Wednesday, November 24, 2021

HMG/Courtland Properties: Microcap REIT Liquidation

*Disclaimer: Please note that is this a $18MM market cap that is closely held and illiquid*

HMG/Courtland Properties (HMG) is a tiny REIT that recently announced intentions to hold a vote early next year to approve a plan of dissolution and liquidate.  HMG was founded in 1974 by Maurice Wiener, he is 80 and is still the CEO of the company (technically this is an externally managed REIT, but there is no incentive fee), he controls 56% of the shares through various entities leaving little doubt the liquidation proposal will be adopted.  

The company's assets are a bit of mess (this liquidation will probably take several years), but the largest asset is a 25% equity ownership in a newly constructed Class A multi-family apartment building ("Murano at Three Oaks") in Fort Myers, FL.  Construction began in 2019, the building was completed in March and is already 97% leased as of the recently released 9/30 10-Q.  With inflation running hot and migration to the sun belt, cap rates on multi-family assets like this one are being quoted below 4%.  This is a hidden play on the craziness in multi-family M&A.  


Disclosure on the property is limited.  But checking the building's listing on apartments.com, it appears the going rate for their units is around $25 annually per square foot, there are 318 units and 312,000 square feet of rentable space.  Let's round down a bit for some vacancy to $7.5MM top line revenue, again back of the envelope, let's use 40% of gross rent goes to some combination of property management, operating expenses and taxes (I spot checked a few multi-family REITs for this, could be off!), that gets you an NOI of $4.5MM on the property.  

I'm sure I'll get the comment that this asset would go for less than a 4 cap but let's use that for now too, since it just started leasing this year, guessing there's not a lot of rents that need be reset to market as leases rollover like other properties.  There's a $39.5MM construction loan on the property, so the net value to the equity under my math is ~$73MM with HMG's share of that being $18.25MM, or roughly the market cap of the company.  Their equity investment in the apartment joint venture is held on the balance sheet at $3.3MM (HMG put in $3.6MM into the project, but due to equity method of accounting, HMG recognizes the proportional losses of the project has experienced since it has been in lease up mode).  Again, sounds a bit crazy, the asset was built for $54.1MM and now seemingly worth double that or more.  Given the debt here is a construction loan and the asset is freshly stabilized, even if the equity group doesn't sell it outright, they'll likely refinance and pull a decent amount of cash out that could be used for an initial liquidation dividend.

The rest of the REIT sort of looks like someone's personal portfolio/family office, in this case the CEO's:

  • The external advisor's "Executive Offices" at 1870 South Bayshore Dr in Coconut Grove, FL.  This appears to be a single-family home (unclear if the CEO uses it as his primary residence) that has a Zestimate of $2.5MM, it has a tax assessment of $1.5MM and a book value of $590k (it was purchased in the 90s).  There's no debt on the property, let's call it $2MM net to HMG or roughly another $2/share in value.
  • 28% interest in a 260 River Street in Montpelier, VT, carrying value of $870k.  Tricky to tell what this really is but they had some environmental abatement issues that are seemingly behind them, a new tenant took possession of the property in March.
  • About $4MM in net cash (after subtracting out ~$800k of current liabilities)
  • $2.8MM of marketable securities, much of which is equities and preferred stock in undisclosed large cap REITs
Then it gets a little strange (if it hasn't already), there's $4.85MM (as of 9/30) in carrying value in 46 individual private investments, it appears like most of these are real estate related (including some multi-family which could have embedded gains) but also includes non-real estate related stuff like technology and there's an energy investment hidden in here somewhere too.  Below is the breakout from the last 10-K, the carrying values have moved around a bit but gives you a sense of the asset classes.  

These investments are carried the lower of cost or fair value, there could be some diamonds in the rough, a few excerpts from recent monetization events: 
"During the nine months ended September 30, 2021, we received cash distributions from other investments of approximately $1.03 million. This included distributions of approximately $584,000 from our investment in a multi-family residential property located in Orlando, Florida which was sold during this quarter. We recognized a gain of $315,000 from this investment." 

