Origen Financial: a liquidation play in the final innings

I first wrote about Origen Financial in 2012 when the company was already in the process of liquidating itself. At the time figuring out its intrinsic value was no easy job since it owned equity interests in a couple of complicated asset-backed securities trusts. This is no longer the case though since the company has sold substantially all of its assets and it is now a cash box.

Origen Financial was initially planning to simply distribute the proceeds of the sale to its stockholders and cease to exists, but it announced an alternative plan last month that would allow it to continue to operate as a mortgage REIT while current shareholders would be given the option to cash out at Origen’s current net cash per share value using a tender offer. Origen is currently trading at $1.64/share while it has approximately $1.82/share in cash. If the tender offer is successfully completed a return of >10% is possible in a couple of months.

If the tender offer isn’t completed the downside is probably minimal. In that case Origen would continue with its original plan to liquidate and still be able to return the majority of its current net cash position to shareholders. The potential return is lower because in this scenario the liquidation will probably take more time and the company would incur more costs. But I think that those costs should be less than $4.5 million: the current spread between Origen’s market cap and its net cash position. In the proxy statement that was mailed to shareholders to vote on the proposal to sell all of Origen’s assets and to dissolve the company they estimated a $1.69/share liquidation distribution. In the press release related to the alternative proposal Origen notes that due to a 3-month delay in the sale of their assets a liquidation distribution would be lower than the original anticipated amount.

Had Origen proceeded with dissolution and distributions of its net cash, the estimated per share amount hat would be distributed is less than the amount estimated in Origen’s proxy materials for the special meeting held in October. The reason for this lower per share amount primarily is attributable to additional operating expenses and transaction expenses resulting from an unavoidable three month delay in completing the GoldenTre transaction. Current members of Origen’s Board of Directors have indicated that they will elect o continue as post-closing Origen stockholders in respect of a substantial portion of the Origen shares they own.

With the stock selling at $1.64 we do have some margin for additional costs since the 5 cents/share translate to $1 million in cash that can be ‘wasted’ before we start to lose money. Only a letter of intent has been signed between MRECS – the party behind the alternative transaction – and Origen, but given the simplicity of the deal I don’t see a lot of risk of it falling apart. In the latest press release Origen estimates that the definitive transaction documents will be signed mid-February, so that could be any day now:

The MRECS transaction is subject to the further negotiation and execution of definitve
transaction documents, MRECS’s satisfactory completion of its due dilgence on Origen, and
other customary closing conditons. Origen expects to deliver tender ofer materials to its
stockholders after the execution of definitve transaction documents, which are anticipated to be completed before mid-February 2015. More detailed information on the tender price and a comparison to management’s estimated distributions upon disolution, the MRECS transaction and the post-closing busines plan for Origen wil be included in the tender ofer materials.

So I think that the downside is limited at roughly zero and that there is at the same time a high probability that the alternative transaction will be completed, resulting in a ~10% gain. Sounds like a good bet to me, and a decent spot to park some idle cash.

Disclosure

Author is long Origen Financial

23 thoughts on “Origen Financial: a liquidation play in the final innings

  1. pietje

    Why is the net cash / share $1.82 but the liquidation value only $1.69? Are they really expecting to burn ~$3.4m liquidating the company in a few months? If so, what % of this number are operating costs? And if the tender offer goes through, shouldn’t we assume the net cash / share will drop to somewhere less than $1.82 due to operating expenses and legal expenses connected to the MRECS transaction?

    Reply
    1. Alpha Vulture Post author

      In the proxy statement that was filed in connection with the sale of their assets they estimated that they would have ~$3.3 million/year in operating expenses, but that was while managing the ABS trusts. Presumably operating expenses are now lower since the company is now only a cash shell.

      I’m not totally sure where they need the $3.4 million for, but I think it is partly for reserves that need to be kept in order to be able to satisfy, for example, unknown creditors. In the proxy statement they specify all actions that they need to take to dissolve the company, but they don’t specify how costly they are.

      And yes, presumably Origen will burn some cash between now and the start of the tender offer. But in the latest PR they specifically state that it will be for an amount equal to the current net cash per share.

      Reply
  2. Brandon

    I was thinking it means the tender offer which gives shareholders the net cash value is greater than current liquidation value, which is lower than the number in the proxy number due to delay. What is your thought?

    Reply
    1. Alpha Vulture Post author

      I don’t think they are saying this. They only state that the deal offers more value than the current liquidation value, and that the current liquidation value is lower than the previous estimated liquidation value.

