Wellsford Real Properties WRP W
June 01, 2001 - 8:42pm EST by
michael99
2001 2002
Price: 16.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 139 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

WRP is an opportunity to buy real estate at as little as 50 cents on the dollar (and at most 61 cents on the dollar), with a plan for value realization in place and virtually no downside. Wellsford Real Properties is a real estate operating company (REOC) and as such its value is in wealth creation rather than earnings distribution. Third Avenue (Whitman's group) has a nice dissertation on why REOC's can be superior to REITs in its latest semi-annual. Third Avenue's also been accumulating this stock.

The stock's at $16.50. Book value is $26.93 and understates true net asset value. For four years others have done the waiting for me (and are likely to sell now in pure disgust), and now I do believe the next couple years will see value realization - and hence a nice return/risk ratio. Here's why:

Wellsford is an incomplete liquidation story now divided operationally into three strategic units:

1) Wellsford Commercial ($10/share book value, liquidating, no recourse debt) - primary asset is a 39% interest in Wellsford/Whitehall, a joint venture with Goldman, valued at 86 million at March 31st. This value will continue to increase. W/W has been in the business of buying up turnaround properties and putting some sweat equity into them, then filling them. This naturally causes book value to drastically understate net asset value. This is important because Wellsford/Whitehall is being liquidated on a 3 year plan at Wellsford Real Properties' insistence. Two recent properties sold at 25% and 40% premiums to book, respectively. Today, the Parsippany announcement - a 43 million book value property sold for 61 million. There was $582 million in assets on W/W's books (213 mill in equity) at last report - but the realizable value is higher.

Just looking at the Parsippany sale, equity in W/W pre-tax will jump over $18M - that's nearly 8 mill to Wellsford. Wellsford only has 8.35 million shares, so that's a pre-tax gain of roughly 84 cents/share on the sale of just one property representing just 6.9% of the JV's assets. With the stock at 16 1/2 and book at 27, you can see where this is headed.

Management certainly considers the $582 million number to understate the true asset value in Wellsford/Whitehall. I've heard management laugh at that number. A 25% premium to book realized on the liquidation of these assets would jump Wellsford's book value nearly $6/share to $33/share. The most recent Parsippany sale went at a 40% premium, and another recent sale went at roughly a 25% premium. Obviously not all will go at such great prices, but it's a good trend. Management told me earlier the 25% premium they fetched earlier was on one of their average properties, and implied there was better stuff to come. Today's 40% premium with the Parsippany sale is consistent, and certainly doesn't make management a liar.

Why liquidate W/W? According the Chairman, "I know real estate. I have fundamental way of analyzing this, and we're in the 9th year of a 7 year boom" and hence he thought it was a good time to start liquidating the Goldman JV. Goldman disagreed. Both offered to buy the other out (Goldman first), but both bid low and neither accepted. So, an arrangement was worked out where WRP sent its employees working on the JV to Goldman and Goldman's man manages it with a newly created company. Goldman has since decided it too doesn't want to expand this business anymore given the stage of the real estate boom. So now, essentially, they're presiding over the liquidation of the JV. Expect good news to come out of this liquidation (like today), with more readily identifiable cash assets appearing on the balance sheet. To be clear, the liquidation is occuring primarily because it is the smart thing to do given the cycle, and a secondary effect is it will make the value more obvious to those reading the balance sheet.

Commercial ADJUSTMENT to book get to NAV: + $3 to $7/share; but again, we've already got a big discount to book, so the key is that there is a liquidation ongoing.

2) Wellsford Capital ($12/share book value; continuing; no recourse debt) -As the real estate market peaks, the Chairman wants to get out of equity, but sees future potential for buying real estate debt on the cheap as things turn sour. So Capital is an ongoing operation with more to come in the future. Management is quite dismissive of "S&L's on steroids," mortgage REITs, and the structure of entities such as CMM. They feel they can be much safer and smarter than using those strategies, and yet by buying smart earn great returns despite not taking on substantial risk.
a) $35.4 mill direct investment in 11.5% meezzanine loand, 277 Park Avenue (DLJ's building, well known to some of you I'm sure 'hedge fund hotel')
b) 51% interest in Second Holding, LLC, another JV that invests in real estate debt. They have been ramping this up. Carried at equity method and equity in Second Holding is roughly $27 mill. That's the limit of their liability. Debt/equity in Second Holding at 12X but of course debt within the JV is non-recourse to WRP. This is the current main vehicle for investment in debt, and it has recently raised several hundred million, which for now is just sitting, earning slightly more than its cost. How this will be used is an unknown, but presumably they'll be smart about it. The stock hasn't been recognized, but management has been creating value, and Capital is a bet they ought to be able to in the future. Again, the equity value at risk herre is only a little over $3/share.
c) $7 mill investment in REIS, a real estate information services company - I write this down simply because there's a family relation behind this investment, but it is possible the 6.9 million may even underrepresent the value of that asset.
d) VLP is being liquidated - another $11 million or so to come.

Capital ADJUSTMENT to book to get to NAV: -1 buck for the nepotistic investment in REIS, though it might work out. One only need look at Homestore.com to see that real estate e-commerce ventures have not been the terrible bombs so characteristic of the .com genre. REIS is not infrequently cited in respectable press, and may have a niche.

3) Wellsford Development ($4/share book value; liquidation?; $99 mill mortgage debt) - 86% interest in an JV with Equity Residential (EQR) which is an 1800 unit multifamily development in a nice area south of Denver. 760 units being rented. Converting 264 more units to condos, and first sales have gone well at nearly $200K/pop (they cost about $166K/pop to build). Sold a 344 apartment project for 22.5 mill last year, for a gain of 3.5 million. Totalling up the value of the various pieces here and I get a small premium to book value. The key is that portions of it are being liquidated at a slight premium.

