This article originally appeared on ValueNeverSleeps.com on May 27, 2018.
For an individual investor, “OTC Dark” companies offer a treasure trove of opportunity. There are plenty of opportunities for deep value investors managing their own accounts to take advantage of “information arbitrage”.
In this series, The Nanocap Journal seeks to investigate the darkest of the “OTC Dark” side-companies that hold their financials close to the vest. While many non-SEC reporting companies will provide financials on their websites or via link on OTCMarkets.com, many stick to a full “lights out” policy.
These de-facto private companies may offer limited liquidity, but if you are interested in taking a position of a few hundred shares, it may be worth your while to dig deeper into some of these names.
To start off this series, we’ll take a look at Cloverleaf Kennel Club. I first heard of this company when I read Nick Bodnar’s 2016 Seeking Alpha article detailing companies listed in the 1996 Walker’s Manual of Unlisted Stocks (fun fact: the 2000 edition is available for “e-borrowing” at Archive.org).
Prior to 2008, Cloverleaf Kennel Club was the operator of a greyhound racetrack in Loveland, Colorado. Due to dog racing’s steep decline, the track closed its doors and sold off the land to developers. The company, however, continued to trade on the OTC (note-this company appears to have been non-reporting since at least the pre-EDGAR era).
Before I reached out to management, I wanted to construct a ballpark estimate of the company’s value via public records.
This was followed up with a look at the company’s filing history. While most modern filings have limited public information, submissions from prior to the 2000s (posted in PDF form) provide interesting details:
The 1995 report lists Luther Hess as a director of the company. Luther Hess was the patriarch of a family heavily involved in dog racing since the 1920s, most notably as owners of Ebro Greyhound Track in Florida (which they still own). Luther’s son Stockton is listed as director in the 1999 report, indicating the Hess family likely retained their interest in Cloverleaf.
The most recent periodic report provides little information-just the name of the company’s registered agent and current mailing address.
Place of Business Address Key To Mystery
After putting Cloverleaf aside for a few days, I realized any entity setup by the company likely shared the same address/registered agent. Searching by this address, I came across the names of two entities: Cloverleaf West Waters LLC (set up in Florida) and Cloverleaf Lakeshore 100 LLC (set up in Alabama). Both shared Arcis Investments (a real estate investment firm based in the Tampa Bay area) as their registered agents.
It appears from this that the proceeds from the sale of the land were invested in what were likely 1031 exchanges, in deals managed by Arcis Investments.
In their portfolio, Arcis manages two properties connected to Cloverleaf’s LLCs:
Cloverleaf West Waters
Cloverleaf West Waters owns a property known as West Waters, located at 5471 W. Waters Avenue in Tampa, FL. The 23,778 square foot flex building was acquired by Cloverleaf West Waters in 2008 for $3.5m.
Cloverleaf Lakeshore 100
Potential Net Value of Cloverleaf Kennel Club
Digging around some more, I came across mortgage records for Cloverleaf Kennel Club, its affiliated LLCs, and the two properties.
The West Waters property was originally mortgaged for $2.1m. The Birmingham property was originally mortgaged for $4.946m. Subtracting these from the sum total of the original purchases ($10.7m) gives us a net value at time of purchase (late 2008/early 2009) of $3.65m, indicating essentially all of Cloverleaf’s assets at the time where invested into these deals.
Here is a copy of the company’s refinancing on the two properties. This loan was backed by both properties.
Based on the snips above, the properties were valued by Cloverleaf’s lender at $10.7m, with the initial loan balance set at $6.55m, giving us a net value of $4.15m. Based upon CLVFA’s outstanding shares (conflicting figures-Walker’s 2000 lists 892,374 shares outstanding, OTC Markets lists 786,624), this gives us a valuation of $4.65-$5.28/share. To be conservative, we’ll go with the $4.65 valuation. With the current ask of the stock at $2.90/share, this represents a discount of ~38%. Prior to the most recent transaction, ask price was $2.15/share, a ~54% discount. There have also been recent transactions of several thousand shares changing hands at $2/share, so patient investors may be able to get in at a 50% discount.
Caveats To Consider
- Carried Interest/Profit Participation held by Arcis in both properties. Although the Florida property has failed to appreciate, the Alabama property has appeared to appreciate, plus mortgage balances for both have been reduced over time via principal payments.
- Liquidity: Unless we see a repeat of prior transactions (motivated seller unloading a few thousand shares around $2/share), likely will not be able to secure a meaningful position in the 50% discount to book area.
- Additional assets may be on Cloverleaf’s books. In 1999 Cloverleaf had net current assets of ~$300k in 1999. It it unlikely this grew during the track’s later years, and was likely utilized in the two real estate transactions.
- Cloverleaf Kennel Club is more than a defunct dog track: it is the owner of at least two real estate properties, and sells at a discount to book.
- Additional research is warranted, but I have taken a token position to solidify my request for financials
- Due to the lack of a phone number/email address, I am reaching out via mail to obtain a copy of the financials.
- Given the iliquid nature of the stock, and the lack of concrete information, a heavy discount is likely justified.
- Few potential catalysts, as shareholders likely prefer to defer taxes by holding onto shares. If any of the properties are sold, they will likely continue to defer taxation via 1031 exchanges.
DISCLOSURE: Long CLVFA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation from CLVFA or any other entity for writing this article. I have no business relationship with CLVFA, or any other company referenced.
This article is for informational purposes only, and should not be construed as investment advice. Please consult your financial advisor before making any investment decision.
CLVFA is an iliquid stock with low trading volume and a market cap of less than $2m. Please be aware of the risks associated with this stock. Do you own due diligence, and caveat emptor.