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Expand My Circle of Competence to Bankruptcy Investing

September 07, 2012 | About:
whopper investments

whopper investments

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Many of you may have noticed that my posts have been a bit on the lacking side lately (then again, this may also be news to many of you). So this begs the question: Where in the world have a been lately?

Well, the simple answer is that I’ve been trying to expand my circle of competence to bankruptcy.

There’s a pretty good reason- I think it’s one of the best areas to invest in. For those who know what they’re doing (and I don’t claim to be one of those!), it seems to be an incredible area to invest as you can 1) develop a huge edge if you know what you’re looking for and are willing to do some work and 2) can earn outsized returns that aren’t at all correlated to the market.

So, with that in mind, I’ve previously spent time researching AGUNF, CAGAQ, and GMTCQ. (disclosure- long all three)

In the same vein, I spent much of the last two weeks reading every single bankruptcy document in the SYMS case (you can find their documents here).

And, after spending all that time and finally deciding to make an investment, how did the market reward me? By sending the shares up almost 20% before I could get my hands on any.

That said, I still think they make an attractive investment at today’s price of ~$3.50. So let’s run through the relevant info.

I’d been following SYMS for a while, mainly thanks to all of the excellent work done over at ragnarisapirate.

The two most interesting documents you’ll want open if you’re interested in the name are these: the notice approving the plan of reorganization, and the plan of reorganization posted 7/13/2012. I would actually use the second one, as it contains more details and is searchable.

So, with all that said, let’s hit some background and see why the equity is so interesting.

SYMS declared bankruptcy at the beginning of November. The basics of the bankruptcy was this: Syms retail operations were terrible, and had been for some time, but Syms had some tremendously valuable real estate.

There was then a war of words between Marcy Syms, the CEO, and Esopus Creek, the head of the equity committee. Eventually, Esopus proposed a plan where they would raise money through a rights offering, use the rights offerings proceeds to repurchase all of Marcy’s shares (she owned 54% of the company) and pay down some obligations, sell off most of the real estate relatively quickly, then develop and slowly sell of four pieces, with the longest development and most effort spent on Syms’ crown jewel Trinity property.

And that’s the plan that eventually got approved. Syms raised 10m new shares at $2.49 per shares, but entered into an agreement to repurchase Marcy’s ~7.8m shares at the same price. Effectively, the company diluted shareholders by ~15% but raised a bunch of liquidity (they don’t plan on fully buying Marcy out until the end of 2013), which will allow them to take their time and maximize the value of their real estate.

This is where I think things start to get really interesting. Shares are currently trading in the mid-$3s, and some smart investors were willing to make a big investment to take the majority shareholder out at $2.49. This suggests the majority shareholder either 1) left a huge deal of money on the table or 2) knew something the new investors didn’t. Thus, my big concern when first digging into the stock: why the hell would the majority shareholder sell out at $2.49 if there’s that much upside here?

So let’s see if we can break out everyone’s incentives and figure out what’s going on here.

I think the key comes from this blurb (sorry, I know it’s small… but you can find the original filing here and enlarge it to your heart’s content!)



Basically, this says that the current value of a liquidation is in the low $2 (or perhaps a bit below $2) per share range. However, with a lot of development, specifically at the Trinity property, the equity committee believes the eventual value of a liquidation could be much higher. In four or five years, it could be as much as $10!

However, getting to that level takes risk. The company must fund a heck of a lot of potential development (or find a partner who can).

So now let’s take a look at the transaction. Marcy sells her majority stake at a premium to immediate liquidation value. Remember, that stake is (as far as I can tell) pretty much her and her family’s sole source of wealth, especially given Marcy has served as CEO of Syms for years and likely won’t have many more job offers! Thus, the family retains their wealth and incurs none of the real estate related risk of developing the Trinity property… a risk that they were much less well equipped to deal with due to both 1) their potential lack of funding in the absence of selling the Syms stake and 2) the fact they didn’t really have any real estate development expertise.

