While the process of selling Wilshire Enterprises (WOC) continues to drag on into its seventh month after the announcement that “initial bids are in,” WOC’s shares have fallen to a level where they trade almost at the level of cash on WOC’s book. We have pointed previously to the disastrous record of its management team, and the current trading levels are only increasing our enthusiasm for the deep value opportunity in WOC.
According to its latest 10-Q, WOC has $15.5 million in cash and marketable securities and net 7.9 million shares outstanding, giving it a per shares cash balance of $1.96. With WOC trading at $2.85, its real estate is valued at only 89 cents/share, or $7 million. However, the net operating income [NOI] of that real estate was $3.6 million in 2006 and, at $2.7 million for the first nine months of 2007, is on track to reach the same level this year.
At a cap rate, the 7% metric used in commercial real estate valuation, the real estate could be worth $51 million gross, or $22 million net of debt. It is clear that the properties’ NOI potential has not been realized, because operating expenses have been growing faster than rental income in 2005, 2006 and 2007. Therefore, the sales price of the real estate should be higher than NOI and cap rates imply.
As we mentioned before, what separates shareholders from the true value of their investment is the enormous overhead, that more than eats up all of the income from the real estate. A change in management, or better yet a sale, is the only way to unlock that value. It is a mystery to us why the sales process takes so long. The $22 billion sale of ArchstoneSmith took only five months to complete, but after seven months WOC’s management has nothing to show on the sale of this $22 million company.
We can’t help the feeling that management may have more sinister intentions. CEO Sherry Wilzig Izak owns 1.6 million shares. If she were to buy out the public shareholders at $3/share, it would cost her $19 million. If she were to wait for the share price to drop even further, she would be able to use the cash on WOC’s balance sheet to pay for all of the publicly held shares at a price of $2.50. Maintaining the status quo would her best strategy if she wanted to buy the whole company on the cheap. In light of the loss of confidence by the market in WOC, as evidenced by the current trading price, this outcome has a non-negligible risk.
Nevertheless, we feel that Wilshire Enterprises represents compelling value at the current price level. Phillip Goldstein’s and Andrew Dakos’ Bulldog/Full Value Partners is likely to continue its proxy contest at the next shareholder meeting this summer. The deadline for inclusion of shareholder proposals in the company’s proxy is February 17, and we would not be surprised if a few disgruntled shareholders will submit resolutions to sell the company to the highest bidder, pay a special dividend or declassify the board. Due to the poor performance of the stock, Full Value Partners has a much better chance to get sufficient votes this time. This will change the board and realize the intrinsic value of the Wilshire Enterprises.
Disclosure: Thomas Kirchner manages the Pennsylvania Avenue Event-Driven Fund [PAEDX], which holds shares of Wilshire Enterprises.