Civeo: a Spinoff and a REIT Conversion

Oil States International (OIS) is a oil services company that is spinning off its accommodation business, Civeo Corporation, later this month (it goes "when issued" Monday, and trades "regular way" on 6/2) after some nudging from activist investors last spring.  Civeo provides accommodation services for the resources industry in remote locations, think "man camps" that kind of look like portable prison complexes.  As apart of Oil States, Civeo is taxed as a C-Corp, but shortly after the spinoff Civeo's board intends to evaluate converting to a REIT structure, eliminating corporate level taxes, providing an immediate increase in the business's valuation.  This isn't a new idea, but despite JANA partners and Greenlight Capital being major shareholders, there's still a significant disconnect in the combined company's current valuation.

The company has laid out the typical reasons for the spinoff: management focus, optimize each unit's capital structure, cleaner for investors to value, acquisition currency, and aligning incentives.  Both businesses are attractive, it's not a classic spinoff where one of the businesses is orphaned and dumped in order to make the parent's results more appealing. However, the real value is the REIT conversion, REITs are valued more richly than C-Corps due to their tax advantaged status.  The pre-spin OIS trades for roughly 7x EBITDA, lodging/multi-family REITs trade in the 15-20x range, as long as the OIS stub remains priced at 7x EBITDA, a lot of value is going to be created through the spinoff and REIT conversion of Civeo. 

Civeo Corporation
Civeo is a pretty unique lodging company, they provide medium term (contracts are around 3 years) accommodations services to remote resource mining operations, a valuable service since infrastructure and labor supply is lacking in these far off locations.  Some of their lodges/villages can be quite large, for instance their Wapasu Creek Lodge has 5100 rooms, making it the second largest lodging property in North America behind the MGM Grand in Las Vegas.

Civeo Investor Presentation

Their operations are primarily located in the Canada oil sands region in Alberta, and around major metallurgical coal mines in Australia (as a result of the late 2010 acquisition of the MAC).  Being a US based company, this exposes Civeo to considerable currency risk, in particular Australia worries me being so closely tied to the Chinese economy.  Another unique feature of Civeo's business is the permanence of their real estate and how the market might value it?  They focus on providing accommodations to long lived resource assets, in the 30-50 year time frame, but their lodges (at least in Canada) are on leased land, and presumably depreciation expense is more real as a result.

Civeo Investor Presentation

Civeo sports a nice growth profile as seen above.  They "land bank" in growth areas like the west coast of British Columbia near potential LNG projects - their current lank bank pipeline could add another 15,000 rooms to their asset base over time.

One reason for the current discount might be due to a lack of pure comparables, do you value Civeo as a hotel REIT, multi-family/apartment REIT?  I blended the two below and threw in Extended Stay, which is not a REIT but is similar in that it tries to create a medium term apartment feel in a hotel.

Data via Bloomberg - Net Debt Includes Preferreds

As you can see, this peer group average is valued at approximately 17.5x EBITDA, I would place a little discount on Civeo as a result of its dependence on the cyclical resource industry as well as the more temporary nature (temporary in the 30 years sense) of its asset base.  Even putting a 15x EBITDA multiple on Civeo, backing out the $775 million in anticipated debt (and not accounting for any cash on hand) I come up with a $5.6 billion valuation, which is slightly more than the entire market cap of pre-spin OIS.  Even if you disagree with the comps, multiple, or discount the 2013 EBITDA for some anticipated slowdowns in Australia and corporate overhead, you're coming close to getting the remaining OIS for free.

Oil States International: Post-Spin
Post Spinoff, the Oil States stub will become a more focused energy services company with a TTM EBITDA of $435 million on $1.7 billion in revenue.  I haven't spent as much time on the remaining pieces of Oil States, but assuming it remains valued at a little over 7x EBITDA (which looks reasonable given peers trade for 9-10x EBITDA) the stub is worth roughly $3 billion.  Below is another list of comparables to give you an idea for where oil services companies are trading currently.

Data via Bloomberg

$5.6 billion for Civeo and $3 billion for Oil States gives you a pre-spin value of $160 per share.  I'm sure some of my numbers are a little optimistic, using EBITDA multiples obviously has its issues, and it will take some time for the REIT conversion to take place and for investors to fully value each component, but there's upside to be had here.

