Tuesday, March 15, 2011

Syms Corp: The Off Priced Stock of an Off Price Retailer.

A company that I have been following for quite sometime, is a small off price clothing retailer called Syms Corp (SYMS). My friend John, over at Shadow Stock had originally written the company up. Their retail operations operate under under the Syms and Filene's Basement names, additionally, they have a very significant real estate portfolio. The company was founded by the late Sy Syms, and was originally taken public in 1983 at 28x earnings. I believe it to be one of the cheaper securities that I have seen; in fact, it is presently priced relatively close to what it was 2 years ago when the bottom of the markets fell out, despite being worth significantly more today. This is a long post, but I think it will be well worth your time.

Activists At The Gate:

The company went through some tumultuous times with a vocal and large minority shareholder called the Esopus Creek Advisors. Here is their original 13D from 2008. One of the things that they had called for, was a nationally recognized real estate firm to come in and appraise all of the real estate holdings of the company... For reasons that I will address, I believe that this should be done, with the results being made public, so that investors can get a good idea of how to properly value the company.

Marcy Syms, the CEO of the company responded to the activists with a scathing and rather witty letter which you can read here.

As a result of the battle, the company was even covered by footnoted* despite the small size of the company. I highly suggest that you scroll down and look at the comments section of the footnoted* write up, as the activists left some interesting thoughts.

Real Estate:

Here is the list of properties that they own or lease, according to their last 10K. I took the liberty of linking to the owned locations on Google Maps, as well as giving you some info on the assessed/estimated market values of the properties per the various tax roles for the governments in which the properties are located. I either linked to the web page where I found the assessment, linked to a screen shot in Picasa (when I wasn't sure the site was set up to give a reliable web address), or had to call the government body which was in charge of assessing the property. Many times, I had to make a few calls to track down the correct city or county, as some of their stores are in bedroom communities of larger cities, and in their annual report, as well as on Google Maps, the store is shown as being located in the larger city. All amounts are in the greenest of US fiat dollars. !DISCLAIMER! All info here is assumed to be reliable, correct, and up to date, but no assurances of any kind can be given.

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Fairfield, CT

Appraised value of $5,638,500 with a construction date of 1993.

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Ft Lauderdale, FL

Located in Boward County, with an appraised value of $6,114,350, the main property was last sold in 1979 for $6.3 million (meaning that on the books, the property has been depreciated down to virtually nothing). There is an additional piece in the area, which is owned by Syms that is valued at $406,902.

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Miami, FL

Upon calling the tax office for Miami-Dade County, since the website didn't seem to co-operate with me, I found that the property is assessed at $4,757,435 and has an address of 4601 NW 77th Ave, in Doral which differs slightly with the address on Google Maps.

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West Palm Beach, FL

Various pieces, assessed at $371,679; $6,229,566; $558,345; $434,506; and what appear to be several other pieces of property, of which, the site spout out an error message to me over... The tax site of Palm Beach County can be searched here.

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Atlanta, GA

The store, which is actually in Gwinnett County, is valued at $3,550,000. While the info on assessment value wasn't on the webpage, when I called Gwinnette County, I got a parcel number (r6216040), which resulted in me being able to see the outline of the lot (which has a ton of parking in it; so much, that it appears to provide parking for the neighboring Pier 1 store. As a side note, there are 2 parcels that the assessor's office told me were located at the address of 5775 Jimmy Carter; the other belongs to a guy named Kieth Chung, and is valued at $3,267,900.

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Marietta, GA

Various pieces valued by the Cobb County Assessor's Office at $231,954; $2,460,000;$1,050,000; $15,940; $447,185; and $791,604.

As an interesting tidbit, it looks like the company has a coin laundry operation in Marietta, which is non-material to the business as it is not mentioned in their 10K.

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Addison, IL

Located in a township, the location is valued at $4,341,644.

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Rockville, MD

Property assessed at $10,383,800 and just sold on March 3rd, as noted in this newly released 8K for $15 million, in what will eventually manifest as a type of sale-lease back transaction.

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Southfield, MI

Southfield County assesses the value at $1,632,350 and $57,840.

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Cherry Hill, NJ

I had to call on this one, but, the Cherry Hill Assessor told me that the location (which is 4 lots) was valued at a total of $6,279,900.

EDIT:

This article from 2009 estimates that the property could be worth over $20 million.

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Paramus, NJ

I had to call on this one as well, but the Paramus Tax Collector's office told me that the property was located at 334 North Rt 17, and note 330, as Google Maps said. Regardless, it is valued at $18 million. The land made up $12,229,00 of the value with the building making up the remaining $5,771,000. The block number is 3601, and the building is on the 6th lot.