Development ADJUSTMENT to book to get to NAV: none, maybe +1 buck/share on the upside. Chairman talks this one up as a "no-brainer" but I'm unwilling to give much credit yet.

That's it; because of the nature of the turnaround properties, I don't anticipate much long-term downside there from the book level. Potential losses in Capital are maybe $3/share in book value. Face value of a $25 mill convertible preferred is more than offset by cash on hand. As time goes by, earnings will add about $1.25 to $1.50 per share to book value each year as well.

The company has been buying back shares when blocks become available, retiring 2 million shares in this fashion in the last couple of years. The Chairman vows to continue doing so, claiming the illiquidity of the stock is the greatest impediment - he doesn't want to run it up. BTW, a strong advocate of share buybacks in undervalued securities, I have never found myself on the receiving end of a management lecture on why buying back stock is such a good idea. That's what I got from this Chairman. "Look, I know what I got..." He gets points for mentioning Berkshire Hathaway in his annual letter, too: "Our business strategy model, based on the Berkshire Hathaway model of net asset value growth being reflected in share price, has thus far not been transferable to the real estate industry."

The history of Wellsford is that management presided over Wellsford Residential Property Trust - of which WRP was a subsidiary - from 1992-1997. The Trust merged with Equity Residential Properties at a price that gave a 23% annualized return since inception to shareholders. The stock had done nothing for years and then ran up for the buyout. Still, that's a source of pride for the Chairman, who points to the annualized return rather than the long stagnation, and I don't believe he is adverse to selling out again so he can have a similar "achievement" here. He is not comfortable with the lack of recognition in the public markets. In any case, WRP was a subsidiary of the Trust, and was spun off immediately prior to the merger. A private placement for 6,000,000 shares at book value ensued the next month. And the stock hasn't done anything since, even though value has been created.

Franklin Mutual (Beacon, Qualified) owns 24% of the common from the initial private placement, and Morgan Stanley owns 17% of the common from the same. Neither have been buyers recently. MJ Whitman Advisors upped its position 25% during the 1st Q.

A decent sized seller (probably Fleet or Advisory Research or both) has been offering shares whenever a decent-sized order comes up to buy, so in my experience at least the illiquidity is less a problem than it appears.

Catalyst

Liquidation of real estate per plan with $200 million in properties being marketed for sale right now; possible sale of whole company; commitment to share buyback at deep discont to intrinsic value; dollar on sale for 50-60 cents with no significant downside; possible Russell 2000 inclusion on June 30th but is one of the few such candidates that hasn't really moved yet.
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    Description

    WRP is an opportunity to buy real estate at as little as 50 cents on the dollar (and at most 61 cents on the dollar), with a plan for value realization in place and virtually no downside. Wellsford Real Properties is a real estate operating company (REOC) and as such its value is in wealth creation rather than earnings distribution. Third Avenue (Whitman's group) has a nice dissertation on why REOC's can be superior to REITs in its latest semi-annual. Third Avenue's also been accumulating this stock.

    The stock's at $16.50. Book value is $26.93 and understates true net asset value. For four years others have done the waiting for me (and are likely to sell now in pure disgust), and now I do believe the next couple years will see value realization - and hence a nice return/risk ratio. Here's why:

    Wellsford is an incomplete liquidation story now divided operationally into three strategic units:

    1) Wellsford Commercial ($10/share book value, liquidating, no recourse debt) - primary asset is a 39% interest in Wellsford/Whitehall, a joint venture with Goldman, valued at 86 million at March 31st. This value will continue to increase. W/W has been in the business of buying up turnaround properties and putting some sweat equity into them, then filling them. This naturally causes book value to drastically understate net asset value. This is important because Wellsford/Whitehall is being liquidated on a 3 year plan at Wellsford Real Properties' insistence. Two recent properties sold at 25% and 40% premiums to book, respectively. Today, the Parsippany announcement - a 43 million book value property sold for 61 million. There was $582 million in assets on W/W's books (213 mill in equity) at last report - but the realizable value is higher.

    Just looking at the Parsippany sale, equity in W/W pre-tax will jump over $18M - that's nearly 8 mill to Wellsford. Wellsford only has 8.35 million shares, so that's a pre-tax gain of roughly 84 cents/share on the sale of just one property representing just 6.9% of the JV's assets. With the stock at 16 1/2 and book at 27, you can see where this is headed.

    Management certainly considers the $582 million number to understate the true asset value in Wellsford/Whitehall. I've heard management laugh at that number. A 25% premium to book realized on the liquidation of these assets would jump Wellsford's book value nearly $6/share to $33/share. The most recent Parsippany sale went at a 40% premium, and another recent sale went at roughly a 25% premium. Obviously not all will go at such great prices, but it's a good trend. Management told me earlier the 25% premium they fetched earlier was on one of their average properties, and implied there was better stuff to come. Today's 40% premium with the Parsippany sale is consistent, and certainly doesn't make management a liar.

    Why liquidate W/W? According the Chairman, "I know real estate. I have fundamental way of analyzing this, and we're in the 9th year of a 7 year boom" and hence he thought it was a good time to start liquidating the Goldman JV. Goldman disagreed. Both offered to buy the other out (Goldman first), but both bid low and neither accepted. So, an arrangement was worked out where WRP sent its employees working on the JV to Goldman and Goldman's man manages it with a newly created company. Goldman has since decided it too doesn't want to expand this business anymore given the stage of the real estate boom. So now, essentially, they're presiding over the liquidation of the JV. Expect good news to come out of this liquidation (like today), with more readily identifiable cash assets appearing on the balance sheet. To be clear, the liquidation is occuring primarily because it is the smart thing to do given the cycle, and a secondary effect is it will make the value more obvious to those reading the balance sheet.

