Owens Realty Mortgage (NYSE MKT: ORM) was
reorganized in mid-2013 into a publicly-traded real estate investment trust
(REIT), primarily to take advantage of federal income tax benefits, via an
absorption merger of California-based LP, Owens Mortgage Investment Fund, which
had a successful track record prior to the merger stretching back to 1983.
Furthermore, the company is managed by specialized commercial real estate
management firm, Owens Financial Group, Inc. (Walnut Creek, CA), which has been
a key player in the originated, serviced and managed alternative commercial
real estate investment market, running a highly successful lending platform
focused on the short-term, $1M to $10M range for over six decades. ORM has
quickly become one of the leading providers of flexible, rapid and
custom-tailored short-term acquisition and transition capital to the commercial
real estate investment space, steadily building up a reputation for integrity
and amassing a sizeable portfolio of real estate, as well as loans.
ORM has a solid, results-oriented investment
strategy focused on primarily first deed position origination, investment and
management of $500k to $20M, one to three-year term loans in the small balance
commercial (SBC) and commercial real estate (CRE) markets. By sticking to
healthy, sub-conforming level, 60% to 75% loan-to-value ratios and typically
interest-only amortizations, ORM has assembled an impressive $63M loan
portfolio, as well as some 34 properties, with a Q3 2014 (September 30)
reported book value of around $156M ($38M commercial, $48M residential, and
$70M land). The company originated seven new loans for the quarter (one
re-write) totaling $6.975M and pulled down $4.491M in full or partial payoffs
on five loans.
A constant emphasis on growing the size of
their loan portfolio, and turning over developed assets in order to unlock
embedded net asset value gains, has allowed ORM to deliver consistently
attractive, risk-adjusted yield to stockholders. The company’s Q3 2014
financials tell the story quite well, with net income attributable to common
stockholders up 11.8% YoY, to over $783k ($0.07 per diluted common share), a declared
quarterly dividend of $0.05 per share of common stock, and funds from
operations (supplemental non-GAAP) at around $1.39M ($0.13 per diluted common
share). Some of the core performance drivers last quarter were interest income
on loans of $649k, due largely to a 23% uptick in the average balance of
performing loans and improved interest income collected on delinquent or
impaired loans of around $350k, as well as a similar increase in rental and
other income from real estate properties, amounting to roughly $375k.
Operationally speaking, the company made some
substantial headway in maximizing the value of their real estate portfolio
during the quarter, completing essentially all of the retail portion of the
11.5-acre Chateau at Lake Tahoe resort project ($52M book value) and securing
triple net lease agreements for 75% of the space, as well as initiating
potential leases for the remainder. Similar operational progress was achieved
in Miami, at the Treasures On The Bay complex ($34M book value) on Treasure
Island in Biscayne Bay (between Miami Beach and downtown Miami), subsequent to
a $21.3M construction loan secured in June 2014 from Bank of the Ozarks via ORM
subsidiary, TOTB Miami, LLC (80.74% owned by ORM and 19.26% owned by Owens
Financial Group). A similar $13M loan was executed in November to broaden the
company’s lending base, generating additional income and cash flow, secured by
a first priority lien on Pointe Tower (condos and related parcel) at the
southern end of Treasure Island.
In concert with the Pointe Tower-secured loan,
ORM organized a $14.5M, six-year term loan with Rabobank executed in late
December 2014, amassing substantial firing power in order to meet rising market
demand in the SBC and CRE markets. The ability of ORM’s seasoned executive team
to capture market value for the company’s shareholders through superb
transactions, many of which are achieved via direct origination through
long-standing relationships, offers investors an excellent way to achieve high
yields at low risk via a relatively liquid real estate investment methodology.
The teeming demand cropping up in commercial real estate, where CRE
fundamentals continue to show signs of improvement, coupled with the limited
ability or willingness of banks to lend due to the regulatory environment and
other factors, has generated a perfected storm for companies like ORM.
High demand for transitional capital and ORM’s
strong, growing brand recognition in the small balance bridge market, combined
with their direct origination and servicing, as well as creative/flexible
investment structuring, have enabled the company to take advantage of the
increasingly abundant opportunities in the space, delivering timely funding in
markets where speed has become essential. ORM’s brand traction has been
steadily improving since inception, increasing the company’s visibility to
market-side and real estate investors with milestones like the NYSE MKT listing
in July of 2013 and subsequent inclusions into the Russell 2000® (which
essentially measures performance of small-cap U.S. equities), Russell 3000® and
Russell Global indexes in June of 2014, along with automatic inclusion into the
associated growth and value style indexes.
The SBC market ($500k to $10M) is still largely
fragmented (top 15 lenders only held 23% of the space during 2013) and
underserved, and there is also a persistent funding gap in the space, which
stretches right up into the middle-market ($10M to $50M). These underlying
dynamics have created a target-rich environment in the SBC market for ORM that
promises higher yields and lower risk compared to the middle to large market
CRE space. Considerable, mounting demand from credit-worthy sponsors in the SBC
space, where loan originations hit $175B in 2013 alone, as well as the fact that
overall SBC market characteristics are analogous to broader CRE fundamentals,
offers Owens Realty Mortgage massive expansion opportunities, and the company’s
management is clearly moving to aggressively pursue loan portfolio expansion
accordingly.
The company is reportedly targeting sale of a
significant portion of their real estate holdings starting this year and
already announced the divestment of their 23.14-acre grocery-anchored community
shopping center ($11.5M book value) near the University of Northern Colorado
back in November of 2014 for $21M, to Alberta Development Partners, LLC. Such
property sale proceeds will be directly applied to further expansion of ORM’s
loan production and overall loan portfolio, in order to continue to increase
cash flow and improve balance sheet ratios, as the company puts forth a
concerted effort to stand by their commitment to increasing shareholder
dividends.
Get a closer look at Owens Realty Mortgage by
visiting www.OwensMortgage.com
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