Angeles Corp. Is Hoping for ‘Niche’ Real Estate Boom
If investors’ attitude toward real estate continues to improve, Angeles Corp. stock could be a big beneficiary.
At $5.875 a share now, the stock is up from $2 at the start of the year. But that move occurred before the L.A.-based firm announced last week that it will sell its securities advisory business to Boston’s United Asset Management for $42 million.
The securities business is the only non-real-estate facet of Angeles. The subsidiary manages $2.7 billion for pension funds, individuals and other clients. The business includes the First Pacific Advisors mutual funds as well as Source Capital, a well-known investment fund that trades on the New York Stock Exchange.
That $2.7 billion has been a nice, profitable chunk of change for Angeles. But the $42 million in cash that United will pay Angeles is a more important chunk of change right now. It should give Angeles the breathing room it needs to continue developing some promising new real estate ventures. And the cash will boost Angeles’ per-share book value to perhaps three times the stock price--which could ring bells on Wall Street.
For Angeles Shareholders, the sale of the funds arm is a case of deja vu. In the 1960s, Angeles was a big player in mutual funds. Then the firm branched into real estate development, only to be slammed in the property market debacle of the early ‘70s. Angeles needed cash to buy out of some bad deals, so it sold the bulk of its funds business in 1974.
In the late ‘70s, Angeles set out to recreate its success in investment management, with star investor George Michaelis at the helm. With the securities business on one side and a booming business in real estate partnership syndications on the other, investors saw enough promise in Angeles to bid the stock as high as $19.75 in 1983.
But the trend has been mostly downhill since. Angeles’ total revenue in the fiscal year ended last June 30 was $40 million, down from $47 million in 1987. The securities unit has done well, but the once fee-rich business of selling real estate partnerships to the public fell apart after Congress changed the tax laws in 1986. In March, 1990, Angeles decided to stop selling new partnerships. The company took a onetime writeoff of $2.9 million.
What now? With the $42 million in cash from the securities unit sale, Angeles President Joseph Cattivera says the company will spend $25 million to buy back a load of bonds and common and preferred stock. That will cut Angeles’ annual interest expense by $4.6 million--no small savings, considering the 1990 interest bill was $13.2 million for this highly leveraged outfit.
What’s left of Angeles will be three main real estate businesses, Cattivera says:
Development and operation of so-called congregate care facilities--apartment complexes for the elderly. The facilities provide meals and other basic services for people who can mostly function for themselves. Angeles already has 11 of these facilities (mostly in the Midwest and Southeast), up from just two in 1989.
Development of manufacturers’ outlet malls, aimed at consumers who will drive long distances to buy at deep discounts. Angeles has four of these malls now nationwide, including one in Barstow that is 100% leased. If economists are right about this being a decade of consumer penny-pinching, the malls could be a gold mine.
Management of real estate (including apartments and warehouses) within previous partnership deals the company sold to investors.
The risks? For starters, some investors will wonder why they should believe that Angeles will get things right in real estate this time around, given its history. Also, this is not a company that will produce real earnings any time soon. Real estate investment is a cash-flow business, because depreciation and other upfront costs eat up the bottom line. And in Angeles’ case, even real cash flow is hard to figure because of the firm’s tangled web of partnership financings and mortgages.
There’s also the underlying risk that Angeles’ real estate holdings (in the partnerships or elsewhere) could be bombs if property markets plunge anew. Cattivera, who runs the firm with CEO William Elliott, says Angeles has encountered “nothing of any real consequence” in terms of real estate troubles. But who knows.
In any case, L.A. money manager George Froley of Froley Revy Investment Co. says the $42-million cash infusion opens interesting possibilities. Most important, he says, the deal will boost Angeles’ book value per share to around $18 from about $6.50 now. With the stock at $5.875, an $18-a-share price tag on Angeles’ assets may get the attention of “value” stock players.
Froley, a longtime associate of Elliott, owns 160,000 of Angeles’ 4 million shares. With management’s stake around 35%, there’s not a lot to trade out there. That makes this stock even more speculative.
Froley smells a winner, but he adds with both hope and caution in his voice: “Bill (Elliott) has bought a lot of assets. I don’t think anybody knows what they’re all worth.”