So it makes a lot of sense that they sold.

And the backers they sold to got the properties at a very, very attractive price and (more importantly) have expertise in the development / selling process that Syms remaining holdings will go through.

Thus, I think the transaction makes sense from both sides.

So, with all that in mind, let’s try to figure out if there’s an opportunity here.

Syms basically plan is to do this

1- Sell most of their real estate for $55-65m in the short term

2- Medium term, lease and sell 3 properties (Westchester, Westbury, Paramus)

3- Long term, redevelop and sell Trinity.

In addition, the company has $11m in cash ($6m in balance sheet + $5m from rights offering), but for safety I’m going to ignore these as I think they’ll eventually be needed to cover on going expenses. Against these assets, they have ~$110m in claims.

Thus, the key to determining the value of the equity comes from figuring out the value of the three medium term properties and Trinity.

Let’s start with the medium term properties. I believe they’re worth ~$45m, and I have two data points to back this up.

1) The doc I embedded quoted a “current” market value of $147m for all of Syms real estate. I believe this includes Trinity for ~$40m (but can’t remember exactly where I saw that, so you’ll have to take my word on it for now). Backing out the $55-65m in “immediate sale” properties would give a value between $42-52m for the medium term properties.

2) If you look at Ragnar’s tax appraised value diligence on Syms, you can see Paramus at ~$12m and Westbury at ~$19m. Westchester isn’t on there, but given it’s almost as big as those two combined, I think it’s fair to see it would be worth at least $15m, which would give us a value of $46m for the three.

Add it all together and we’re looking at $100m in value for properties outside of Trinity, versus $110m in claims. Thus, we can figure out the value of Trinity, subtract $10m, and divide by 16.7m share to figure out the per share value of Syms.

So what is Trinity worth?

I don’t think $120m is out of the question after some development. Esopus had this quote in one of their first 13-D filings (source).

And just to illustrate the enormous value that has yet to be unlocked by the Company, on April 17, 2008, just four days ago, New York City property records revealed that a nearby parcel located at 8 Stone St., having approximately 100,000 buildable square feet and the same zoning characteristics as 42 Trinity, sold for over $60 million to a hotel developer. This transaction equates to $600 per buildable square foot, thus implying a valuation for 42 Trinity at $102 million
I believe this valuation doesn’t include the $8m Syms paid for an adjacent building (and $3m+ for more air rights), so it’s entirely possible that that value is too conservative. Some people will point out that this valuation was done just after the peak of the real estate bubble, but rents in NYC are way up since then, so I would venture a guess that potential value has actually increased, not decreased. Let’s call it a wash.

So, for the sake of conservatism, let’s say Trinity is worth $100m (as always, I’ve tried to give you all of the relevant numbers and facts, so please feel free to play around with assumptions to get your own numbers).

That would put value to the equity at $90m, or (with 16.7m shares out), ~$5.40 per share.

However, remember that this isn’t an immediate liquidation. The company believes it will take 4-5 years to sell Trinity.

If you assume a 10% discount rate, that would imply the NPV of $3.36-3.70 per share. Thus, w/ shares just under $3.50, they’re currently right within that range.

Of course, that estimate is very sensitive to valuation. It’s entirely possible that the three medium term properties sell for $10m, or Trinity is worth $150m, not $100m (because of the time value of money, a dollar from the medium term properties is worth more than one from Trinity, though there’s much more potential upside in Trinity).

But there’s also downside- it’s entirely possible that the project runs into delays, or the property doesn’t market itself as well, or (especially likely) that costs run higher than anticipate… or it may just take longer than expected to sell.

Honestly though, it’s entirely likely my projections are a bit conservative. However, I’m content to rely on them and wait for a pull back. I thought shares were very attractive in the high $2 range, and I’d love a chance to start a position in that range.

That’s it for this post. However, for those of you who are very interested in the stock, I’m going to post (in chronological order) links to all of the key (in my mind, of course) filings I found when digging through the bankruptcy. It should serve as an effective jump-start to figuring out everything that’s going on here. If you’re not interested (or will just take my word for everything that happened), just ignore everything below.

