing the lease is fairly high. I have not visited the properties, only viewed them online. I’m told that there is a commuter rail system that has built (or is building) a new spur that will service this building and adjacent buildings. This should add significant value to this property. I’m also told that the SSA owns and occupies approximately five similar buildings that surround Security West. I think this lowers the chances of SSA relocating to a different location, which is already a very low probability. The pragmatist in me also doubts their ability to empty out of Security West and consolidate into their other buildings.
The mortgage on Security West will be paid down to $10 million by October 2018. If a new lease can be negotiated, I expect them to refinance similar to what they did in 2003, a transaction that resulted in a $41 million distribution to Regency from the LP. Although I am not a real estate expert, I believe that a 15 year signed lease that would extend to 2033 would be considered an obligation of the United States government. If the GP of Security Land should decide to sell this building in the current low interest rate environment, I believe it might command a very low cap rate.
The secondary asset, which should not be overlooked, is their investment in MESC Capital LLC (“MESC”). Regency, through its wholly owned subsidiary, Regency Power Corp, has a 50% membership interest in MESC, which owns an onsite energy facility that supplies steam and electricity to a Kimberly Clark tissue mill in Mobile, Alabama. Regency acquired its interest in MESC in 2004 for $7.3 million. MESC has a 15 year agreement to supply power to Kimberly Clark continuing through 2019. Regency's interest in MESC has been appraised from $6 to $13 million in the 2010 going private proxy. MESC has distributed almost $20 million to Regency in its 10 year history giving me comfort that it is worth $10 million or roughly 4 times the 2014 annual distributions. Hypothetically Kimberly Clark could shutter this paper mill, which I imagine would turn the power plant into an ugly white elephant of sorts. But on the flip side, I doubt a competitor is going to build a power plant anywhere nearby.
RAFI has a healthy, simple, and conservative balance sheet. As of 9-30-14 they had over $8million in cash. $8 million in cash plus Security Land being worth $38 million plus $10 million for MESC arrives at a back of the envelope value of $56 million, or $15 per share.
Regency has stated they are still looking for more assets but they have been very picky so far with 2 transactions in 20 years. My guess is that Security West will be refinanced, sometime prior to 2018. Perhaps RAFI could refinance as early as 2016, which would make this a rare combination of a value idea with a catalyst approaching. I believe that RAFI will receive in excess of the current stock price (per share) as a result of the financing. Mr. Levy is in control here, but he has a good track record and seems to be somewhat responsive to his shareholders. I suspect he will pay some out in the form of a large special dividend and retain some for future investment opportunities. Mr. Levy is approximately 60 years old.
The company is not an SEC registrant, after a “going dark” transaction in 2010. Financials are on the company’s website which has the appearance of being shareholder friendly and also at otcmarkets.com.
The company is controlled by Laurence Levy (founder/chairman Hyde Park Holdings, Inc.) who owns about 60% of the stock. Or does this mitigate risk as he eats his own cooking? Time will tell.
Kimberly Clark could shut down their paper mill in Mobile, AL.
Both assets up are for lease renewal in 2018-2019.
Lease Renewal at Security West in Maryland by the Social Security Administration sometime in 2016 or 2017. Likely refinancing of Security West.