    Commercial ADJUSTMENT to book get to NAV: + $3 to $7/share; but again, we've already got a big discount to book, so the key is that there is a liquidation ongoing.

    2) Wellsford Capital ($12/share book value; continuing; no recourse debt) -As the real estate market peaks, the Chairman wants to get out of equity, but sees future potential for buying real estate debt on the cheap as things turn sour. So Capital is an ongoing operation with more to come in the future. Management is quite dismissive of "S&L's on steroids," mortgage REITs, and the structure of entities such as CMM. They feel they can be much safer and smarter than using those strategies, and yet by buying smart earn great returns despite not taking on substantial risk.
    a) $35.4 mill direct investment in 11.5% meezzanine loand, 277 Park Avenue (DLJ's building, well known to some of you I'm sure 'hedge fund hotel')
    b) 51% interest in Second Holding, LLC, another JV that invests in real estate debt. They have been ramping this up. Carried at equity method and equity in Second Holding is roughly $27 mill. That's the limit of their liability. Debt/equity in Second Holding at 12X but of course debt within the JV is non-recourse to WRP. This is the current main vehicle for investment in debt, and it has recently raised several hundred million, which for now is just sitting, earning slightly more than its cost. How this will be used is an unknown, but presumably they'll be smart about it. The stock hasn't been recognized, but management has been creating value, and Capital is a bet they ought to be able to in the future. Again, the equity value at risk herre is only a little over $3/share.
    c) $7 mill investment in REIS, a real estate information services company - I write this down simply because there's a family relation behind this investment, but it is possible the 6.9 million may even underrepresent the value of that asset.
    d) VLP is being liquidated - another $11 million or so to come.

    Capital ADJUSTMENT to book to get to NAV: -1 buck for the nepotistic investment in REIS, though it might work out. One only need look at Homestore.com to see that real estate e-commerce ventures have not been the terrible bombs so characteristic of the .com genre. REIS is not infrequently cited in respectable press, and may have a niche.

    3) Wellsford Development ($4/share book value; liquidation?; $99 mill mortgage debt) - 86% interest in an JV with Equity Residential (EQR) which is an 1800 unit multifamily development in a nice area south of Denver. 760 units being rented. Converting 264 more units to condos, and first sales have gone well at nearly $200K/pop (they cost about $166K/pop to build). Sold a 344 apartment project for 22.5 mill last year, for a gain of 3.5 million. Totalling up the value of the various pieces here and I get a small premium to book value. The key is that portions of it are being liquidated at a slight premium.

    Development ADJUSTMENT to book to get to NAV: none, maybe +1 buck/share on the upside. Chairman talks this one up as a "no-brainer" but I'm unwilling to give much credit yet.

    That's it; because of the nature of the turnaround properties, I don't anticipate much long-term downside there from the book level. Potential losses in Capital are maybe $3/share in book value. Face value of a $25 mill convertible preferred is more than offset by cash on hand. As time goes by, earnings will add about $1.25 to $1.50 per share to book value each year as well.

    The company has been buying back shares when blocks become available, retiring 2 million shares in this fashion in the last couple of years. The Chairman vows to continue doing so, claiming the illiquidity of the stock is the greatest impediment - he doesn't want to run it up. BTW, a strong advocate of share buybacks in undervalued securities, I have never found myself on the receiving end of a management lecture on why buying back stock is such a good idea. That's what I got from this Chairman. "Look, I know what I got..." He gets points for mentioning Berkshire Hathaway in his annual letter, too: "Our business strategy model, based on the Berkshire Hathaway model of net asset value growth being reflected in share price, has thus far not been transferable to the real estate industry."

    The history of Wellsford is that management presided over Wellsford Residential Property Trust - of which WRP was a subsidiary - from 1992-1997. The Trust merged with Equity Residential Properties at a price that gave a 23% annualized return since inception to shareholders. The stock had done nothing for years and then ran up for the buyout. Still, that's a source of pride for the Chairman, who points to the annualized return rather than the long stagnation, and I don't believe he is adverse to selling out again so he can have a similar "achievement" here. He is not comfortable with the lack of recognition in the public markets. In any case, WRP was a subsidiary of the Trust, and was spun off immediately prior to the merger. A private placement for 6,000,000 shares at book value ensued the next month. And the stock hasn't done anything since, even though value has been created.

    Franklin Mutual (Beacon, Qualified) owns 24% of the common from the initial private placement, and Morgan Stanley owns 17% of the common from the same. Neither have been buyers recently. MJ Whitman Advisors upped its position 25% during the 1st Q.

    A decent sized seller (probably Fleet or Advisory Research or both) has been offering shares whenever a decent-sized order comes up to buy, so in my experience at least the illiquidity is less a problem than it appears.

    Catalyst

    Liquidation of real estate per plan with $200 million in properties being marketed for sale right now; possible sale of whole company; commitment to share buyback at deep discont to intrinsic value; dollar on sale for 50-60 cents with no significant downside; possible Russell 2000 inclusion on June 30th but is one of the few such candidates that hasn't really moved yet.

    Messages


    SubjectGoldman Partnership
    Entry06/04/2001 08:58 PM
    Memberround291
    The company is a minority shareholder in a Goldman controlled entity. Although he clearly sees an interest in liquidating, it's not clear that Goldman is on base. Why, for example, did Goldman (or the company for that matter) low ball on it's bid for the JV?

    What if this guy is not successful in forcing a liquidation? A few asset sales does not a liquidation make. Also, what happened to the cash from the asset sale? Did any of it ever make it up to the company?

    Can you clarify Goldman's intentions/motivations in this?

