- Recent land transactions points to 84% to 165% upside based on land value alone.
- Company has sizable below market leases and neighborhood is rapidly gentrifying.
- Easy to understand assets and potentially large pool of buyers.
J.W. Mays (NASDAQ:MAYS) represents a rare opportunity to buy into Downtown Brooklyn real estate in a gentrifying neighborhood at half of private market valuation. In the worst-case scenario, shareholders triple their money by 2021 as the existing leases expires and are replaced with market rate rents.
New York City/Downtown Brooklyn real estate is a bit different than the rest of the country. In the 90s and 2000s, Downtown Brooklyn was an undesirable neighborhood for retail and office spaces. J.W. Mays office tenants consist mainly of government entities such as Department of Motor Vehicles and Workforce etc. Some of the tenants are currently paying $1.19 to $7.63 per square foot with most leases expiring by 2021. Market rent for similar office is closer to $30 per sqft in the neighborhood. J.W. Mays' largest retail tenant is a store called Cookie's Department Store which pays under $4 million a year in rent and occupies roughly 127,000 sqft of space with Fulton Street frontage. This represents roughly $27 per sqft. Ground floor retail space in the Fulton Street Mall with Fulton Street frontage is closer to $300 per sqft. We believed that the blended average rent including basement and second floor space for the Cookie's Department Store space should be at least $100 per square foot by the time the lease expires in 2021. In addition to the Cookie's Department Store, J.W. Mays also owns a corner store leased to Payless and a corner store leased to Pretty Girl. Both stores have Fulton Street Frontage.
Here is a link to a detailed analysis on J.W. Mays put together by Rhizome Partners.
The presentation provides compelling analysis on why J.W. Mays is currently worth $89 per share and will be worth over $160 by 2021. Given that the neighborhood is undergoing dramatic transformation, it is likely that intrinsic value is even higher than $89 today when the presentation is made public. This analysis will focus on recent transactions.
1. The site of Juniors Cheese Cake was acquired by a real estate developer for $439 to 536 per buildable square foot on Feb 18th, 2014. In essence, the developer will knock down the building and build a retail/luxury building on the site. The total purchase price is $45-55 million with 102,500 total buildable sqft.
2. On June 3rd, 2014, JDS Development bought a 174,000 sqft site for $43.5 million. This equates to $250 per buildable sqft. This site does not have frontage on Fulton Street Mall.
3. On June 10th, 2014, Capstone Equities and Carlyle Group bought a 2 parcel development site for $35 million. Based on 175,000 buildable sqft, the purchase price equates to roughly $200 per buildable sqft.
The average price per buildable sqft of these three transactions equates to $312 per sqft. None of the transactions has frontage on Fulton Street hence losing out on potential to charge tenants $300 per sqft for retail space fronting Fulton Street.
J.W. Mays owns 2 buildings in the Fulton Street Mall. The company owns 90% of the 9 Bond Street Building which consist of 380,000 sqft plus another 84,000 of air rights. Adjusting for the 90% ownership, the owned buildable sqft would be roughly 417,000 sqft. 25 Elm Pl is 100% owned and has 201,000 sqft with 108,000 of air rights which totals 309,000 buildable sqft. The total owned buildable sqft would be 726,000. Applying the average $/sqft of $312 gets us to $226mm. Applying the low end gets us to $145mm. This equates to $112/share and $72/share respectively. Adding in the roughly $18 per share for assets owned outside of Brooklyn and adjusting for the $3/share in mortgages, we get to $130/share and $90/share respectively. We are likely conservative with our figures as we did not add a premium for J.W. Mays' Fulton Street Frontage.
Lloyd Shulman and family own 47% of the company. Lillian Goldman Marital Trust and Estate of Lillian Goldman own roughly 23% of the shares for decades. The Goldman family would like the asset to be monetized as they are in similar boats with minority holders. Lloyd Shulman is 71 years old. Succession and estate planning is certainly a factor here. Insiders have not openly stated that they are looking to sell or willing to sell. However, most company will deny that they are exploring strategic alternatives at all cost up until they file an 8-K announcing a sale transaction.
Unlike some obscure industrial companies in the Midwest, NYC real estate companies can be easily valued. The potential buyer pool is also much larger. Substantial due diligence can literally be conducted by taking the subway to Downtown Brooklyn and walking inside the buildings. As real estate continues to increase in value in the Fulton Street Mall, we believe that a public bid for the company may occur in the next 6-24 months. The discount between the current market price and the private market is too large to ignore and the company only has $6mm of debt which will allow a buyer to recapitalize the assets. We believe that an acquisition did not happen in the past because no one was aware that J.W. Mays had such significant asset holding in the Fulton Street Mall.
There are several REITs with sizable NYC holdings including SL Green (NYSE:SLG), Vornado (NYSE:VNO), Alexander's Inc (NYSE:ALX), Boston Properties (NYSE:BXP) that can offer an attractive bid with a mix of cash and stock. The REITs' ability to finance acquisitions with historically low cost of capital will enable them to make an offer that the Shulman cannot refuse. Even acquisitions at $130/share can be quite attractive for companies like Vornado as they can utilize their low cost of capital and more importantly their leasing abilities to attract top retail and office tenants. With the public REITs' shares trading at over 20X EV/EBITDA and greater than 10 P/S, acquiring J.W. Mays can generate significant upside due to gentrification and opportunity to re-tenant the spaces. In addition to the REITs, there are many real estate funds looking for acquisition. J.W. Mays is a rare opportunity for a fund to potentially buy a publicly traded company at a discount to private market value. It is not a stretch to say that between the public REITS, real estate private equity funds, real estate families in NYC, and foreign capital, there are literally hundreds of potential interested buyers with sufficient cash to buy out J.W. Mays. A public tender for the company could quickly escalate into a bidding war between many parties.
Will the Shulman family sell? I think that depends on the price. At over $100/share, this equates to $94 million to the Shulman family. For the last 3-4 decades, the family has endured the bankruptcy of their department stores and tough 80s, 90s and 2000s when nobody wanted to be in Downtown Brooklyn because it was literally that dangerous. I would guess that they would think long and hard about a $100/share bid.
At today's price of $48.00/share, an acquisition could represent 87% to 170% upside. If the company is not acquired by 2021, J.W. Mays should be worth $160 simply by leasing the expired square footage at market rate.
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