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Saj Karsan
Saj Karsan
Articles (5983) 

Investment Thesis for PMC Commercial Trust

May 13, 2010 | About:

Sometimes a company will appear cheap, but whether the investor will ever see the benefit of the company's success is another story. If management controls the company, or shareholders are not well represented on the board, the company could hoard money, or spend it on empire-building acquisitions. But some companies are organized such that substantial payouts are required.

Consider PMC Commercial Trust (PCC), a real-estate investment trust (REIT). As a REIT (rather than a regular corporation), the company must pay out at least 90% of its annual income. In doing so, it is not taxed at the company level. Large tax savings can generate significant shareholder value, as we've seen with both Dorel and Key Tronic.

With PMC trading at just $85 million, however, that value may be up for grabs for current shareholders. The company's distribution currently yields 8% (though this may decline with lower earnings), but that's not even the most attractive aspect of this investment: shareholder equity is over $150 million.

The company's assets are mostly in the form of loans receivable from franchised hotel owner/operators. These assets are secured by real-estate and personal guarantees. Earnings are depressed because interest rates are low (and so the company cannot earn great returns on its assets) and because economic conditions have made it difficult for borrowers to pay their loans.

To the first point, temporary earnings shortfalls should not drive the investment decisions of value investors. This is precisely the type of situation that leads to depressed stock prices, allowing value investors to profit in the long term. To the second point, PMC has been a rather conservative lender, and as a result has suffered few loan losses. The company requires significant equity investments on the part of the borrower before a loan is made, and does not offer any riskier loan packages including interest-only or subordinated debt. As a result, its satisfactory loans (i.e. loans that are not delinquent, or aren't on any watch-list for being behind on tax or franchisee payments) comprise 92% of its loan portfolio, up from 89% one quarter ago.

As such, at its current price, PMC may offer investors both decent income and the potential for capital appreciation due to the large discount at which the stock trades relative to its loan portfolio. Companies in similar lines of business with similar discounts to PMC that we've already looked at include Quest Capital and Manhattan Bridge.

Disclosure: Author has a long position in shares of PCC

Saj Karsan


About the author:

Saj Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

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