Tropicana Entertainment Buys Lumiere Place from Pinnacle

Tropicana Entertainment is the majority owned gambling unit of Icahn Enterprises that trades over the counter under the symbol TPCA.  The quick summary thesis is as follows: (1) Tropicana has a large net cash position, (2) Carl Icahn owns 68% of the company and has a strong track record in the gaming industry, (3) A small float and an OTC listing creates an opportunity for individual investors as its equity is ignored and illiquid, (4) the regional casino industry was over built in the 2000s and is generally unloved by investors.

Lumiere Place
On Friday, Tropicana used the majority of their net cash position and available liquidity to purchase the Lumiere Place casino and attached hotels/restaurants in downtown St. Louis from Pinnacle Entertainment for $260 million.  As part of the Pinnacle's purchase of Ameristar (for over 8x EBITDA), Pinnacle came to an agreement with the FTC to sell one of the combined Pinnacle/Ameristar's three casino properties in St. Louis that controlled 60% of the market share which was a concern for regulators.

Opened in the beginning of 2008 at the height of the casino building bubble, Lumiere Place is an upscale casino located across from the Edward Jones Dome and America's Center convention center near the Gateway Arch.  In addition to the 2000 slot machines and 68 table games, the Lumiere Place property includes two hotel properties in the Four Seasons Hotel St. Louis and the HoteLumiere, plus additional restaurant and retail space.  Pinnacle has positioned Lumiere Place as a luxury brand that is less focused on the slot/retail gambler and more focused on table games and non-gambling related revenue which is a departure from Tropicana's current core consumer (I believe should be seen as a positive).

Pinnacle Entertainment's Sept 2012 Investor Presentation

In total, approximately $600 million has been invested in the project since it opened 5 years ago, and its currently on the books for $401 million as of June 30th.  While Lumiere is probably worth far less than $600 million today, Tropicana clearly purchased it for less than replacement cost.  Pinnacle has previously disclosed an annualized EBITDA of $34 million for Lumiere, at a $260 million purchase price, the EV/EBITDA multiple is 7.5x, just below what the average casino operator is trading today of 8-9x.

Liquidity
As of 6/30, Tropicana had $241 million in cash and $170 million in debt, for a net cash position of $71 million.  The $13 million in interest payments on the term loan facility versus the minimal interest income from the cash has been a drag on earnings.  Tropicana has the option to increase their term loan by $75 million and has an used $15 million letter of credit facility giving it plenty of room to make the Lumiere purchase, but not a lot more given their annual capital expenditure needs (which currently roughly match cash flow from operations).  This purchase seems about the perfect size given Tropicana's balance sheet, meaningful but not a stretch.

Pro Forma Valuation
While I continue to think that the EV/EBITDA ratio is best for the gambling industry due to the varying capital structures, the purchase of Lumiere Place should also make Tropicana look cheaper on a more traditional P/E basis as the idle cash and term loan (which have a drag on earnings versus being cancelled out looking at it from an EV/EBITDA basis) will be invested in a productive income generating asset.

But looking at the "new" Tropicana, I come up with the following back of the envelope valuation:

EBITDA
Tropicana's current core = $84 million
Lumiere Place = $34 million
Total = $118 million

Enterprise Value
Market capitalization of the equity = $405 million
Net Debt = $189 million (current cash is $241 million, so take the $170 million in debt and add the additional $19 million)
Total = $593 million

EV/EBITDA = 5.02x

Icahn Enterprises currently values (for the purposes of their non-GAAP NAV) their 68% pre-Lumiere stake at $566 million, or 9x EBITDA.  Using that same 9x EBITDA valuation for the post-Lumiere Tropicana, and the equity should be valued at $873 million versus a market cap of $405 million today, so the market is giving you almost a 55% discount to become a minority shareholder in a company controlled by one of this era's top investors, seems like a good deal to me.

Disclosure: I own shares of TPCA

Asta and BMO Revised the Great Seneca Portfolio

It's been years since Asta Funding has been actively buying distressed consumer debt portfolios, their core business, and while they returned to that market this past quarter with a $3.3 million purchase of $53 million in face value of receivables, I think the much more important transaction is the renegotiation of the Great Seneca portfolio debt with BMO.  In the past I have treated the Great Seneca portfolio as a free option, and assumed it was worthless and the non-recourse debt would be written off as well.

