American Church Mortgage Company (ACMC)

American Church Mortgage is selling for 40% of intrinsic value, but, like many nano-cap stocks, has its share of risks and liquidity issues. Low insider ownership could pave way for activist involvement, but the company has by-laws in place that serve as a de-facto poison pill to prevent a takeover. Despite these risks, I believe this is a “value is its own catalyst” situation: no immediate catalyst to realize intrinsic value, but over time the stock should trade closer to intrinsic value (either due to activist involvement or increased awareness in the company).

Overview

Share Price: $2.10
3-Mo Avg. Volume: 591 shares
Shares Outstanding: 1.67m
Market Cap: $3.52m
Price/Book: 0.3
Revenue: $2.69m
Operating Loss: ($337,207).
Dividend (TTM): $0.24
Dividend Yield: 11.43%

American Church Mortgage Co. (ACMC) is a mortgage REIT that invests in loans and bonds backed by church real estate. The company was formed in 1994 by American Investors Group, a broker of church-backed debt securities. American Investors serves as the advisor to the trust, for which it received $324,000 in 2016.

A full listing of institutions to which ACMC has loaned money can be found here.

Source: 2016 10-k

As per the most recent 10-K filing, in 2016 ACMC generated $673,186 in net interest income on $34,493,414 in invested assets, giving us a net interest margin of 1.95%. This was down from $939,077 on $34,244,127 (2.7% net interest margin) in 2015.

Total provisions for losses were $155,056 in 2016, down from $188,634 in 2015. Operating Expenses were $855,337, an increase from $792,730 in 2015.

Operating expenses (excluding a $258,000 impairment on the bond portfolio) were $597,337-down from $792,730 in 2015. The bulk of this expense is the advisor’s management fee.  $126,450 was for amortization of deferred costs (on financing), $78,473 net loss/impairment on real estate held for sale, along with the management fee and other expenses (according to the 2016 proxy statement, Audit and Tax fees were $147,924 in 2015).

Despite posting a loss of $337,207 for the year, the company has continued to pay out dividends: dividends in 2016 totaled $427,840. This has given the stock a high yield (11.43%), but this comes at the expense of the company’s capital base.

Valuation

Source: 10-K filing
Source: 10-K filing

Total book value totals $11.5m (or around $6.85/share). Not bad for a stock trading in the $2.00 to $2.25 range.  But the $64,000 question is whether or not these assets have liquidity, or would the company have to take a haircut in the event of a liquidation. Compounding this is the heavy amount of leverage on the balance sheet ($25.1m in investor certificates). As mentioned earlier, the company holds ~$34.5m in invested assets: $22.4m in mortgages (net of $1.27m in impairment allowances, and $0.27m in deferred loan origination fees), and a $11.37m bond portfolio.

Could ACMC unload its mortgage portfolio if it wanted to? There are several relatively large financial institutions (Thrivent, Ziegler) that specialize in church mortgages; there are also dozens of small institutions and brokers (similar to American Investors) who are active in this space. I believe that there is enough liquidity for ACMC to unload their portfolio, but to be conservative I estimated a 5% haircut across-the-board ($1.72m).

To Summarize:

Current Assets  $    4,620,000.00
Mortgage/Bond Portfolio  $  32,000,000.00
Real Estate Held For Sale  $        340,000.00
Debt/Liabilities ($    28,060,000.00)
Net Value  $    8,900,000.00
Net Value Per Share  $                     5.30

 

This gives us a liquidation value of $5.30 for ACMC, meaning the company is selling for around 40% of intrinsic value.

Catalysts

Low Insider Ownership Could Make Way For Proxy Fight, But By-Laws Serve as de-facto poison pill

According to the 2016 proxy statement, the company has very little insider ownership:

Source: 2016 Proxy Statement

CEO Philip J. Myers holds just 4.98% of ACMC’s outstanding shares. Insider ownership as a whole totals 5.08%. There are no outside 5% holders.