Risks
A few questions/risks that run through my mind:

• Will traditional oil service company investors dump Civeo after the spin?   Seems unlikely given that's what the investor base has been pushing for, but any blip due to selling pressure would be temporary.
• What about OIS, will that get dumped in favor of Civeo?  This appears more likely than Civeo being sold indiscriminately, however it's already cheap and would be a bite sized acquisition target for larger players in the industry.
• Australia - Civeo is heavily exposed to the country's met coal market and thus the Chinese growth story which we've seen is slowing a bit and potentially in a massive housing bubble.
• REIT conversion doesn't occur, it appears that the IRS is softening up its stance on these non-traditional REITs (like Iron Mountain), but with Civeo structures not being 100% permanent, I could see it being viewed with a skeptical eye.

My Strategy
Most value investors are aware of the spinoff strategy of buying the SpinCo after the initial wave of selling by unnatural holders or ones that don't want the orphan/bad business.  But in this instance, I think that Civeo could be the more appealing company for new investors to come in post-spin due to the planned value unlocking strategy to convert to a REIT.  So instead of waiting for the spin, I bought June expiration calls on OIS early last week, that way I have leveraged upside to the initial reaction to the spinoff which I expect to be positive, and the secondarily I plan to exercise the option, immediately sell OIS (unless it slumps) and hold CVEO until it converts to a REIT for that second leg up in valuation.

Disclosure: I own OIS calls

News Corp Buys Torstar's Harlequin

Last Friday, News Corp announced the purchase of Canadian media company Torstar's book business Harlequin, best known as a romance novel focused publisher, for C$455 million (or roughly 8x 2013 EBITDA of C$56 million).  I think its an interesting deal for both sides, more of an incremental move at News Corp and a transformational one at Torstar.

News Corp
News Corp was spun off of Twenty-First Century Fox last year (it was the spinoff but kept the name of the original parent) and unlike other recent spinoffs, the parent didn't saddle it with debt but instead let it go with $2.5 billion in excess cash.  Originally News Corp created a share repurchase plan and discussed initiating a dividend, but it seems like plans have changed as neither have been utilized and instead News Corp has made a couple small digital purchases in Storyful and a UK Luxury Shopping site.  Now comes a larger one in Harlequin, which is expected to be accretive to earnings and improve News Corp's free cash flow immediately.

Harlequin has a strong brand and a loyal repeat customer base but has experienced trouble making the transition from print to digital under Torstar, maybe under News Corp this trend will improve?  Romance novels initially seem like a great fit to be purchased and read digitally.  Books like 50 Shades of Gray are incredibly popular, yet no one likes to be seen reading a copy on the train, it's easier and more stigma free to read it on your morning commute on a Kindle.  Hopefully News Corp can implement some best practices learned from HarperCollins' move to digital at Harlequin, strip out some fixed costs, and cross sell HarperCollins books through Harlequin's much larger international distribution channel.  It seems like News Corp paid full price, but as a strategic buyer there are some efficiencies to be gained anyway. 

I still think News Corp is an interesting spinoff as I outlined in this earlier post, they have a collection of book publishing and Australian assets that together with their cash position roughly equal the market cap of the entire company.  The majority of their revenue actually comes from the remaining newspaper assets, which have strong valuable brands, but will take time to transition from print to digital.  In the meantime, Murdoch has hinted at even more deals in the works, he's probably not done yet for the year.

Torstar
From Torstar's angle, it was interesting to listen to their investor call on Friday, analysts were congratulating the company on getting a full valuation for Harlequin, sending the stock price up over 20% on the news.  The deal is more transformational for Torstar than it is for News Corp, Torstar will use the proceeds to pay down their debt and will be left with approximately C$260 million in net cash.  Initially it sounds like Torstar will be investing the proceeds into the business or making an acquisition versus returning it to shareholders.  Torstar's remaining businesses include the Toronto Star, 115 weekly community newspapers, and several joint venture holdings in other media assets.  Maybe they could roll-up additional community newspapers in a similar fashion to New Media's strategy?  It also sports a large dividend; on the surface it still looks pretty cheap.

Disclosure: I own shares of NWSA

Speculating on Iron Mountain's REIT Conversion

Many investors are well aware of record storage operator Iron Mountain's efforts to convert the company from a C-Corp to a REIT.  As a REIT, Iron Mountain (IRM) would be taxed only at the individual shareholder level and would likely reduce their cost of capital, both of which would cause the shares to be re-rated higher inline with storage/industrial REIT peers.  Iron Mountain's primary business is building large storage centers and "leasing" out space on their racking structures to store paper records.  In this business line they have over 67 million square feet of storage space across over 1,000 locations, so there's a good case to be made that Iron Mountain is indeed a real estate driven company.

