Buy PCC before merger

Last year I wrote about the merger of PMC Commercial Trust (PCC) with CIM Urban REIT. After some shareholder revolt, It looks like the merger will go through. To reiterate, here are the details of the merger:

  • 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.

Currently, PCC trades at $9.50. 

Because of the shareholder revolt, CIM three founders have “agreed to purchase up to 2.75 million shares of PMC Commercial at a market price of up to $5.00 per share under a 10b5-1 trading plan. The plan generally will expire on the date that 2.75 million common shares of PMC Commercial have been purchased or August 10, 2014, whichever is earlier.” Read more about the agreement here.

The agreement should provide a price support to the post-merged company. I expect the shares to trade higher from $9.50 to $10+ in coming weeks. I owned some shares for years and have loaded up recently after the agreement was announced.

Disclosure: I am long PCC

Income Securities Watchlist

Currently, I am wary of income producing securities because interest rates are so low. As a result, I’m concentrating on income securities that have adjustable rates or are convertible. However, two of these three securities are neither adjustable or convertible. Here are some securities that are on my watch list.

AVF (AIG $25 denominated 7.70% Junior Debentures)

I have written about this security before, but it is finally at the price ($25.08) that I am comfortable with. Here are the brief details of the security. Read full analysis here.

  • Symbol: AVF
  • Principal Amount: $25
  • Coupon Rate: 7.7% or $1.925 before December 18, 2047. Three-month LIBOR plus 3.616% thereafter.
  • Call Date: December 18, 2012. AIG can redeem all ($1 billion), but not in part  before if a “tax event” happens or a “rating agency event” occurs anytime before December.
  • Mature Date: December 18, 2062, which can be extended to December 18, 2077
  • Distribution Dates: 3/18, 6/18, 9/18 & 12/18
  • Current Price: $25.08
I would buy AVF at any price around $25. 

HAVNP (10.25% capital securities New York Community Bancorp (NYB))

Here are the details of the security:

  • Symbol: HAVNP
  • Principal Amount: $10
  • Coupon Rate: 10.25%
  • Call Date: Currently callable $10.36, in 2013 callable at $10.31, etc..
  • Mature Date: 6/30/2029
  • Distribution Dates: 3/31, 6/30, 9/30 & 12/31
  • Current Price: $11.22

The danger with this security is that it can be called at anytime at $10.36. However, I’m not sure NYB will call it because:

  • NYB gives a dividend of 7% on the common shares.
  • The float is really small for HAVNP ($25.5 million).

To be safe, I would buy these at $10.50 or under. The price does drop to that range once in a while.

 PCC

PMC Commercial Trust (PCC) is a REIT that makes loans to “small businesses collateralized by first liens on the real estate of the related business, primarily in the limited service hospitality industry.” Most of the loans they make are mostly guaranteed by the SBA (Small Business Administration). They sell off the guaranteed portion and keep the rest. 

The reason I am watching this stock is:

  • They are trading at almost half of book value.
  • They pay almost a 9% dividend.
  • There has been inquiry from private equity about the company and it has formed a special committee to study those inquiries.
  • Most of their loans are adjustable rates. Due to the low interest rates, they are really hurting. They are still profitable if you back out the costs for the aforementioned special committee. If interest rates rise, the stock price should rise with it.

There are risks associated with this stock:

  • Their income is not covering dividend payments. So, they could cut the dividend in the future.
  • Their loans are concentrated in the hospitality industry and in one region (Texas).

I have a small position in this stock that I initiated a while back. However, I’m waiting to see what happens before I buy more.

Disclosure: I am long PCC.