Merchants' National Properties Inc. (MNPP)

Today's write up is on a dark unlisted stock called Merchant's National Properties (MNPP). It is a real estate company based out of New York City. What is intriguing about this business is that it is "dark," yet has a market cap of 120 Million and is extremely communicative with shareholders. Their website provides useful information on all their properties across the United States, plus a relatively detailed annual report with a proxy statement and robust financials. Plus, the business is relatively simple to understand - real estate.

(Note - all numbers are based here on a share price of $1,300. The shares are pretty illiquid and based on just one share, the price can move a decent amount. So when you are reading this it may be a little different. Look at the volume of trades to determine the significance of the movement.)

I came across the company whilst perusing OTC Markets for stocks with high share prices. My thinking behind that, was that any unlisted stock with a high share price is bound to have some kind of business or valuable assets behind it that has not been diluted too much over time. Sure enough, MNPP fits the bill. 

MNPP was founded in 1928 as a real estate business. That same year, they acquired 17 properties for $3.5 million. Since then, they have operated as a real estate business, owning commercial properties across the United States, and collecting rent on those properties. They have grown their holdings over time. Now MNPP manages, develops, and leases 67 properties in 13 US states. 

In 2006, MNPP acquired Marx Realty, which was founded in 1915. Now, Marx handles the property management of a growing number of MNPP properties, which is adding to profitability. Marx also handles the development and leasing of the properties. 

The partnership of MNPP and Marx Realty came about when MNPP became bankrupt in 1933. Leonard Marx, who founded Marx Realty, took control of MNPP. He died in 2002 but had a significant stake in MNPP, which I believe is why they acquired his company - Marx Realty in 2002. Today, Leonard Marx's three children own 30.01% of MNPP shares. 

What is intriguing about MNPP is that it is conservatively run. Management is not overpaid, and the company uses very little leverage - unlike most real estate companies. MNPP has 250 million in assets but just 54.5 million in liabilities. And only 25.3 million of that is mortgages. The stated book value of the company is 196 million. Yet the market cap is 120 million. (All numbers quoted in here are as of December 31st, 2019, in their annual report.)

So this is a real estate company trading at 0.61 of book. You would think that there must be something horribly wrong with the company. They must be losing money, making terrible deals, using tons of leverage, paying out ridiculous stock compensation, and issuing shares. Yet none of that seems to be the case here. 

MNPP seems to act like a conservative private company. The insiders own 20% of the company. Then there are the descendants of Leonard Marx, who own 30% of the business. MNPP owns high-quality real estate in attractive markets. Their current primary focus is New York City, Atlanta, and Washington DC. 

"Marx has been and will continue to sell assets with little or no potential for rental income growth in non-core markets in which we believe the upside potential is limited in comparison to the investment required and reinvesting the proceeds from these sales into assets in higher barrier to entry markets with more attractive long-term appreciation potential. As has been our practice, as long as most of the owners of any given property agree, and an opportunity arises that is economically advantageous, in case of a sale in excess of $2 million, we will continue to seek to roll over the proceeds into tax-deferred exchanges for other assets in one of the following markets - New York City, Atlanta, and Washington, DC."

Throughout the report, it is clear that they are very selective and judicious with the capital. 

"99 Greenwich Avenue, Greenwich, CT: In July 2019, we completed the sale fo this property for $30 million. MNP owned a 16.9% interest in the property. We sought a 1031-tax deferred exchange for the property, but we did not find a property that made sense for the exchange and we distributed the proceeds from the sale to ownership in January 2020."

So it is like they are operating this company with long-term-shareholders in mind. The goal is to improve efficiency in their assets and to slowly grow their book over time. 

Earnings

As far as earnings go, the company is profitable and cash-flow positive. 2019 is a little weird because of the accounting change where unrealized gains from securities are recorded as income. MNPP has a decent sized security portfolio, given its market cap - 50 million. But including everything, they had an earnings yield of 8.6%. They are consistently growing their book value over time. 

Value Realization

MNPP is a dark, illiquid stock. Remember, between Marx's children and insiders, 50% of the float is taken up. A lot of times, people will worry about how value will be realized in such a dark, illiquid security. Will it remain cheap forever? Here are the ways that MNPP can appreciate over time.

