Mortgage company investors demand its liquidation

by Ryan Smith02 Jun 2017

Investors in a California mortgage company are so dissatisfied with its returns that they’re demanding the company liquidate itself, according to a news release.

In an open letter to Owens Realty Mortgage, Freestone Capital Management – which, together with its affiliates, owns about 7.6% of Owens’ outstanding shares – slammed Owens management for “questionable decisions” and its “continued destruction of shareholder value.”

“We believe that Management should explore the immediate liquidation of the Company to close the value gap between the Company’s current market price and our estimated liquidation value, thereby returning capital to the Company’s long-suffering investors,” wrote Gary I. Furukawa, Freestone founder and senior partner.

Furukawa wrote that Owens and its predecessor, Owens Mortgage Investment Fund, had “a long-term history of trailing market returns.” According to Freestone’s calculations, between Jan. 1, 2009, and May 31, 2017, investment in Owens gave shareholders returns more than 15% below the returns of the FTSE NAREIT Mortgage REIT Index.

“We believe that this enormous gap is due to a flawed business model which penalizes shareholders and primarily enriches Management,” Furukawa wrote. He wrote that Freestone believed that Owens paid above-market fees to its external manager, Owens Financial Group.

“In our view, this explains why the Company, with a tangible book value of approximately $214.9 million, incurred an aggregate operating loss from 2010 to 2016 of approximately $7.2 million,” Furukawa wrote. “Based on these numbers, we believe the only winner here is the Owens Manager, with the shareholders stuck with an underperforming investment.”

Furukawa slammed Owens for its perceived “long-term enrichment” of its own management at the expense of shareholders. Between 2010 and 2016, the company paid Owens Financial Group more than $28 million. “During the same period, the company had an operating loss of $7,178,271!” Furukawa wrote. “The Owens Manager’s compensation keeps rolling in while shareholders lose money – in our opinion shareholders are clearly losing at the expense of Management. Not surprisingly, (Owens Financial Group) is owned by Company insiders.”

William C. Owens, executive chairman of Owens Realty Mortgage, owns 62.5% of Owens Financial Group, while Owens President and CEO Bryan H. Draper also owns a significant chunk.

Furukawa said the agreement between Owens Realty Mortgage and Owens Financial Group created a conflict of interest. He also said that continued mortgage lending by the company – which would result in millions of dollars in additional fees to Owens Financial Group – would be “a breach of the Board’s fiduciary duty” to shareholders.

“After more than eight years of poor returns, instead of continuing to bet on unprofitable and risky loans, the Company should recognize reality and return its underperforming capital to its long-suffering shareholders,” he wrote.

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