However, last summer, the IRS initially pushed back on Iron Mountain stating they were "tentatively adverse" to classifying the racking structures as real estate.  The basic question is how permanent are they?  Are the racking structures more similar to walls in a house or removable display shelves in a grocery store?  The market reacted quickly selling off IRM shares from around $40 per share before the announcement.

Iron Mountain hosted an analyst day presentation in March (shares are trading in a similar $27-29 range since) where one of the main topics was the REIT conversion, listen to the whole call if you can, but the key REIT valuation slide is below:

It's fairly clear by these measures that Iron Mountain would be significantly undervalued as a REIT.  If approved, the stock should recapture much of the ground it has lost since the IRS's "tentatively adverse" push-back in the near term, and maybe more upside above $40 over the longer term. 

Management seems fairly confident in a positive outcome, they have been operating the company as a REIT since the beginning of the year in preparation of approval so they could file next year as a REIT.  The board initially announced plans to evaluate REIT status in April 2011 (after some activist pressure), and formally announced the desire to pursue the strategy in June 2012, if plans fail the board and management would face real credibility issues.  Additionally, the IRS recently has been approving non-traditional REITs in sectors such as outdoor advertising, cell phone towers, data storage centers, and casino properties.  There is some time pressure to get approval sooner than later, in order to qualify as a REIT, Iron Mountain would have to make a special dividend within the calendar year to distribute their accumulated earnings and profit (E&P) to investors.  In order to get this done, the company believes they need to initiate the process in October, if the IRS doesn't rule in their favor before, the REIT conversion gets pushed back to 2015.

I'm writing this on Wednesday (4/30) afternoon, earnings come out tomorrow (5/1) morning, if any negative REIT related news is released tomorrow I could end up with egg on my face pretty quickly.  But I couldn't resist a little special situation call option strategy, I bought some call option contracts, nothing big, basically just free rolling the small profit I made on BioFuel Energy earlier this month.

Disclosure: I own IRM calls

Momentum Traders and BioFuel Energy

That was quick!  My last post was on Greenlight Capital's proposed transaction to utilize BioFuel Energy's net operating losses (NOLs) in a reverse merger of sorts with a real estate developer/homebuilder the hedge fund controls (JBGL Capital).  I noted at the bottom that I expected a wild ride because it seems like the current crop of momentum day traders had taken notice to this small float stock with a sexy name and were driving up the price without understanding the Greenlight transaction or reading the details of how BioFuel Energy is going to meet the $275 million price tag for JBGL Capital.

On Thursday, BioFuel's share price jumped almost 30% with no news and well above the maximum range of the rights offering:

5. The Rights Offering. Prior to and contingent upon the closing of the Acquisition, the Company will conduct a rights offering for shares of its Common Stock (the “Rights Offering”) to raise at least $70 million. Each right will permit the holder thereof to purchase shares of Common Stock for a price per share equal to 80% of the average closing price per share of the Common Stock for the 10 trading days immediately following the date of filing of the Registration Statement relating to the Rights Offering (the “Filing Date”); provided, that in no event will the price per share of Common Stock be greater than $5.00 per share, or less than $1.50 per share. Subject to certain limitations, the Rights Offering will be backstopped by certain investors determined by Greenlight.

Based on the initial terms of the rights offering above, anyone buying BioFuel Energy above $6.25 (80% of which is the maximum $5.00 of the rights offering) is guaranteed to face massive dilution after the rights offering is completed.  In order to fund the acquisition, BioFuel is going to have to issue 4-5x as many shares as is currently outstanding, at a maximum price of $5 per share, that's going to force the fair market value considerably lower than where its trading currently.  I don't have the trading mindset to participate in this kind of pump and dump, so I exited this morning at $8.15.  Slightly disappointed that I won't be participating in the rights offering unless things change dramatically, but maybe I'll get an opportunity again once the transaction closes.

Disclosure: No Position

BioFuel Energy's Reverse Takeover

Greenlight Capital and developer James Brickman are proposing that BioFuel Energy (BIOF) purchase JBGL Capital, a residential developer and homebuilder controlled by the two, for $275 million in a reverse takeover transaction to take advantage of the failed ethanol producer's $178.2 million in net operating losses.

BioFuel Energy was founded in 2006 in the middle of the ethanol craze.  The company operated two ethanol plants, one in Nebraska and one in Minnesota, which produced ethanol and related products for the company until this past November when they turned their assets over to the lender in a foreclosure.  After the foreclosure, BioFuel Energy is now a shell company with two assets, $10.8 million in net cash and the aforementioned $178.2 million in NOLs.