    Subjectround291
    Entry06/04/2001 09:45 PM
    Membermichael99
    Finally a message. Coinciding with a rating that says that a dollar for 50 or 60 cents with virtually no downside risk is average. I must not have been clear.

    "Why, for example, did Goldman (or the company for that matter) low ball on it's bid for the JV?"

    My info is that the Goldman bid was for about book value. WRP's response? "Look, I'll buy YOU out for book." Goldman refused as well, of course. So basically both sides thought book was too low. What does that tell you? Makes sense since these are rehabilitated properties worth more than was paid for them, as the recent asset sales attest. I'm not saying all sales will be 40% premiums - they clearly won't. But $582 mill in real estate assets is a low number for the true value in the JV.

    BTW, when this company was spun off, a private placement of shares was done at Morgan Stanley, Franklin Mutual, etc. The placement was for shares at book value, and it was an easy sell. At that time the shares were about 20.50. Since then the shares went to 16 and the book went to 26. This company is worth at least book.

    "What if this guy is not successful in forcing a liquidation? A few asset sales does not a liquidation make"

    They are not going to firesale off the properties, but there is a 3 year plan of liquidation in place. Nothing needs to be forced. Goldman's new company agrees with this plan. It's in the SEC filings, if you care to look.

    As for WRP, look at the sales recently. Liberty Hampshire, VLP, Sonterra, the apt conversions to condos in Silver Mesa, etc. There's a slow partial liquidation ongoing at the WRP level too. "cash will accumulate"

    "Also, what happened to the cash from the asset sale? Did any of it ever make it up to the company?"

    Which sale? The Parsippany sale just happened a few days ago. The 1st Q sales are not yet distributed - and can be found as "undistributed joint venture income" in the cash flow statement. But as the JV is an LLC in liquidation, the cash will make it to the parent company. No worries there.
    As the Chairman states in his letter - cash will start to accumulate. Meanwhile, book value will edge up nonetheless, representing the premium over book received for properties liquidated in the JV.

    "Can you clarify Goldman's intentions/motivations in this?"

    Same motivations as always - to make money. But Goldman differed with WRP on the timing for liquidating the JV team. When the JV was restructured, the reason was WRP thought it was time to liquidate and Goldman Sachs didn't. Goldman's first thought was to buy WRP's share of the assets cheap - hence they offered book. Since, as discussed above, that wasn't good enough, they arranged for a new Goldman-sponsored company to take over, from WRP, the administration of the JV, which would be liquidated, and the new company got the lease for the administration facilities as well as the employees involved, including one key individual running the thing. The goal on Goldman's side was to keep the team together so that investment in rehabilitation projects could continue with the talent assembled. Goldman got the team, which Goldman financed with $75 mill additional equity after the fact, and WRP got its liquidation. Since that time, Goldman's decided not to push so hard with new investment in rehabilitation work. WRP was proven right on the timing, Goldman proven wrong. WRP didn't have to pay any severance packages or lease termination fees and amended the JV at the right time.

    Mike

    SubjectMore Questions
    Entry06/04/2001 10:31 PM
    Memberround291
    Mike -

    Thanks for endulging me. I expect to learn a good deal from our exchange.By the way, I don't recall my rating of your original post but I tried my best to sum up my thoughts at the time.

    You seem to have an inside track on what WRP and Goldman management might have been thinking when they independently decided to bid book value. Although I'm not close enough to the situation to know what either side (let alone both) bid, I'll hazard a different interpretation of why neither insider bid what you must expect to be fair/intrinsic value...neither insider had enough conviction as to possible realizeable value to bid a mere $1/share above book. Seems to be the profit maximizing strategy from my vantage point...that is if you wholeheartedly believed the underlying assets are worth substantially more than the entity that they sit in.

    Considering the structure of the WRP entity, a gain need not be distributed to shareholders and will likely be reinvested in some company activity. If past returns on equity are a prelude to like future returns, I'm not sure I'd be comfortable with that. Also, a 40% pre-tax gain in a subsidiary company/investee realized over a three year period "ain't chopped liver", but it also ain't no windfall.

    Can't say I understand the difference between "old Goldman" and "new Goldman" companies. Different glove, same hand from my perspective.

    I think the downside is finding yourself sitting in a company with historically sub-par returns on equity three years from now waiting for a partial liquidation to move the needle on the share price.


    Subjectround291
    Entry06/05/2001 12:12 AM
    Membermichael99
    "neither insider had enough conviction as to possible realizeable value to bid a mere $1/share above book. "

    This is a bit philosophical, but whatever rate of return Goldman or WRP expected with their offers, it is likely not zero. Hence, I don't see why either would want to pay "full price" or intrinsic value. Given that neither is a sucker, I'm not worried by the lack of a front-end buyout. Both have the option of simply awaiting the liquidation returns rather than accepting book, and both chose the former. The hurdle rate for Goldman is considerable, of course.

    E.g. You know Jack Byrne will never sell White Mountains to Warren Buffett's Berkshire because not only are both bargain hunters but both are value maximizers for their shareholders. Hence, the bid/ask will be quite wide and no deal will be done. Does this mean that White Mountains wasn't worth more than $200 because Buffett wouldn't pay more than $200?

    "finding yourself sitting in a company with historically sub-par returns on equity three years from now waiting for a partial liquidation to move the needle on the share price."

    Below I write more about ROE as a measure here, but there are definite liquidation noises here. And part of the catalyst is that as liquidations occur, book value jumps. The Parsippany sale just jumped book value 70-80 cents by itself. It's perhaps optimistic but not hard to think you get a $33 book value, mostly in financial instruments, in a relatively short time. The market would value that more realistically, and in truth it would likely get bought at that point or before then.