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Secaucus, NJ

I had to make a call to the city of Secaucus. They told gave me a website, and after a long conversation, we figured out that Syms owned 3 pieces of land. The first, which is noted as 1 Emerson Lane, is valued at $16,876,800; 1 Syms Way, which I couldn't find on the tax website, but I was told by the Building Department that it did indeed exist under that address, and that it is valued at $419,000, maybe it's a parking lot? Interestingly, Syms also owns a condo in the city, at 429 Dunlin Plaza which is valued at $153,800.

This property was just added as collateral to a short term credit agreement with bank of America.

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Buffalo, NY

After a few calls, I was led to the City of Clarence, where the Assessor's offices told me that the location is worth $3,100,000 million, along with another parcel, which includes an access road to the Eastern Hills Mall, which is valued at $230,000.

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Elmsford, NY

This is one of the most interesting stories in regards to property owned by Syms. In the annual report, there is a note that there is a land lease that expires in 2068. This lease, as they told me in the Division of Building in the Elmsford Government is, more or less, soley for a stop light, which is owned by a judge in the town... Furthermore, the company owns 3 parcels on E Main St (which is called Terry Town Rd in the record books due to 9-11 compliance). The first is a vacant lot, located at 295 Terry Town Rd which is valued at $26,600; the lot where the Syms store rests is valued at $326,400; and the lot which Syms leases to another party, which in turn leases to Bed Bath and Beyond, is valued at $620K (this info comes from how the Department of Building understands the leases to work).

I have a hunch that since the Syms store alone is 59,000 sq ft., that a neighboring is a parcel owned by a local judge, and that they both sit under 1000 ft from an interstate exit, that these assessed values are somewhat understated due to how many small town governments seem to operate. I can't imagine that commercial real estate would be valued at under $10/sq-ft anywhere in the country other than a place like Detroit, Michigan or even Gary, Indiana.

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New York, NY

This, despite it's shoddy appearance (yeah, I actually did some scuttle butt on this one, and took the pics that I link to), this location is the gem of the Syms crown. It is located in the middle of Trinity Place and sits in the middle of a Subway entrance and exit. The city of New York assesses the market value at $9,580,000. As if that isn't enough, it is a stone's throw from the NYSE on Wall St and the Trinity Church (I wonder how many out of work investment bankers made there way there to buy clothing when the Dow was under 8,000?).

As I pointed out earlier, my friend John at Shadowstock, wrote up about the potential worth that the property has (at the height of the great bubble, potentially $102 million). The property that it is compared to is located a few blocks away on Stone, on which the Double Tree Hotel chain built a 42 story hotel. Apparently, the lot was sold in 2008 for whopping $60 million, but was bought by Sam Chang's McSam Hotel group in 2007 for just $17 million.

To further bolster this, it should be noted that the company bought some of the airspace above this store for the sum of $3.1 million in 2008. According to Robert Kelling, the company could build a 16 story building on the location. This was, and is, a small price to pay to have the option to be closer to fully utilizing this property. It is possible that the company will be able to pick up more air rights, giving it the ability to construct an even larger building. They just raised some cash from the sale of a property and people may be willing to sell some development rights on the cheap in light of the slow economy.

If that isn't enough for you, then here is the 8K from 2008, where they bought the building that neighbors the Trinity store for a sum of $8,000,000. In it, the company states that "Discussions relating to the acquisition, which were initiated by the owners of 67 Greenwich Street, commenced in 2002. Although the Company does not have any plans to develop the site, it believed it prudent to complete the purchase in order to protect its property at 42 Trinity Place from encroachment. The property at 67 Greenwich Street includes a landmark structure along with appurtenant air rights." This shows the long term view that the company has, as it took 6 years to buy the property.

From my understanding of the deed, they paid the $8 million ~2,900 sq ft of land that is presently assessed at a meager $750K by the city of New York (the rumor is that the building isn't structurally sound). They even went to the trouble of taking care of any potential zoning issues. If this is any indication of what they feel they can do with the rest of block that they own, look out above.

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Westbury, NY

Nassau County assesses the value at $11,971,575.

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King of Prussia, PA

In the spirit of openness, Chester County doesn't believe in letting the public view records for free, as they wanted to charge me $50 bucks to view them. A free phone call later, I learned that the Syms location in King of Prussia has a parcel ID# of 43090074000 and is valued at $1,661,010.