During the quarter, Asta wrote down the value of the Great Seneca portfolio by $10.2 million to $46.3 million which they identify as the net realizable value.  Then below is the explanation for the transaction they completed with BMO:

"On August 7, 2013, in consideration for a $15 million prepayment funded by the Company, BMO has agreed to reduce minimum monthly collection requirements and the interest rate significantly. After BMO receives the next $15 million of net collections from the Great Seneca portfolio, offset by credits of approximately $3 million for payments made to BMO prior to the consummation of the agreement, the Company is entitled to recover, out of future net collections from the Great Seneca portfolio, the $15 million prepayment that it funded. In exchange for possible future debt forgiveness, BMO has the right to receive 30% of future net collections, after the Company has recovered its $15 million prepayment"

Although the 6/30/13 financials show $105 million in cash and securities, Asta paid BMO $15 million this past week as part of the revised agreement and now has $94 million in cash/securities (presumably after $4 million in cash inflows).  In essence Asta is reinvesting in this portfolio, while it might not be counted as a new portfolio purchase, its almost the same thing.

Going forward the first $12 million (net of $3 million in previous payments) will go to BMO, following that Asta will get the next $15 million and recover the prepayment, then the remaining revenue will go 70/30 to Asta/BMO.  So given the Great Seneca's net realizable value is $46.3 million, the first $27 million is allocated to BMO first, then Asta, leaving the remaining $19.3 million to be split 70/30, or $13.5 million to Asta Funding.  Asta's accounting is generally conservative (still making $9.75MM this quarter in zero basis assets), I think the $13.5 million number is likely an appropriate value for the end recovery value of the Great Seneca portfolio and may end up being a bit low.

Asta currently receives about $3 million a quarter on the Great Seneca portfolio, if this continues, BMO will be paid off in one year, and Asta will recover its $15 million prepayment in about 9 quarters.  If the $3 million quarters continue from there its about another 8 quarters (or 4 years from now) before the net realized value would be recovered in the 2nd quarter of 2017.  While it might initially feel generous to assume the $3 million can continue that far into the future, I've been pleasantly surprised the zero basis portfolios have continued to produce consistent cash flow for the past several years, and show little evidence of slowing down.  So assuming a $3 million a quarter run rate, Asta would earn about a 33% IRR on it's initial $15 million investment over the next 4 years, or an NPV of just over $7.1 million using a 20% discount rate.  The prepayment will make the balance sheet look a little weaker in the next few quarters, but I would say this is clearly a smart transaction for Asta.

Based on how I've previously valued Asta Funding, removing out the Great Seneca portfolio and adding in the NPV of the zero basis portfolio, I've made another attempt and included a line for the NPV of Great Seneca given the new arrangement.

As you can see, I roughly value Asta's book value at $16 per share, or 77% higher than it's current price of just over $9.  All the minority shareholders would probably prefer a big stock repurchase plan (which has expired and has not been renewed), but it appears Asta is finally using their excess cash and investing again in the core business which should be a net positive.

Disclosure: I own shares of ASFI

Summary of 2nd Quarter Results

Below is a brief round up of a few names I've mentioned on the blog before and their recent results.

American International Group
AIG had another nice quarter, exceeding expectations and announcing the initiation of a $0.10 dividend and another $1B in share repurchases.  These moves were surprising given the drama surrounding the ILFC sale to a consortium of Chinese buyers, which has seen several deadlines come and go.  They're still working with the consortium to see if a sale can be completed, the deadline has been pushed back to the end of August, but AIG is also preparing for an IPO of ILFC later in the year that would de-consolidate ILFC (meaning they'd sell at least 51%) from AIG's financial statements.

AIG's book value is now $61.25, and its recently trading for just under $49, so the discount to book value has been closing fairly quickly.  While I still view AIG as a long term hold, I would consider selling for around 95% of book value which is still a little while off.  In the meantime hopefully book keeps growing with retained earnings and gets accelerated with AIG repurchasing shares at below book.

Calamos Asset Management
Calamos Asset Management's (CAM, but CLMS is the ticker) market value hasn't moved much since I initially profiled the company a few months ago, but the assets under management have taken a 10% slide to $27.4 billion as of 7/31.  As a result, pre-tax earnings are down over 30% from last year's run rate, proving the operating leverage in the asset management business works both ways.  Their flagship Calamos Growth and Calamos Growth & Income funds are suffering large outflows due to poor recent performance; the Calamos Growth Fund is in the bottom 92% of its peer group over the last five years, according to Morningstar, making it a dreaded one-star fund.  What financial advisor wants to answer the "why am I in a one-star fund" question from a client?

