TPRP - Tower Properties

[mjohn707]

Tower Properties is a real estate company based in Kansas City, Missouri.  At the recent price of $10,900 per share it trades for a 16% FFO yield, a 12% AFFO yield, and about 2/3rds of the historical cost of the owned real estate.

 

As of the year ended Dec 31, 2013, the company’s real estate had a cost of $186M, $50M in accumulated depreciation, and a book value of $139M.  If we add the $50M in accumulated depreciation to the tangible book value of the company (as of the most recent quarter) of $33M, we get a value of $83M against a market cap of only $53M.

 

Looking at it another way, as of the quarter ending June 30, 2014, the company owned 11 office buildings totaling 750,700 sq feet, one warehouse of 71,900 sq feet, 9 apartment complexes with a total of 2,144 apartment units., and 30 acres of undeveloped land.  If we figure that the office space is worth $90 a sq foot, the warehouse $35 a sq foot, the apartments $70K per unit, and the land $10K per acre, we get an estimated value of $220M against a book value of $172M (including equipment and purchased tenant improvements), for a $48M difference which matches up pretty well with the accumulated depreciation figure of $50M.

 

The company has 4,842 shares of stock outstanding and is not SEC reporting, although annual and quarterly reports are published on otcmarkets.com. 

 

[thepupil]

shhhhhhhh

[mjohn707]

shhhhhhhh

 

I don't think you have to worry about a bum-rush of people trying to get into this pink sheet with a 5 digit stock price

[fareastwarriors]

shhhhhhhh

 

I don't think you have to worry about a bum-rush of people trying to get into this pink sheet with a 5 digit stock price

 

and almost no volume

[thepupil]

I was half kidding, but this is not an easy stock to accumulate.

 

For the benefit of my current position, I will invite potential competitors for stock by posting my simple property by property breakdown which matches the buildings with the debt. There is hidden value here in that a good deal of their properties have been around a long time (namely the earlier phases of New Mark). They also own some land around New Mark (and have for a long time).

 

You can see that the consolidated book value doesn't tell the whole story and there is clearly a lot more value here with some unencumbered properties and some that have negative book equity because they've borrowed more as buildings have appreciated, but actually have positive market equity.

 

The office assets are of pretty low quality and St Louis isn't exactly a booming and tight office market, but I don't think there's anything terribly wrong with the portfolio there and where it is marked.

 

Basically this is a slow growing  70 cent dollar run by owner managers who are already very wealthy and have reputations to keep since they run a large community bank. They'll slowly use cash flow to upgrade their portfolio (they overpaid for Dunes at Falcon Valley, but that's okay because it has a wonderful 35 yr ginnie mae loan on it so that will just amortize over time and build equity).

 

It's a lovely stock and a nice way to buy some boring midwestern apartment communities.

 

EDIT: I posted an early version of my spreadsheet earlier...the attached is more updated.

 

Tower_Properties_Breakdown.xlsx

[mjohn707]

(they overpaid for Dunes at Falcon Valley, but that's okay because it has a wonderful 35 yr ginnie mae loan on it so that will just amortize over time and build equity).

 

When I first saw the price they paid for it I thought it was really cheap until I realized they also assumed the mortgage

[shhughes1116]

Overpaid?  Definitely...  The assessed value is ~$21,000,000 for the Dunes at Falcon Valley, and they paid ~$40,000,000 (cost plus assumption of mortgage).  I realize that real estate assessments are not always accurate, and sometime trail the market prices, but this is a pretty substantial difference.  This ends up being about $199k per unit for garden style apartments, with average rents ranging from $875/month (studio) to $1300/month (3 bedroom).  I don't know the breakdown of units, but I am having a lot of trouble seeing the value in this transaction.  Based on the parcel maps, it doesn't look like they acquired undeveloped land with the transaction, although there are adjacent undeveloped parcels owned by others.   

 

Am I missing something obvious here?  Or did they pay an outrageous price for this?

