Investors in Wilshire Enterprises (WOC) had to suffer through another painful quarter of losses. While commercial real estate markets remain strong, apartment rents continue to increase in most markets and the largest ever buyout of a multifamily REIT, Tishman Speyer’s and Lehman Brothers’ (LEH) purchase of Archstone-Smith, closed in early October, Wilshire’s losses continue to depress its stock price.
In the meantime, shareholders are waiting for a buyout that just doesn’t seem to happen, despite the announcement, with great fanfare, that “Initial Bids Are In” a good five months ago.
Wilshire started off in 1951 as an oil and gas exploration and development company and ran real estate operations as a sideline business. In 2003, Wilshire began divesting its oil and gas business and has since operated as a real estate firm only. The timing of that sale was unfortunate and was followed by a steep increase in the price of oil and all oil producing properties.
Management had explored the sale of both the whole firm and the oil and gas business separately. A real estate fund run by Oaktree Capital Management circled Wilshire for a while and executed a confidentiality agreement but bailed out after a few months without ever submitting a bid. Following the sale of the oil and gas business, Chairman and CEO Sherry Wilzig Izak described the strategy for the use of the proceeds:
“We expect that these capital resources will enable us to pursue increased value for our real estate business, through improvements of our existing properties as well as the potential acquisition of new income generating assets.”
Unfortunately, the value enhancement strategy has not quite worked out and Wilshire realizes losses. The properties generate net operating income - the real estate equivalent of EBITDA - of almost a million dollars in the last quarter. However, with corporate overhead running at $900,000, not much is left for shareholders. After depreciation, the company is generating a loss. The small size of the firm is one explanation for the imbalance between revenue and overhead. Another clue lies in the $170,000 “stock based compensation,” which strikes us as a little high for a company whose stock price has been on a downtrend for a year.
Wilshire has been for sale since 2003, and shareholders are getting antsy over the glacial speed of the sales process which appears to be designed more to keep management in place than to generate a sale of the company promptly. In late 2005, Mercury Real Estate Advisors, then a 14.6% owner, began sending letters to management asking to speed up the sales process. Wilshire’s poison pill prevented Mercury from acquiring a larger stake. Mercury identified Sherry Wilzig Izak as the principal obstacle to the company’s profitability:
“Ms. Izak was paid […] a total 2004 compensation package of $704,800! This compensation package exceeds the profit for the Company for the entire year. Moreover, we understand that Ms. Izak does not appear in the office on a regular, daily basis and it is not clear to us that she performs any productive or useful function on behalf of the Company and its shareholders. While it is perfectly clear that a majority of the Board of Directors (Messrs. Donnenberg, age 82, Schmertz, age 79 and Wachtel, age 80) are cronies of her late father, this exorbitant payment is shameful under any circumstances and must end immediately. These conflicts of interest are too blatantly obvious to ignore.”
A few months later, Mercury made an unsollicited offer to buy WOC for $8.50/share. Management ignored the proposal and simply refused to talk to Mercury. Instead, it pulled a stunt to appease irate shareholders temporarily that allowed management to maintain the status quo for a little longer. It announced a special $3/share cash dividend just before that year’s shareholder meeting and conveniently eliminated a vacancy by reducing the number of board members to six. It also extended its poison pill (shareholder rights plan) for another year. Mercury sold its stake subsequently.
While Mercury was selling, another activist investor entered the picture in August 2006. Full Value Partners is an affiliate of Philip Goldstein’s appropriately-named Bulldog Investors, which became a household name when Goldstein sued the SEC over a rule forcing hedge fund advisors to register. His victory in that lawsuit was a major embarrassment to the SEC. Full Value Partners hold 14.9% (their ability to acquire a larger stake is limited by Wilshire’s poison pill’s 15% threshold) and nominated two members to the board. Wilshire has a staggered board, so that only two directors are elected each year - Itzig herself will not be up for reelection until 2009. The SEC could not beat Bulldog, so Wilshire needed to spend $200,000 of shareholder funds on the proxy fight. In the end, it won only by pulling off a stunt reminiscent of its 2005 defense against Mercury: it announced that “Initial Bids Are In” and that the sale of Wilshire was imminent, so that no change to the board was needed. Shareholders believed management at their own peril. Despite management’s claim that it won “by substantial majorities,” the vast majority of outside shareholders voted with the dissidents. Management won only because Izak’s family controls 21% of the shares.
Five months have passed and no progress has been made on the alleged bids, so we can assume safely that management was never serious about selling the company. The valuation of multifamily properties is holding up well despite the current credit crunch and widening of CMBS spreads. But the longer management waits, the more likely a pullback in commercial real estate becomes. Continued procrastination will alienate shareholders even further. We subscribe to the view that you can fool many shareholders many times, but not all shareholders all the time. Unless there is some progress, we expect the vote at the next meeting to go against management and for Bulldog/Full Value Partners. At which point the Itzak discount will finally turn into a takeover premium.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund [PAEDX], which owns shares of Wilshire Enterprises.