CPTP - Capital Properties, Inc

[SugarRE]

I have been following CPTP for some time, but deemed it too complicated given the oil terminal and put it to bed about two years ago.  When I recently a little pull back over the past few months, and that Michael Price bought some, I decided to take another look.  Per Bloomberg, Capital Properties, Inc. (CPTP) conducts petroleum terminal operations, holds certain development properties in downtown Providence, Rhode Island and operates other downtown properties such as public parking facilities. In addition, the Company owns Tri-State Displays, Inc., which leases land along interstate and primary highways for outdoor advertising purposes. 

 

In summary, they own a bunch of ground leases, billboards and parking lots (the “Real Estate”) and a “petroleum terminal” in Providence, RI.  I believe that the real estate is about worth its stock price, but here are two things I can’t nail down given my lack of expertise in stock investing in general, and oil and accounting specifically.  Please see the bottom of this post for my background.

1. The Deferred Income Tax line item on the balance sheet and further detailed on the bottom of page 25 (note 7).  I'm trying to figure out if its a liability I should deduct it some my calculation of NAV, if it goes away over time for some reason, or just generally what it is.  I have asked a few of my more stock savvy friends and don’t have a satisfactory answer. 

http://www.sec.gov/Archives/edgar/data/202947/000119312516505226/d113886d10k.htm

2. The second is I have zero idea what the petroleum terminal is worth. 

 

The RE values are estimated below.  Ground leases generally have very low cap rates and can be financed at high LTVs.  I spoke with some whole business securitization folks on the billboard multiple/cap rate and threw a high cap rate on the parking lots.  Note that I did not include expenses in the valuation of the ground lease as they are normally fully passed through.  I allocated 60% of the Leasing Expense (assuming there is some bloating given long term, concentrated ownership) to the billboard and parking lots.  I also rounded up the parking lot income (high cap rate) to account for short term leases and make the total revenues approximately equal the reported Leasing Revenue. Lastly, I netted out the dividend notes, other liabilities and Number 1 (above) to arrive at close to the current share price (below).

 

                Value      Cap Rate Income     Exp

Ground Leases 62,300,000 5.0%         3,115,000

Cash                   2,225,000

Billboards           8,155,703 9.0%        999,000 (264,987)

Parking Lots   6,509,867      10.0%        886,000 (235,013)

Total 79,190,570                 5,000,000 (500,000)

 

 

Dividend Notes (11,787,000)

Other             (501,000)

Def. Inc Taxes   (4,720,000)

 

                  62,182,570 Total NAV

                    6,599,912 Shares

                            9.42 Per Share

 

 

Another way of looking at it is the whole company at is valued at a 6 cap rate on just the real estate income.  Note that the below calc does not include the deferred tax liability and gives no credit for anything having to do with oil.  It also makes the 60% Leasing Expense adjustment as noted above.

 

Leasing

5,016,000 Revs

(500,000)  Exp

4,516,000 Total

6.0%         Cap on EV

 

6,599,912 Shares

10         Price

65,999,120 Mkt Cap

9,562,000   Net Debt

75,561,120  EV

 

In summary, I’m wondering if anyone has looked at this name, has thoughts on the oil terminal or on the deferred tax liability and the treatment of it.  I am relatively new at this, so please be gentle.  Thanks.

 

For those who care/are curious, by way of background I’m a real estate private equity professional and I dedicate some of my intellectual capacity (and capital) to undertake real estate related, value investing as a hobby.  I first picked it up when I looked at HMG and WOLF in 2012 and either my thesis was right or I am lucky (prob some combination of both).  If the underlying assets are not RE, then I’m not going to spend time on it.  If I’m any good at my day job, which I think I am, I should have a better than average ability to value underlying real estate assets.  That, and as big of a margin of safety as I can find, and voila!  Also, most of the companies are sub $00mm market caps and many are sub $100mmm.  Current holdings are (in order of most recent original purchase): JCAP, SELF, GYRO, RAFI, FRPH, LAACZ, MAYS, AHH, ABCP and HMG.  I’ll like do write ups on these in the future at some point.

