AmBase Corp- Mispriced Penthouses
The battle for the fourth tallest condominium tower in Manhattan may provide a lucrative investment opportunity for savvy investors.
The battle for the fourth tallest condominium tower in Manhattan may provide a lucrative investment opportunity for investors. The key to Ambase's investment thesis is the potential for a sizable payout from the company's derivative lawsuit against its former partners and developers of the Manhattan condominium tower at 111 West 57th Street. For a quick summary of the Manhattan condominium towers’, see here.
There are undeniable contract violations by the developers that resulted in unquestionable financial damages to Ambase’s shareholders. Ambase has a contractual equity put right that could give ABCP shareholders many multiples of the current share price if it were to be upheld by the court and paid out. After years of litigation discovery (and more to come), the value of this off-balance-sheet asset may become apparent to other investors.
The equity put right is a provision that allows Ambase the right to put its initial investment (~$65m dollars) back to the developers if the development cost increases by more than 10% from the agreed budget. If the courts uphold Ambase's Equity Put Right and the counterparties pay the debt, the total proceeds could be $150 million relative to Ambase's market cap of $5 million at the time of writing (with no debt). The net payment to Ambase could exceed $112 million (or $ 2.75 per share v $0.14 share price today), tax-sheltered at least in part by NOLs, following a split of proceeds with the CEO resulting from an earlier litigation funding agreement. Ambase shareholders may receive additional proceeds if the other claims against the foreclosing lender, and the Senior Mezzanine lender are successful in court.
Despite a prolonged timeline, ongoing cash burn/litigation financing, and a potential change in splits of the litigation proceeds, the asymmetry in this investment thesis remains unchanged with the option-like expected return. Ambase’s most recent 10Q (3/31/23) provides the latest information on the litigation and the company’s current funding situation. Latest 10Q
So far, litigation has been funded by personal capital from Ambase CEO Richard Bianco, who funded the early rounds of discovery with over $7m of his private capital for a 25% split of the legal payout. He has consistently bought Ambase stock when large blocks have been open for sale. Bianco and Ambase' longtime lawyer, David H Thompson, are highly skilled in managing protracted and complex litigation with a demonstrated track record. In 2012, after more than 15 years of lengthy and costly litigation, Ambase was awarded $180m in damages against the FDIC. At the time, Ambase was the holding entity of Carteret Savings, a profitable bank that turned insolvent due to FDIC's "supervisory goodwill" accounting treatment. Management's track record with prolonged litigation is a positive.
The key to a positive investment return is enforcement and payment of Ambase’s contractual Equity Put Right against the developers Stern and Maloney. Litigation success/settlement on any of the other claims against the lenders who permitted a hard foreclosure on the Manhattan condominium tower, wiping out Ambase equity would be a bonus. Given the misunderstood, forgotten, and unfollowed nature of Ambase stock due to its illiquidity, the complexity of its litigation matters and its history of corporate governance issues, the equity put remains mispriced.
Ambase’s market cap today (29/08/23) is $0.14 x 40.7mm shares is $5.7mm. Assuming an 80% probability of losing -$5.7mm and a 20% probability of a +$75m payout, accounting for litigation financing payouts of 50% (very conservative estimates), the expected value of the equity put is still positive at $10.4m, 1.8x the current market cap.
Estimated next steps: On 5/9/22, Judge Cohen ruled on the developer's Motion to Dismiss portions of Ambase’s Complaint. The motion to dismiss in the court case resulted in the dismissal of specific claims; however, the claims that were not dismissed and will be continued in the court case are the breach of contract claims alleged by Ambase. Check out the Ambase brief from July 23.
Disclaimer:
The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.