The real estate downturn in the US has resulted in low land values in many parts of the country. But in some cases, prices are perhaps too low. Consider Income Opportunity Realty Investors (IOT), a public company that invests in real-estate.
The company has a book value of $72 million (comprised mostly of land and notes receivable) and yet it trades for between $11 million and $18 million! (The reason for the big spread there is that the stock is rather volatile!) The land is composed of 203 acres of undeveloped land in Farmer’s Branch, Texas, carried at just under $30 million. It is about a 20 minute drive from downtown Dallas, and is situated 15 minutes from the Dallas/Fort Worth International Airport. The land was acquired in May of 2006, so it may be overvalued; but is it worth only one sixth of its carrying value?
The company’s notes receivable are mostly the result of recent land/building sales. The main risk with the notes is that they are due from related and affiliated parties. At least one of these parties has a very high debt to equity ratio, and happens to be the parent company of IOT, owning 80%+ of the company!
On that subject, a potential risk to the company is its ownership/management structure. The parent company will likely do what it needs to do to benefit itself, so IOT’s actions may not always benefit its minority shareholders. There appear to be conflicts of interest on the board of directors as well, as the company appears to be governed by employees of the company’s advisor, which is rarely a good thing for shareholders.
IOT’s stock price has absolutely tanked in the last few months, however, offering the company’s shares on the cheap. When TCI acquired a large number of shares of IOT in July of 2009, it noted that “The Company’s fair valuation of IOT assets and liabilities at the acquisition date approximated IOT’s book value.” Since that time, IOT stock is down 60% and its book value hasn’t changed much. In the meantime, the company continues to break even, mostly by collecting interest on the notes outstanding. (This amount is then offset against interest payments and operating expenses.)
Many investors like to identify potential catalysts before investing in a stock. There don’t appear to be any catalysts on the horizon here, however. That land could sit undeveloped for a long time, and most of the notes don’t mature until 2027! However, it appears clear that the company is trading at a massive discount to its assets, so value investors with long-term outlooks who require no catalyst may find this stock worthy of owning.
Disclosure: Author has a long position in shares of IOT