Calamos has been countering their growth fund strategy issues by introducing several new value and alternative strategy funds to diversify their revenue business model.  The alternatives segment is the one strategy where Calamos is seeing net inflows, and I think that it has the most potential as its not a strategy that's easily replaced by an index or passive fund.  Financial advisors are moving assets to index and passive mutual funds, traditional managed A share type funds are at best out of favor and might be in a permanent secular decline.  Alternative mutual funds are an easy sell after the past decade of volatility and given their complexity, one where the management fee is a more justifiable, maybe.

The value in Calamos is still primarily in the odd corporate structure that causes the operating company to be consolidated with CAM, but where CAM only owns 22.1% of the operating company.  This consolidation hides the assets that are attributable just to CAM, which are worth roughly half the market capitalization.  Based on the same assumptions as my original valuation, I put the CAM's current value at roughly $16.39 per share today.

The Calamos family has the right to exchange their ownership for CAM shares based on a fair value approach.  The above is the quarterly reconciliation that Calamos publishes based on the accounting quirk that's the primary reason its undervalued, but it could also be used as the reason for the Calamos family to dilute the CAM shareholders out of that value under the guise of a fair value exchange.  The shares issued line under the no recognition of other assets assumption is almost twice the shares in the full recognition assumption.  That's been hard for me to get comfortable with, so despite the CAM shares being materially undervalued, it's remained on my watch list.

Ultra Petroleum
My natural gas pick, Ultra Petroleum, had another good/boring quarter as they continue to keep capital expenditures within cash flow and just tread water until natural gas prices fully recover to a more normalized level.

One interesting takeaway from the conference call was when CEO Michael Watford said the following about how they value their assets:

"So a quick reminder of how we view our assets. At $4 gas, we restore all the value and volume to our proved reserves. That puts us at 5 trillion cubic feet of proved reserves and PV-10 value of $5.25 billion, which is approximately our enterprise value today. Looking forward a bit to $4.50 gas and ignoring the 5-year limit on PUDs, Ultra would have 9.2 trillion cubic feet equivalents of proven light reserves, with a PV-10 value of $8.1 billion. This translates into a $20 per share increase in stock price."

$4.50 gas might be farther away than it sounds as prices have moved back down to under $3.50 in the past few weeks.  On my favorite slide in their presentations, Ultra doesn't forecast $4.50 prices until 2016, but its a comment that I wanted to keep highlighted for future reference.  The other management comment I liked was the possibility of a share buyback or dividend in the future with their free cash flow, versus all the talk of an acquisition last quarter.  Given the high returns of their Pinedale asset, I don't see why they'd be looking to dilute those returns unless it was an acquisition for acquisition's sake.

I picked up some shares in the $16-17 range earlier in the year, and recently sold an equal amount of higher cost basis shares to reduce my position size to a just above average weighting.  I wanted to take some risk off the table and with Ultra's share price increasing with natural gas prices decreasing, seemed like a good opportunity.

Disclosure: I own shares of AIG, UPL, no position in CLMS

Gramercy's Business Plan is Moving Along

Gramercy's quarter again looked mostly as expected, and as management stressed on the call there's a noticeable lag in what the financials look like and the future state of the business.  Gramercy made significant progress towards investing their available cash in net leased assets, completing 11 discrete transactions for $111.2 million (mostly towards the end of the quarter).  During the question and answer session of the conference call, management indicated that this level of activity would be a good base case run rate for Gramercy through the end of the year.  I found this comment particularly interesting based on their capacity analysis slide below showing $96.9 million in remaining capacity.

So this leads me to believe that most of Gramercy's available cash and borrowing capacity will be exhausted by the end of the 3rd quarter or early 4th quarter, setting up for the dividend to be caught up on the preferred by year end as that would likely need to occur before any major capital raise.

As for the what the common is worth, I'm going to take a slightly different approach than my previous quarterly recaps (here and here) and instead take a balance sheet look at the valuation based on a slide that Gramercy provided in their presentation.  The one thing I noticed initially, is the plug "Intangibles" line item on the asset side is negative, meaning the market is valuing Gramercy above its current NAV.

