Real Estate Dev Mishorim Stock Opportunity

There is an interesting Israeli real estate developer that has caught our attention. It can be invested in directly via the company's stock or bonds on the Tel Aviv Stock Exchange.

Here are highlights from an economic analysis commissioned by Portfolio Management firm Cramim by Senior Financial Analyst Zuri Ilan. [TABLE=30] (This analysis is intended for institutions only; see legal disclaimer at the end of the article)

Company Overview

Mishorim ("Levels") Development Company Limited is engaged in the initiation and development of real estate projects, hotels, tourism and resort properties in Canada and Israel. The group owns income-producing real estate properties, hotels and other assets totaling about 85,000 sqm and land for development and improvement totaling approximately 3,000 housing units and more than 13,600 acres.

The company is controlled by businessman Gil Blutrich, Chairman of Mishorim and President and Chairman of the Canadian subsidiary Skyline. Mishorim's business strategy includes identifying opportunities in stable and and developed countries, identification of strategic and financial partners to reduce risk, equity extraction, development and asset enhancement, improvement of cash flow and asset realization with significant capital gains. Mishorim is characterized by excess yield compared to the industry while maintaining a low risk profile.

Primary Activities

• Hotel Management - management, acquisition, holding, improvement and sale of hotels, resorts and rental hotel rooms.
• Real Estate Investment in Canada - initiation, development, construction and sale of real estate for usage in residential, commercial, hotels, recreation, industrial and office settings in Canada.
• Rental Real Estate and Development in Israel - initiation, development, operation and sale of entrepreneurial and income-producing projects in Israel.

Corporate Structure

Mishorim Development Corporation:

• Direct ownership of assets in Israel
• 70.31% interest in Skyline Canada Israel
• Skyline Canada Israel has a 94.36% interest in Skyline International Inc.

Mishorim Awarded a "Buy" Recommendation

Mishorim made a number of positive, significant moves last year that required us to renew our attitude about its stock valuation. Despite the weakness of the market and in particular the weakness of small cap Israel stocks, we actually now find a opportunity to award a "Buy Recommendation" with a target price of 17.1 shekels, reflecting a premium of 98% over the price in the market today (as of the date of analysis).

The management at Mishorim continues to surprise and show consistent success and steadfastness of strategy that it set for itself by the ability to improve assets and their sale with significant profits in relation to its size. We can see this in the realization of assets in Israel and Canada, especially in the last two years as operations and the significant potential future in Canada (via the controlling 66% interest of Skyline International) starts to gain momentum and taking off with a return to economic stability in Canada.

The company recently demonstrated its ability by a land sale in downtown Toronto (Temperance 66) with a significant cash profit of about 94 million shekels within only three years, and the sale of luxury apartments at the King Edward Hotel for a profit of about 15 million shekels within a few months with a full equity recovery. These are just two examples of many that have not yet manifested themselves in the stock's performance.

Holding Mishorim's shares reflects a direct exposure to the strong and developed economy of Canada, which has infinite potential for entrepreneurship. The enormous potential of existing assets of Skyline, combined with a relatively low risk level, will cause the stock to climb sharply with the onset of the second stage of the company's asset improvement plans.

Some Key Properties

King Edward (17%) - the purchase this property with a number of sizeable partners in Canada raised the company another notch. Within only a few months, the group managed to improve and sell unused land for a total profit of $24 million which will be recognized in the first half of 2012's financial reports, which will in fact return 50% of its investment from its hotel activities, and that doesn't include the increase of cash.

Deerhurst Resort - in January, the company completed the acquisition of the site at a price of $26 million with a $19 million bridge loan. It is likely not coincidental that the bridge loan was taken now, as this year the company plans to sell 124 condominium units + 95 land parcels for building for a net profit estimated as at least $ 22 million. Here, too, the company will succeed in restoring the equity invested in the acquisition plus additional profit within a short period of time.

Horseshoe Valley - without relating to the internal growth of the field of hospitality and hotel management, there also exists in this property high potential value. Here, too, one can not ignore the success of the company to increase the building rights to approximately 1276 units + 370 additional hotel rooms + 37 000 square meters of retail space. The entire site was purchased for $36.8 million when the company last year invested another approximately $3.4 million in renewing the park that offers adventure sports and recreational activities. This investment will immediately increase the NOI already in the coming year. Again in this case, just the future incremental value from the enterprise yields high capitalization rates of 18% - 20%, which cannot be understated.

Port McNicoll - The land was purchased at "bargain" price of only about $8 million with residential, commercial and hotel building rights. The management of the company has been able to improve  the value of the land and increase the building rights from approximately 650 units to approximately 1512 units in addition to increasing rights in the hotel and retail spaces. In the first stage with the sale of less than 5% of the land's potential, the company returned all capital invested and thus paved the way for the second phase which has a more significant future value according to all estimating methods and current valuations. Even at high capitalization rates of 16% - 25% the future value is significant.

Skyline Tower - April 2011, the Company signed an agreement to sell the land at Temperance 66 for approximately - 140.4 million shekels. After repayment of the mortgage totaling about $13 million, the company expected cash flow surplus amounts to 94 million shekels. The company’s proven ability to improve properties has not been reflected in its share value.

Activity in rental properties in Israel - the company manages rental properties in Israel with a fair value of 167 million shekels when the annual NOI attributable to the company amounted to approximately 13.1 million shekels in 2010. Despite an increase in cash flow forecast in the coming years following the continued increase in occupancy and rent price increase, we think they are fully priced.

Skyline International (66% interest)

Has potentially immense value for years to come. In accordance with the strategy, the company has made in recent years purchases of assets with tremendous upside potential, which with a conservative approach amounts to evaluating them at at least $113 million.

In the valuation we carried out on Mishorim, we chose to focus on the activities of Skyline Canada, as we believe that most of the future value of assets will come from asset improvements and from major property rights of the company.