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Houston, TX

The website for the Harris County Tax Office wasn't working well, so a call concluded that the 2 pieces of property are worth $3,292,585 and $1,025,782, respectively. The Harris site, has one of the more interesting features I have seen, which shows a graph of the historical tax liability in relation to the assessed value of the parcel.

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Conclusion On The Real Estate:

My back of the envelope calculation shows that the total assessed value of the company's real estate holdings is just over $113 million... And that is when you DON'T include the assessed value of the recently sold property in Rockville, Maryland. When you throw in that property to the total assessed values of the other Syms locations, the number goes up to ~$124 million. Compare that to the property, plant, and equipment that is on the books, it implies that ALL of the company's fixtures, desks, and such, are actually worth a negative number... That's right, all of these items for 48 stores are valued at a negative ~$3.1 million dollars. When a company is trading at 1/2 of book value, this is simply an absurdity. Another interesting bit of info in regards to the PP&E, is that the company picked up roughly $22 million in PP&E due to the Filene's Basement acquisition. Which puts the book value of said PP&E at each of those stores at just under a million bucks a piece (how much Syms felt they were worth of the purchase price, is another thing).

The reason for this discrepancy between the assessed value of the company's real estate (as has been speculated on, but never publicly detailed; see here and here), and it's value on the books, is that a lot of it has been on the books for such a long time that it has been depreciated down to a very small amount. Despite this, the company is trading at just over 1/2 of it's stated book value. In 2009, the company entered into an asset based credit agreement, which is for $75 million. It seems that Syms Corp is one of the few companies that is actually able to borrow money against it's real estate (the agreement was literally just amended).

I am sure that there are some locations that I couldn't find which were also not addressed in the annual report as they were not viewed as being material to operations; but, I did find some pieces, like the condo in Secaucus, New Jersey. It is estimated by one investment firm that the company has understated their owned real estate portfolio by as much as 33%! Here, we see that the company had thought of an interesting way to monetize it's real estate, but, ultimately decided not to.

One of the things that I absolutely love about the real estate holdings of Syms, is that they are spread out along the east of the US and are in some pretty desirable localities. This, is in stark contrast to a company such as Income Opportunity Reality Investors, which is tied to the real estate of a single city and the origination of mortgages which may or may not preform for a long period. With Syms, the properties as a whole, generate stable cash flows and should for the distant future.

It is important to remember that the company does have a history with profitably investing in and subsequently selling real estate assets. In 2006, they gained over $10 million from the sale of 2 properties in 2006, as is noted in page 6 of their 10K from early 2007.

Filene's Basement Acquisition:
The company bought 23 Filene's Basement stores out of bankruptcy nearly 2 years ago paying under $40 million out of pocket. while it has been great for revenues, it hasn't done much for earnings. One good thing that has come from the acquisition, which we most likely have yet to see all of the repercussions from (it was just over 1.5 years ago), is that the company basically doubled it's purchasing power with the acquisition, and got a lot of name recognition through the iconic Filene's brand. Since the acquisition, as is outlined in the company's 10Q the company is working to become more efficient by changing distribution methods, reducing corporate headcount, and closing unprofitable stores.

When the company purchased Filene's they didn't do it alone, the did so along side The Vornado Realty Trust, and apparently took the company from the likes of Men's Wearhouse after they couldn't find financing and Syms offered to acquire more leases as part of a greater turnaround. Under the Vornado part of the purchase, they paid a hefty sum to be able to amend some leases.

Speaking of the turnaround, Syms has only had a little over a year and a half of reporting to show how they have gone about restructuring Filene's. It seems that there will be great benefits in the efficiencies that Syms believes it can achieve. The company recently announced that it will be laying off 108 employees in Secaucus, which, a local newspaper believes make between $25K and $35K a year. This will save the company over $4.3 million annually if it does not replace them and it cost $40K to employ each of the workers. Again, this has yet to be reflected in their financials, as they did not make the layoffs until January 30th. Total, there will be 210 position eliminations in part due to a change in distribution in Massachusetts. At $40K each, this will be a total of $8.4 million in savings over the next year! There have also been 1 time expenses related to the restructuring which will not appear with such frequency in the future. (Page 9 of their 10Q)

Here, Marcy Syms speaks at the NASDAQ closing ceremony about the future of the combined entity.

Here is a video, which is about the moat provided by the good name of Filene's Basement. Thanks goes to "carvel46", as they alerted me to it.



Could Insolvency Actually Be THAT Bad?!