Equity committee objections to feline’s / syms combo (docket 0214, 11/18/2011) http://www.kccllc.net/documents/1113511/1113511111118000000000005.pdf

Response to request to disband equity (docket 0318, 12/7/2011)

http://www.kccllc.net/documents/1113511/1113511111207000000000009.pdf

Syms response to equity committee disband, including some shots at Eso (docket 0347, 12/9/2011)

http://www.kccllc.net/documents/1113511/1113511111209000000000029.pdf

Syms request for examiner; admints felines is terrible and well out of money (docket 0376, 12/13/2011)

http://www.kccllc.net/documents/1113511/1113511111213000000000018.pdf

First monthly operating report; shows consolidated data (docket 0749, 1/31/2012)

http://www.kccllc.net/documents/1113511/1113511120130000000000028.pdf

Equity committee’s files their plan for reorg, which seems to be exactly what’s going on

(docket 0800, 2/3/2012)

http://www.kccllc.net/documents/1113511/1113511120203000000000011.pdf

Equity committee response to delaying April 10th hearing on a plan (docket 1016, 3/29/2012)

http://www.kccllc.net/documents/1113511/1113511120329000000000013.pdf

syms first reorg plan (docket 1363, 5/24/2012)

http://www.kccllc.net/documents/1113511/1113511120524000000000020.pdf

Syms first disclosure statement (docket 1364)

http://www.kccllc.net/documents/1113511/1113511120525000000000003.pdf

Feb operating report; had switched to liquidation acting (docket 1483, 6/12/2012)

http://www.kccllc.net/documents/1113511/1113511120612000000000012.pdf

Second liquidation plan (docket 1640, 7/13/2012)

http://www.kccllc.net/documents/1113511/1113511120713000000000001.pdf

Second disclosure (docket 1641)

http://www.kccllc.net/documents/1113511/1113511120713000000000008.pdf

and rerevised docket (1642) (search “could result in the aggregate net realizable” to see equity distribution)

http://www.kccllc.net/documents/1113511/1113511120713000000000003.pdf

Prelim objection of unsecured credits (“no doubt estate is solvent, we want interest”) (docket 1894, 8/21/2012)

http://www.kccllc.net/documents/1113511/1113511120821000000000018.pdf

most recent supplement (docket 1931, 8/27/2012)

http://www.kccllc.net/documents/1113511/1113511120827000000000009.pdf

June balance sheet (docket 1855, 8/15/2012)

http://www.kccllc.net/documents/1113511/1113511120815000000000010.pdf

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Rating: 3.6/5 (12 votes)

Comments

svoleti7
Svoleti7 premium member - 1 year ago
How do you search for opportunities? Is there a site you prefer that lists recent Bk filings? Do you have any good keyword searches for sec edgar (other than 'bankruptcy':) Given the sheer amount of filings to read, how do you get an idea that something is worth drilling down? I believe, as you do, that this is a very interesting niche. Lastly, are there any specific guys filing with sec 13- filings to ride the coat tails of specific activist shareholders particularly where the primary asset is real estate? Real estate lies squarely within my very limited sphere of knowledge and so any info you can share toward researching exchange listed real estate bk scenarios is greatly appreciated. Have you looked at buying unsecured debt or convertibles if they are the fulcrum security in a restructuring? Thanks for the great post. Both Ggp and Sears bk sec filings and also court docs are such great places to learn from the masters. The ackman presentation on Ggp in 3/2009 is simply astounding. The cram down provision he cited was very well thought out and showed incredible sophistication. His attention to ggp hidden assets was remarkable and hhc is an excellent spin out investment vehicle. That being said, Bruce Flatt and Lampert are really my favorite big guys to learn from and the recent spat with Pershing over ggp is testament to Flatts inceredible capital allocation skills and understanding of franchise value. thanks again for any help.

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