Capital Crossing Preferred Corp (CCPCN) is an extremely rare bird. It is a REIT which owns cash and mortgages worth $118 million, as of Sept. 30, 2008, and it has less than $1 million in total liabilities. But the 8.5% Series D non cumulative, exchangeable preferred shares are selling for just $6 million (thinly traded at $4 per share), even though they pay a $2.125 annual dividend. It common stock is 100% owned by Lehman Bank FSB, a well capitalized subsidiary of Lehman Brothers Holdings, Inc. The 8.5% preferred shares (CCPCN) are a separate legal entity with its own board and reporting requirements, trading. This is extremely rare – both because of its severe undervaluation, and also because of its separate reporting and filing status.
In November 2008, CNPCN’s board announced it was going to redeem the 8.5% Preferred shares at $25 per share. But in December the Office of Thrift Supervision said no – Lehman Bank, CCPCN’s parent, needed to keep the “capital” on its balance sheet.
Meanwhile, CCPCN is still paying its quarterly dividend of $0.53125 per share (an annual yield of 53 %!). We think there is a good chance the stock will rise to close to its $25 redemption value over the next year or so. First, it is highly likely that Lehman Bank FSB will be sold (along with its 100% ownership of Capital Crossing’s common stock) to another company, most likely another bank or a private equity fund.
Second, as of Sept. 30, 2008, CCPCN had $63.2 million in cash, plus $54.8 million in mainly commercial mortgages. The total cost to redeem the CCPCN preferred is $37.5 million (at $25 for each 1.5 million preferred share). So the company has more than adequate capital (and virtually no debt).
Third, even if Lehman Bank were to buy the CCPCN shares in the market, they would likely rise to at least $14 - 17 or so. The CCPCN shares would then yield 12 – 15% which is where other bank preferred shares are trading.
Fourth, even if Lehman Bank sold its commercial mortgages at huge discount (even though as of Sept. 30, 2008, all but 1% or so were performing loans), the board has a fiduciary obligation to maintain sufficient cash in Capital Crossing to redeem the CCPCN shares.
This stock is a true value investment along the lines that Ben Graham talked about in his book The Intelligent Investor.
Full disclosure: Hake Capital, Hake Partnership and Hake Investment Research own shares in CCPCN.
