Street Capitalist has a beautiful post on Gyrodyne Company of America Inc (NASDAQ:GYRO). It’s trading at its 52-week highs, but its settlement of a court case with the State of New York means that it’s at a greater than 60% discount to its liquidation value on a sum-of-the-parts basis. It’s also got some activists on the register.
Here’s the background:
Gyro just announced that they won a court settlement from the State of New York. Here’s what happened:Here’s Tariq’s valuation:
“ST. JAMES, N.Y., June 30, 2010 – Gyrodyne Company of America, Inc. (NASDAQ:GYRO), a Long Island-based real estate investment trust, announced today that the Court of Claims of the State of New York issued an opinion requiring the State to pay to Gyrodyne an additional $98,685,000 for land appropriated in 2005. Under New York’s eminent domain law (the “EDPL”), Gyrodyne is also entitled, subject to EDPL Section 514, to statutory simple interest on the additional amount at a rate not to exceed nine percent (9%) per annum from November 2, 2005, the date of the taking, to the date of payment.
The opinion was issued in connection with Gyrodyne’s claim brought in April 2006 for just compensation for the 245.5 acres of its Flowerfield property in St. James and Stony Brook, New York (the “Property”), taken by the State. The State had paid Gyrodyne $26,315,000 for the Property at the time of the taking, which Gyrodyne elected, under the eminent domain law, to treat as an advance payment while it pursued its claim.
In its opinion, the Court agreed that the State had improperly valued the Property and misapplied the eminent domain law’s requirement that just compensation be determined based upon the highest and best use and the probability that such use could have been achieved. Applying this standard, the Court determined that there was a reasonable probability that the Property would have been rezoned from light industrial use to a planned development district, thereby resulting in the aforementioned award to Gyrodyne.”
Gyrodyne Press Release
I look at situations where a court verdict is announced, a drug trial passes, or a certain earnings target is met as milestones in my investment process. So if I think a stock is undervalued, I will look at whether or not the company meets the milestones that I put up to, check its progress against my thesis. The benefit is that when a company meets its milestones, part of the uncertainty or risk behind your thesis goes away. Gyrodyne is a good case of that.And the activists:
So let’s look at this on a sum of the parts basis:
+ 41.0 (interest payments)
+ 34.0 (book value of real estate)
+ 1.10 (cash & cash equivalents)
- 21.5 (total liabilities)
= 153.6 / 1.29 shares outstanding
= $119 per share.
With the shares currently trading around $73, you get a potential gain of 63%. To me, this is a conservative estimate of liquidation value because the real estate is booked at cost. My guess is that some of it may have appreciated since they acquired it, but would rather not speculate. The company also owns an interest of a bit less than 9% in a Florida orange grove. Again, I would rather not speculate as to what the value of that interest really is.
Typically, whenever a company has a large cash balance, they tend to be greeted with skepticism. One of the risks companies with high cash balances is the fact that they might squander the cash horde. I think there are two reasons for why I would handicap this as a low possibility:See the rest of the post at Street Capitalist.
1. Shareholder Activists
Phil Goldstein of Bulldog Investors owns 17.46% of the stock. Two other partnerships own a combined 15% of the stock (River Road Asset Management, Leap Tide Capital). Phil Goldstein is a notoriously tough activist, he has been pretty big on forcing close-ended funds to liquidate when trading at discounts to NAV. I think there is a good chance Goldstein and the other investors will make sure the money from the court case is used in an accretive manner.
[Full Disclosure: I hold GYRO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]