Lessons Learned Over Forty Years: Investing in Companies with Significant Hidden Assets (Particularly Real Estate)

Lessons Learned Over Forty Years: Investing in Companies with Significant Hidden Assets (Particularly Real Estate)

Lessons Learned: Hidden Assets

We are approaching our 40th year of publishing Asset Analysis Focus. As far as we know, we are the oldest subscription based institutionally oriented research publication on Wall Street.

Throughout 2014 and 2015 we hope to share with you some of the lessons we have learned over almost four decades by utilizing excerpts from prior editions of Asset Analysis Focus to illustrate a number of value investing’s core principles.

One of the more successful approaches that we have utilized is the Hidden Asset approach, particularly when real estate is a large component relative to a company’s market capitalization.

Examples of the Hidden Asset Method

In 1978, we profiled Alexander’s Inc., which was a regional department store chain, with 12 locations in New York and New Jersey. The company’s common shares were trading at roughly $8 and had a stock market capitalization of just over $24 million and an enterprise value of slightly more than $72 million. Cash flow per share was $2.11, while stated book value per share exceeded $12.

Seven of the twelve locations were owned by the company. The most valuable being one square city block located on Lexington Avenue and 58th Street in Manhattan. That site now contains the Bloomberg corporate headquarters as well as One Beacon Court which is one of New York City’s most prestigious residential addresses. One apartment in that building which is 9,000 square feet has a current asking price of $115 million.

Although Alexander’s other owned locations were not nearly as valuable, they were in their own right trophy properties. The Paramus New Jersey property and the Rego Park Queens location were gems. Ultimately Alexander’s was acquired by Vornado not for its operating businesses but for its real estate.

Other examples that we profiled through the years included businesses like Wrather Corporation which owned a significant stake in Teleprompter which was one of the largest cable operators at the time as well as the rights to the Lone Ranger and Lassie. Its crown jewel, however, was the Disneyland hotel in Anaheim, California which was contiguous to the Disneyland resort. It also had the exclusive rights to build additional Disney hotels in California. We originally profiled the company in August of 1977 when it was trading at $2.50 per share and in August of 1988 it was acquired for $23.25 per share.

Beneficial Standard was a California based insurance company that owned an extensive portfolio of real estate properties that included shopping centers located in Marina Del Rey and Palm Springs California, among others. It also owned office buildings located primarily in Los Angeles. We advocated splitting the company in two parts, insurance and real estate, which they eventually did. Subsequently, both entities were sold. – 2 –

Both McDonald’s and The Home Depot have large real estate components. When both companies fell on hard times and their common shares plummeted in value, their real estate holdings relative to their depressed market prices were quite significant. For example, Home Depot’s owned real estate represented ~ 45% of the market value of the entire entity when we profiled it in May of 2011.

At one point, Tiffany and Company’s Manhattan store was worth more than the entire market value of the whole entity. In 2009, at the height of the financial crisis Saks Fifth Avenue’s common shares fell to $1.85, it’s Manhattan store alone which was unencumbered was worth more than the market capitalization of the entire company. Saks was recently acquired for $16 per share by Hudson’s Bay.

Tishman Realty & Construction: Why Reading Footnotes is Critically Important

We have included an excerpt from an early edition of Asset Analysis Focus which featured Tishman Realty & Construction which owned a significant number of office buildings located primarily in New York City, Los Angeles and Chicago. The title of the report was “Generally Accepted Accounting Principles Versus Economic Reality.”

Prior to the great recession of the early 1970’s a large number of gigantic office towers were built on Avenue of the Americas in NYC. As the economy continued to sour and with New York on the verge of bankruptcy it was becoming increasingly more difficult to find tenants to occupy the enormous amount of available space.

Tishman had just completed construction on a large building located on Avenue of The Americas. The company concluded that it would take many years to fill the space, so they elected to give the keys to the bank, becoming the first major developer to walk away from a project since the Great Depression. Generally accepted accounting principles dictated that Tishman had to write this asset down to zero. This mandated write down totally eliminated the company’s retained earnings.

Since the company had no retained earnings it could no longer pay a dividend, and the shares plummeted in price reaching a low of $8.75 per share. Unfortunately, generally accepted accounting principles forces a company to immediately write down a property it abandons to its estimated disposal value. However, the same accounting practices did not permit Tishman to write up its operating assets to an estimate of their present market values – which in this case was significantly more than their acquisition cost.

As of September 30, 1974 the company owned all or portions of more than 23 buildings that were fully functioning, and as a group, showed positive cash flow that same year. In the company’s fiscal 1974 annual report, dated September 30th Tishman once again reiterated its belief that, “the company’s developed properties are carried on its balance sheet at far less than market value.” At the time Asset Analysis Focusestimated that Tishman’s private market value exceeded $25 per share. – 3 –

Early on, we learned the importance of thoroughly reading the footnotes contained in 10-Ks. In fact, it is a good idea to read the footnotes first, and to try and avoid companies that have a plethora of footnotes.

On page 4 of Tishman’s 10-K and with further reference in the footnotes the following appeared:

“The Registrant has been studying the possibility of restructuring the registrant in a form that would be more beneficial to the shareholders and more reflective of underlying asset values.”

In 1977 the company commenced a plan of complete liquidation. By 1978 the company had distributed $13.75 in cash, and an interest in a limited partnership that was valued at $7.50, for a total of $21.25.

An investor can learn two very important lessons from the Tishman saga:

(1) The importance of real estate ownership by a company, especially when it is a large component relative to a company’s market capitalization. By marking the assets to the market, it not only more accurately values the company, but it also creates a margin of safety.

(2) The importance of assiduously reading footnotes.