I’m going to be upfront- this situation is no where near my circle of competence, so take what I say with a grain of salt. That said, it looked pretty compelling when I stumbled on it, so I thought I’d share it with readers who are interested in special situations or have an interest in them.Atel Cash Distribution is a partnership that basically engages in equipment leasing. The company is structured as a partnership and is currently in its liquidation phase and will liquidate all of its assets by December 2013, in addition to distributing any and all of its income to shareholders.
Book value of ~37 cents is much higher than today’s price 20 cents. Because all of the equipment was acquired between 1993 to 2004, book value is likely not a reflection of the underlying equipment value. I have no insights into the value of this equipment (most of it is for transportation, mining, or oil and gas equipment). These seem like items that would retain significant residual value (more so than their depreciated value), but again, I have no insights. The company does mention in their 10-K that the value of their equipment should INCREASE with inflation (see page 9).
The company paid distributions of 5 cents in 2009, 8 cents in 2008, and 5 cents in 2007 and has generated ~7.3 cents in operating cash flow in the first nine months of 2010 (so this year’s distribution should also come in around 5-8 cents). All of the company’s equipment are on long term leases, so their cash flows are relatively stable until the equipment comes off of lease, at which time the company will sell the equipment and return that cash to shareholders.
Note- It sounds like the distributions qualify as return of capital, not dividends, which could make the company interesting from a tax perspective.
My take- this seems like a great special situation opp. Given that the company will liquidate and distribute proceeds to shareholders by December 2013, a significant catalyst is in place and you can easily figure out your IRR in several scenarios. When you look at the current cash flows and then add in the book value of the company (which, again, could be substantially understated), its hard not to come up with an ultimate distribution value of 45-50cents per share, and quite possibly much more. Versus a current share price of 20 cents, that’s a lot of upside. Again, this business / situation isn’t in my circle, so I’m staying away from it, but it is definitely worth a look.
If any readers have any thoughts or experience with this type of situation, I’d love to hear them, either on here or through email.
The two main risks – book value is actually overstated, which results in distributions coming out significantly less than anticipated (could also be caused by selling into a weak economy). I don’t think this is too big a risk, but it is a possibility. Main risk- the stock has almost no liquidity. It could be very difficult to get your hands on shares at a price that makes sense.
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This is outside my circle as well, but I’m going to start digging in and maybe I can educate myself. One thing I did come across as I started looking for documents on the SEC was that it appears Atel has a bunch of similar LLCs which made it a problem finding the correct one.
I eventually got it, but that raised the question in my mind why they have so many entities. Is this a situation where they’ll sell the assets to another LLC that management controls? I have no idea if this is the case, it’s just the first thing that popped in my mind on seeing a dozen similarly named LLCs apparently doing similar things. Perhaps there’s a good explanation, I’m going to keep digging, will let you know what I find.
interested to see what you find, good to have another person look at it
So from what I’ve found, this particular unit is probably not a good call right now. As you’ve probably seen, it’s highly illiquid right now, even the 10k acknowledges there’s no market for the unit. I may check out some of the other funds they’ve got that aren’t being closed, there’s a list here if you’re interested- http://www.atel.com/investors/10ks.html .
It looks like this particular unit is almost entirely consisting of equipment that’s leased in the railroad industry, especially rolling stock. That potentially could play into the tax treatment that you mentioned. As it’s set up as a pass through entity I think you’re correct that the distributions are tax free return of capital. However I think this is also a situation similar to gas pipeline MLPs where the tax liability is also passed through on a K-1 tax form. In the case of MLPs this can lead to having a tax liability in every state that the MLP’s pipeline passes through, which would not be fun. Check the statements, they didn’t pay any tax as entity.
If I’m correct on that, the other thing I’d point out is that the book value figure you cite is only going to be unlocked by selling all the assets which after 10-20 years of depreciation probably have a tax basis close to zero, which means you’re going to be paying taxes on .37 a share. That means you’re looking at paying 12-13 cents, leaving 24-25 cents a share.
Finally, I’m not sure if in ZZEFB you’d have a tax liability for every state their rolling stock goes through or if the only state would be where Atel is HQed. If I were looking to pursue ZZEFB I’d definitely clarify that with the company.
