This is part two of a multi-part series on Dr Michael Burry, value investor, founder of Scion Capital and one of the first fund managers to bet against the subprime housing market. The first part of this series can be found at the link below.
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Dr. Michael Burry — Part two: How much can I lose?
There are some great examples of Burry’s investments while he was running Scion. A classic value play was Wellsford Real Properties (WRP). Originally, I was going to cover several of Michael Burry’s classic investments in this piece, but looking at Burry’s thesis for the Wellsford trade has taken up this entire article — even with several thousand words cut out. So I’ll take a look at some of Michael Burry’s other investments in parts three and four of this series. For the time being, here’s Wellsford:
Wellsford Real Properties(WRP) – $16.60 on Jun 1, 2001
WRP is an opportunity to buy real estate at as little as 50 cents on the dollar (and at most 61 cents on the dollar), with a plan for value realization in place and virtually no downside. Wellsford Real Properties is a real estate operating company (REOC) and as such its value is in wealth creation rather than earnings distribution…The stock’s at $16.50. Book value is $26.93 and understates true net asset value…Here’s why:
Wellsford is an incomplete liquidation story now divided operationally into three strategic units:1) Wellsford Commercial ($10/share book value, liquidating, no recourse debt) – primary asset is a 39% interest in Wellsford/Whitehall, a joint venture with Goldman, valued at 86 million at March 31st. This value will continue to increase. W/W has been in the business of buying up turnaround properties and putting some sweat equity into them, then filling them.
2) Wellsford Capital ($12/share book value; continuing; no recourse debt) -As the real estate market peaks, the Chairman wants to get out of equity, but sees future potential for buying real estate debt on the cheap as things turn sour…yet by buying smart earn great returns despite not taking on substantial risk.a) $35.4 mill direct investment in 11.5% meezzanine loan, 277 Park Avenue (DLJ’s building, well known to some of you I’m sure ‘hedge fund hotel’)
b) 51% interest in Second Holding, LLC, another JV that invests in real estate debt. They have been ramping this up. Carried at equity method and equity in Second Holding is roughly $27 mill. That’s the limit of their liability…Again, the equity value at risk here is only a little over $3/share.
c) $7 mill investment in REIS, a real estate information services company – I write this down simply because there’s a family relation behind this investment, but it is possible the 6.9 million may even underrepresent the value of that asset.
d) VLP is being liquidated – another $11 million or so to come.
…because of the nature of the turnaround properties, I don’t anticipate much long-term downside there from the book level. Potential losses in Capital are maybe $3/share in book value…
The company has been buying back shares when blocks become available, retiring 2 million shares in this fashion in the last couple of years. The Chairman vows to continue doing so, claiming the illiquidity of the stock is the greatest impediment – he doesn’t want to run it up…
The history of Wellsford is that management presided over Wellsford Residential Property Trust – of which WRP was a subsidiary – from 1992-1997. The Trust merged with Equity Residential Properties at a price that gave a 23% annualized return since inception to shareholders. The stock had done nothing for years….
Franklin Mutual (Beacon, Qualified) owns 24% of the common from the initial private placement, and Morgan Stanley owns 17% of the common from the same. Neither have been buyers recently. MJWhitman Advisors upped its position 25% during the 1st Q.
A decent sized seller (probably Fleet or Advisory Research or both) has been offering shares whenever adecent-sized order comes up to buy, so in my experience at least the illiquidity is less a problem than it appears.
Liquidation of real estate per plan with $200 million in properties being marketed for sale right now; possible sale of whole company; commitment to share buyback at deep discount to intrinsic value; dollar on sale for 50-60 cents with no significant downside; possible Russell 2000 inclusion on June 30th but is one of the few such candidates that hasn’t really moved yet.
The whole Wellsford Real Properties thesis can be found here. At the link, there’s also a string of comments covering how the investment thesis developed over time. Wellford merged with Reis during 2007.
This is rigorous analysis by any standard. Michael Burry looked at every possible avenue and outlook for different parts of the business, its history and current shareholders. There’s no stone left unturned, but Michael Burry mainly concentrates on the potential downside for each section of the Wellsford business. Indeed, Michael Burry assess each business under the Wellsford Real Properties umbrella and computes the potential downside on a per-share basis. This is something Michael Burry specialized in.
Michael Burry always approached each investment thinking “how much can I lose”, rather than the standard approach used by the majority of asset managers, investors and fund managers, (re: The Little Book of Behavioral Investing) “how much can I make”.
I’m going to take a closer look at some of Michael Burry’s other investments in part three of this series so stay tuned!