1. The stock can re-rate to book value. Currently, MNPP is at 0.61 of book. I don't think that book is at all overstated. So if the stock re-rated to book, that would be a stock appreciation of 63.93%.

2. Dividends - MNPP consistently pays out a portion of profits as a dividend. MNPP trades at a dividend yield of about 3.84%

3. Stock Buy Backs - MNPP buys back shares. In 2019 they bought back 1,425 shares at an average price of $1,645 per share. There are now 91,638 shares outstanding. 

4. Book value will grow. At an 8 percent earnings yield, considering dividends, book value will likely grow at something like 4% a year. 

So let's assume a ten year holding period. That is what I would go into this security with — a long term play. If we say that in 10 years, book value will re-rate to 90% of book and that the business earns 8% a year, we would have a capital appreciation of 127%, or 12.7% a year. 

I think that MNPP is attractive because it is a way to own high quality commercial real estate, at really attractive prices. You have a good management team that is shareholder aligned running it for you. You get paid out a small dividend every year. I think that the downside is low, and the upside is reasonable. This is not going to be a high flyer stock. But I think that this stock will very safely return 8-13% CAGR over the next ten years plus. 

Risks

There are definitely risks involved. The is a commercial real estate company based out of New York City. We are in the midst of the COVID pandemic. There are risks that people don't want to live in New York or other populated cities. Risks that real estate prices go down dramatically. 

That being said, MNPP uses very little leverage. It may not do well in the short term. But I think that the risks are adequately priced into the stock already. At the time of writing this, the share price is $1,300. I think to ensure success holding this stock; you need to think of it as a very long term play. Like 10+ years. What is attractive is that this is probably something you can own for much longer than ten years. 

If It Is Such a Good Stock, Why is it trading so cheaply?

Probably because it is dark and illiquid. Not many people know about this. Eventually, I found one other right up (mentioned below) but there is almost no one talking about this stock online. A major shareholder passed away in 2017, which opened up a bunch of shares to be traded. I think that there was some indiscriminate selling from the estate, which brought the shares down a bit with the liquidity. 

What is really cool though, is that even though this is "dark" stock, management is not sketchy. They are super friendly to investors and give a ton of information on their site. I would be very apprehensive to own if management was unfriendly and secretive towards shareholders. This really just seems like a low-key, long-term real estate holding company. 

Is Book Value Understated?

This, I am not sure of. They hold the real estate on their books at the original cost. Yet, according to their accounting notes, they will adjust the value of the real estate on the books if there are changes to the expected future cash flows of the property. For example, they took an impairment of $1.3 million in 2019 when a property that they were trying to sell had a deal that fell through. 

I can't see the original price they paid for everything and the year that they bought each property. I'm sure with some digging that all that stuff could be found out. I don't think that book is over-stated. I am also not making any assumptions about the book being under-stated. Better to be conservative unless someone really knows for sure. 

Fun Fact

Warren Buffett used to own shares in the MNPP and ended up selling them to Walter Schloss. After I had invested in MNPP I found a really good article on Seeking Alpha, written by Thomas Niel on MNPP. In there he pointed this fact out.

If you have read the Snowball, then you might remember this being mentioned. From what I recall, the "favor" that Walter mentions here is when Buffett demanded that Walter sell him his shares in Berkshire. This was when Buffett was still in the acquiring phase of the stock. So he sold Walter a few stocks that were of really high quality and cheapness as a way of repayment. Super interesting that MNPP was one of them and that Walter had held on to it for so many years. That is kind of my thought process with this stock. Walter did super well with like a 30+ year holding period without having to touch the stock. I think it can be a lot of work to continuously sell stocks and then find new ones to replace them with. 

Disclosure

I own shares in MNPP at the time of this publication. I am an absolute Rook when it comes to investing, so don't take anything I wrote here as scripture. Ideally, this blog can serve as a starting place for your own research if it intrigues you. As always, please feel free to point out where I am wrong or right in the comments section. I am newish to investing and have so much to learn. I could be completely wrong on anything I write, so feedback is welcome. Cheers!

~ Calum