So, in short, I’m passing, but I’m going to keep looking at their other LLCs, maybe something will look a bit more enticing.
Interesting points, and thanks for looking into it! I agree with alot of them. One that I’m questioning though
If I’m correct on that, the other thing I’d point out is that the book value figure you cite is only going to be unlocked by selling all the assets which after 10-20 years of depreciation probably have a tax basis close to zero, which means you’re going to be paying taxes on .37 a share. That means you’re looking at paying 12-13 cents, leaving 24-25 cents a share.
If an asset has a tax basis of zero but is on the book for having some value, the difference in taxes will show up as a deferred tax liability (which would thus be a deduction from book value). So they shouldn’t have a problem with book value taking a hit when they sell the equipment (and thus, the investor shouldn’t be paying any extra taxes). Still have to worry about normal taxes on the distributions though
You may be correct, accounting’s not my forte, but it looks like it’s the other way around, the book value is low (not zero, I was merely making a point) and the tax value is higher.
Let me know if I’m reading the 10k wrong, link’s here- http://www.atel.com/investors/10ks/f510k09.pdf
The info is on page 19 of the pdf near the bottom.
Thanks,
Mike
Another thought- it’s a pass through entity and pays no income taxes, and I can find no item for deferred tab liability, so how would this be taken care of? Or are you suggesting that the tax liability would have already been passed on to unit holders in the past?
wow, nice find…. i decided to pass so didn’t dig too hard through the footnotes
I think that makes it even more interesting.It means they’ve been over depreciating their assets when presenting to shareholders, and likely understating their book value (most of the times, this over depreciation would result in a deferred tax asset, but it looks like they didn’t accrue one, so book value is likely significantly understated in that case).
Yeah, this looks really cheap.
If anything, I would bet that book value understates the value of the partnership.
Certainly, this equipment looks like it still commands decent leasing rates.
And it would make sense if it is carried on the book at less than its true value, since the standard straight-line depreciation methods used don’t account for inflation. This can cause a company’s hard assets (such as ZZEFB’s rental equipment) to be valued in, for instance, 1995 dollars, which would understate their value in 2011 dollars.
Unfortunately, it looks nearly impossible to get a position in this, but thanks for pointing out an interesting scenario.
Its pretty easy to get a position in it go to the website secondary market. As the cost of new equipment goes up i.e. inflation, manufacturing costs it raises the value of used equipment. This fund is not the one you want. 9 -15 are good values and there are people out there who want to get out but don’t understand they take a huge haircut if they try and sell it.
We’ve just discovered my very old, very ill father in law gets a small check from this fund about once per quarter and cannot figure out how he can get out of this fund. Any suggestions?
Thanks
I would just keep it. The fund is liquidating and the commissions and spread would likely eat up most of the proceeds from the sale.
The reason why there are so many LP’s under the LLC structure is b/c its a private equity program. SEC law states 2 yr funding period then you have to open a new fund. As far as FUND V, its MACRS accelerated depreciation across all the funds Book Value is approx 20%. Historical residual value is 51% of cost. Fund V-VIII. had a different structure and portfolio of equipment including large vessels.If you want to play the spead funds 9 & 10 are very healthy. Value should be about 8 per unit. Its not a stock. Its a tax shelter and preservation of income and capital play as well as alternative asset.
I disagree with James in that I believe the funds that are closer to liquidation offer the best value. If buying undervalued assets, the closer to liquidiation the better IRR (IMO).
Well, turns out you were right! I have been accumulating these over the last year and a half at $.24 – $.29 per unit, received $.15 in 2011 distribution, and they just announced a liquidation distribution of $.50, with potential for more. Basically, the railcar/containers were worth 2 – 3x book. I will take the tax hit any day with that type of return.
I have been trying to do some research on this particular investment for years since I inherited some 10,000 units. Im not educated enough to understand a fraction of what anybody commented about it so would someone be willing to explain this to me in laymans terms because I have thought about selling them for years.
Richard, which ATEL partnerships do you hold? I would not sell them. If you want to sell them, you need to go through one of 5 or so brokers that specialize in selling them. The price you get on the market is a fraction of the underlying value IMO. That is why I buy them whenever I can. Sit back and enjoy your distributions.