Voltari Corporation: Icahn May One Day Benefit From NOLs, Other Shareholders Not So Much

In what has become a seasonal sport, penny stock speculators have bid up the price of Voltari Corporation (VLTC) shares. The company, which was originally known as Motricity, was a failed mobile advertising company that threw in the towel and became a NOL (net operating loss) shell.

Carl Icahn was an investor in Motricity, then increased his position as the company ceased to be a startup (not Icahn’s typical scene) and became something more in his bailiwick (NOL shell).

The company should be familiar to SA readers: In early 2015, speculators pushed shares from more than 10-fold after news of Icahn increasing his position. Several SA contributors (Jeremy Raper, Paulo Santos, and Auspex Research) opined about the opportunity to cash out existing positions, but cautioned anyone looking to take a position after the mega-rally.

As with most bubbles, shares eventually tumbled back to Earth. Speculators looking for a quick buck bailed, and more fundamental-oriented investors read the 10-ks and decided better NOL opportunities lay elsewhere.

After continuing to slide back to early 2015 levels, another bump occurred in late 2016, with shares nearly doubling around the time Voltari moved from the NASDAQ to the OTC Markets (likely short covering). After this exchange change, the stock eventually fell to lows seen before the 2015 “Icahn-lift on steroids”.

After crumbling to all time lows in Fall 2017, the speculators came back, this time making a mountain out of a anthill: Icahn filed an amended 13-D, which disclosed that his entities purchased just a few more shares of preferred stock (with a value of $34,730.91). No increase in common share ownership (unless you count the percentage increase from 52.3% to 52.7% since the last 13-D/A filing in 2015, due only to a decrease in common stock outstanding).

Despite this, the automated articles that have increasingly become the “fake news” of the investing world picked up “Icahn” and “13-D”, and published a slew of articles. Coupled with a penny stock with low float, speculators bid up shares from $0.60 to $1.27 on December 20, 2017:

Again, after the pop, interest dissipated, until January 2, 2017, when shares saw a 52% bounce back to where the stock was trading on the December 20th “news”.

While this may be a textbook case of irrational investing, the question is: fundamentally, does Voltari offer investors any tangible opportunity?

This Time It’s Different-And Not In A Good Way

Voltari Corporation may be a great vehicle for a billionaire investor to utilize net operating losses. However, it is not likely to be a great opportunity for small investors looking to invest alongside a Wall Street legend.

Voltari is not Icahn’s only horse in the NOL stable: You may be familiar with Cadus Corporation (KDUS), a failed biotech startup that after years of dormancy became a flipper of luxury homes in the Miami area.

Despite presenting a compelling investment thesis (NOL utilization plus real estate development), long term Cadus failed to deliver to shareholders, unless they were fortunate to take a position in mid-2017.

Shares soared last September as Icahn announced an offer to take Cadus private at $1.30/share. Shares have since traded above the offer price ($1.44/share) as investors anticipate a higher bid will made be made (similar to what occurred with Federal-Mogul).

While both are NOL shells controlled by a high profile financier, Cadus has a lot more underlying value relative to its NOLs vis-a-vis Voltari.

Cadus’s luxury home properties are worth at least ~$25.5m (based upon Thingley Wangchuk’s conservative estimate) and ~$36m (book value as per last 10-Q). Add in ~$3.6m in other net assets, and the company has a net value of ~$29.1m-~$39.6m, against $21.4m in NOLs and $1.5m in R&D credits as of 2017.

Voltari, on the other hand, has a negative book value (due to preferred shares yielding 13%, paid-in-kind due to the company’s lack of cash generation) of ~-$54.8m, against federal NOLs of $498.6 million (as of December 31, 2016).

Quick Valuation of Voltari

Assets

Voltari’s primary tangible assets are two investment properties, located on the outer fringes of the New York metropolitan area.

Long Branch, NJ

Triple net leased to JP Morgan Chase, this bank branch property is located in Monmouth County, NJ (northern most part of the Jersey shore).

The current lease expires in 2020, and the company expects to generate an average of $203,000 of annual rental revenue during the current lease term.

Voltari paid $3.6m for the property (implied cap rate of 5.63%).

Flanders, NY

The second property is located in Flanders, NY (Flanders is located on the eastern tip of Long Island, north of the Hamptons).

7-Eleven leases the property under a double-net lease. The current lease expires in 2029, with average annual rent income estimated by the company at $162,000.

Voltari paid $2.8m for the property (implied cap rate of 5.8%)

Total Value of Real Estate

After depreciation, the current book value of the properties is ~$6m.

Given the recent purchase of the two properties, along with the reasonable valuation implied by the cap rates (understandable given credit-worthy tenants), I believe they are worth approximately the purchase price ($6.4m).

The remaining assets have a total book value of $1m. These include $572,000 in cash, $315,000 in prepaid expenses, and $100,000 in other assets (which based on the 10-K is likely restricted cash).

Voltari’s valuation allowance results in the company carrying their NOLs at zero.

NOLs

As of the end of 2016, Voltari had Federal NOLs of $498.6m. Due to a 2012 IRC Section 382 ownership change approximately $3.1 million of Federal net operating losses will expire unused, but this reduction will likely be replenished with new operating losses generated in 2017 and 2018.

Icahn should be able to use the NOLs without triggering limits on their use imposed by the IRS. As he has owned more than 50% of the company’s common stock since 2015, this year Icahn will be able to acquire the remaining common shares without triggering a Section 382 ownership change (which would materially reduce the ability to use the NOLs).