    One can argue about the upside, but one can't argue about the limited downside here. The price you pay takes care of that. From my price, I get a 60% return if book value is realized in 3 years. If what I think NAV is realized, I get a 100% return. What makes these numbers special, however, is not the upside but the lack of downside because of the price you pay.

    "Considering the structure of the WRP entity, a gain need not be distributed to shareholders and will likely be reinvested in some company activity. If past returns on equity are a prelude to like future returns, I'm not sure I'd be comfortable with that."

    Actually, consider the structure of WRP. Really. It is a special kind of REOC which buys real estate assets cheap and sells them later at a premium. It doesn't throw off the cash during the rehab period/development period. Like Whitman says, this is a wealth creation stock, not an earnings stock. Critical distinction. Hence ROE, using earnings (which understates the hidden value creation that goes on in appreciating real estate) as the numerator is not a good measure to use for these companies. At least not until the last asset is liquidated.

    Have you calculated the ROE based on earnings per share for Berkshire Hathaway - another wealth creation company?

    If all assets were liquidated and book value were adjusted upward to say 33 now (to reflect one possible NAV), then we would say in 4 years the company had increased book value from 20/share to 33/share by realizing the current hidden net asset value. That's roughly 15% annualized returns to equity to this point. The 20 start point was more representative of NAV at the time because it started largely with cash.

    I don't think anyone thinks WRP should be public. At the spinoff there was more optimism that the public markets would recognize what REOCs do than has been the case. REOCs are favored over REITs for this reason by Whitman's Small Cap Real Estate Fund - the REOCs are universally cheaper and less recognized. The cash will likely not be distributed to shareholders. Rather the cash will fund buybacks at discounts to intrinsic value, which will push intrinsic value per share higher and higher. The one remaining possible use of the cash generated is to fund Capital, which is already well-funded. At some point value will out, and it will likely occur via etiher increased market recognition as the ongoing liquidation machinations progress or a buyout.

    Seems there was some value recognition today after someone read my post (or it may have been coincidence). So, there is always the chance the market figures it out, too.

    My money favors a buyout though as W/W unwinds itself, or even before.

    "Can't say I understand the difference between "old Goldman" and "new Goldman" companies"

    There's a central figure here Previdi who was at the JV already and started the new company and is Goldman backed. So Goldman and WRP each own interests in a JV which is managed by this new company backed by Goldman and populated by people from WRP (not management-level). Can't say I blame you for not understanding the difference, but there is a difference.

    BTW, I heard today secondhand but supposedly from a company source that they were not buying back shares recently because their lawyers told them not to. This is hearsay, and it is not what I heard in either my discussions with the Chair or the CFO. But there's an obvious implication there if it is true.













    SubjectRisk/Reward
    Entry06/05/2001 08:48 AM
    Memberjim211
    Great recommendation. The definition of a 9 rating is that one would give one of them per year. Well there's mine.

    What excites me the most about WRP is how protected it is on the downside. I have a hard time seeing how one could lose much here. And with several very strong catalysts, the probability of a hit within a reasonable time frame is high. Nothing sexy here, just a high probability/low risk situation.

    SubjectThanks
    Entry06/05/2001 09:58 AM
    Memberround291
    Mike -

    Thanks for addressing my questions! This situation could very well, as you suggest, be a winner.

    Not sure I agree with your ROE vs. Wealth Creation distinction though. Buffet either owns cash gushers outright (and uses the cash to further his renown investing activities and build Berkshire book value, though in an often lumpy fashion) or owns equity in companies that uniformly generate significant ROE and grow shareholder equity themselves. Most of his investments, to my knowledge, are highly liquid as well. Whitman argues that real estate is highly liquid and that properties can be sold over the phone. This may be the case, but it's hard to draw clean parallels between an REOC and a portfolio of business equities with growing ROE and shareholder equity. These are not equivalent wealth creation machines.

    Best wishes on the success of your investment.

    Subjectwealth creation and price
    Entry06/05/2001 11:28 AM
    Membermichael99
    When I use 'wealth creator' I simply mean that value is displayed not by an earnings stream but by appreciation of assets (and hence not displayed well). Such companies are not created equal but they are of the same cloth. Accounting convention doesn't allow one to "write up" the value of acquired assets (except in special circumstances). Hence, with wealth creation companies, book value tends to lag far behind net asset value/intrinsic value. Since neither earnings nor book achieve the magnitude to spark recognition, these companies are generally not well-recognized, unless they are headed by a certain Warren.

    Such companies often inhabit a no-man's land - on a P/E or ROE basis the price seems too rich. And even when interest is sparked, next-step evaluation finds a murky picture that may as well be barbed wire. Most people like to be told what NAV is rather than try to figure it out themselves.

    As to price, if one acquires earning assets for 50 cents on the dollar then one's investment earns twice the ROA that the investee as a whole earns. It's the price you pay that matters most. That's the theory behind this idea.

    Thank you for your comments.




    Subject$36.6 mill share buyback
    Entry06/07/2001 03:35 PM
    Membermichael99
    WRP just announced that they completed a 2 million share buyback at 18.10/share in a private transaction with an institutional investor. Total cost 36.6 million, and it raised book value/share from 26.10 to 28.65/share. I believe NAV/share is now well north of $30/share, making WRP an even better bargain. Even the recent 10% runup has not kept up with the value creation just completed.

    This makes 4 million shares bought back in the last 2 years or so, and there are just over 6 million shares remaining. Again, this is the Chairman that "lectured" me on the huge benefits of share buybacks (preaching to the choir, of course), and I believe this is a tremendous validation and confirmation of what he preaches.

    Mike

    SubjectWhitehall JV
    Entry06/08/2001 12:12 AM
    Membertrum96
    I've tried to value the Whitehall JV based on the 10-K. I see two components, the Operating and the Renovation RE. I know it's not possible to get a true value for the prop's based on the financials alone, but perhaps you have some real estate experience and can tell me if I'm making blatant errors. I have a small amount of REIT experience.

