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GenCorp, the defense company with real estate holdings in Sacramento, California, is unlikely to turn into a short-term high return opportunity for activist shareholder Steel Partners, sources familiar with Gencorp’s holdings told dealReporter. The Sacramento real estate market is reeling from the increased pressure of the depressed US housing and construction industries, which will limit Steel Partners’ options with regard to any short-term transactions.
Steel Partners, which recently was granted three board seats, is likely to push for changes to maximize the value of its investment after gaining three board seats and prompting GenCorp to oust Chief Executive Terry Hall last month. The firm has a 14% stake in GenCorp, but has not publicly stated any strategic plans.
Real estate aside, GenCorp could consider launching a buyback program using its USD 72.5m of cash or adding debt given their leverage ratio of 3.43x as reported in the company’s first quarter results. Given a share price of USD 10.34, only 8.7% above its 52-week low of USD 9.50, this may be an attractive option. However, considering its negative free cash flow, the company might be better off reserving its cash position to pay for more pressing issues.
However, the enormous amount of land stuck with a non-related aerospace business was always there as a potential trade off for an activist investor.
As part of its core defense business, GenCorp acquired thousands of acres of land around Sacramento, California, to perform rocket tests. During the run up in the real estate market in the early part of the new millennium, Sacramento’s land values shot up and activist hedge funds filed multiple 13-Ds attempting to draw attention to the value tied up in GenCorp’s unentitled raw land. GenCorp is currently in the process of seeking entitlements to develop about half of the approximately 12,600 acres it owns in the Sacramento area.
The risks associated with the entitlement process are significant to the timing of the eventual sale of the land, but the environmental cleanup of the old rocket testing facility has put a wrench in activists’ attempts to break the company into parts, consisting of defense and real estate, one top shareholder said. The shareholder said because part of GenCorp’s land was designated as a Superfund site by the US Environmental Protection Agency there was a possibility that splitting the company into its components could void the agreement with the EPA and cost GenCorp the government’s financial support of the cleanup.
A source familiar with real estate in the Sacramento area said he expected GenCorp’s land - with the exception of that within the Superfund program - to eventually be given entitlements by California regulators. The source said he believed the land would become developable in stages beginning with Rio del Oro, Glenborough, and then the area located in the City of Folsom and later the borough of Westborough. He said there was little clarity on when Westborough would be entitled because the entitlement process could take so long, but said it would be more than three years from now.
Recent comparable land sales in the area are dismal, according to the first source and a second source also familiar with GenCorp’s and other real estate in the Sacramento area.
Recently, national development companies have been unloading inventory to achieve favorable tax treatment through loss accounting, according to the two real estate sources.
In the Sacramento area 800 “ready to build” lots recently sold for USD 45,000 per acre or USD 9,000 per lot, the sources said. The second source said a builder is unloading lots bought for USD 124,000 each three years ago for USD 17,000 each today. It could take up to three years to clear the market of unwanted inventory, putting further pressure on prices in this market, the real estate sources agreed. The current oversupply in the market compounded with GenCorp’s land still tied up in the entitlement process pushes the timing of a any potential deal for GenCorp’s real estate into the distant future, the two real estate sources agreed.
In an earnings conference call Wednesday GenCorp said they expected their Rio del Oro and Glenborough holdings could be entitled and ready for development this year. The two sources disagreed, saying it could take much longer, especially in the case of Glenborough because of the potential for delays linked to environmental or permitting factors.
The two real estate sources familiar with GenCorps’ land holdings in the Sacramento area said the land was relatively valueless compared with its value back in the real estate boom. The sources estimated that in its current state, as unentitled raw land, GenCorp’s land was worth about USD 25,000 per acre. Unentitled, GenCorp’s raw land could have been worth between USD 100,000 to 150,000 had they sold back during the boom, the second source said. The first source said Rio del Oro, one of the divisions of GenCorp’s huge swath of land, could have been worth between 500,000 and 700,000 per acre had it been entitled during the boom.
GenCorp has in the past been opposed to offloading real estate in large land sales as it would have impacted its balance sheet by artificially inflating annual revenue figures, the first source said. Now the company would be lucky to find a buyer who would be willing to hold the land and wait for the market to come back, he added. But this same source said GenCorp’s real estate strategy was to maximize value through entitling the land and finding joint venture partners for development and future sale.
The first source said one of the reasons GenCorp is opposed to large land sales was the strong negative reaction from the board to a sale of 1,115 acres of unentitled raw land to Elliot Homes for about USD 25,000 an acre in 2001. Though the board did not approve of the valuation, the source said, as a part of that deal the buyer, Elliot Homes, agreed to help GenCorp entitle an additional 2,700 acres next to the Elliot Homes property in the Rio del Oro division.
Steel Partners would take no immediate action to either sell the land or split the company, the shareholder said. The shareholder said that Steel would likely continue with the entitlement process and prepare the land for a sale at some point in the future when the real estate market improves. He said that once a greater portion of the land was closer to entitlement the share price for GenCorp would trend towards USD 25 per share to reflect the value of the land.
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