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Vestin Realty Mortgage, Inc. (VRTA, VRTB) invests in loans secured by real estate through deeds of trust or mortgages. It offers various real estate loans, including commercial property, construction, acquisition and development, land, and residential loans. The company operates in Arizona, California, Colorado, Nevada, Ohio, Oregon, and Texas. It also focuses on investing in real estate properties.

Today, Vestin Realty Mortgage is divided into two separate funds that both incur their own expenses, including a management fee to Michael Shustek's (the chairman and CEO) company. The company has announced plans to merge VRTA and VRTB at a .82 exchange rate in Q4 2012; this merger should happen imminently.

Below is what the company's balance sheet will look like post-merger:

Q3 2012

VRTA

VRTB

Pro-Forma

Balance Sheet

Cash

0.53

2.109

2.64

Investments in Marketable Securities

0.83

0.732

0.00

RE held for sale

7.12

66.82

73.94

Mortgages

13.86

27.14

41.00

Other Assets

0.16

0.958

1.12

Total Assets

22.50

97.759

118.70

Liabilities

0.34

47.478

47.82

Book Net Worth

22.16

50.28

70.88

Book Net Worth / share

3.50

4.10

4.30

Shares O/S

6.34

12.27

16.495

This needs some elaboration.

First off, "investments in marketable securities" is related to the amount of shares VRTA and VRTB own of each other. VRTB owns 538,178 shares of VRTA and VRTA owns 537,078 shares of VRTB. When the merger is completed these shares should get counted as treasury stock and decreased shares outstanding (which is what I've done in the pro-forma share count).

The primary asset on the balance sheet (under "RE held for sale") is the company's ownership of Fort Worth Sheraton property, which was sold out of bankruptcy as of Sept. 24, 2012, for $55 million. The acquirer has 60 days from that date in order to finalize the sale. Approximately $47 million worth of liabilities is associated with the same property and will disappear after the sale. This is a major win by the company. The uncertainty surrounding it was a big negative, which may have been part of what has kept the stock price down.

To highlight a couple of the major risks: The three largest borrowers account for 47% of the company's investment in real estate loans, and the vast majority of loans (~80%) were in Nevada, one of the worst hit areas by the housing crash. On a positive note, though, most loans were originated in the last two years and will come due in the next 12 months, which should offer some comfort that the loans mentioned on the balance sheet do not need to be marked down.

The balance sheet illustrates just how undervalued Vestin is: Book value per share (which can potentially mostly be turned into real cash within 12-24 months) is worth $4.30 per share. That's a significant discount to the current stock price. This may be the closest you can get to purchasing cash at a discount.

Don't expect this cash to be distributed in the near term, though. The company has intentions to continue growing its lending and real estate investment business.

Below is an estimate of what the pro-forma financials will look like based on the latest Q3 financials:

Q3 2012

Income Statement (Q3 2012)

VRTA

VRTB

Pro-Forma

Revenue

0.291

0.427

0.718

Expenses

Mgmt Fee

0.242

0.242

Professional Fee

0.166

0.166

Other

0.15

0.15

Total

0.558

0.558

Cash Flow

0.16

I stripped out all one-time, non-recurring gains and losses in the financials. This is not completely honest, as part of the business is related to flipping real estate (so it is not really non-recurring), but that's more difficult to estimate and I am more interested in the mortgage portfolio.

After the merger, the company could earn cash flow of around $650,000 a year, or ~$0.05 per share. The company is not fully invested at the current time, however. If the company is able to maintain a fully invested portfolio, cash flow could be nearly twice as high.

The CEO is also in the process of creating a new fund, of which Vestin owns a 40% stake of the management company and would receive fees on the new fund. During the summer, Shustek made a significant purchase of stock in VRTB and throughout 2011 made significant purchases of VRTA stock. He is the largest shareholder of the company. Vestin has a questionable history with a lot of value destruction and contested lawsuits involving Shustek. But my view is that that is all in the past and the company is poised to chart a new path of growth.

In summary, I believe that Vestin is a great investment at this point due to the following:

  1. The company trades at a significant discount to its liquidation value
  2. Is in the process of selling a large investment (which was a great uncertainty in the past)
  3. Will likely become cash flow positive in the next two months after its merger is consummated
  4. Has potential to grow earnings through better utilization of funds
  5. Has a potential catalyst with the raising of the new MVP fund
  6. It is a great investment to play the real estate recovery, especially in areas that were greatly affected by the crisis

In my view, the potential upside is much greater than the potential downside at this point.

Disclaimer: As with all investing, micro-cap investing involves risks. Please do your own due diligence and do not solely rely on articles like this one.

Source: Vestin - Trading Below Liquidation Value, Upcoming Merger Will Make It Cash Flow Positive