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Owens Realty Mortgage, Inc. (ORM): REIT Making the Right Moves to Grow Loan Portfolio, Cash Flow, Dividends
Owens Realty Mortgage (NYSE MKT: ORM) was reorganized in mid-2013 into a publicly-traded real estate investment trust (REIT), primarily to take advantage of federal income tax benefits, via an absorption merger of California-based LP, Owens Mortgage Investment Fund, which had a successful track record prior to the merger stretching back to 1983. Furthermore, the company is managed by specialized commercial real estate management firm, Owens Financial Group, Inc. (Walnut Creek, CA), which has been a key player in the originated, serviced and managed alternative commercial real estate investment market, running a highly successful lending platform focused on the short-term, $1M to $10M range for over six decades. ORM has quickly become one of the leading providers of flexible, rapid and custom-tailored short-term acquisition and transition capital to the commercial real estate investment space, steadily building up a reputation for integrity and amassing a sizeable portfolio of real estate, as well as loans.
ORM has a solid, results-oriented investment strategy focused on primarily first deed position origination, investment and management of $500k to $20M, one to three-year term loans in the small balance commercial (SBC) and commercial real estate (CRE) markets. By sticking to healthy, sub-conforming level, 60% to 75% loan-to-value ratios and typically interest-only amortizations, ORM has assembled an impressive $63M loan portfolio, as well as some 34 properties, with a Q3 2014 (September 30) reported book value of around $156M ($38M commercial, $48M residential, and $70M land). The company originated seven new loans for the quarter (one re-write) totaling $6.975M and pulled down $4.491M in full or partial payoffs on five loans.
A constant emphasis on growing the size of their loan portfolio, and turning over developed assets in order to unlock embedded net asset value gains, has allowed ORM to deliver consistently attractive, risk-adjusted yield to stockholders. The company’s Q3 2014 financials tell the story quite well, with net income attributable to common stockholders up 11.8% YoY, to over $783k ($0.07 per diluted common share), a declared quarterly dividend of $0.05 per share of common stock, and funds from operations (supplemental non-GAAP) at around $1.39M ($0.13 per diluted common share). Some of the core performance drivers last quarter were interest income on loans of $649k, due largely to a 23% uptick in the average balance of performing loans and improved interest income collected on delinquent or impaired loans of around $350k, as well as a similar increase in rental and other income from real estate properties, amounting to roughly $375k.
Operationally speaking, the company made some substantial headway in maximizing the value of their real estate portfolio during the quarter, completing essentially all of the retail portion of the 11.5-acre Chateau at Lake Tahoe resort project ($52M book value) and securing triple net lease agreements for 75% of the space, as well as initiating potential leases for the remainder. Similar operational progress was achieved in Miami, at the Treasures On The Bay complex ($34M book value) on Treasure Island in Biscayne Bay (between Miami Beach and downtown Miami), subsequent to a $21.3M construction loan secured in June 2014 from Bank of the Ozarks via ORM subsidiary, TOTB Miami, LLC (80.74% owned by ORM and 19.26% owned by Owens Financial Group). A similar $13M loan was executed in November to broaden the company’s lending base, generating additional income and cash flow, secured by a first priority lien on Pointe Tower (condos and related parcel) at the southern end of Treasure Island.
In concert with the Pointe Tower-secured loan, ORM organized a $14.5M, six-year term loan with Rabobank executed in late December 2014, amassing substantial firing power in order to meet rising market demand in the SBC and CRE markets. The ability of ORM’s seasoned executive team to capture market value for the company’s shareholders through superb transactions, many of which are achieved via direct origination through long-standing relationships, offers investors an excellent way to achieve high yields at low risk via a relatively liquid real estate investment methodology. The teeming demand cropping up in commercial real estate, where CRE fundamentals continue to show signs of improvement, coupled with the limited ability or willingness of banks to lend due to the regulatory environment and other factors, has generated a perfected storm for companies like ORM.
High demand for transitional capital and ORM’s strong, growing brand recognition in the small balance bridge market, combined with their direct origination and servicing, as well as creative/flexible investment structuring, have enabled the company to take advantage of the increasingly abundant opportunities in the space, delivering timely funding in markets where speed has become essential. ORM’s brand traction has been steadily improving since inception, increasing the company’s visibility to market-side and real estate investors with milestones like the NYSE MKT listing in July of 2013 and subsequent inclusions into the Russell 2000® (which essentially measures performance of small-cap U.S. equities), Russell 3000® and Russell Global indexes in June of 2014, along with automatic inclusion into the associated growth and value style indexes.
The SBC market ($500k to $10M) is still largely fragmented (top 15 lenders only held 23% of the space during 2013) and underserved, and there is also a persistent funding gap in the space, which stretches right up into the middle-market ($10M to $50M). These underlying dynamics have created a target-rich environment in the SBC market for ORM that promises higher yields and lower risk compared to the middle to large market CRE space. Considerable, mounting demand from credit-worthy sponsors in the SBC space, where loan originations hit $175B in 2013 alone, as well as the fact that overall SBC market characteristics are analogous to broader CRE fundamentals, offers Owens Realty Mortgage massive expansion opportunities, and the company’s management is clearly moving to aggressively pursue loan portfolio expansion accordingly.
The company is reportedly targeting sale of a significant portion of their real estate holdings starting this year and already announced the divestment of their 23.14-acre grocery-anchored community shopping center ($11.5M book value) near the University of Northern Colorado back in November of 2014 for $21M, to Alberta Development Partners, LLC. Such property sale proceeds will be directly applied to further expansion of ORM’s loan production and overall loan portfolio, in order to continue to increase cash flow and improve balance sheet ratios, as the company puts forth a concerted effort to stand by their commitment to increasing shareholder dividends.
Get a closer look at Owens Realty Mortgage by visiting www.OwensMortgage.com
