FUR - Another Liquidation

Winthrop Realty (FUR) is a liquidation, currently trading at 12.70 which could yield a return of 12.5% to 33% within one or two years with safety of principal. This return is calculated based on total value to be realized in liquidation. As liquidating distributions will be made 'on-the-go’, rather than at the end, the IRR realized would be higher.

The plan of liquidation was approved on 8/5/14. To obtain the desired tax treatment, the company must finish its liquidation within 24 month, by August 2016 or convert to a non-tradable liquidating trust at that time. The deadline is unlikely to be met and the shares will most likely be converted into a non-tradable trust in August.

The current liquidation estimate is $14.17 per share. It is $15.17 per share according to latest 10-Q filed for the period ended 9/30/15 (https://www.sec.gov/Archives/edgar/data/37008/000119312515369963/d86799d10q.htm). Then one has to subtract $1 that has been paid in distribution since the 10-Q was filed. I don’t find a reason not to trust this estimate given that management has a good history of liquidating assets in excess of estimates as can be seen in the 3Q15 supplement on the company’s website (http://files.shareholder.com/downloads/FUR/1344024586x0x859175/B043636B-6876-4483-930B-0BCABFFAFFF2/FUR_Q3_2015_Supplement_10.28.15.pdf).

Further to this $14.17 estimate, the company has recently collected $5 million as a non-refundable deposit on a property sale which was then cancelled. The deposit does not have to be returned and the company’s 83.7% ownership in the asset will entitle it to $4.185 million, or $0.11 per share. So added together, the “stated distribution” is about $14.28. Based on a current purchase price of $12.7, this indicates a return of 12.5%, if management meets its estimated sales prices. As noted, Management has a history of exceeding these prices. Moreover, the advisory arrangement which gives management 20% of any excess over the thresholds serves to incentivize management to maximize value.

Times Square Property

The company has an interest in a ‘crown jewel’ property at 20 Times Square (http://20timessquare.com/). The property consists of a 452-room hotel, 18,000 square feet of LED signage, and 76,000 square feet of retail space and 40,000 square feet of entertainment space. The floor plans can be seen on the property’s website.

The company has currently valued the property at $1.17 billion. Their $1.17 billion appraisal seems reasonable seeing as there are development loans signed which, when fully funded as construction progresses, will total to $800 million. So that’s an implied LTV of 69%, which seems reasonable in the post-recession period for a development loan. The company only owns a portion of the equity in the development venture. As stated in the company’s recent 8-K, the equity value attributable to this asset for financial statement purposes is approximately $169 million ($4.64 per share). Under the operating agreement for this asset, the Trust will be entitled to 15.28% of any additional property value in excess of $1.182 billion.

I believe this property could contribute anywhere from $0.08 to $2.56 per share in addition to the current estimate of $4.64 per share.

Comparables/metrics used in valuation:

The comparable for the hotel is the recently sold 468-room Double Tree Guest Suites Times Square, which is directly across from the property in question. The double tree sold for a gross sale price of $540 million, on $1.15 mm per room. This deal was done in December 2015, so quite current. In fact, that buyer (Maefield) is FURs partner in the 701 7^th Avenue project.

The retail signage comparable is the billboard at 719 7^th Avenue developed by Vornado.

The retail leasing rates are from various NY retail leasing reports from CBRE and JLL as well as knowledge of the CBRE lease marketing.

The entertainment space comparables are tough to find and I simply assigned a per-square foot lease of $150 at the high end, though, this is likely to be conservative given that the rate I used is equivalent to the ‘Concourse 2’ retail rate even though the entertainment area is much better positioned within the property. Cap Rates used are 4.35% to 5.35% from high to low, based on Cap Rate surveys of the major firms. For the entertainment space, I used 6% on the low and 5% on the high end.

Low multipliers are 90% of high multipliers and NOI margins used are 65% for signage and 50% for everything else.

Valuation:

So the most optimistic case calls for 33% return whereas a simply achieving the stated targets, which management has shown an ability to do, would yield 12.5%. This does not consider any upside from being able to sell other non-times square properties for more than current appraisals, which management has shown the ability to do.

Risks:

1.       Timing: If management takes longer than planned to liquidate, realized returns could be lower. However, Management has thus far done a good job of staying on schedule.

2.       A real estate recession: In the short-run, considering supply and demand factors in FUR’s markets, this appears to be a remote possibility only. A cap-rate expansion is more likely if rates were to increase significantly. This is particularly true in NYC where hotel supply has been at peak levels. I have attempted to use reasonable cap rates at the low-end to allow for this. Further, trophy properties such at 701 7^th Avenue are not 100% correlated to cap rates as can be seen from recent NYC trophy-property sales. So while cap rates could be higher, they could just as well be lower and I believe I have used rates that are reasonable.

3.       Opportunity Cost: Is it wise to earn 12.5% when potentially better investments are out there? Given the relative safety of principal, the reducing amount of capital invested as distributions are paid, and other options available in the market, I believe FUR represents a good investment for the ‘cash’ portion of any allocation investors might have. Should other securities fall a lot and other investments become more attractive, liquidations like FUR generally fall less (as has been observed for our two liquidations – FUR & GYRO – in the market decline of January 2016). At that time, the buyer can switch from FUR into other investments, if needed. But if this were not to happen, a 12.5% to 33% return on a cash allocation within 12-18 months would be an acceptable rate in my view.

Please note:

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implied. Factual statements are believed to be truthful and reliable, but are not warranted
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Disclosure: Long FUR