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PMC Commercial Trust (PCC). Real Estate Investment Trust (REIT) operating out of Dallas, TX.Commercial lender which originates collateralized loans to small businesses and sells themOriginates loans primarily to the limited hospitality industry (hotels and motels), but also to commercial outlets;
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1. PMC Commercial Trust (PCC)
2. PMC Commercial Trust (PCC) Real Estate Investment Trust (REIT) operating out of Dallas, TX.
Commercial lender which originates collateralized loans to small businesses and sells them
Originates loans primarily to the limited hospitality industry (hotels and motels), but also to commercial outlets; hotels constitute 94% of loans
Does NOT make loans to subprime or residential borrowers
3. Types of Loans PMC is a direct lender rather than mortgage broker
PMC makes a variety of small loans, generally between $100,000-$4mil; the average loan is $3.1mil
Loans come at both fixed and floating rates; terms usually 20-25 years
PMC participates in the SBA and B&I governmental loan programs for small businesses
4. Market Conditions PMC is currently feeling increased competition from banks in the limited-hospitality loan sector
At the same time, credit market disruptions and interest rate cuts have decreased net interest income
PMC nevertheless anticipates loan originations of $50-60mil. for 2008
PMC has expanded its share in the SBA 7(a) federal loan program; in 2007 its commitments and approvals grew from $2.9mil to $7.0mil.
Prepayment of both variable and fixed-rate loans has stayed high with low interest rates; PMC collects one-time fees on prepayments.
5. Statistics Market Cap: $82mil.
Assets: $230mil.
Equity: $156mil.
Debt: $59mil.
Price/Book: .52
Price/Sales: 3.72
Forward Annual Dividend Rate: 10.40%
6. 5-Year Financial Statistics
7. PORTER’S FIVE FORCES
8. Rivalry Competition includes: specialty commercial lenders, banks, broker dealers, other REITs, savings and loan associations, insurance companies, etc.
10K 2007: “many of these competitors have greater financial and managerial resources than us, are able to provide services we are not able to provide, and may be better able to withstand the impact of economic downturns.”
Due to increased competition from other lenders, “our ability to offer fixed-rate loans is constrained by our cost of funds.”
Basically, offer less attractive lending rates than others ? variable rate lending
9. Threat of Substitution Other banks
Other REITs
Fixed rate lending companies
Differentiation
Assigned personal Business Development Officer, flexible loan terms, understanding of borrowers’ businesses
PMC provides direct contact with lender, better information, services
Offers additional lending if firm chooses to expand, not solely SBA loans
Emphasis on customer excellence & personal attention
10. Buyer power vs. Supplier power Diverse buyers, with many choices of lenders
Buyers not concentrated
Loss of one borrower would not have a material adverse effect on PCC
PCC generally finds loan opportunities through personal contacts, internet, attendance at trade shows, local commerce, direct mailings, advertisements in publications, and referrals. In order to fund new loans, PCC borrows funds or sells loans
Source: structured loan transactions
Derive income from hotel properties
11. Barriers to entry Need a lot of capital
Competing with banks
Not many barriers to entry, but still pretty high
Develop good relationship with hotel franchises, other borrowers, etc.
12. Direct Competitor Comparison Ashford Hospitality Trust (AHT)
Capital Trust (CT)
Both are larger than PCCin fact, CT has positive revenue, unlike PCC
PCC has a fairly large operating margin of 63%, compared to 13%, 69%, 41%, 34%
Net income is good, positive, respectable for a company of its size
Room for growth! =)
13. Strengths Goes through rigorous evaluation of borrowers
Substantial down payments are required
“Cash outs” are typically not permitted.
Obligor is personally liable for the loan.
Loans made to less risky businesses, such as national franchises: Comfort Inn, Hampton Inn & Suites, Holiday Inn Express, Best Western, Clarion and Candlewood Suites
14. Weaknesses Small REIT, only 46 employees
No diversity in regions where loans are originated
Originates mostly variable-rate loans, which are not as attractive to borrowers
15. Opportunities Small business, so it has room to grow
Originate more loans
Increase scope of regions where loans go out to
Possibility of real estate industry coming back
16. Threats Competing with other loan originators with better rates and better services
Hotel industry is highly volatile, making loans is risky
Future of real estate industry not looking too bright
17. Valuation - WACC Risk Free Rate: 3.743%
Market Equity Premium: 4.5%
Beta: 0.53
Cost of Equity re= 6.128%
Debt to Total Capital Ratio: 1/3; Equity: 2/3
Cost of Debt: 7.8%
Tax rate: assumed 35%
WACC = (2/3) (.06128) + (1/3) (.078) (1-.35) = .05775 = 5.775%
18. Valuation - DCF See Attachment
Value per Share: 18.53
19. Valuation – NAV Unique quality: no depreciation
(Rents – Operating Costs) * (1/cap rate) = estimated value of property portfolio
Then + tangible assets – liabilities (but not intangible liabilities).
Finally, divide by # shares outstanding
20. Valuation – NAV If we assume an 8% cap rate: NAV = 19.05
If we assume a 12% cap rate: NAV = 17.57
Current Price: Around 7.50