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.
Author is long Origen Financial