 

Nevertheless, I do think the shares are undervalued, especially when you consider that they have ~$2.5 million of cash on the balance sheet, plus ~$10.5 million worth of shares in Commerce Bancshares.  So if you back out the cash, the FFO/share and AFFO/per share are substantially higher. 

[yadayada]

I think they financed the loan with a 35 year mortgage. The purchase price was still 23 mill. They financed 17m of that 23 with a 35 year mortgage. So they overpaid by a few mill.

 

It seems maintenance capex is 2-2.5 mill$? They need to do some regular spending on leaseholde improvements and furniture. That seems to average at about 2.5 mill in the past 3 years. So cash flow to share/debt holders is more like 7.5 mill? Still an 11% yield. That acquisition will throw off another mill or so?

[thepupil]

shhughes, yadayada is correct (hey yada, we agree on something!). The total consideration for the building was $23MM. They paid $6MM in cash and assumed the 35 yr 3.5% $17MM mortgage ginnie mae project loan mortgage.

 

Ginnie Mae's are assumable. Basically the previous owner of the property timed the borrowing very nicely to get that low of a rate on the mortgage (i know because I funded these types of mortgages for a big bank, I'd buy them from mortgage bankers and securitize them).

 

Locking in that low of a rate for that long has value, and in my view, Tower paid up for that. They are going to own that building for a long time, so they'll derive the full benefit of the low rate and extended term.  They also paid up to get a nice leased up newly built property that contrast with the rest of their portfolio, which is a little lower quality.

 

It's clear they aren't buying 50 cent dollars, but at the current valuation and cash flow they don't need to.

 

[mjohn707]

I think they financed the loan with a 35 year mortgage. The purchase price was still 23 mill. They financed 17m of that 23 with a 35 year mortgage. So they overpaid by a few mill.

 

It seems maintenance capex is 2-2.5 mill$? They need to do some regular spending on leaseholde improvements and furniture. That seems to average at about 2.5 mill in the past 3 years. So cash flow to share/debt holders is more like 7.5 mill? Still an 11% yield. That acquisition will throw off another mill or so?

 

Yeah the acquisition should do something like 2M in revenue, maybe 40-50% operating margins.  The 6-year avg cap-ex is something like $2.6M per year

[yadayada]

hey yada, we agree on something!

Thank god, maybe some day we could even be friends!

[mjohn707]

Don't know if everyone heard, but there was a tender offer for 100 shares of stock @ $11,200 which is probably why the stock has popped up a bit over the last couple of days.  Here's the link to the press release on otcmarkets.com: http://www.otcmarkets.com/stock/TPRP/news/Tower-Properties-Company-Required-Response-to-Shareholders-Regarding-Sunset-Plaza-Acquisition--LLC-Tender-Offer--Press-Release-?id=92029&b=y

 

This tender is actually competing with the company's dutch tender for $1M worth of shares at $10,000 to $11,000 which runs until December 8th:  http://www.otcmarkets.com/stock/TPRP/news/Modified-Dutch-Auction-Tender-Offer?id=89188&b=y

 

[thepupil]

I told you to be quiet!  ;D

 

Sunset Plaza Acquisition LLC has the same address as Maxus REIT (MRTI).

 

Hmmm....

 

http://www.manta.com/c/mb55cl3/sunset-plaza-acquisition-llc?utm_expid=82789632-25.oHnsZFf0S6aL6ZTTV65kcg.0

 

104 Armour Road

North Kansas City, MO 64116 - View Map

Phone: (816) 303-4500

 

http://www.mrti.com

 

 

[mjohn707]

Wonder what they want with a couple hundred shares?

[HowMuchValue]

TPRP just announced a $20 million upgrade to 6601 College Blvd. http://www.kansascity.com/news/business/development/article31383692.html

 

The after picture looks a million times better than the before picture but do you guys really think it will allow them to triple the rents on this building?

[mjohn707]

The equity is only trading at three times renovation, is that a good price?  ;)

[HowMuchValue]

Hey guys,

 

Just a heads up that I posted an article on SeekingAlpha:

 

http://seekingalpha.com/article/4033393-security-like-best-tower-properties

 

It is a PRO article which means that it will only be viewable by the public for the next 30 days.