    The Operating have rent of about $22/ft, 3.4MM sq ft and 90% occupancy (per March 01 10Q). That equates to about $70MM per year rental (rounding up). Some of the Renovations are actually rented out, which is why the estimated rent is below that reported in the income statement. Based on JV's financials, NOI has equaled about 65% of rent the years 1998-2000. So, that would give an NOI of about $46MM for the operating prop's.

    The gross values for the properties in renovation equaled $191.5MM at 12/31/00. They are likely worth more, but I've no way to estimate by what amount.

    Total RE (including in progress and before depreciation) at 12/00 was $619MM. Subtracting the $191.5MM of renovations leaves RE of about $430MM.

    The NOI of $46MM at a 9.5% cap rate would imply a value of $485MM, or a gain of $55MM over the $430MM. 9.5% may be aggressive. The Parsippany building sold for $61MM with rent of $7.4MM, but that was a newly renovated building with a new tenant through 2016.

    In any case, I don't see impairment for the JV. I'd appreciate any feedback on the logic of this basic approach (or lack thereof).

    SubjectFranklin?
    Entry06/08/2001 12:55 PM
    Membergary9
    Presumably they bought back shares from Franklin Mutual? Is this correct? Why would they sell at $18?

    SubjectFranklin
    Entry06/08/2001 05:32 PM
    Membermichael99
    Yes, looks like Franklin was the seller. They had owned the shares since a private placement 4 years ago at the time of the spin-off. To invest in this company, one must be comfortable that one knows more than Franklin Mutual, or at least be in a position to invest more wisely than Franklin Mutual. Since we're talking mutual funds on Franklin Mutual's side, it's not a stretch to consider one can invest much more wisely.

    Selling back 24% of the shares to the company just seems incredibly unwise - one of those cases where the leading shareholder getting out actually creates significant value for remaining shareholders.

    Gotham Partners sold 1.2 million shares back to WRP a while back at 16.

    When I started buying this stock, it became obviuos immediately that there were sellers. After I finished my position, I told another PM about this. He too had no difficulty buying a large position without pushing the price up. Now we know both Gotham Partners and Franklin Mutual have sold their stakes here - and that doesn't include those on the public markets who have been selling hundreds of thousands of shares into the run-up.

    So, one must simply have to believe that one's analysis of the situation is right. If, as I believe, mine is right, the buyback of 24% of the shares at 18 just jumped NAV by at at least the $2.55 book value just jumped. In fact, it makes WRP more valuable post-buyback at 18 than it was pre-buyback at 16. When I got the fax just before the market close yesterday, I immediately ordered up more shares at 18. No-brainer.

    I've owned this stock from the 16 level, so the way I look at it I'm starting over with a free $3+ unrealized capital gain (the gift created by the stock buyback) and a stock that is roughly about the same value it was before the run-up.

    Which raises a key potential catalyst. If WRP were to continue to pour cash generated from asset sales (above book) into share buybacks (well below book), then we have a risk-free way to drastically increase per-share NAV while at the same time narrowing the discount to NAV that the stock gets as a public REOC. The Chairman is quite aware of this line of thinking.

    Mike




    Subjecttrum - JV
    Entry06/08/2001 05:38 PM
    Membermichael99
    The way this message board works I don't have your numbers in front of me as I write this. There are several ways to value real estate, of course, and yours is a perfectly logical one, though I didn't check any of your numbers against mine. That +55 million differential you come up with in conclusion is before the Parsippany sale, and that one sale will eat up 18 mill of your differential already. One might reason that there is more upside than 55 mill, but I have to say in my analysis, 55 mill did fall within the lower end of my projected differential. My conclusion is the same though: the stated book value of the JV is something of a floor for the valuation, with significant upside, especially now with only 6.3 million shares out on WRP's side. At 16, the shares were cheap and safe any way you sliced them.

    Mike


    SubjectRussell 2000
    Entry06/08/2001 05:40 PM
    Membermichael99
    This is kind of fluff that doesn't really impact the value. But depending on how Russell views yesterday's buyback (actually, whether they view it is more important), WRP might have just taken itself out of the running for inclusion because the market cap is now set to fall. So it remains to be seen whether a bunch of buyers will need to own this stock on July 1. Certainly the recent run-up would seem to have qualified it otherwise.

    Mike

    Subjectmortgage REITs
    Entry06/09/2001 12:30 PM
    Membertrum96
    I'm not sure if you can answer this, but your original post made a negative comment towards CMM. I've looked at CMM and TMA (trying to understand their business plans) and both seem to invest in adjustable rate mortgage securities, funded in large part by reverse repurchase agreements and other adjustable rate securities. TMA has minimal net interest spread, ranging from negative 9 basis points to positive 50 since 1998.

    One major problem, as experienced in 1998, seems to be during flights to quality the CMBS assets yields may decrease, as yields are based on Treasuries, while the rates charged for the reverse repo's increase as their value decreases. Also, the minimal interest spreads leave small room for error in the case of asset impairments. It seems to me these are structural problems which can't be eliminated as long as the short-term funding plan stays in place.

    Do you have an opinion as to whether this is correct and if so, is a main reason these types of companies still exist to provide fee income to the advisors?

    I own stock in another mortgage REIT which makes whole loans, minimal credit losses, uses longer term debt financing, much less leverage, and I don't feel any unease because it seems more sensibly structured and I want to make sure I understand the difference. Thank you.

