I am long Gyrodyne (GYRO, Financial) and think it is worth substantially more than $80 per share. The main value component has to do with an Eminent Domain case and the compensation the company will receive from the State of NY for the land that was condemnated. There is a good analysis already posted on the web valuing the company so I am not going to spend time there (link at the bottom). In the best spirit of Mr. Berkowitz, I am going to attempt, with your help hopefully, to kill the company. Let’s try to find a way to justify why the stock is at $80 (and not higher), or even better, why it could be expensive at $80.
First, a few relevant notes:
- On June 30th, a court decided to value the land exactly at the price GYRO suggested, which assumes the land could have been sold for residential (higher price per acre) purposes and not necessarily for industrial use (its current zoning).
- If one reads the court's decision* and, understanding that no new evidence can be included in an appeal, it is extremely hard to see a way in which the State could win if they do decide to appeal.
- If they do appeal, and hence they take longer to pay, GYRO will continue to receive a very nice 9% interest. Interest is being accumulated since the land was condemnated and currently amounts to approximately $42M (or $32.50 per share). Some people have been talking about interest being not necessarily 9%, and very probably a lot less than 9%. Everything that I have read, though, is pointing to interest being exactly 9%. If someone has relevant info and links, please do provide them.
- The Court of Claims entered judgment on August 24th, so the State has until September 24th to appeal.
- The amount the State will have to pay as of August 24th, assuming they don’t appeal and win, including interest, is approximately $141M, or about $109 per share.
- Management has constantly repeated that they want to implement the plan presented to shareholders in December 2005. In short, they are taking all necessary steps to achieve a liquidity event (or events) to transfer value back to shareholders.
A.pursuing a conversion to a real estate investment trust (REIT), DONE
B.disposition and redeployment of the assets of the Company in a tax efficient manner, DONE
C.maximization of the value for the remaining 68 acres at Flowerfield, IN PROCESS
D.and vigorous pursuit of maximum value from the State of New York for the 245.5 acres of Flowerfield taken by eminent domain. IN PROCESS
(NOTE: The four objectives were listed in a single paragraph. I separated them for clarity and added current status.)
Having won the case, the amount of money GYRO will receive from the State is higher than the current market value of the company (and that is without considering the rest of the company’s assets). So, my question is why is the price of the share still substantially below intrinsic value?
Possible reasons:
1.Mr. Market believes the State will appeal and win.
The key point in an Eminent Domain case is to determine what is the best and highest possible use for the land and then value the land accordingly. Current zoning for the land condemnated is industrial. GYRO claimed there is a reasonable chance land could have been rezoned for residential use (and hence valued at a higher price). The State believed the best and highest use was industrial (although during the trial, they did admit in cross-examination that it was probable for the land to be rezoned to residential). In the court’s decision, the judge felt the State did a terrible job defending the case, and, on the other hand, felt that GYRO presented a strong and credible case to value the land.
The State can very well appeal, but there are 2 things to consider:
A. No new evidence can be presented, and
B. Assuming the State does not win the appeal, interest keeps accumulating.
It is hard for me to express how strongly I feel about the State not being able to win the appeal based on the evidence already presented. I highly suggest that anyone interested read both the court’s decision and the post-trial memorandum of law (links at the bottom). So could Mr. Market be thinking that there are other circumstances, not related to the evidence, that could lead to the State winning an appeal? Can any lawyer with experience in Eminent Domain appeals please shed some light?
2. Mr. Market does not like uncertainty, and will not start buying shares until GYRO actually starts receiving money from the State.
I ignore if the State can declare itself not solvent and simply not pay (I imagine that is highly unlikely). Does the State have a track record of not paying in condemnation cases? I dont think so. I will just repeat Mr. Buffett’s quote, “if you wait for the robins, spring will be over”.
3.Mr. Market believes the State will appeal and even if they lose the appeal, payment will be delayed.
This could very well happen. But remember that a 9% interest is accumulating on the meantime. That is 9% on the current amount due. So what does that mean for a shareholder that purchased shares at today’s prices?
Let us ignore for a second the rest of GYRO’s assets and operation. As of August 24th, the amount to be paid to GYRO including interest was approximately 141M or $109 per share. 9% interest on 141M equals 12.69M or about $9.83 per share, which translates to a 12.29% annual return for the shareholder who bought at $80. Not bad at all!
GYRO does have some debt, but GYRO’s other assets are worth substantially more than the debt, so the remaining operation and assets have a net positive value. As long as management does not destroy value, and apparently they are not doing that, one can consider the rest of the operation and assets to be a free call option.
4.Mr. Market believes taxes will erode a big chunk of value.
Management has wisely taken these steps:
- Company was converted into a REIT four years ago.
- Settlements received thus far have been reinvested so that no taxes had to be paid.
Even in a worst case scenario, where taxes do have to be paid on the amount to be received from the State, I understand they would likely amount to about 15% of the funds received, which diminishes, but not destroys the margin of safety.
5.Mr. Market believes Management will not transfer wealth back to shareholders
As stated above, the current plan of the company calls for a liquidity event (or events) to occur “in a reasonable period of time”. It is obvious that any liquidity event will have to wait until the State pays the amount due for the condemnation. If we believe management’s intentions, it is very probable that a liquidity event will take place shortly after the State pays the amount due. An appeal, though, will likely delay any liquidity event. It is worth noting that Mr. Stephen Maroney, the company’s CEO, holds about 6% of the company’s shares and I am sure that, after years of fighting to protect the real value of the land, he wants a liquidity event as much as all other shareholders.
But even if no liquidity event takes place once the State pays for the land, as long as Management does not destroy value, the company would still be worth considerably more than its current market value.
6.Market cap of only about $100M, together with a ridiculously small trading volume (daily avg. of only 3,500 shares), keeps most institutional investors away.
Even if there are no institutional investors, the pressure by interested individual investors requesting shares should eventually lead to a higher share price. Shares immediately jumped from $ 39 to $70 when the decision of the court was announced, and have since moved from $70 to $80. So there are perhaps more buyers than sellers right now, but not enough yet to move the price closer towards its intrinsic value. It could be that some potential buyers are turned away by the lack of trading volume. To me, though, that represents opportunity. Their loss, our gain.
Conclusion
The only risk I see to a significant downside on the intrinsic value of the company is the State winning an appeal. I don’t think they can win based on the evidence provided. Let us see if a lawyer with some experience on RE issues can give more information as to how else the State would be able to win the appeal (I am currently looking into that and will keep you posted on what I find). Otherwise, I don’t think we would succeed in killing this company.
Street Analyst valuation of GYRO:
http://streetcapitalist.com/?s=gyro
Courts decision:
http://vertumnus.courts.state.ny.us/claims/search/display.html?terms=gyrodyne&url=/claims/html/2010-033-604.html
Post-trial memorandum:
http://www.gyrodyne.com/documents/home/4794_001.pdf
This is not a recommendation to purchase or sell shares of Gyrodyne (GYRO) or any other company. Conduct your own due diligence, or consult a licensed financial advisor or broker before making any and all investment decisions. Any investments, trades, speculations, or decisions made on the basis of any information found on this commentary, expressed or implied herein, are committed at your own risk, financial or otherwise.
