Current price: $19.6
Expected Liquidation Value: $25.20 (reduced to $15+)
Upside: 28% (IRR of 8% or greater)
Expiration Date: December 2021
This idea was shared by Dave.
GYRO’s liquidation commenced nearly a decade ago and is still proceeding, albeit at a glacial pace. In management’s defense, they have been seeking value-add modifications to the company’s remaining two properties prior to disposing of them, which has slowed the process significantly.
However, a recent sale agreement coupled with a conservative management estimate of value portend good shareholder returns if the modifications are ultimately approved.
This is a summary write up. Ample detail can be found in the GYRO filings if you wish to dig deeper.
Summary of Opportunity
- GYRO is liquidating and management currently estimates a 12/31/21 end date.
- Management’s estimate of Net Asset Value, pro forma for a recently (8/29/19) announced agreement, is $20.20.
- In our estimation, this NAV understates the value in liquidation because management did not include a revaluation of certain other for-sale real estate to reflect the agreement price.
- Even adjusting for a potentially longer liquidation timeline, a reasonable IRR is possible at the current stock price ($20.00).
GYRO’s remaining assets consist of two properties: (i) a largely undeveloped 64-acre parcel referred to as “Flowerfield,” in Smithtown, NY, close to SUNY Stony Brook and (ii) a 10.5-acre parcel in Cortlandt Manor, NY with an existing medical office building and space for additional development.
For the last few years, GYRO has been working with consultants and the respective municipalities to secure: (i) approval to subdivide the Flowerfield parcel and (ii) a zoning change for the Cortlandt parcel. The company argues that these modifications, or “entitlements,” will result in accretive, increased sale values for the properties.
On 8/29/19, GYRO announced that it had entered into an agreement to sell roughly 9 acres of land (Lot 4) at Flowerfield for $16.8mm. While the deal has a number of contingencies, including approval of GYRO’s proposed subdivision plan by the Town of Smithtown (NY), the price is attractive – nearly $1.7mm per acre.
As a result of this agreement, GYRO updated the value of its Net Assets in Liquidation to $20.20 per share, reflecting a $4.10 per share increase in “real estate held for sale” offset by an increase in the expense reserve of $1.72 for a net increase in NAV of $2.38 from the June 30, 2019 value. The increased reserve largely resulted from an 18-month increase in the liquidation timeline, extending the projected end date from June 2020 to December 2021.
Importantly, according to the 8K, the updated NAV ($20.20) does NOT include a revaluation of the other acreage for sale at Flowerfield based on the contract price. In other words, despite a contract price per acre meaningfully in excess of the 6/30/19 carrying value of the undeveloped Flowerfield acreage — as demonstrated by the $4.10 (or 17%) increase in gross “real estate held for sale” mentioned above — GYRO did not undertake a revaluation of the other acreage. Instead, management just added the incremental value implied from the Lot 4 sales proceeds to NAV, less sales commissions. Management likely did not want to conduct a full appraisal at this time and instead went with this expedient, if conservative, approach.
This is the essence of the current investment opportunity.
Rather than outline a bottom-up valuation of GYRO in light of the recent Flowerfield agreement, we instead invert, and explore the implied values for the remaining properties based on the pro forma NAV of $20.20 provided by GYRO.
To begin with, based on an exhibit to the 8/29/19 8K, here is the proposed subdivision of the overall Flowerfield (“FF”) parcel. Lot 4 is the parcel under agreement and Lot 2, the well-reviewed Flowerfield Celebrations parcel, is not owned by GYRO (but it makes a hotel on adjacent Lot 5 a compelling opportunity):
Here is the pro forma balance sheet adjustment to reflect the agreement based on the company’s recent 8K filing:
Now, let’s break down the pro forma “Real estate held for sale” line item:
In rows 81-83, we deduct the contract value of the parcel under agreement. Row 85 deducts our estimate of the gross value of Lot 1, the existing leased industrial/office property at Flowerfield. Row 86 therefore shows the implied value of all of the unsold, undeveloped proposed subdivided lots at Flowerfield (Lot 3 and Lot 5) as well as the entire Cortlandt Manor property.