When a company is written up as one that is a cigar butt due to it's losses, one should wonder "what is wrong here?" Given the types of losses that Syms has, I am personally not worried too much for a few reasons. First, a significant chunk of the losses come from depreciation, which, when looking at a discount retailer with real estate holdings of this nature, I don't feel are 100% losses. Syms will be able to juice many of their allocations for well longer than their useful life according to their accountants (things like metal clothing racks generally don't break). Furthermore, it seems like revenue should pick up rather soon, as the company, along with the nation, emerges from the recession. When a company's revenue rises, generally, it can be pretty high margin revenue (for example, as a customer, I will be more apt buy an extra 2 shirts and 3 ties in a visit).

Maybe I'm missing something along the line of earnings and cash burn; even if the company does manage to go insolvent, there there still seems to be little reason to worry. It is important to remember that insiders own over 1/2 of the company and in the event that the company is reorganized, they will fight tooth and nail for the common stock holders. Furthermore, since the company leases a significant portion of it's locations, it could potentially be able to sell off unprofitable assets, renegotiate unfavorable leases that could be left from the Filene's Closet acquisition, or even shutter the stores. When sitting on the type of "Class A" assets that they hold, this is one of the few situations, like General Growth Properties, where it might actually be favorable for the company to get in the situation to reorganize.

Liquidation:

While there is virtually no chance that the company will be liquidated, a liquidation valuation must be looked at when calculating a margin of safety. As is, the company is trading at 1/2 of book, which, I feel is well below an orderly liquidation value for the company. If the location at Trinity is worth $40 million, that adds substantial gains to the book value. When looking at the real estate portfolio and valuing the continuing operations at, say $500K per store (which could potentially be super low, especially if there is any significant pick up in same store sales), I have no problem believing that this company is better than a 50 cent dollar. If given some time to run, the company is better than a 30 cent dollar, or, worth more than $300 million.

Thoughts On Management Vs. The Activists:

While I certainly have a history on this blog of being sympathetic to activist shareholders (see here, here, and here), this is one of the first cases in my memory where, at the present time, I wouldn't support activists if they tried to take the company over. While management seems to have generated bad returns in the short run, related to the Filene's Closet acquisition, I think that things will eventually work out. Additionally, I don't see why the company would purchase the air rights above the Trinity Place location if they didn't plan on doing something worthwhile with the location. With this said, I will reiterate that the activists do have some great ideas; I would love to see the company do give more specific plans for some of the real estate holdings (such as 42 Trinity) and make public the real values of all of their real estate.

Additionally, the company does have a history of share buybacks, such as this one. Over the past 3.5 years, the company has repurchased, just over $2.25 million in stock (hopefully, they will repurchase a lot more in the coming quarters). While addressing issues that are left to the board to decide, I like the types of connections that the directors have with retail operations and Asian producers, as are outlined in their most recent proxy.

Furthermore, Marcy Syms once wrote in her book which was published nearly 2 decades ago, that "Most importantly, you’ll be working for a company that cares more about staying in the business than making next quarter’s figures. That’s the family’s job—to keep the business healthy for the generations to come." This is the sort of thing that I love to hear from management. And frankly, despite the fact that it seems they are underpreforming based on their asset size, this makes me more certain that the company will be around for some time, and that it will thrive. The fact that the company bare's the founding family's name, should serve as incentive, in the same way that the name change of Steak n' Shake to Biglari Holdings gave Sardar Biglari incentive, to not do something overly stupid and company destroying.

There has also been governance concern over the family attempting to take the company private. And who could blame them? I'd want to take the company private too. However, due to having large outside ownership (which reduces float, meaning that a few amount of people purchasing shares can do a lot to raise the price, especially in a short squeeze), I am not concerned, as they will do all that is in their power to keep any governance issues in check. Interestingly, when the company attempted to deregister it's stock, the activists threatened to split up their shares into a plethora of directly registered holders of common stock, making the delisting impossible according to SEC rules. Which, I am glad about; as a minority shareholder, I hate the idea of the shares being traded over the counter, despite the cost savings of as much as $750,000 that it would provide. Additionally, when not reporting with the SEC, you don't have such stringent reporting requirements, which, the company could have potentially used to hide some of it's real estate investments, in effort for management to take the company over on the cheap. However, it doesn't seem that this will ever be able to happen due to the position held by the activists- who seem to be incredibly informed about all the matters of the company. When this de-listing attempt happened, it scared away many investors, but, it is unlikely to happen again in light of the previous actions of the activists.

Here is a speech that Marcy Syms gave in response to all of the above concerns, her writing seems sincere.

Overall, it seems that management is self interested, which, when controlling the company, is great, provided that you have a great check and balance to prevent abuse, which is exactly what they guys at Barington Capital and Esopus Creek Advisors provide us.

