Elie Rosenberg is a value investor based out of Dallas, Texas. He is the founder and editor of valueslant.com, a site dedicated to value investing research and analysis.
Gyrodyne (GYRO) is a special situation stock perhaps nearing the end of a multi-year court battle. Will value finally be unlocked and is it worth the risk?
|Price as of 7/18/2011||67.97|
|52 Week Range||63.52-82.94|
|Shares Out (MMs)||1.29|
|Market Cap (MMs)||87.7|
|Enterprise Value (MMs)||107.7|
Gyrodyne was founded in 1946 and for most of its history developed co-axial helicopters. In 1951 Gyrodyne bought 500 acres on the north shore of Long Island, New York, about 50 miles east of Manhattan. A small portion of the land served as the development and manufacturing sites of the company. The helicopter business slowly died out. In 1999 the remaining helicopter assets were sold. The company went into the real estate business with a focus on monetizing the Long Island property known as “Flowerfield” owing to its earlier use as a flower nursery.
In the 60s Gyrodyne donated about 180 acres of the Long Island land they were not using to the State of New York to build a new university. The site would eventually become part of State University of New York (SUNY) at Stony Brook, quite ironic in light of the events that were to unfold three decades later.
The Court Case
By 1999 Gyrodyne had developed only a fraction of the land for industrial use. That left about 300 prime acres undeveloped, at the time one of the largest plots of undeveloped land on Long Island. In November 2005 the State of New York seized 245.5 acres of the land through eminent domain to serve as the home of a new research center for adjacent SUNY Stony Brook. The State paid Gyrodyne $26.3 million for the land.
Gyrodyne sued the State for just compensation in May 2006 and the trial was finally held in August 2009. Eminent domain court cases revolve around determining the value of the land developed to its reasonable “highest and best use”, whether or not it was being used in that fashion at the time it was claimed. The Gyrodyne appraiser appraised the land at $125 million for the highest use as a luxury home development. The State’s appraiser valued the land at $22.5 million based on its current zoning for light industrial use.
The Court found in favor of GYRO in June 2010 by accepting the $125 million valuation. The State thus owed GYRO an additional $98.7 million in addition to 9% simple interest on that amount since the seizure date of November 2005. The Court accepted GYRO’s claim that the land would eventually be rezoned for residential use, and therefore also accepted GYRO’s valuation because the State insisted the land would not be rezoned and did not guide the Court to a valuation under residential use.
The State appealed the decision, and Gyrodyne has replied to the appeal. The State cannot present any new evidence in the appeal. The central claim of the State in the appeal is that the Court had a constitutional duty to scrutinize the validity of GYRO’s valuation even if it felt the State provided no reasonable valuation. GYRO has responded that when only one side’s expert presents a revelant valuation then that sets the valuation range for the court.
The Other Assets
GYRO has a few other sources of value aside from the potential legal award:
- A portion of Flowerfield rented out as industrial space, currently cash flowing (Funds from Operations) about $1 million
- 62.4 undeveloped acres of Flowerfield
- 3 medical office parks with FFO of about $2.1 million
- A 10% stake in a partnership that owns 3,700 acres of undeveloped land in Florida known as “The Grove”. The land is in foreclosure, so it is likely this stake is worthless.
The key driver of GYRO’s value is whether the State will win the appeal in the Flowerfield case. It seems to me the State does not have a very strong case, but I would not be confident enough to buy GYRO based on that assumption. The question then becomes whether there is a sufficient margin of safety in case GYRO loses.
Between the main award, interest, and legal fee reimbursement, the total award from the Flowerfield case would be $132 million assuming a 35% tax rate on the interest. (As a REIT it appears they will not have to pay corporate taxes on the main award, but they probably will on the interest portion.) One nice feature of GYRO is that one is being paid to wait with the interest on the award, so that mitigates to some degree the risk that the case keeps dragging on.
The value of the real estate assets aside from the disputed land is on the books at $33 million, and I estimate it is worth $69 million on the high end.
When the case concludes it is likely GYRO will sell out to another REIT, and there is a sizable executive compensation package in the case of a liquidity event that is tied to the stock price.
Last week, GYRO announced they were seeking to raise $10 million through a shareholder rights offering. It has not been priced yet, and presumably there will be some dilution although I have not factored that into the valuation. The company was vague as to why they felt it was necessary or what they are going to do with the money. Perhaps it signals they think the court case will drag on for a while.
Putting these points together, I estimate a value between $100-125 a share if GYRO wins the case (first three columns below) and about $32 a share if GYRO loses (the far right column- assumes High scenario for real estate assets). For context, GYRO traded in the high 30s before the award was announced in June 2010.
If we assume a mid-range value of $112.50 per share in a win and $32 per share in a loss then we can look at how the market is handicapping the odds in the court case. The odds that would yield an expected value of the current $68 a share are 45% win/55% loss. That seems overly pessimistic, but it is hard to invest based on that unless one has some legal insight. The safer way to approach it is just to look at the downside scenario, which would be a 50% loss. With a management team that do not appear to be particularly strong REIT operators it is hard to see how they will create much value beyond the $32 a share in the case of a loss. This downside risk makes GYRO a pass for me. It would be great to hear from anyone who has a legal analysis of the case and/or thinks GYRO is a buy.
Disclosure: No position