But what are the NOLs worth, especially with the recent changes in the corporate income tax laws?

Starting in 2018, the corporate income tax rate will be 21%. The new tax law limits use of future tax loss carry-forwards to just 80% of taxable income, but NOLs accumulated in prior years may be used to offset 100% of taxable income in future periods.

Assuming the NOLs can be completely used before they expire (expiration begins in 2019 for the Federal NOLs), they could produce a tax savings equal to $104.7m.

To give a rough value of the NOLs let’s assume they could be utilized within a 3 year period. At an 8% discount rate, the NOLs are worth ~$90m.

Given Icahn controls the common stock, and owns almost all of the preferred stock (which continues to grow in redemption value), he has complete leverage over the minority common shareholders.

Perhaps Icahn will make an offer that is reasonable and passes the sniff test. He offers to buy out the remaining shareholders at a price that gives the NOLs an implied valuation of half their present value ($45m). For purposes of this valuation we will make that assumption.

Total Asset Value

  • Real Estate: $6.4m
  • Other Assets: $1m
  • NOLs: $45m
  • Total Asset Value: $52.4m

Liabilities

Operating Liabilities

Operating Liabilities (deferred rent, accounts payable, accruals, etc.) total ~$900k.

Debt

If owning most of the common stock and almost all of the preferred wasn’t enough, Carl Icahn is Voltari’s primary lender.

Through a vehicle named Koala Holdings, Icahn provides Voltari with a revolving loan facility of up to $30m in aggregate principal amount. Voltari may request Koala to increase this to $80m under the current terms of the agreement.

Voltari has currently utilized $5.5m of this facility, using the proceeds to acquire the Long Branch and Flanders properties.

Preferred Stock

Voltari currently has one class of preferred stock outstanding (Series J). Icahn’s entities (High River, Koala) own 98% of the outstanding preferred shares.

The preferred shares carry an annual yield of 14%, which Voltari has elected to pay-in-kind. This has resulted in redemption value being bumped up by a cumulative of $24.4m.

As of the last 10-Q, the aggregate redemption value of the Series J preferred stood at $55.4m. As long as Voltari continues to pay-in-kind, the redemption value will bump up 3.5% quarterly, meaning the current redemption value (as of publication) of the preferred stock stands at $57.3m (or 7x market cap).

Total Liabilities

  • Operating Liabilities (current and non-current): ~$900k
  • Outstanding Debt (Koala Revolving Note): $5.5m
  • Redemption Value of Preferred Stock: ~$57.3m (accruing quarterly)
  • Total Liabilities: $63.7m

Conservative Valuation

With an assessed current value of $52.4m for the assets and $63.7m for the liabilities, I estimate the company (at the present time) is worth ~-$11.3m, or ~-$1.25/share. Barring any new developments, there is likely minimal inherent value to the common stock.

Implied Valuation

At the current valuation ($1.39/share and $8.2m market cap), investors are implying that the NOLs are worth $64.3m, or 71% of my estimate of their net present value.

Catalysts

Takeout Likely Not in the Cards

With his preferred stock accruing in-kind interest at an annualized rate of 14.75%, Icahn has no incentive to buy out the other common stockholders. By 2020, the series J preferred stock will have a redemption value of ~$75.45m, bringing them closer to the net present value of the NOLs.

In addition, Voltari has less than 300 shareholders-of-record. In theory, if Icahn wanted to eliminate administrative costs, Voltari could “go dark” and stop making quarterly filings. Again Icahn has many ways to play Voltari like a violin.

Icahn could also wait for investor interest to dissipate, and make an offer that one announcement is at a substantial premium to the prior trading price, but is at a price around what we are seeing today.

Likely Scenario For NOL Utilization

Based upon the increases in the Koala loan facility, along with the preferred shares continuing to accrue a redemption balance at a 14%, I believe the remaining common stock will not be acquired as seen in the Cadus deal. Icahn will continue to keep the company public, increasing his control via the preferred stock, and financing the company’s utilization of their net operating losses through continued expansion of the loan facility.

While so far Voltari has limited their real estate investing to net lease retail properties, in the future they could follow the lead of Trinity Place Holdings (TPHS), the successor to Syms that is using NOLs to shelter the future profits from a condo development.

While the Trinity Place situation has many differences (condo development is on site of former Syms flagship, management includes experienced team of real estate operators), a similar strategy could be utilized. The concentrated ownership of Voltari would eliminate the possibility of a future REIT conversion, but another strategic alternative could be utilized once the NOLs run out.

Bottom Line

While Carl Icahn may one day utilize the tax loss carryforwards of Voltari, it is unlikely shareholders entering the stock today will reap material benefit. With the Series J preferred stock accruing at a 14.75% annualized clip, it becomes more apparent minority shareholders will not be able to profit alongside Uncle Carl.

As seen in Cadus Corporation, investors had a tough time making money. Unless they had great timing, they most likely will tender their shares at around what they paid several years ago.

Speculators will continue to drive Voltari’s stock up and down, as automated financial news articles and idle chatter on financial social media sites bring in uninformed investors looking to make easy money.

With low liquidity and a fair amount of short interest (~471k shares, or ~11% of float)  Voltari is not an attractive short. With the volatility and potential for minor news causing material increases in the share price, Voltari continues to be a pass on the long-side and the short-side.

 

DISCLOSURE: NO POSITION

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