    Subjectyou got it
    Entry06/09/2001 03:01 PM
    Membermichael99
    Sounds like you got it. Also sounds like we may be of equivalent skill sets in evaluating these entities, so I'm not sure I can provide much more clarity than you already have on these issues. Others are welcome to comment. Going up the risk scale, we have S&L's, conservative mortgage REITS such as you own ("S&L's on steroids" according to WRP's Chairman, then entities like CMM. But of course S&L's can be run into the ground as well. So my impression is that while the structure defines the risk level in large part, management plays an obviously huge role as well.

    As to why certain entities exist, it appears to me that in this industry management generally is in a position to screw shareholders. Goes with the territory, and creates the classic risk in many REITs that managers paid by assets under management will climb the risk scale to acquire assets.

    Wellsford has a compartmentalized higher-risk entity in the Second Holding LLC JV, but 1) the debt is non recourse to Wellsford and 2) my conversations with management lead me to believe, though my judgement may be in error, that management is being somewhat conservative as well as opportunistic there. The 10K has tremendous disclosure. In any case you can write off the entire equity in Second Holding and still not impact the valuation of WRP very much. In fact, the buyback just announced probably just jumped NAV per share by nearly as much the downside effect of writing off Second Holding.

    I've been told by a more savvy real estate guy than me that Wall Street doesn't value real estate appropriately as much because intelligent real estate investment can get more complicated than most of Wall Street wants to deal with. Compounding the problem is that savvy real estate guys can run their mouths a mile a minute through subjects that are arcane to most generalist value investors. The thing about Wellsford is that the disclosure is quite excellent, and management talk most of the time in clearly comprehensible terms for generalists. Certainly I can understand "there's nothing better I can do than buy back stock at such a big discount."

    Mike


    SubjectSecond Holding
    Entry06/09/2001 10:26 PM
    Membertrum96
    Second Holding has issued long-term debt of up to 10 years, which should reduce/eliminate the possibility of a liquidity crunch which so many CMBS investors experienced in 1998. My understanding is CMM got margin calls because it had reverse repo funding which seems destined for problems during flights to quality, especially for an investor such as CMM which had especially low rated/unrated CMBS. It's the reverse repo funding, I can't seem to understand the logic of it...

    SubjectSecond Holding
    Entry06/10/2001 01:49 AM
    Membermichael99
    Agreed - I don't see Second Holding as a CMM-like entity but it is much higher up the risk profile from a Jimmy Stewart S&L. And I don't think we need to write it off (indeed, there is the potential for significant benefits to equity as well); just saying that if one did, it doesn't hurt much given the valuation and the price of the stock.

    Yep - CMM failed as part of the flight to quality that doomed LTCM, as wonderfully retold in Lowenstein's "When Genius Failed." That risk still exists - lower rates are only good if the spreads hold up. Betting on the 100 year flood not happening more than once every 100 years. And then of course there's the impairment risk for sub holders in a deteriorating economy, which is probably the more immediate and somewhat certain risk. It's easier to figure out the credit environs of an S&L or the underwriting culture of an insurer - neither easy tasks - than it is to figure out the true quality of assets in an unrated pool during good times, IMO, no matter the reputation of management (often very good).

    Mike




    SubjectColorado real estate
    Entry06/10/2001 01:51 AM
    Membermichael99
    A page one article in the WSJ this past week highlighted Colorado as a surprisingly strong real estate market, seemingly due to the influx of Californians fleeing their own state among other things. This type of news bodes well for Wellsford Development's Colorado condo conversion project.

    Mike


    Subjectcompensation package
    Entry06/13/2001 04:43 PM
    Membertrum96
    Today's WSJ discussed a unique compensation package for AIV, a REIT.

    The most recent SEC filing, the current proxy (on page 9), provides details for a similar package put in place in 1998.

    If you or others are interested, I think it would be interesting to see how various of us compare this package versus traditional option packages. It's an unusual package but not very complicated, only takes a short time to digest. I won't post my own comments yet order to avoid "tainting the pool."

    SubjectNOL & Franklin
    Entry06/14/2001 10:50 AM
    Membermichael99
    Something I never mentioned yet is interesting given WRP's newly lowered share count:

    The Company has available at December 31, 2000, NOL carryforwards aggregating $64.7 mill, which as a result of limitations under ss.382 of the Internal Revenue Service Code, as it applies to the VLP acquisition, the Company can only use $6.2 mill of such loss carryforwards each year. Any such amounts not utilized in a year can be carried forward to subsequent years.

    The tax benefit from this will be just 1.5 million or so a year for the next ten years, but now with only 6.3 mill shares out, it is extra wind at one's back. A light breeze perhaps, but not totally insignficant.

    A filing on June 11th confirms as suspected that it was Franklin Mutual that sold out. I've been told that Michael Price basically had nothing to do with this investment in the first or last place.

    Mike




    Subjectrecent developments
    Entry06/18/2001 12:34 AM
    Membermichael99
    This from 1/99 Third Avenue report:

    "The company takes an opportunistic investment approach and seeks to buy properties that require repositioning and/or renovation. An example of the company’s investment style was the $15.8 million purchase of 194 acres of land and two office buildings with an aggregate 560,000 square feet in Wayne, New Jersey. Though the buildings were vacant when acquired (formerly the international headquarters for American Cyanamid), the purchase price equated to only $28 per square foot assuming the entire purchase price was allocated to the buildings. Upon completion of renovations and tenant improvements, the buildings should be worth over $160 per square foot with an all-in cost of about $110. The 194 acres is zoned for the development of an addition one million square feet of office or research space."

    Recent news out Wayne, as reported by the Bergen record, include favorable zoning rulings and significant corporate interest (such as from Toys R Us) that may lead to significant value realization well above book in the short if not near term.