 

[winjitsu]

Welcome to the board! Only wish we were both around last year -- I spent alot of time on FRPH during the spin-out and passed (sadly -- would have been a nice return) because I couldn't assess the RE value.

 

Wish you didn't list your credentials, that way people are forced to engage your ideas on a purely intellectual basis  ;)

[Orchard]

How did you find all these interesting real estate related micro caps?

[shhughes1116]

Valuing the terminal is fairly straightforward, although there are a limited number of comps for this asset class where the purchase price is publicly disclosed.

 

So first, a somewhat comparable purchase:

CorEnergy purchased a terminal in Portland (Oregon) back in 2014 for $40.0 million (1.5 million barrels of storage), with annual rent of $5.0 million, and a 15-year agreement with ArcLogistics.  Assuming similar margins as the Providence terminal, NOI is around $1.35 million, maybe a bit higher since I expect margins to increase slightly as scale increases, so let's be generous and call it $1.5 million.  At NOI of 1.5 million, and a $40 million purchase price, that gives a cap rate of 3.75%. 

 

(I will bite my tongue and hold my comments until the end...)

 

So based on Capital Properties' recent agreement with Sprague, the Providence oil terminal is now 100% rented.  Annual rent is 3.5 million dollars, plus an additional $0.15 for each barrel moved through the facility in excess of 3.5 million barrels.  Based on their most recent 10K, they generate ~$3.520 million revenue, and have expenses of $2.569 million, so NOI of $0.951 million.  Using the comparable from Portland, the terminal would be valued at $25.36 million.

 

Now for my comments:

1. I like distillate terminals as an investment.  They can be used for all sorts of liquid crude by-products (aviation fuel, gasoline, naptha, asphalt, ethanol, biodisesel, etc).  They can generally be set up to import or export liquids which is an added bonus.  And given the NIMBY folks, its not like a lot of new terminals are getting built in the United States, so the asset does have a narrow moat (48% of tankage capacity in Providence harbor).   

2. A 3.75% cap rate for a distillate terminal seems absolutely outrageous to me, and reeks of the MLP-mania during the last couple of years (buy crude/gas assets at absolutely any price.)

3.  If your thesis rests on a potential sale/liquidation ,then when considering valuation of tank farms and terminals, one must attempt to estimate potential future environmental liabilities.  Their 10k provides a good history of one environmental liability. 

 

I think a 10-15% cap rate is more appropriate for this type of asset.  I think that takes into account the narrow moat while leaving some room for environmental remediation.  Therefore I would derive an asset value of $6.5 - $9.5 million. 

 

The deferred income tax liability is a function of depreciation and cost differences (like an increase in the fair value of a property relative to the tax basis.)  To understand how to account for this liability, you need to understand how management will act in the future.  If they never, ever, sell their property, then this will always remain a liability.  If management sells a particular property that has been depreciated, then they will either be subject to depreciation recapture (a portion of that liability) or they will need to conduct a 1031 exchange to avoid the depreciation recapture.  If you are estimating the liquidation value of the company, then the deferred income tax is most certainly a liability that should be included in your calculation.     

               

[KJP]

Current holdings are (in order of most recent original purchase): JCAP, SELF, GYRO, RAFI, FRPH, LAACZ, MAYS, AHH, ABCP and HMG.  I’ll like do write ups on these in the future at some point.

 

Off-topic for this thread, but I'd like to ask what you see in JCAP.  I've seen some bullish writeups on it elsewhere.  But on the surface, I see (i) bloated expenses relative to the current size of the company, leading to costs exceeding net interest income (ii) an inability to raise capital on advantageous terms, and (iii) a refusal to cut the dividend, which is causing a capital-starved company to burn through even more capital.  What am I missing? 

[SugarRE]

Time to take a look at this again. More of a pure RE play given the recent announcement on the saw of the facility.