[oddballstocks]

This is a good company.  I profiled them a few months back in my newsletter. 

 

Nice write-up, I feel like you're missing a large part of the story though.  Take a look at their connections with the bank.  The BOD is cross pollinated, this is where most financing comes from and I think some of these relationships are key to understanding the idea.

 

Regardless, great company, low price.

[mjohn707]

This is a good company.  I profiled them a few months back in my newsletter. 

 

Nice write-up, I feel like you're missing a large part of the story though.  Take a look at their connections with the bank.  The BOD is cross pollinated, this is where most financing comes from and I think some of these relationships are key to understanding the idea.

 

Regardless, great company, low price.

 

Thanks for the compliment.  When I originally invested I did read a little of the history of the company and their relationship with Commerce, although it was (like all of my ideas) just a quantitative decision where I couldn't find any qualitative deal breakers if that makes sense.  I still own it although it seems that price has run up a bit

 

 

[mjohn707]

Hey guys,

 

Just a heads up that I posted an article on SeekingAlpha:

 

http://seekingalpha.com/article/4033393-security-like-best-tower-properties

 

It is a PRO article which means that it will only be viewable by the public for the next 30 days.

 

Those valuation numbers seem a bit optimistic, just to make sure I understand, what is the maintenance capex number you're using to calculate AFFO?

[Packer16]

An interesting company but since it does not pay out any cash flow in dividends your exit is dictated by when the managers sell.  This in part explains the discount.  Do you have any idea of when they could possibly sell the firm and have an exit? 

 

Packer

[HowMuchValue]

Hey guys,

 

Just a heads up that I posted an article on SeekingAlpha:

 

http://seekingalpha.com/article/4033393-security-like-best-tower-properties

 

It is a PRO article which means that it will only be viewable by the public for the next 30 days.

 

Those valuation numbers seem a bit optimistic, just to make sure I understand, what is the maintenance capex number you're using to calculate AFFO?

 

Maintenance capex is covered under Maintenance & Repairs on their Income Statement. Quoted from their annual report:

 

"Maintenance and repairs are charged to expense as incurred.  The cost of additions and betterments that improve or extend the useful life of the property are capitalized.  Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives.  The cost of assets retired or sold and the related accumulated depreciation are removed from the applicable accounts and any gain or loss is recognized as income or expense.  Fully depreciated assets are retained in the a

ccounts until retired or sold."

 

Additionally, I ding them for 100% of "Purchase of Equipment and Furniture" which would be considered "additions or betterments that improve or extend the useful life of the property" for conservatism.

[KJP]

An interesting company but since it does not pay out any cash flow in dividends your exit is dictated by when the managers sell.  This in part explains the discount.  Do you have any idea of when they could possibly sell the firm and have an exit? 

 

Packer

 

They have paid a significant special dividend in the past. 

[mjohn707]

Hey guys,

 

Just a heads up that I posted an article on SeekingAlpha:

 

http://seekingalpha.com/article/4033393-security-like-best-tower-properties

 

It is a PRO article which means that it will only be viewable by the public for the next 30 days.

 

Those valuation numbers seem a bit optimistic, just to make sure I understand, what is the maintenance capex number you're using to calculate AFFO?

 

Maintenance capex is covered under Maintenance & Repairs on their Income Statement. Quoted from their annual report:

 

"Maintenance and repairs are charged to expense as incurred.  The cost of additions and betterments that improve or extend the useful life of the property are capitalized.  Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives.  The cost of assets retired or sold and the related accumulated depreciation are removed from the applicable accounts and any gain or loss is recognized as income or expense.  Fully depreciated assets are retained in the a

ccounts until retired or sold."

 

Additionally, I ding them for 100% of "Purchase of Equipment and Furniture" which would be considered "additions or betterments that improve or extend the useful life of the property" for conservatism.

