A Rare Bargain
Today we are issuing an updated report on LIG Assets (LIGA). LIG Assets may be one of the most successful opportunistic investors and financiers of its size and its strategy could result in $3-4M in net profit this year. Such a return is 4x the current market cap, making LIG’s share price a rare bargain.
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LIG Assets is a unique and yet misunderstood company. The Company traces its roots to the real estate and energy markets, but shifted its approach in 2010, when it began acquiring below-market value residential properties. Management elected to take advantage of an environment that offered high cash-generating properties at bargain basement prices, along with low interest rates. While a meaningful percentage of income was generated via relatively quick property purchase and sale transactions, management decided to hold properties for longer periods, as the intermediate timeframes appeared to offer even higher asset value increases.
At the same time, management realized that its wildly successful business model could be replicated in other industries outside of real estate. As a result, LIG began providing financing and entering into financial transactions in commercial real estate and a variety of other industries, including entertainment, gaming, and opportunities in South America.
For those investors that have been involved in the stock since last spring, a number of changes have occurred. Many early investors in the stock got on board in order to participate in the growth of the profitable residential real estate market and even greater growth through direct and indirect ownership of a LIG Asset portfolio company, SuiteMagic. While management’s focus remains on the real estate sector and occasional opportunties in other spaces, one of the reasons why it is misunderstood is because LIG behaves less like a publicly-traded asset play and more of a hedge fund comprised of limited partners seeking outsized returns.
Most asset plays, or real estate project-oriented firms, are typically involved in their portoflio holdings for meaningful periods of time, generating income for years and then profiting from the sale of the assets. LIG takes what we would refer to as a core and satellite approach to its business model. The residential real estate business is considered core and is income-generating, and along with other proposed projects, has turnover but is somewhat steady in nature. The smaller, satellite portion is a high turnover approach to largely illiquid assets, which involve generating a series of short term gains. As a result, LIG tends to get involved in a variety of projects that produce positive capital returns, while the returns on the core side tend to be a mix of income gains and capital returns.
It is this approach which resulted in roughly $900,000 in net income in (unaudited) 2012 results, and could result in up to $4M in net profits this year, which is remarkable for a stock with a market cap of around $1M. At current levels, it is literally trading 1x FY12 earnings and based on the balance sheet, has a book value of $0.06 per share. Clearly, whether one takes an operational approach or an asset-based approach, the stock is very undervalued.
THE 5 HORSES
We divide the Firm’s operations and holdings into 5 categories, or horses that will drive value via asset growth or income generation for the Company and shareholders. As noted above, considering LIG’s core and satellite approach, holdings today may not be holdings tomorrow, and profits are used to engage in additional transactions.
Residential Real Estate:
The Company owns approximately 300 residential homes primarily in Texas that are income-producing via rents associated with these properties. They are managed by an affiliate and mortgages are held on all properties. From time to time, the Company sells some of these properties and adds new ones, while maintaining a similar profile in terms of home style, value, and associated debt. As of December 31, 2012, the properties were carried on the books at $22.6M, with debt of $16.2M. It is possible that the true value of the homes is carried at a discount to their true worth in May 2013, given the recent rise in home values in LIG’s markets. In any event, absent a property-by-property breakdown, there appears to be considerable value in the Company based on the net value of these figures ($6.4M) alone.
Commercial Real Estate:
In late 2012, LIG announced a new key cog in its growth plans. The Company entered into a strategic alliance with Texas Real Estate Hedge Fund, LP to invest, acquire, manage and finance commercial real estate properties. The Texas Real Estate Hedge Fund, LP will focus on commercial real estate opportunities with valuations ranging from $3M to $100M with properties primarily located in the Southwest, West and Midwest sectors of the United States. The composition of these assets will cover Multifamily, Retail, Destination Hotel and Office properties. LIG Asset’s and Texas Real Estate Hedge Fund’s expertise, in association with a seasoned team from MMR Realty Advisors and Inter Continental Real Partners selectively analyze and underwrite the targeted acquisitions.
This strategic alliance, with a strong focus and many successful years of experience, has been developed with the opportunity to take positions in assets that are “Off Market” and can be acquired on a negotiated basis. Given the repositioning of the Commercial Mortgage-Backed Securities and the upcoming Commercial real estate maturities, LIG Assets and Texas Real Estate Hedge Fund, LP foresees significant opportunities in calendar year 2013 and beyond.
We should note that the Managing Director of Texas Real Estate Hedge Fund, LP, Victor F. Russell, has thirty-five years of expanding entrepreneurial experience in commercial real estate brokerage, acquisitions, development, appraisal reviews, finance and mortgage banking. Mr. Russell’s past experience includes Managing Director for Bear Stearns / EMC real estate division with a valuation of over $1.6 billion dollars of REO’s, nonperforming, sub-performing and performing pools of mortgages.
Cripple Creek is a hot bed for real estate and other entertainment and hospitality businesses. Cripple Creek is a short driving distance from Colorado Springs, Colorado, which is the headquarters for the United States Olympic Committee and the USA Olympic Training Center. Cripple Creek is more than 100 years old, and was founded during the booming Colorado Gold Rush, which attracted miners searching for their fortunes.
South American Properties:
The Company recently acquired controlling interest in a Firm that LIG renamed South American Properties, Inc. (OTCPK – SAMP). The new entity plans to acquire and develop real estate properties, and other income generating assets located in South America with a more specific focus on the country of Peru. For example, THCB plans to build a full service luxury marina called Colan Marina near the port of Paita in northern Peru. Colan Marina will be a planned full service marina and lake with 150 slips, dry dock facilities, maintenance and fuel service and full 24-hour security. The marina will be a man-made construction to be created by excavation of a salt flat bordering the emerald bay beach on the west and 100-foot cliffs on the east. A canal 24-meters wide and 200-meters long will connect the marina from the Pacific Ocean. Land has been purchased surrounding the lake portion as well as on top of the cliffs overlooking the marina location.
We do not view THCB as a core business and given that it is a publicly-traded entity, it is possible that management spins off its ownership in a stock dividend to shareholders. As a result, we view any progress on this front as a bonus rather than a key factor in valuation or profitability.
In our view, LIGA’s biggest risk is access to capital and financing. A secondary risk would be slowdowns in the real estate market, which we deem unlikely in the insulated Texas market. In addition, the Company has already secured important relationships in the commercial space which should help it overcome similar issues that might be more problematic for other firms. Execution risks noted above could push timetables, meaningful revenue generation and profitability out to a later date, or result in a smaller initial ramp, thus impacting LIGA revenue and income goals. The South American Properties entity could be viewed by some as a potential distraction but we believe that senior personnel’s time will be adequately divided between core and non-core projects.
VALUATION AND CONCLUSION
In our view, LIG Assets can be assigned a valuation as an asset play or a profit center. In either event, the stock is surely undervalued. It carries a book value of $8M, or $0.06 per share and through its opportunistic business model that combines core income producing properties and relatively swift capital gain projects, LIG could generate $3-4M in net profit in 2013. Near term catalysts that lend credence to profit estimates include a recently announced $1M+ gain on its LIG Entertainment finance venture in the coming months and the potential development and sale of various real estate properties.
Looking ahead, we would not be surprised to see a cash dividend paid to shareholders related to the LIG Entertainment transaction or a stock dividend for SAMP, which when combined could provide solid returns for investors. In the absence of such events, if the Company earns $4M in net profit, the stock could trade up to a value of $28M, or $0.20 per share, which represents 7x estimated FY13 net income and a healthy discount to book value of $0.06.
Recent Trading History For LIGA
Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
I, Robert Goldman, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.
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