At year end 2013, hedge funds Greenlight Capital and Third Point owned 35.4% and 17.4% respectively of the company, one that's a rare investing black eye for each.  The NOLs are clearly valuable, otherwise the company would be liquidated and the $10.8 million would be distributed to shareholders, but the NOLs are only valuable if they can construct a transaction where there isn't a change of control in the mind of the IRS.  In comes the home builder transaction where Greenlight is already the lead investor.  There isn't much available about JBGL Capital on their website, but Greenlight would only choose an asset that would throw off taxable income to utilize the NOLs, so its reasonable to assume its fairly profitable.   I tend to like the residential real estate sector right now and think home builders will have the wind at their back for some time as we're still far below historical new home starts in the US.  The millennials generation will one day move out of their parents basement and start buying homes, just might take longer than most expect due to the financial crisis hangover and student loan debt.

Transaction Details, $275 million for JBGL Capital, compensated by the follow ways:

1. $150 million in debt financing provided by Greenlight, 10% fixed interest rate for a 5 year term with a 1% prepayment penalty during the first two years.
2. A rights offering of at least $70 million, with each holder able to purchase shares at 80% of the 10 day average closing price following the official registration statement.  Maximum price is $5.00, minimum is $1.50.
3. Equity issuance to Greenlight/Brickman, this will ensure that Greenlight owns 49.9% of the shares following the rights offering and James Brickman will own 8.4% of the shares.
4. Cash of $10.8 million currently held by the company

The debt is the most concerning of the above; 10% is awfully high in such a low rate environment, but I view this as Greenlight's preferred return for choosing the asset and being the company sponsor.  But after a few quarters of profitability, you'd assume the company could refinance the loan, but with Greenlight/Brickman being the lenders, would they be conflicted in facilitating a refinancing?

However everything else sets up pretty nicely, post transaction, David Einhorn will become the Chairman of the Board and James Brickman will be the CEO and join the board as well.  So Greenlight will remain the sponsor and presumably a long term shareholder of BioFuel in order to retain the NOLs, any "change of ownership" would disqualify the NOLs in the eyes of the IRS.

At the current price of about $5.30, you get around $2 per share in cash and the market is valuing the NOLs at $3.30 per share or only ~$17 million.  That's a reasonable valuation without any specific details of JBGL Capital which should come with the rights offering and subsequent filings.  BioFuel Energy, probably due to its name, former industry and low float, seems to now be on the radar of unsophisticated momentum traders which could make for a wild ride until the transaction is completed, but I took a very small starter position in the name (with the intention to participate in the rights offering) as I think there could be substantial upside once the dust settles.

Disclosure: I own shares of BIOF

CLOs, Leverage Loan Funds, BDCs and Oxford Lane Capital

Last week I attended a panel discussion titled "CLOs in the Heartland" hosted by Mayer Brown and Fitch Ratings, while most of content was directed at the structured finance industry (my day job), I found a few of the topics applicable to the broader value investing universe that I thought I'd share. 

CLOs, Leveraged Loan Funds and Oxford Lane
For the uninitiated, Collateralized Loan Obligations (CLOs) are pools of leveraged loans that are then sliced (tranched) into different levels of risk and sold to institutional investors.  Unlike the ABS CDOs that were ground zero of the 2007-2009 financial crisis, CLOs experience few defaults as they were genuinely diversified among many different industries and weren't forced to sell assets that had dropped in value.  Contrastingly ABS CDOs ended up holding 100 securities that were virtually the same and all were impaired at the same time causing total losses in many deals up to the AAA tranche.  A good example of the collateral held in a CLO is Tropicana Entertainment's term loan they recently closed in connection with the Lumiere purchase.

CLOs are typically actively managed for a period of time by an asset manager, and those managers have begun facing considerable competition for loans from retail floating rate mutual funds and ETFs.  An interesting situation has the potential to play out in this space as a CLO represents essentially permanent capital for the manager for an extend period of time, during times of distress like 2007-2009, CLO managers were able to hold on to their assets and ride out the wave without investors demanding their money back.  CLO investors could only obtain liquidity by selling their CLO liabilities/equity holdings in the second market.  Whereas in a mutual fund or ETF, a manager would be forced to raise capital by liquidating their loan portfolio to meet redemption requests.

