Gyrodyne, LLC (GYRO)

[Enterprising Investor]

Investing With An Edge: Gyrodyne (2/16/16)

Summary

•Gyrodyne is a small company with an interesting history. It is liquidating.

•Investors at today's prices should do well in the liquidation, but there are a few upside possibilities that could result in them doing very well.

•Gyrodyne is small and liquidity is limited. Limit orders and patience are best for these types of situations.

This is the latest in my "Investing with an Edge" series. For more on the series, please see here.

Company: Gyrodyne (NASDAQ:GYRO). Reasons for opportunity: liquidation, small size

Note: GYRO's market cap is small at ~$40m, and shares are rather illiquid with only ~5k ($130k) trading hands per day and often with a wide bid-ask. Illiquidity and wide spreads generally call for limit orders.

Gyrodyne is a company with an interesting history. In 2005, SUNY Stony Brook used eminent domain to take 245.5 acres from GYRO for $26.3m. Gyrodyne argued that this payment was not enough and eventually won a huge trial award against the state of New York. You can read a bit more background on the company and trial history here. Soon, none of that history will matter because GYRO is in the process of liquidating and has already paid most of that cash to its shareholders.

This series has covered liquidations before because they tend to be overlooked opportunities given the lack of a natural buying constituency and their returns are relatively uncorrelated to the market. GYRO is no different: shares currently trade at <$27 per share, and the company's most recent estimate of liquidation value is $31.24/share (see p. 35 of its most recent 10-Q).

There could actually be upside to that $31.24 number. The upside could come from two places: lower expenses and higher sales proceeds.

The first upside source is from lower expenses than estimated: liquidations tend to slightly overestimate the costs it will require to complete a liquidation. It's actually in management's best interest to do so. In general, management is paid a bonus for liquidating more than they originally estimate, so slightly overestimating costs to liquidate can result in better returns from them when they beat their cost target. In addition, liquidation management teams are generally praised if they come up with a better liquidation result than they estimated and sued if the results are worse, so it's normally better to be conservative on expenses.

The second source of upside could come from selling assets at a better than anticipated result. All of the same incentives mentioned in the cost piece apply here as well: management is better served being conservative and beating estimates than it is being aggressive in their estimates. We already have some indication that their initial estimates might be conservative: page 39 of their 10-Q states they entered into a sale agreement for one of their remaining properties after the quarter closed and the "sales price for the Properties exceed the December 2014 pro-rata appraised value of the buildings in the Port Jefferson Professional Park." In addition, the company has valued two of its properties (Flowerfield and Cortlandt Manor) at their current liquidation value, but the company is considering ways to increase their value by realizing their "highest and best" use. Flowerfield is a 68 acre site that is currently zoned for light industry and mostly undeveloped: if the company is successful in getting it rezoned or otherwise getting development, it could significantly increase the site's value and result in additional upside to shareholders.

While lower expenses or higher sales prices would be nice, investors don't really need any of that to profit from a purchase at today's price. If the company's marks prove accurate and it can liquidate by its stated timeline of year-end 2016, investors would be looking at a solid return with almost no correlation to the market.

Is it possible the process drags out later than 2016? Of course, but if that were to happen, it's likely because the company has found a way to increase one of its properties' value and shareholders are likely to end up doing better than if the company had been liquidated faster.

There are, of course, risks here. Namely, the liquidation could be more costly than estimated, the properties could go for less than estimated, or the liquidation could simply take significantly longer than originally estimated. With 20% of the company's assets already in cash and marketable securities and more coming soon as Port Jefferson is sold, investors at today's prices are well rewarded for taking those risks.

Additional reading: GYRO liquidation proxy 7/1/14; Supplement to proxy 7/1/15 (see p. 19 for estimates of expenses to liquidate)

http://seekingalpha.com/article/3898196-investing-edge-gyrodyne