      Reply
      1. Brandon

        Sorry I wasn’t clear. Yes so basically we are getting an amount that is higher than 1.69-expenses from delay per share. By the way, is the $1.82 per share just cash or net cash?

        Reply
          1. Matt

            Material liabilities were all associated with the assets, so I’m guessing current liabilities are pretty small – accrued pay, unpaid bills, etc. I don’t know for sure, but the tender shouldn’t be too much lower than $1.82.

  3. Michael P

    Are you using leverage to play this situation? If so, how much leverage are you taking?
    What do you think is the probability of the tender offer going through?

    Reply
  4. Doug

    What is in it for the Mack Realty to help out Origen? I ask, because my guess is a high percentage of the owners of a stock already committed to a liquidation are just going to take the tender and cash out.

    I think the best case scenario is that the shell of the company is valuable enough that MRECs doesn’t really care how many people cash out. If so, it seems like the alignment of interests would be strong and the probability of the deal going through would be high.

    Reply
    1. Alpha Vulture Post author

      I don’t think they will care how many people will cash out. They intent to raise something between $200 and $400 million in new equity while the current market cap of Origen is $44 million. Think they are mostly interested in the shell.

      Reply
      1. Bob

        Would Mack Real Estate be able to keep the NOL carryforward with the proposed structure? I realize that a NOL for a REIT may seem useless, but it could give them the flexibility to skip paying out a dividend or two to benefit the shareholders? Not sure that is worth anything…shame to see a good NOL go to waste

        Reply
        1. Alpha Vulture Post author

          I don’t think there are NOLs that will survive since the proposed transaction will entail a massive change of ownership (I doubt that they are valuable in a REIT anyway).

          Reply
  5. Mark

    The tender offer documents have not been released yet even though it is Feb 20. Do you think the tender offer is still likely to go through?

    Reply
  6. Jag

    Page 15 of the proxy materials indicates that company intends to reserve at least $1,925,000 towards costs in connection with the sale transaction ($0.07 per share). This amount appears to be in addition to ongoing operating cost of $3.3M on an annualized basis. Factoring in these additional committed expenses seems to explain why the co. projected a liquidation distribution of only $1.69 versus $1.82 of cash on hand.

    Please let me know what I am missing.

    Reply
    1. Alpha Vulture Post author

      Since the sale transaction has been closed I think those costs have already been incurred and don’t need to be deducted from the latest cash figure. The problem I think is that there are probably some residual liabilities on the balance sheet that need to be paid. The $1.82 cash on hand is not a net cash figure.

      Reply
  7. Matt Jones

    I just got around to reading about this. I was hoping it would be a simple and obvious one but I’m not so sure

    They said the amount would have been lower than the amount specified in the meeting but for the MRECS deal. in the filing about the meeting there is no amt given. Do they mean the 1.69? if so why didn’t they say so in the filing about the meeting?

    It seems there’s really no way to know how much this will be for. They had some undisclosed amount at the meeting, but it was going to be lower than that unkown amount by some other unknown amount, which would result in a new unknown amount, but now it is going to be higher than the new unknown amount. So I have an equation with three variables and three unkowns here. Even if I use the 1.69 figure it’s too many unknowns

    going about it another way, they say it will be for net cash/shr but it’s hard to estimate what that will be. we know the cash amt, but the last balance sheet is almost a year old so trying to predict the liabilities seems to be a bit hard

    thoughts?

    Reply
  8. Rohit

    Looks like the deal with MRECS fell through. http://finance.yahoo.com/news/origen-financial-announces-termination-letter-152000121.html

    They will now make a liquidating distribution of $1.5 / share in April.

    Origen also will make an initial distribution on April 23, 2015 of $1.50 per share to its stockholders of record as of April 13, 2015, retaining approximately $6.2 million for expected dissolution and wind down costs and expenses and contingencies

    I think at the current price of $1.55, this is now a decent risk/reward situation. What do you think?

    Reply
    1. Alpha Vulture Post author

      Probably. You basically need them to pay out $1 million of the $6.2 million reserve to break even. Seems to me an excessively large number to liquidate the company, but you never know…

      Reply
      1. Billy James

        Would it make some sense to wait until the distribution is paid out and the share price drops before doing anything? I agree with you on the reserve being too big, and this could be a good place to make a small bet.

        Reply
  9. Wolverine

    What? It sold but only gave us $1.50, when the price has been around $1.69 for the past several months. Either they’re going to give us a dividend-after-the-fact to make up the difference, or they’re looking for lawsuits for breech of trust.

    Reply

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