Backing Out The Probability of Winning the Emminent Domain Case
Instead of owning Gyrodyne outright, you could synthetically create the payoff to the emminent domain case, and with this date, you could figure out the probability the market is assigining to Gyrodyne’s chances of winning the case. Gyrodyne has a market cap of $32.26M, but has a NAV by my estimates of at least $44M. The payoff to the emminent domain case is around $98M outright, but comes out to around $66M after legal fees are paid assuming a third of the money will go to the lawyers. A lot of this is imprecise, so I will use my best judgment and welcome people to correct any mistakes they spot under these assumptions, or if they have better assumptions to use.
Using these assumptions:
$44M NAV + $66M CASE = $100M GYRO
44 /100 + 66/100=100/100
66/100= 100/100- 44/100
So going long 100 shares of Gyrodyne & short 44 shares of Gyrodyne would create the following payoff if the eminent domain case had a favorable settlement:
[($77.51*100)-(25.01*100)]+[(44*25.01)-(44*77.51)= [$7751- $2501]+[$1100.44-$3304.4]
= $5250-2203.96= $3046.04
The total cost of financing the position, ignoring any short rebates from our prime broker, would net out to:
Long 100 Shares- Short 44 Shares= $2501- $1100.44= $1400.56
The question becomes a matter of what we think the odds of winning the emminent domain case are. The market seems to currently be assigning a probability of 46% based on the financing cost divided by the potential payoff.
Below are US equity closed-end funds that trade at a discount to NAV below -30%, along with the fund’s monthly premium/discount to NAV since inception. Although some discount to NAV may be warranted to adjust for liquidity, some of these spreads below seem somewhat extreme. My thought is to begin searching for investment candidates in closed-end funds that trade at a substantial discount to the historical premium/discount NAV spread with the idea that the spread will snap back into place. Once candidates for further research are selected, the normal due diligence process of fundamental analysis will begin to verify those values.
(Data Source: www.etfconnect.com)
Tortoise Capital Resources Corp. (TTO)
Premium/
Discount to NAV: -66.74%