Given Gramercy's acquisition pace and their capacity analysis slide, I made a few adjustments below to back into a new NAV based on full cash/capacity utilization before a capital raise.  I took the $96.9 million in net equity capacity and assumed Gramercy would make new acquisitions at a 9% cap rate (average of the 2nd quarter), and then those assets would be revalued by the market at a 7% cap rate ("widest arbitrage in our experience") to come up with $124.59 million in additional real estate owned (on top of the $10.6 million in the pipeline).  Making those asset purchases zeroes out both the cash and CDO advances and asset sales line items, but keeps the KBS Promote and CDO Bonds line items.  In Gramercy's slide they leave out the value of the asset management contracts, but these clearly have value.  Given that they're generating $4 million in after tax contribution annually, and have about a 3 year lifecycle, I discounted that back a bit to a round $10 million to come up with a total asset value of $631.8 million.

On the liabilities side, I removed the preferred dividend as its paid in the capacity analysis calculation and then added the pipeline and current portfolio borrowing capacity numbers given in Gramercy's guidance, making the total debt $237.9 million, or roughly 40% of the real estate value, inline with management's comments today.

Removing the preferred par value, and the common is worth $305.8 million, or $5.14 per share, which is pretty much the same as I've come up with before, and is only ~15% above what it's trading at now.  But I think the dividend is finally on the horizon, and then Gramercy can start raising capital and further exploiting the private/public net lease arbitrage.  Gramercy remains my largest position, although I might be tempted to sell a bit if it trades above $5.20 again without paying the dividend.  

Disclosure: I own shares of GPT

UCP Inc - Worthwhile on its Own?

This will be the last post on the PICO/UCP story for a while, but I haven't had much time to dig into new situations and there just seem to be fewer interesting investing ideas with the markets drifting higher and remaining relatively calm.  As I've covered recently, UCP is the home builder/land developer unit of PICO Holdings that recently completed its initial public offering.  While I consider the transaction a positive for PICO, given PICO's complexity and management compensation structure, UCP might be the better investment for the near term as its a purer play on the continued housing recovery.

To summarize, UCP Inc (the publicly traded entity) owns 42.3% of the operating company UCP LLC, while PICO owns the other 57.7% and will remain the controlling shareholder.  UCP is primarily a California home builder and land developer with some additional exposure to the Puget Sound Area in Washington state.  Below is a snapshot of the current owned and controlled lots in UCP's inventory:

Since UCP essentially didn't get started until after PICO bought it in 2008, UCP has no legacy or problem assets on its balance sheet, the majority of their lots were purchased opportunistically in the 2008-2011 period and are carried on the balance sheet at historical cost.

What have real estate prices done in the areas where UCP operates?

Fresno: http://www.zillow.com/local-info/CA-Fresno-home-value/r_18203/

Monterey: http://www.zillow.com/local-info/CA-Monterey-County-home-value/r_2444/

Santa Clara: http://www.zillow.com/local-info/CA-Santa-Clara-County-home-value/r_3136/

Seattle: http://www.zillow.com/local-info/WA-Seattle-home-value/r_16037/

While Zillow isn't the perfect data source, their estimates all show year over year price increases in UCP's markets of anywhere between 12-22%.  So if anything, the real estate on the balance sheet is likely understated, but for the sake of being conservative I won't make any adjustments.

Below is the pro forma balance sheet after the offering:

Based on the current market price of $14.23, UCP has a market capitalization of $261 million, and a price-to-book ratio of about 1.2x.  Other home builders trade for a multiple of book value, but a good recent comparable seems to be TRI Point Homes (TPH) as its almost exclusively based in California, was formed by a private equity investor during the crisis and as a result of its January IPO, has plenty of cash.   TPH trades for 1.6x book value, a 33% premium to UCP, maybe some of that is justified by more desirable community locations, but given the similarities, I think its a good comparable.  UCP also compares favorably on the home building margins and it has the optionality of being a developer and selling their lots to other builders.

So why is UCP cheap?  Besides its small size and geographic concentration, there was very little hype leading up to the offering, little coverage since,  and it hit the market as home builders have been tumbling with the rise in mortgage interest rates (the home builder index is only up marginally on the year, but was up significantly in 2012).  It just seems to be overlooked here, UCP debuted at $15, the low end of its range, and has traded lower ever since.  Some of that discount is probably a result of the organizational structure, as PICO will continue to hold 57% of the economic interest and control the board, making an acquisition or other transaction unlikely.  Additionally on the negative side management is getting a nice raise, and doesn't own any shares outside of the initial options they were granted in the offering, plus there will be extra expenses UCP will incur as a stand alone public company.  