GYRO’s current subdivision application indicates that the best use for Lot 3 is Office and for Lot 5 is Hotel. In lines 88 and 89 we assume that Lots 3 and 5 are sold at a significant discount to Lot 4 (on a $/acre basis) given the different expected uses. These discounts may prove conservative as this is a unique property in eastern Long Island, but true comparables are difficult to find. At those discounted values, the “Implied gross value of Cortlandt Manor” in row 90 is unreasonably low.
The Cortlandt property is well-located across the street from NY Presbyterian-Hudson Valley Hospital and, according to GYRO management, there is considerable demand for its expected uses: medical office space and multi-family residential. In January 2018, a neighboring property (“Evergreen Manor”) went under LOI. The asking price for the neighboring property at the time was roughly $1.2mm per acre. That property is no longer on the market. For this analysis, we assume a value for Cortlandt of $1mm per acre.
Totaling it all up, and deducting incremental sales commissions and management bonus accrual (see GYRO filings for bonus detail), you get the value in row 104.
Expected net proceeds from the sale of Lot 4 are as follows and we believe it is reasonable to think that this transaction closes in 2020 and the net proceeds are distributed at closing:
Here is a look at IRRs at varying liquidation distribution timelines (with an extra $1 per share ($1.4mm) deducted in 2022 scenarios to reflect one year of additional operating expenses not reflected in $20.20 NAV):
In summary, since both parcels are unique, with new entitlements, comparables are hard to find. For instance, in 2017 undeveloped commercial “comparables” around Flowerfield traded in the $400k per acre range – a far cry from the Lot 4 contract price of $1.7mm per acre.
The key question is to what extent the Lot 4 price translates to Lots 3 and 5. There may also be upside to our Cortlandt Manor estimated value. We have tried to be conservative above and we still see reasonable IRRs depending on your estimate of time to completion.
Management’s past estimates of the timing to complete this liquidation have been inaccurate. However, in our view, this is largely due to the time-consuming municipal approval process in both Smithtown and Cortlandt Manor and not poor execution by GYRO management, per se.
GYRO offered the following update on the two approval processes in the 6/30/19 10 Q:
Considering these comments and my recent conversation with a representative at the Cortlandt Manor planning department, I think it is reasonable to expect both the FF and CM municipal approvals are secured in 2020. In a recent conversation, management of GYRO indicated that they intend to have all of the parcels under contract prior to entitlement approval. This comment may indicate there are currently interested buyers for all parcels, which would not surprise me given the fact that we are three years into this process.
Importantly, GYRO management indicated that the Assisted Living operator under contract to purchase Lot 4 is pursuing their Site Plan Approval with the town of Smithtown at the same time that GYRO finishes the overall subdivision approval. This is a good sign because the town would likely dedicate its staff resources to Lot 4 Site Plan Approval only if the overall subdivision approval was anticipated.
Management incentives here are not ideal. Rather than share in the net proceeds distributed to shareholders, management and the board are entitled to receive a share of the net proceeds from real estate sales to the extent they exceed a pre-entitlement appraised value (more detail can be found in the GYRO filings). Importantly, cash invested to secure the entitlements is added to the appraisal basis for purposes of the bonus calculation. Having said this, in years of following this stock, we have not witnessed poor conduct by management and the recent contract price for Lot 4 is an encouraging indication that the entitlement investments will generate a positive return.
We would like to see further expense reduction, notably a delisting, but to date certain stockholders seem to have prevailed on this issue of keeping a NASDAQ listing.
For what it’s worth, recently reported holders include notable value investors, albeit with small $ exposure due to the FMV of what is left of GYRO. These folks may keep pressure on management for cost reduction efforts:
- GYRO is illiquid.
- Each estimate of the end date for this liquidation over the past 10 years has been wrong. Management currently estimates it will be completed by 12/31/21, but it may take longer.
- GYRO is now an LLC, so you will receive a K-1 (and it has historically been late).
- Despite GYRO’s diligent efforts to date, there is no guarantee that either the Flowerfield subdivision or the Cortlandt Manor re-zoning will be approved by the respective town political leaders. However, the economic incentive (property taxes) for both communities to approve the entitlements is significant and current elected officials in both communities are on record supporting approval.