Mindset Capital presentation on opportunity in real estate – Owens Realty, UCP – from the ValueX Vail, June 2015.
Home Prices Continue to March Higher
Owens Realty Mortgage (ORM)
- From 1990-2007 Owens Realty was a successful private mortgage fund paying over 8% annual yield to investors
- Financial crisis caused the fund to foreclose on most of its loans and suspend dividends
- In 2013 converted into a REIT and went public to provide liquidity to investors
- Currently a public company that has no analyst coverage, pays a small dividend with substantial real estate assets, and has a small loan book
$100m Property on the Books for $53.7m
- 11.5 entitled acres in the heart of Heavenly Valley Ski Resort area of South Lake Tahoe
- Entitled for 477 Hospitality Units, 58,000 SF of retail, 20,000 SF meeting space and 19,000 SF Spa Facilities
- April 2009 appraisal was in excess of $100 million
- Recorded at cost of $53.7m on balance sheet
- 3.5 hours from SF & should benefit from tech boom
- Entitled status difficult to replicate
- Property is currently being marketed for sale
Miami Condo Project
- Ocean front location in North Bay Village, Florida
- 154 condo units in Pointe Tower (renovated in 2005-2007) that are managed as apartments.
- 15 condo units (out of 160 total) in the South Tower. Also renovated in 2005-2007
- Rental units are 95% occupied with $19.63 annual rent per square foot
- 160 units in North Tower. Building is 100% vacant and Owens Realty is in the process of renovating the building completion estimated Q4 2015
- At $200k per unit net of sales cost, should be worth close to $66 million.
Valuation Analysis
Sale Proceeds = Dividends to Investors
- Owens Realty has recently completed the sale of three properties for over $24 million in proceeds ($15m gains above book value)
- Recently announced increase in regular quarterly dividends to $0.08 per share, or 2.2% annual yield
- Announced a special one time dividend of $0.10 per share payable for shareholders as of June 30
- In late May, announced a buyback starting at the end of June for up to 5% of the company
Summary
- Current dividend is 2.2% (excluding special one time dividends) and rising
- Book value is $17.18 per share and rising
- NAV is at least $20 per share
- Stock trades around $14.50 per share
- Classic underfollowed, misunderstood microcap with little downside and uncertain upside
- Potential risks: disappointing sale prices and delayed timeframe of property sales
UCP: An Undervalued Homebuilder
This Isn’t an Encouraging Chart
UCP History with Shareholders
- Poorly received IPO in 2013 with PICO Holdings retaining a 57% stake in UCP
- IPO to take advantage of the lots UCP had acquired in the financial crisis
- UCP has experienced operational problems and generated losses as they have scaled up
- Confusing story with a development arm and a homebuilding arm
- Has yet to prove they can generate income and returns for shareholders
UCP’s Future: Turnaround or Sale
- “We have encouraged UCP to evaluate options for unlocking shareholder value” PICO’s Q4 earnings release
- PICO, the main shareholder, is losing money and is actively marketing one of its main assets.
- UCP cannot be far behind if it doesn’t show significant improvement
- Doesn’t make sense for UCP to be public with a market cap of $60 million.
- Recent merger activity points to significant cost savings in mergers
- Ryland and Standard Pacific estimated $50 to $70 million in savings in their merger
Tailwinds for UCP
- There is a shortage of homes with new single family home construction staying at generational lows
- John Burns Consulting estimates that we are at the beginning of a 15 year bull market for homebuilders
- UCP’s markets are very strong in Seattle, Nashville, Northern California, Southern California, North Carolina, and South Carolina
- Latest new home sales data rose to a seven year high and is up 24% for the year through the month of May
UCP is Very Cheap
- Stock trades near $8 and has a book value of $10.81 per share
- Average P/B multiple of homebuilders is close to 2 times
- They bought most of their land in the heart of the crisis and that book value is significantly below market value
- UCP owns 6,886 lots, in very attractive locations
- UCP could double in value by returning to its IPO price
- Risks include continuation of operational losses, majority investor not pushing for change, drift.
See full PDF below.