Here is a video where Marcy Syms talks about the business:





One last snippet about Marcy comes to us from this New York Times article. Apparently, as a kid, she remembers clipping coupons and going to 3 different grocery stores to save the most money on food so that the business could operate better... Additionally, when she doesn't buy her clothing from our Syms stores, she gets them from flea markets, tag sales, and Costco. That is the kind of frugality that I like to see instilled in management from a young age!

The Conclusion:

For me this investment is similar to that of Bruce Berkowitz's in St. Joe, the big difference being that, in this instance, management is very shrewd when it comes to owning land. By extension, they don't need to be replaced. I am 100% certain that Syms sits on a mound of valuable real estate, and I am pretty sure that it will be monetized at some point in the future; the recent sale of a location shows the company does know when to selectively sell off assets, any additional sale of which, can be a great catalyst. I don't know exactly when it will be, but, with the company trading at ~1/2 of it's stated book value (which, seems to be pretty damned conservative) a smart investor can wait for a while and do quite well; if it takes 3 years just to get to the stated book value, you are looking at a 23%+ annualized return.

In the mean time, a Syms shareholder gets the comfort of sitting on a huge margin of safety, with a company that the Buffett of the partnership days would have loved; all while in the middle of some pretty turbulent economic times, when many companies seem to be close to, or at full valuations. This is a company that seems to be anything but mediocre, based solely on valuation alone.

To sum up, I feel pretty safe in this one... provided that the whole of the east coast doesn't get blown up (and destroying the company's real estate), I should do fine owning this stock. In the case of the east coast being turned into a glass bowl, I can assure you that I won't be worrying about my company's assets, but rather, my own ass. ;)

Disclosure: Long SYMS. While all information is believed to be correct at time of publication, no assurances can be made. This is not investment advice. Always do a ton of your own research when contemplating doing anything that I talk, write, or so much as even think about.

9 comments:

Jacob said...

Jeff,
As always, I thoroughly enjoy your posts. I will have to look into Syms more, as it is completely new to me. Any thoughts on UWN before tomorrows earnings report?

Jacob

Josh said...

Great post Jeff! Didn't realize you could call the local tax office find real estate appraisals.

Definitely some funny things you uncovered. Like the coin laundry mat, the condo and the judge owning the real estate with an odd appraisal.

jeff said...

Thanks for the kind words guys. In regard to UWN, the company is probably chugging along on it's way to profitability. As you know, they are getting ready to report on the 4th+ month of the turnaround of their newly acquired assets, which will be interesting.

I won't be shocked if they turn a slight profit (then again, they may lose a little, too). I also look forward to hearing an update on the financing of the casino development project. I still own UWN shares.

Water Investor said...

if it takes 3 years just to get to the stated book value, you are looking at a 23%+ annualized return.

where do you get this time frame?

This stock sits at the same price as it did in 2001. I remember having similar valuations back then and also thinking that it would gravitate towards book value in 2 or 3 years ago. That would have been 7 years ago!

jeff said...

For the 3 years comment, I am simply pulling a number out of thin air to prove a point. There is a ton of time for stuff to happen, any of which, will reward a shareholder handsomely. While there is no foreseeable catalyst other than the Filene's Basement synergies being realized, the stock is cheap enough that I can overlook that.

While the stock does trade for the same amount that it did in 2001, it has had a great range of prices since that time. Not that past price action means anything, but, the company has previously traded for close to it's intrinsic. That is the point in which I would have sold and handsomely rewarded.

To rip off a much better investor than I: in the short run, the market is a voting machine, but in the long run, it is one that weighs... Again, past price performance is virtually irrelevant, as I want to own part of this business. Syms should weigh quite well when considering the discrepancy between price and value.

Daniel said...
This comment has been removed by the author.
Anonymous said...

why have you not mentioned the minimal capital lease obligations of $282.5mm (per 10k) that should be accounted for in a liquidation scenario?

jeff said...

@Daniel: Thanks for reading, I look forward to talking with you. I just sent you an email.

@Anon: I didn't account for them, as they are a part of the continuing operations, which could continue on in what I believe would be a profitable manner (the leased stores are worth something); either to the company, a spun off entity, or a buyer of the stores (such as TJ Maxx, Burlington Coat Factory, or even Men's Wearhouse, which bid for Filene's).

Anonymous said...

Thanks for this writeup. I see a conflict of interest between management/insiders and public share owners, and that makes it look like a value trap (people see better opps elsewhere despite the distorted valuation). A similar situation is Microsoft's impaired valuation (see a recent article in Fortune about them). Activists are powerless in both cases.