This low insider ownership could give an activist the key opening to make a move on ACMC. However, the company’s by-laws prohibit a transfer of shares to any person who would, as a result, own more than 9.8% of the outstanding stock. In the event an individual acquires more than 9.8% of ACMC, the company has the right to redeem the shares, serving as a de-facto poison pill.

There are a few positives in regards to activism: the board is not staggered, meaning all 4 directors could be replaced in one fell swoop. The poor performance of the company (down from $4 five years ago) means long-term shareholders are likely unsatisfied with the company’s performance, and would possibly be open to a management change.

Risks

Realizing Shareholder Value Will Require Activist Involvement

Unless the company expands their capital base, it appears the net interest margin is not sufficient to cover operating expenses. Even assuming the operating expenses and impairment charges did not exist, the net interest income ($673,186) as a percentage of equity ($11.5m) is only 5.8% (less than the ~6% the investor certificates are yielding).

Liquidating the company and returning capital would be a better option to shareholders, but this will only occur if an outsider rallied shareholders and pushed for change. With the company enabled to repurchase stock from a shareholder who owns more than 9.8%, an activist’s ability to put pressure is limited.

Risky Assets

Church mortgages have several inherent risks: the first is that a church is special purpose real estate. In the event of a foreclosure, the lender would either have to find another congregation in the market for a property, or sell the property at a discount to a developer who could convert it for another purpose.

Church properties also face the risk of repaying the loan. A church is dependent on member contributions to fund operations and pay any loans on the property. With secular declines in church attendance, and aging congregations, many churches face the specter of closing down or merging, which could create a glut of church real estate. Churches are also dependent on their senior pastors. A senior pastor retiring, passing away, or otherwise leaving a church can affect attendance/member contributions.

ACMC has $5.3m in mortgage loans that are more than 3 months in arrears. The company has reserved $1.3m against these loans. Of these loans, $1.85m are in default. The company also holds real estate for sale (foreclosed properties) of $341,000 (the loan balance on these properties was $618,000).

Worst case scenario (if all the loans in arrears were foreclosed), I expect the company would be able to resell the properties for at least half of the loan balance ($2.65m). This is based on transactions from previous years.

Here is an adjusted valuation taking into account additional impairment of $1.38m (the difference between the current impairment reserve and a “worst case scenario” impairment reserve:

Current Assets  $      4,620,000.00
Mortgage/Bond Portfolio  $    32,000,000.00
Real Estate Held For Sale  $          340,000.00
Debt/Liabilities  $ (28,060,000.00)
Additional Impairment  $    (1,380,000.00)
Net Value  $      7,520,000.00
Net Value Per Share  $                       4.48

Even with additional impairment, the stock is trading for less than liquidation value.

Illiquid Stock

ACMC is a very illiquid stock that trades on the OTC. Only a few hundred shares change hands on a typical day. Entering or exiting a position would take some time.

Bottom Line

ACMC is selling for below underlying asset value. While these assets have some liquidity concerns, I believe the heavy discount provides a sufficient margin of safety. While I believe the impairment reserve is adequate, a recession could lead to more foreclosures, leaving the company with more illiquid church real estate assets. I also believe there is enough liquidity in the church mortgage market to liquidate the company’s assets.

While there is no obvious catalyst on the horizon to realize the underlying value of ACMC, the low insider ownership offers the opportunity for an activist investor (given the small market cap likely an individual investor as opposed to a fund) to push for a change in company policy. While the company limits the ability to accumulate more than 10% of the company, dissatisfaction amongst shareholders should give an activist a good shot of winning a proxy fight.

Disclosure: I am long ACMC.

Disclaimer:

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation from ACMC or any other entity for writing this article. I have no business relationship with ACMC, 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. 

ACMC is an iliquid stock with low trading volume and a market cap of only $3.52m. Please be aware of the risks associated with this stock. Do you own due diligence, and caveat emptor.