But I think the positives and the valuation outweigh the negatives.  I'm generally positive on real estate still, there will be pauses as interest rates rise to a more natural level, but with pent up demand from years of low household formation and long term demographic shifts away from the midwest and to places like California, UCP could be a good short-to-medium term investment.

Disclosure: No current position in UCP, I own shares of PICO

PICO's UCP is One Step Closer to IPO

UCP, PICO's homebuilder and developer, took its next step in the IPO process by announcing terms on Monday to sell 7.75 million shares (more if the underwriters exercise their option to purchase additional shares) at a range of $15 to $17 per share.  For those unfamiliar with UCP, it was substantially formed by PICO in 2008 as the real estate crisis was hitting California where UCP is principally based.  PICO, through UCP, took advantage of the crash and picked up an inventory of lots through California and Washington, many of those lots were purchased in 2008 and 2009 at rock bottom prices.

Back in April, I wrote up a quick update after UCP filed an initial filing with little financial details.  I figured PICO was selling out, rather than looking to raise capital for further expansion.  While short-term, the sell out scenario would have resulted in a quicker pop to book value, the capital raise is a smart move long as UCP is going to need more capital in order to battle in the competitive homebuilder industry.  One of PICO three main businesses will now have a quotable market price making PICO a little more transparent and easier to value, and it gives UCP more flexibility to raise more capital on its own.

One additional quirk in the filings is the complicated organization structure.   The new public shareholders are going to have a 42.3% interest in the newly formed UCP, Inc., which primary asset will be a 42.3% stake in UCP, LLC.  PICO is going to maintain 57.7% of the economic interest in UCP through their UCP, LLC Series A Units (which are exchangeable for Class A common stock in UCP, Inc on a one-for-one basis) and also receives UCP, Inc. Class B common stock which have no economic interest, but square up the voting so that PICO has 57.7% of the voting rights.  Got all that?

I'm not a tax accountant (so this could be where those smarter than me comment below), but there appears to be some built in tax advantages to the structure as PICO exchanges UCP, LLC Series A Units for UCP, Inc shares some of the real estate assets in UCP, LLC will receive step up cost basis treatment, and through an agreement with UCP, 85% of this benefit will accrue to PICO.  Possibly also giving PICO incentive to pursue this route and simplify the structure?

Coming down to what all this all means for PICO shareholders.  A $16 share price (the midrange between $15 and $17) equates to a $293 million market capitalization for UCP.  PICO will own 57.7% of UCP for a market value of $169 million, versus $110 million in current book value, is an increase of $59 million book value (13% increase on PICO's $460 million book value).

I still have concerns around PICO management's lack of ownership, but CEO John Hart does have a lot of options expiring in a few years at significantly higher prices ($33.76, expire 12/12/2015), so that should give him motivation to increase the share price, but the incentives are still misaligned by the fact that he doesn't own much stock himself.  He's been at PICO since the mid-90s, makes $2 million a year, and only has ~$700,000 in stock.  But this IPO is a step in the right direction of making PICO simpler to understand which will hopefully unlock value for shareholders.

Disclosure: I own shares of PICO, no plans to buy UCP directly

Retail Holdings looking to IPO Singer Asia

A quick update on Retail Holdings (which I previously discussed back in January), despite general weakness in emerging markets and their underperformance this year, Retail Holding announced last week they are "considering" a potential IPO of Singer Asia (their primary asset) on Singapore's stock exchange.

The IPO is probably in its early stages, but it continues to highlight management's intent to close the valuation gap between Retail's NAV and the market price, which has only barely moved since the announcement.  Below is my updated valuation spreadsheet.  I added Singer Industries and Regnis as I mistakenly left them off before, Singer Finance is part of Singer Sri Lanka as far as I can gather from the annual report, either way they're small rounding errors.

The investment thesis on Retail is pretty straightforward.  Retail Holdings trades for a steep discount to its NAV and yet their stated strategy "is to maximize and monetize the value of its assets, with the medium-term objective of liquidating the Company and distributing the resulting funds and any remaining assets to its shareholders."  Unlike other liquidations, Retail's assets are very much operating businesses that should grow and increase in value over time (playing off the long term trend of the growth of the middle class in emerging markets).  Stephen Goodman, Chairman and CEO, owns roughly 25% of the shares and is in his late 60s, making him highly motivated to monetize Retail Holdings assets.  I continue to hold and look for opportunities to pick up more shares, not easy given the illiquidity.

Disclosure: I own shares of RHDGF