Gyrodyne Company of America, Inc. (GYRO) is a real estate investment trust (REIT) that manages several properties in the state of New York and Virginia. In November 2005, the State University of New York at Stony Brook acquired 245.5 acres of the company's property at Flowerfield through eminent domain. After that, in March 2006, the company received payment of $26 million from the state of New York for the acquisition. Being unsatisfied with the state's valuation of the property, the company filed a series of lawsuits against the state, claiming damages. In July 2012, the lawsuits are finally settled and the company received $167 million from New York State pursuant to the judgment in favor of the company. Of that amount, $98 million is for additional damages, $1.47 million is for costs and expenses, and $67 million is for interest.
Following the successful legal battle, the board of Gyrodyne was determined to return the funds to investors through several tax-efficient liquidity events. The company first distributed the interest portion of the settlement in the form of a special cash dividend on Dec. 14, 2012. This year, after receiving a favorable ruling from the IRS, the company declared another special dividend in September 2013 to distribute the remaining portion, which is subject to a lower excise tax at 4% rather than a 35% level REIT tax. This second dividend has a record day of Nov. 1, 2013, and is the one that I will discuss in more detail here.
The $66.56 per share special dividend consists of a cash dividend of $45.86 per share and the remaining $20.7 per share dividend, which could take several forms, including:
- Further cash proceeds from asset disposition, or
- Dividend notes payable (face value = $20.7 per share, coupon = 5% annually, mature in two years), or
- Interests in a limited liability company (LLC), to which the remaining assets of the company will be transferred.
So, the second portion of the dividend could take three forms. Let's look more closely at the dividend note scenario, which I believe is the most likely to happen. As a matter of fact, in the pro forma liquidation financials the company provided in its filings with the SEC the dividend note is discussed in much detail.
It is logical to get the fair value of GYRO's common stock by adding the above two portions of the dividend, and whatever the remaining proceeds to be distributed from the post-dividend LLC. Usually, the valuation involves the daunting task of evaluating real estate property values. However, in this case, all the evaluations can be easily found by turning to page 55 of the above-linked document.
Let's now value the common stock as A+B+C, where A is the $45.86 cash dividend, B is the value of the dividend note, and C is the value of the remaining proceeds. For the matter of simplicity, we will ignore any discounting of future money; any reader with further interest is advised to calculate the present value of the above values assuming appropriate interest rates.
The dividend note can be seen as a form of corporate bond collateralized by the real assets. The principal value of the note is $20.7 per share per $100 par value. The note is callable, has a 5% coupon payable semiannually, and matures in two years. As a comparison, a AA-rated non-callable General Electric (GE) corporate bond with a 5% coupon and January 2016 expiration is traded at $110.98 at the time of this writing. A comparable callable bond is not available, but will be obviously less valuable. Therefore, we can value portion B at most at 110.98/100*$20.7 = $22.97.
The value of C can be found by looking at page 55 of the proxy document mentioned above. It is estimated to be anywhere from $0.94 to $6.20. Without more accurate knowledge of the value of the real property, let's simply take the average and arrive at $3.57.
So, the fair value of the shares is shown by using A+B+C = $72.4. But remember that, first, we assumed a non-callable bond in evaluating B and, second, the remaining funds will be distributed in two years -- not available immediately. So this value of $72.4 is on the optimistic side.
With the stock recently trading around $75-$76, the stock is apparently overvalued. Investors paying such premiums are effectively betting that future liquidation proceeds from remaining assets will exceed the company's own estimate by far. Considering that the medical office part of the commercial real estate market is still depressed, and that the company wasn't able to sell its assets for the past year, such optimism is likely undue.