Bloomberg reports that the company that is the biggest property owner in downtown LA, with concentrated holdngs in the Little Tokyo section of Los Angeles is trading at a deep discount to book value minus borrowings. The reason? The company may not be able to refinance debt coming due.
Now one may legitimately take book value with a handful of salt, and my dim recollection of LA is that Little Tokyo is adjacent to rather than in the business district. Another factor is that this stock probably trades by appointment: market cap of $142 million, with 45% held by the CEO. Nevertheless, this is yet another manifestation of the credit crunch.
From Bloomberg:
A package of Los Angeles real estate on sale for 35 cents on the dollar is attracting investors to the depressed shares of Meruelo Maddux Properties Inc., the biggest private landowner in the city’s four-square-mile downtown.
The stock has plummeted 85 percent since an initial public offering 15 months ago as the global credit crisis threatens to disrupt refinancing of $200 million in mortgage debt coming due in the next 12 months, as well as completion of the city’s tallest downtown residential tower.
Meruelo Maddux owns or controls 80 acres including the Little Tokyo Shopping Center, home of the country’s largest Japanese supermarket, as well as warehouses and buildings used in Tom Cruise’s action film “Mission Impossible III.”
“It sure looks like a cheap way to play the downtown L.A. market,” said Mike McGarr, a portfolio manager at $2.4 billion Becker Capital Management in Portland, Oregon, which has added shares this year and owns 1.55 million. “You’re not hanging your hat on a few properties. You’ve got about 50 properties in various states of development or redevelopment.”….
Loan payments and maintenance consume $500,000 a month more than the company takes in, eroding the developer’s $13.5 million in cash.
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Having studied MMPI’s financials, the Bloomberg article smells kinda funny.
If the reporter can’t read a 10-K, he could at least note that Becker Capital, quoted in the article, recently sold 11.5% of its MMPI stake (filing of 5/2/08).
Steve,
That was the reason for my comment on the size of the float, and “trade by appointment.” This may be bigger than the pink sheets, but it doesn’t mean it isn’t subject to similar tactics (pump and dump, just not as extreme due to large amount outstanding).
And it is weird Bloomberg is covering a story with so little dough at stake.
The other reason I took interest, aside from curiosity, is that at the Milken conference, Lew Ranieri mentioned that a lot of commercial RE developers were or were about to be in default on their deals. Often this is for reasons a bank might waive upon inspection (or charge a fee, or up the rate a bit), like not meeting lease up targets, but the banks are pulling the loans if they have an excuse. They need to shrink their balance sheets, development is risky, so to them it’s a no brainer.
Ranieri said some of these were good deals, the developer has 20-40% equity (of course, this begs the question of where you get the debt) and some were in very good locations.
Now this isn’t precisely that kind of situation, but it does have an element of banks shedding development risk.
Or am I reading this wrong? Your input appreciated.
Yves,
MMPI’s portfolio has so many issues that the “discount” still seems rich to me (for example, 36%+ vacancy rate, 20% of leases are month-to-month, development projects that require further land purchases, negative cashflow, etc.) There are several holding here that are worth looking at carefully, but the problem is breaking them out of MMPI’s portfolio to capture the potential Ranieri is talking about. (I have no position in MMPI, long, short, or sideways.)
717 W 9th is an enormous high-visibility project near the Staples Center and the Nokia Theater. When completed it will be the tallest residential building in downtown LA. It’s well underway. No, it’s not in Little Tokyo, but if the project has any delays, even the slightest hiccup, the entire city will take notice.