Newsletter Value Investor Insight carried an interview with Spencer Capital Management hedge fund manager Ken Shubin Stein in its February 28th edition. Since November 2000, Spencer Capital Management has earned a net 24.1% compounded annually, vs. an annual 2.1% loss for the S&P 500. Here's what he had to say about Resource America (REXI):
Tell us about one of your much lowerprofile ideas, Resource America [REXI].
KSS: This company that has been run for many years by the Cohen family, first Ed and now his son Jonathan. They start businesses, grow them and sell them – and have proven that creating shareholder value is embedded in their DNA.
The last five public entities the Cohens have spun off or IPO’d have annualized returns of 26%, 29%, 22%, 25% and 129% since going solo. They usually retain interests in these companies to the ongoing benefit of Resource America, while they build new businesses within it.
The investment thesis here is straightforward. The market cap is $300 million. There are $150 million in excess assets on the balance sheet – not needed to support the business – in the form of cash, investments and income-producing real estate.
They also own a small-equipment leasing company, which will do over $500 million in loan originations by the end of this year. They lease things like telephone systems and high-end copiers for small businesses. In an interesting twist, Resource America built and sold the same type of business with the exact same management team in the 1990s. It was eventually owned by Citigroup, which released the management from their non-competes and they went back to REXI and started the same business all over again.
The leasing company alone is worth $200-250 million if they sold it, which they could do easily. They’ve already had people approach them to buy it.
So you’re already seeing asset value above the current market price.
KSS: And that doesn’t include their asset management business, which I estimate is worth another $300 million. The company manages over $8 billion in a host of different types of funds – in things like private equity, real estate and collateralized debt obligations – that are sold through several channels, including independent financial planners and brokers. The business is growing nicely and should reach $10 billion in assets within two years.
The stock trades at $16.50 and you estimate the assets at more than twice that. Why the disconnect?
KSS: I think there are a few things. First, the businesses are a bit complicated. Some of the funds invest in pretty unusual stuff. One makes leveraged investments in savings and loans through securities called trust preferreds. To value those, you have to understand some arcane aspects of S&L regulation and also understand what trust preferreds are.
In addition, the company is obscure and nobody follows it. On the last earnings call there were two people, Leon Cooperman [of Omega Advisors] and me.
There are also related-party transactions with the Cohens that make some people uncomfortable. We’ve put hundreds of hours into analyzing the data and we see nothing but a long and distinguished history of shareholder focus and value creation on their part.
This is just tremendously undervalued. It’s an asset play you could break up and sell for a lot more than the market value. You also have great management, which provides call options on their continuing ability to create value and start new businesses we don’t even know about yet.