Retail investors have been pouring money into floating rate or bank loan funds as a safe haven from interest rate risk, the below slide from the conference shows the dramatic flows that occurred in 2013.  I would guess much of this happened after the spring when rates first began to start moving up.

What happens when flows reverse themselves?  Leveraged loans are not book entry securities and aren't completely liquid.  Loans that trade hands on the secondary market can take 1-2 weeks to settle, and if they're distressed that time frame can stretch out into months.  Retail investors are by nature hot money, and may pull their cash at the first sign of distress causing liquidity issues for the managers of leverage loan ETFs and mutual funds.  This rush to exit and forced selling of supposedly liquid assets is what caused trouble in the money market fund sector, and could cause similar issues for bank loan funds.  A fund's net asset value might not be what it appears in a quick liquidation.

One panelist, Levoyd Robinson (fantastic panelist BTW) of Chicago Fundamental Investment Partners, pointed out the CLOs are essentially long volatility in the bank loan space.  Because of their pseudo permanent capital funding structure they'll be in a position to take advantage of any volatility caused by the retail investor exiting the space.  CLO equity (first loss position, 8-10x leveraged) targets internal rates of returns in the mid-teens, and his thinking is if volatility picks up, these returns would only increase over the full cycle as managers in CLO could pick off good credits from forced sellers.

Where could individual investors potentially take advantage of this idea?  Many BDCs hold CLO equity, but I'm not a huge fan of those as I think they're primarily built for the benefit of the third party manager.  But there is one BDC-like investment company that invests almost completely in CLO equity and a little bit in the junior/mezzanine tranches, Oxford Lane Capital (OXFC).  While I haven't done a lot of work on Oxford Lane, a few things do jump out at me, they have been ramping up their equity base and buying a lot of the recent CLO issuances.  Is this because CLOs are a great deal now?  Eh, more likely the 3rd party management agreement that encourages asset growth over total returns.  But it is a pure play on CLO equity, and will likely perform better in a rising rate environment than the mortgage REITs. 

BDC's Continue to be Popular
The growth of BDCs and its potential issues is another area that concerns me and might be ripe for distressed investing situations in the future.  Their growth as been pretty incredible as retail investors continue to scoop up anything with a high yield, never mind the fact that they're taking incredible amounts of risk to secure that yield when they could take fractions of the risk for the same return if they had a total return mentality.

One hallmark of BDCs has been their limit on leverage to one times equity, however there's talk of that increasing to two times leverage by the end of the year.  Politicians are putting this forward as a way to increase lending to small businesses, but the fact remains that most of the loans that end up in BDCs are not to small businesses or venture capital like startups, they're the same stuff that finds their way into CLOs.  Continued low interest rates and competition for leveraged loans is making it more and more difficult for managers to grow their distributions, so one way to make that problem go away is more leverage.  Expect a few blow ups in this sector during the next recession.

Blog Note
I will be attending the 9th Annual Credit, Restructuring, Distressed Investing & Turnaround Conference next Friday (4/4) in Chicago, and would enjoy meeting up with any readers who are also attending, so if you are attending please send  me a note.  I doubt there are many attractive active distressed ideas out there currently, but it will be interesting to hear the panelist comments and hopefully come away with a few areas of interest to watch for as the business cycle unfolds.

Disclosure: No positions

Municipal Mortgage & Equity

So I was browsing around for new ideas when I stumbled across a post by Olmsted at the Corner of Berkshire & Fairfax message board who compared a new name to me, Municipal Mortgage & Equity ("MuniMae"), to blog favorite Gramercy Property Trust.  And after reading through quite a few complicated balance sheets, I can agree the parallels are definitely there.

Before the credit crisis, MuniMae originated and managed debt and equity investments collateralized by affordable housing that offered attractive tax incentives.  Things went very wrong for the company in 2007 when the market for tax-exempt debt securities sharply declined forcing the company to meet all sorts of collateral calls by selling their assets at distressed prices just to stay alive.  The situation was compounded by some accounting issues and their accountant's assessment that there was significant doubt they could continue as a going concern.

Fast forward a few years and the company has sold off most of their assets and derisked their balance sheet, the most recent example being the sale of a huge bond portfolio, "MuniMae TE Bond Subsidiary LLC" or TEB, to an affiliate of Bank of America Merrill Lynch.  As part of the sale, they were able to shed much of their short term floating rate debt that was financing the long term fixed rate bonds which was presenting the company with interest rate risk scenarios where a small increase in rates could effectively wipe out the equity.  Another key aspect of the TEB sale is it allows the company to convert from a partnership to a corporation for tax purposes.  As a partnership, the company was forced to pay a lot of phantom gains out to shareholders due to the company repurchasing their own debt at a discount.  Now going forward, they'll be able to utilize their huge NOLs and essentially never pay income tax again.