And this one: 

In August 2021, one of our other investments in a private bank located in Palm Beach, Florida merged with a publicly traded bank, and we exchanged our original shares for shares in the publicly traded bank. Accordingly, we have reclassified this investment as marketable securities, and as of September 30, 2021 this investment with historical cost basis of $35,000 has an unrealized gain of approximately $128,000.
But also this one:
The other OTTI adjustment in 2020 was for $175,000 for an investment in a $2 billion global fund which invests in oil exploration and production which we committed $500,000 (plus recallable distributions) in September 2015. To date we have funded $658,000 and have received $206,000 in distributions from this investment. The write down was based on net asset value reported by the sponsor and takes into consideration the current disruptions in the oil markets because of the economic fall out of the pandemic.
Even stranger there are some ~$1.5MM in loans they've made, apparently mostly all to the same person.

On the minus side of the ledger, there's about a $1MM in annual expenses between the management fee and G&A, we should probably capitalize that for at least 4 years given it's going to take time to unwind all the mess here and I get approximately ~$30/share in value and it trades for about ~$17.25/share today.  

The key with any liquidation is the timing of the cash flows.  Here it could be a reasonably attractive IRR since the largest asset just stabilized and it would make sense to either sell or refinance cash out of it in the near term.  Once most of your basis is out of the stock, it's easier to be patient on later monetization events.

Disclosure: I own shares of HMG

19 comments:

  1. Like always, Thanks for the idea. Is there a reason why you didn't deduct taxes from your analysis?

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    1. Could be an oversight, but it is a REIT so my understanding is the taxes would transfer to the individual, each person's situation is different.

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  2. the stock jumped $2/share on your article.

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    1. Hence my disclaimer at the top, it'll probably come back down, I'm holding.

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  3. Murano has 318 units averaging 942 square feet, for a total of around 300,000 leasable sf (the difference between 312,000 and 300,000 is leasing offices, fitness, etc).

    Data providers tell me the property is achieving $26.64/SF per year in rent right now, currently 97.5% occupied. Your cap and expense assumptions are reasonably accurate for the Ft. Myers market. So, overall, lease leasable area but a little more in rent.

    Day job is in real estate so figured I'd pass along finer information, the way I look at the apartment valuation I'd end with maybe $4 million more in value. These assets can get refinanced at 75-80% leverage pretty easily, that would be ~$12M back to HMG, no insight into what HMG's other investor partners strategy is, though. Usually you can match capital source to what's going to happen... always enjoy your thoughts, thanks for sharing, good luck.

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  4. Very interesting. Does anyone know whether you can buy liquidations in an IRA?

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  5. https://www.sec.gov/Archives/edgar/data/311817/000157587221000375/0001575872-21-000375-index.htm

    Initial estimation is $20-30/share. So my guess was the high side, but the initial range tends to be conservative, might be roughly right.

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    1. The one bad thing that stood out to me is that they do not intend to make any pre-effective date distributions. And they only intend to implement the monetization strategy after the effective date. So, Q1 vote, then a maximum of 90 days to the effective date, post-effective date liquidations will be made 150 days after the last notice of rejection given, etc.

      I guess we would be lucky if a first distribution is paid out in 2022. Value is surely there but I don't think these guys are in a hurry and the IRR could be (relatively) disappointing. Though still an above-average bet, probably.

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    2. That's totally fair, I do agree, don't think they're in a big hurry and there is a lot to untangle here. Less of a screaming buy at $22 today.

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  6. When do they have to issue their financials on a liquidation basis?

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    1. Guessing Q1, liquidation vote is early in the new year.

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  7. for what its worth, the zestimate for "Executive Offices" at 1870 South Bayshore Dr in Coconut Grove, FL is now showing $3.5mm+ vs $2.5mm at the time of posting.
    Thanks!

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    1. Oh nice, now hoping to see it is up for sale. A bit disappointed that this went non-traded before they made any distributions or even sold anything, money likely tied up in this for a while but still have confidence it will turn out pretty well.

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  8. https://www.gulfshorebusiness.com/murano-at-three-oaks-apartments-sell-for-122-5-million/

    Murano at Three Oaks sold for $122.5MM, $10MM above my estimate.

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  9. Very impressed with your back of the envelope valuation! Factoring in sales expenses i.e. broker commission etc. HMG's equity seems to be right around your estimate. With the biggest question mark de-risked I guess the biggest factor going forward is the timing of the distribution. I wonder how long that will take...

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  10. Anyone have any ideas on when we should get a distribution here? Or really even an update from HMG? Thanks again for sharing this one.

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    1. No real update as far as I know. I hope Ian didn't cause any problems with the Fort Myers apartment complex sale, I'm guessing it was completed well before that.

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