PMC Commercial Trust (PCC) Interesting Merger

For a while, I have been meaning to write about interest sensitive stocks stocks. One of these stocks that I have had in my portfolio for quite a while is PMC Commercial Trust (PCC). PCC is a REIT that makes small business loans in the hospitality industry. The company focuses on SBA loans in which the government guarantees a substantial portion of the loan. The government portion is then sold at a profit to investors. PCC keeps the non-guaranteed portion of the loan.

PCC had been trading around $7-$8 for a long time and what made it a interesting investment was:

  • It gives a steady dividend. Currently, it is $.50 annually. In the past, it has been been above a $1. 
  • The majority of the loan the company keeps is variable interest rate loan (LIBOR based). With interest rates going up, it is an opportunity for the company to earn more money and increase dividend and stock price over the coming years.
  • It trades at a significant discount to its book value of $13+.

Before I could write this up, the company announced a merger with a private company, CIM Urban REIT last week. The stock shot up over a $1. Here is the press release, but here are the simplified details:

  • Existing shareholders will receive a special $5.50 dividend.
  • The merged company will have a implied valuation of $2.439 billion (based on CIM Urban equity) and pay a dividend of 3.5 after the merger.
  • PCC shares should trade at $10.50 (pre-dividend of $5.50) if the merged company trades at the implied valuation.

The stock is trading at $9.38 today. There are a couple ways to win here:

  • It is hard to say what the company will do post merger since we don’t have the specific financials of CIM, but if it trades near the implied valuation, there is upside here.
  • The deal undervalues PCC. CIM could come in with a better offer at shareholder dissent or a rival could make a better offer.
  • At 9.38, the merged company trades at over a 20% discount to the implied valuation and I don’t see it going down much further.

If the deal does not go through, the stock could fall, but this is a stock that would be to hold due to rising interest rates. For now, I am keeping my shares.

Disclosure: I own shares of PCC.