Regency Affiliates, Inc. (OTCPK:RAFI), through its subsidiaries, owns interest in previously quarried and stockpiled rock, at Groveland Mine in Dickinson County, Michigan. Regency holds 50% ownership in an on-site energy facility as well, supplying steam and electricity to a Kimberly-Clark (NYSE:KMB) tissue mill in Mobile, Alabama.
It also has 50% ownership of a 34.3 acre complex at Woodlawn, Maryland, which consists of a two-story office building and a connected six-story office tower (the buildings have a net rentable space of 717,000 square feet).
Regency Affiliates is controlled by Laurence S. Levy, who has had a successful investment career mostly pertaining to leveraged buyouts (his biography can be found here).
Upon taking control of Regency Affiliates in late 2002, Mr. Levy began divesting non-core assets from the company’s portfolio. He then helped to renegotiate the company’s lease with the Social Security Administration to ensure its occupancy of the company’s building until 2018 (upon completion of the terms of the mortgage, there will be a 10 million one time payment to extinguish the loan).
Regency Affiliates and its partners in the building complex were able to obtain a mortgage of 98 million dollars with an interest rate of 4.63%, which led to a distribution to Regency Affiliates against the building for 41 million dollars. This distribution allowed the company to pay off the majority of its debts, maintain cash on its balance sheet, and purchase a 50% interest in MESC Capital, along with DTE Energy (NYSE:DTE), which provides power to a Kimberly-Clark tissue mill in Mobile, Alabama.
Components of Regency Affiliates:
Iron Mountain Resources:
The company has declared its ownership of Iron Mountain Resources (a previously quarried stockpile of rock) to be worth nothing due to the fact that the company would not see any value from the sale of the rock unless it can be sold for greater than $25 million dollars (the amount of preferred stock the company must redeem if it decides to sell the rock), which it presently cannot.
Regency Power Corporation:
Acquired in April 2004, the company’s 50% interest was acquired for 4,300,145 dollars. The total purchase price of the facility was $33,600,000, with $28,500,000 funded by debt and the balance paid by DTE and Regency Affiliates. The company recognized income of $2,182,406 in 2005 and $854,325 in 2004 from this investment. It is clear that this investment is producing a high rate of return based on the amount of capital Regency has invested in the company (additional information can be found on page F-12 of the company’s 2005 Annual Report).
Social Security Building:
For the years ended December 31, 2005 and 2004 the Company's income from its equity investment in Security was $649,333 and $360,225, respectively. These funds, however, are principally committed to the amortization of the outstanding principal balance on Security's real estate mortgage. (Additional information can be found on page F-10 of the company’s 2005 Annual Report)
The thesis behind this investment is that for the patient investor, Regency Affiliates will increase in value over time. Upon completion of the current lease agreements in 2018, Regency could conceivably extract at least 80 million dollars in a new mortgage arrangement (5% increase on rents per year for 15 years, times the initial payout in 2003 that the company received, subtracted by a 5 million dollar debt payment in year 2018).
Assuming that MESC maintains its power generation for the Kimberly Clark facility (to which management gave a 70% chance in December 2005), the value of the partnership could be at least 67 million dollars (assuming a 5% increase in the value of the company due to its utility-like status and predictable cash flows), half of which is owned by the company, for a value of 33 million dollars. 10 million dollars in cash will be on the company’s balance sheet (assuming Mr. Levy cannot find a suitable place for it, which he most likely will). Added together, the total value of the company in 2018 should be in the vicinity of 120-125 million dollars or 30-32 a share (4 million shares are currently outstanding to include options).
This would equate to a 16% rate of return for 12 years if the stock was purchased today at its current market price.
There are numerous assumptions that are made with my valuation. Both MESC and the Social Security buildings could not renew their long term contracts. The increase in rents for the Social Security building and increase in the value of MESC could not increase by 5% per year. The company could de-register and no longer report publicly to shareholders. Despite these concerns, I believe there is merit to this investment idea for a few reasons:
1. Intelligent investors are attracted to the company - Raffles Associates, run by Paul H. O’Leary, owns a greater than 5% stake in the company, along with John Deysher, who runs the Pinnacle Value Fund, and holds a 2% stake in the company.
2. Laurence Levy has been very successful in the past finding businesses that provide a steady stream of cash and maximizing the return on those businesses. A few examples of Mr. Levy's investment acumen can be seen in his leveraged buyout of a tunnel in the Detroit area and current involvement in Rand Logistics (RAQC.OB), which is a Great Lakes shipping company that appears to be one of the more successful SPACs (Special Purpose Acquisition Company) that have gone public.
3. My analysis of the company could prove conservative. Mr. Levy still has 10 million dollars to work with, and the company’s major asset could be worth more than I estimated due the fact that the building is located in Maryland, which has had a strong real-estate market. Though the holding of Regency Affiliates requires a long term investing horizon, there is a potential for a high compounded return over the next 12-15 years.
Disclosure: I do not hold any shares in Regency Affiliates, but I do hold warrants in Rand Logistics, a company run by Mr. Levy.