A reader recently informed me of REIT Redux's FixPMC initiative which is related to my recent write up of PMC Commercial Trust. Their rumblings for change date back to 2009. They have remained muted in the recent months. Their plan essentially boils down to calls for PMC to either sell itself or liquidate. At current market prices, the company is selling for a lot less than what I suspect either of those ultimate values will be.
It is always difficult to invest in a situation where management is so intent on ignoring their shareholder's. One of the problems is that there are some family members on the board. 3.3% owner Martha Greenberg is the sister of former CEO and 2% owner Lance Rosemore. Neither play an active role in the company anymore, but collect decent income from ownership as well as their duties as directors. Martha never played a role and is a doctor, a completely irrelevant background for the responsibilities of a board member. This isn't exactly foul play, because they do have an ownership stake in the company and are as deserving of representation as anyone else. Lance can argue he is an owner and has a lot of familiarity with the company. Martha's presence on the board though is definitely obnoxious and irresposible.
In the past 6 months or so since I've put more effort into my investing and casting a wider net in my research on companies, I've really been shocked at the total farce and racket that is corporate directorship. Yes, you hear and read it about it plenty, but without looking at specific examples, its difficult to really understand just how abusive a lot of these arrangements are.
The Fix PMC initiative is simultaneously a drag on the stock and a possible catalyst. It is a drag because their attempts at change ultimately failed. It is a possible catalyst though if they renew their efforts for change in the company.
The initiative points out these problems with PMC:
- Increasing overhead as a percentage of revenue
- A broken business model
- Shrinking loan portfolio over the years
- Deteriorating competitive position
Overall I agree with Reit Redux that the company has seen better days and should be engaged in some type of value unlocking action. At the same time, I'd question the intellectual honesty of the presentation. Such instances, in my opinion, are bothersome because they undermine what is a good idea by taking it in the wrong direction. At the same time, it is necessary to go to an extreme to convince people of things.
In reference to criticizing the compeitive position, RR says:
Competitive conditions are deteriorating – CIT recently announced an effort to put $500 million to work in the SBA loan business and will waive 7(a) application fees in order to get this volume done. On a sidenote, CIT has had a small cap REIT ($150 million in market cap or about double PCC’s current market cap) specializing in the healthcare finance for a number of years. After their strategic alternatives process, Care Investment Trust’s board announced “our board of directors’ belief that the liquidating distributions that we will make … would likely result in a greater return on investment to our stockholders relative to other strategic alternatives.”
PMC focuses almost exclusively on budget motels, so I do not know if the competition is really heating up. Also, the healthcare sector has an easier time finding willing lenders because it has more consistent revenues than a motel would. There is more competition in healthcare finance overall. The CIT effort to put $500m to work in SBA 7a loans is also misleading, because in 2010, $12.6bn in SBA 7a program loans were made. The CIT statistic is a lot less damning in this context and seems to only provide a loose tie in for the liquidation of a small cap REIT, which is the path the activists would like PMC to follow.
Increasing overhead as a percentage of revenue is something to remain cautious of, but to always keep in context. Revenues are down a lot over the past several years due to decreasing interest spreads. While it would be ideal for the cost structure to be 100% variable, that is not the case. Due to the effect of interest rates, it also means that overhead isn't always reflective of productivity. At the same time, the decreasing size of the loan portfolio indicates that there is less demand for their services, so fewer loan officers and employees would be a reasonable expectation.
The shrinking loan portfolio, and lack of new loans being written, is not an automatically disturbing trend. The motel industry is not going gangbusters with the economy in its current state, and now the increasing price of oil, which will affect travel. In one respect this is comforting because the portfolio is seasoned. It has an established payment history and borrowers have an increasing amount of equity. From what I understand, this makes selling the loans easier, which would bode well for the company going into liquidation or runoff. I question the headline risk in such a strategy though, because financiers looking to break up a company and put people out of work and decrease lending is a difficult sell.
The most recent filings show very little new business being written, which should really become apparent as the boost from the SBA 7a program disappears. I certainly don't expect the motel industry to rebound and grow again within the next year. This should really begin to weigh on the company. It is possible that Reit Redux will reemerge in its attempts to bring change at PMC. With few new loans being written, cash should start to build on the balance sheet as old loans are repaid. I think the company is cheap even barring this catalyst, so I remain comfortable owning it, but Reit Redux might be able to unlock the value at a faster rate.
Disclosure: Long PCC
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