    Mike

    SubjectAnnual Meeting & Comments
    Entry06/21/2001 02:36 PM
    Memberlil305
    I attended the annual meeting last week. Notes posted by Sethquick on the Yahoo message board accurately reported on most of the major issues. A few comments of my own:

    YTD asset sales have been $101.6 million, halfway to the goal for the year of $200 million (the goal is the same for 2002 and 2003). Lynford refused to be pinned down about how asset sales might be split between Wellsford and W/W.

    Management resisted the label that Wellsford/Whitehall is in liquidation since that implies a set timetable. They did point out that there is a buy / sell agreement with Goldman at 12/31/03. My interpretation: If another $500 million of asset sales are made through the end of 2003, roughly 2/3rds of the Company’s wholly owned and joint venture properties (at carrying value) will have been sold and it doesn’t matter much what you call it.

    Management indicated that the idea that Franklin would sell their block to the Company was set in motion by the expected departure of the Franklin account manager at the end of June and the desire by the new manager to start with a clean slate. Franklin was willing to sell all or nothing.

    As detailed in the footnotes, at 12/31/00 the Company had almost $65 million in tax NOLs available as a result of their 1998 purchase of Value Property Trust but can use only $6.2 million of these a year. Amounts not used can be carried forward and don’t expire until 2008 – 2012. As I read the footnotes, at a 34% assumed Federal tax rate, less than 25% of the NOLs are included in NAV (the rest, $17.5 million after tax, is a valuation reserve that reduces the Deferred Tax Asset account)

    Re the June 8, 2001 article in the Bergen Evening Record: The article indicated that Toys ‘R’ Us has been looking for a new corporate headquarters to consolidate four locations into one. TOY has also applied for permission to expand its 37-acre property in Montvale, but this action has been opposed by some local residents and is pending. Meristar is reportedly interested in building a conference center/golf course/hotel on the property. The value of the property mentioned in the article is more than $70 million.

    My Comments: Further to Michael99’s last post, it should be noted that the annual report lists $16.50 sq ft as market rent for PointView, but it is not clear that such a figure would apply to the entire property with one tenant. Regardless, the value should be considerably greater than $70+ million cited in the Bergen Evening Record article, assuming a reasonable cap rate. The 2000 10K lists the gross investment in the property as $45.6 million, up about $6.5 million for each of the past 2 years. I don’t know what improvements have actually been made (versus increases due to carrying costs; the Bergen Evening Record article cites property taxes as $1.2 million in 1998; capitalized interest for carrying the property would be many $ millions). The 1999 Forbes article indicated that there were substantial asbestos abatement and electrical wiring costs to be incurred.

    SubjectThanks lil
    Entry06/26/2001 09:11 PM
    Membermichael99
    Thanks for the review. As Lil referenced, the Yahoo board has another summary of the annual meeting, posted by a sethquick who seems to have followed this a while.

    Subject2nd Quarter Results
    Entry08/07/2001 02:25 PM
    Memberlil305
    I spoke with investor relations today re the Pointview property. The 2nd quarter earnings released 8/7/01 indicated that Pointview was under contract to sell and that the Company had taken a $5.9 million write-down on the property. According to IR, failure to disclose the name of the buyer or the terms and amount of the sale indicated that it was not a done deal (that may indicate that financing is necessary, which would rule out Toys R Us as the buyer). The buyer has requested that details be withheld until the transaction is consummated. WRP’s book value at 6/30/01 was $28.72 on 6.332 million shares.

    SubjectPointview
    Entry08/18/2001 04:16 PM
    Membermpk391
    Thanks lil305 for the update. I'm wondering if you have any insight into the fundamentals behind the writedown. my hope is that they are very specific to that property, and not the NJ market in general.

    thanks,
    Mike

    SubjectPointview
    Entry08/29/2001 05:22 PM
    Memberlil305
    Just back from vacation so hadn't seen earlier question. I have no insight on this property or the NJ market. I did buy some shares at $19.90 on the theory that the transaction will go through and that the cash will pay down debt at the JV level to reduce interest expense by a fair amount. The discount to book value is still large and there is a possibility that some of the cash (assuming the loan agreement permits) will be upstreamed to buy back more stock.

    Subjectprice drifting lower
    Entry10/21/2001 12:08 AM
    Membermichael99
    The stock now trades at record large spreads to its adjusted NAV - adjusted for the 2 million share buyback at a big discount to NAV. I still find this attractive. To the extent W/W wants out of New Jersey real estate, it is getting a bit of a reprieve in terms of demand and probably pricing. The downside is that the economy will stifle the condo conversion process outside of Denver.

    Subjectrequest for update
    Entry03/27/2002 01:38 AM
    Memberjy543
    i was just wondering if you might be able to post an update on this stock. much appreciated. thx.

    SubjectLong overdue action
    Entry03/26/2004 02:12 PM
    Memberjohn771
    This roach motel may finally be closing:
    -----------------------------------------------------------
    Wellsford Retains Lazard Freres & Co. LLC as Financial Advisor
    Wednesday March 24, 10:46 am ET


    NEW YORK--(BUSINESS WIRE)--March 24, 2004--Wellsford Real Properties, Inc. (AMEX: "WRP") announced today that its Board of Directors has authorized the retention of the investment banking firm of Lazard Freres & Co. LLC to advise WRP on various strategic financial and business alternatives available to it to maximize shareholder value. These may include a recapitalization, acquisitions, dispositions of assets, a liquidation, the sale or merger of WRP and alternatives that would keep WRP independent. There is no assurance as to which of the aforementioned alternatives will occur.


    Subjectvalues
    Entry04/02/2004 01:19 PM
    Memberpat110
    It looks like not much value left in the Goldman partnership. Anyone have an idea on the properties owned directly? If they are worth more than book it might be a buy here on anticipation finally of a sale or liquidation.

    Pat

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