 

I think you're double counting the income from the Commerce Bank stock, you're adding it into your AFFO calculation and then subtracting it from your enterprise value.  I don't think this makes a big difference but it's not the right way to think about it.  Also, you're not including a portion of the maintenance capex.  Over the last 8 years, the total of equipment and furniture and purchased tenant improvements averaged around 2.5M a year, and I think that's a more accurate amount to use for maint. capex.  I think you're too optimistic about the new properties, they'll have operating expenses associated with them as well.

 

That's all nitpicky stuff, but the gist of what I'm trying to say is that you're way too optimistic on value.  I think the real AFFO might be around 9M-11M, and that this thing is maybe around a 66 cent dollar or so, and it's nowhere close to a 33 cent dollar.  Every assumption you're making seems optimistic to me

[HowMuchValue]

Hey guys,

 

Just a heads up that I posted an article on SeekingAlpha:

 

http://seekingalpha.com/article/4033393-security-like-best-tower-properties

 

It is a PRO article which means that it will only be viewable by the public for the next 30 days.

 

Those valuation numbers seem a bit optimistic, just to make sure I understand, what is the maintenance capex number you're using to calculate AFFO?

 

Maintenance capex is covered under Maintenance & Repairs on their Income Statement. Quoted from their annual report:

 

"Maintenance and repairs are charged to expense as incurred.  The cost of additions and betterments that improve or extend the useful life of the property are capitalized.  Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives.  The cost of assets retired or sold and the related accumulated depreciation are removed from the applicable accounts and any gain or loss is recognized as income or expense.  Fully depreciated assets are retained in the a

ccounts until retired or sold."

 

Additionally, I ding them for 100% of "Purchase of Equipment and Furniture" which would be considered "additions or betterments that improve or extend the useful life of the property" for conservatism.

 

I think you're double counting the income from the Commerce Bank stock, you're adding it into your AFFO calculation and then subtracting it from your enterprise value.  I don't think this makes a big difference but it's not the right way to think about it.  Also, you're not including a portion of the maintenance capex.  Over the last 8 years, the total of equipment and furniture and purchased tenant improvements averaged around 2.5M a year, and I think that's a more accurate amount to use for maint. capex.  I think you're too optimistic about the new properties, they'll have operating expenses associated with them as well.

 

That's all nitpicky stuff, but the gist of what I'm trying to say is that you're way too optimistic on value.  I think the real AFFO might be around 9M-11M, and that this thing is maybe around a 66 cent dollar or so, and it's nowhere close to a 33 cent dollar.  Every assumption you're making seems optimistic to me

 

I agree that the dividend income from Commerce Bank stock should not be included, so we are talking about a -$0.2 million per year adjustment to my annualized AFFO numbers - taking 2016 AFFO from $10 million to $9.8 million and 2017 AFFO to $11.8 million to $14.8 million from $12 to $15 million. "The Company received dividend income from ownership of Commerce Bancshares common stock of $165,702 for the nine months ended September 30, 2016. " That is not a substantial adjustment.

 

Also, you have to remember, in my 2016 AFFO estimate there are 3 months that the New Mark Apartments did not generate revenue (they were sold). A $35 million property at an assumed 7% cap rate would have made an additional $0.6M in AFFO. Therefore, with these two adjustments, we are still above the headline numbers from my article ($10.4M in 2016 and $12.4M to $15.4M in 2017).

 

Tenant leasehold improvements are not maintenance capital expenditures. These are things that leaseholders pay for throughout their lease term. Try to rent some office space as is and then try to rent the same office space with different layout, additional lights, and security doors - you will pay more for the additional items and the company leasing them to you will earn their profits back throughout the lease term. They have to because the next tenant might not want the same customized options. If you think that companies leasing out office space will do these things out of the goodness of their heart I have some magic beans to sell you :P

 

Even assuming 100% of Equipment and Furniture is maintenance capital expenditures is a stretch. A lot of these items are similar requests. If you ask for the company leasing you office space to buy you desks for all of your staff - this is a growth capital expenditure as the company leasing to you will be compensated for it!

 

Of course the new properties will have operating expenses... but $35 to $47.5 million of assets earning call it an estimated 7% cap rate... that is a $2.5 million to $3.3 million AFFO boost... it is quite substantial!