So the bond portfolio that remains is now only 55% leveraged and much of it is non-performing, so the risk of the company switches from mostly interest rate risk to underlying asset performance risk.  The TEB sale also will dramatically reduce the net interest income spread they receive, putting pressure on the company to either cut operating expenses or find a new profitable venture.

In relating MuniMae back to pre-net lease Gramercy, MuniMae historically sponsored Low Income Housing Tax Credit Funds ("LIHTC Funds") where they sourced capital for the development of tax advantaged affordable housing developments.  The developer of the affordable housing project would start out as the General Partner, however during the credit crisis many of these projects and developers ran into financial trouble, causing MuniMae to step in become the General Partner to protect their investors interests in the project (also because MuniMae guaranteed certain investor's investments).  So even though MuniMae has a limited (0.01-0.03%) equity investment in these LIHTC Funds, as the GP, they're deemed for GAAP accounting reasons to be in control and must consolidate these funds on their balance sheet causing all sorts of problems.  In their quarterly press releases, MuniMae makes adjustments for the non-economical consolidation adjustments for us:

The cash and restricted cash portion of the balance sheet is pretty straight forward, the restricted cash is mostly collateral held in total return swaps that will expire in the next year or two.  $45MM in free cash is a nice position to be in when they have a share repurchase plan in place to buy up to 4 million shares at the book value per share as of the last quarterly, or $1.22 currently.  That's a nice floor under the current market price, and management and the company have been recently purchasing shares at higher levels.

But the most relevant footnote to their financials is regarding their bond portfolio and effects of consolidation:

(2) Represents the carrying basis of the bonds eliminated in consolidation. This amount excludes net unrealized gains occurring since consolidation that have not been reflected in the Company’s common shareholders’ equity given that the Company is required to consolidate and account for the real estate, which prohibits an increase in value from its original cost basis until the real estate is sold ($32.5 million at September 30, 2013 and $10.7 million at December 31, 2012).

So the fair value of the bonds is closer to $321.4 million dollars, a $32.5 million increase is a big adjustment for a ~$50 million market cap.  The big question then... are the marks correct?  Well during Q3 2013, MuniMae foreclosed on and sold the underlying real estate on two bonds in their portfolio for virtually the same amount as the fair value of the bonds.  Small sample size, but it provides a little reassurance that the fair values are reasonable.

In addition to cash and bonds, there's a grab bag of other assets MuniMae has on its balance sheet:

• REO assets: They have a few parcels of undeveloped land and a multi-family property that they've foreclosed on in the past that they're holding as real estate held-for-use.  On a few recent conference calls these have been discussed as potentially having value a few years down the line, and that they were valued at 7-10x their current book value at the time the original bonds were issued.  
• Solar assets: There are some leftover solar assets from a failed business purchase just before the credit crisis, value here is probably minimal.
• Some potential GP incentive income from the LIHTC Funds that could materialize, but not for several more years.
• International Housing Solutions (IHS): 83% stake in a South African asset manager that has one private equity fund which invests in affordable housing in South Africa.  MuniMae's equity stake in the one private equity fund shows up on the balance sheet, but not the ownership stake in the asset manager doesn't.  IHS is looking to raise capital for another fund and MuniMae might use some of their free cash to invest here.

If you assume the rest of the balance sheet is properly marked, the adjusted book value per share of MuniMae is closer to $2.00/share (currently $1.25), with a lot of management optionality in how they deploy their free cash (more stock and debt repurchases), manage the remaining bond portfolio, and any upside from the REO and LIHTC assets.

The obvious risks here are (1) the bond portfolio loses value and (2) this has been a historically mismanaged company with the same management still in place.  As for the bond portfolio, it's mostly unleveraged at this point, removing most of the dangerous impact from rising short term rates, and the bonds are collateralized by affordable apartments.  There's lots of talk about the disappearing middle class and people falling behind, tax advantage affordable housing will probably play a role in addressing the problem.  As for management, in reading their filings and conference call transcripts, they strike me as very transparent and fully acknowledging their past mistakes.  They even let individual investors ask questions!  So I agree that MuniMae could be a good place for people who have taken gains in Gramercy and looking to roll that money into a similar theme.

I've added a smallish position to my portfolio.

Disclosure: I own shares of MMAB