A UDF “Residential Development Project Life Cycle”: Where Did UDF IV Public Shareholder Money Go? by Hayman Capital Management
“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffet
A UDF “Residential Development Project Life Cycle”
- UDF I receives bank loan
- UDF I starts residential development
- Financial crisis / housing crisis hits
- UDF I defaults on bank loans from the lending bank (Premier Bank)
- Premier Bank fails; FDIC is appointed as receiver
- RCS Capital raises capital from retail investors that are “starved for yield”
- .RCS Capital funnels retail capital to UDF IV
- UDF IV funnels public shareholder capital to Centurion American (“Centurion”)
- Centurion pays millions to UDF I for “assistance” and “services”
- The payment, in part, allows UDF I to recoup realized losses incurred by UDF I and its private investors at the expense of the public shareholders of UDF IV.
A Scheme To Recover Past Realized Losses With New Capital
UDF I began operations in 2003 principally as a lender to real estate developers and as an equity investor in real estate developments. The principal investors in UDF I are Hollis Greenlawand Todd Etter, CEO and Chairman, respectively, as well as other management insiders and “friends and family.” Unfortunately for them, UDF I was long real estate, in a levered way entering the financial crisis in 2007. As presented in the following case study, UDF I lost 100% of its equity investment in this specific investment and incurred millions in losses; however, it appears that UDF management partially recovered UDF I losses by using funds from public shareholders in UDF IV. This case study is yet another example, illustrating a continued pattern of management’s poor investment track record, in stark contrast to its claims in an investor presentation (June 2014) that management “identified the housing bubble and avoided lending in frothy markets.”
During the financial crisis, UDF I got behind the “eight-ball,” but rather than accept the losses (like so many others had suffered) which resulted from poor real estate investment decisions and an over reliance on leverage (debt), UDF management tapped public markets, through a public offering of UDF IV, in an apparent attempt, at least in part, to dig themselves out of a very deep hole. After charging upfront double-digit fees and commissions (10-15% of an investor’s capital) to entice self-dealing brokers and investment advisers to sell shares of UDF IV to the public, UDF never “caught up” and now is in a much deeper hole.
Management has raised one UDF fund after the next in an apparent attempt to obscure substantial losses in prior funds by moving non-performing loans from one fund to the next. UDF management describes the pattern and practice of using new investor capital to buy loans from affiliated funds “as the advantage of investing in projects previously underwritten and actively monitored by UDF as those projects move through the development stages.” In doing so, management tries to justify economically irrational decisions by using very carefully penned disclosures which ultimately mislead investors.
[drizzle]The following case study highlights the controversial nature of UDF management’s scheme. During the financial crisis, UDF I defaulted on bank loans in excess of $22 million (related to one specific residential development), and losses were crystalized in late 2011 / early 2012; the lending bank lost almost 50% of its funded loan balance (approximately $10.6 million) and ultimately failed. In a normal situation, the equity provided by UDF I should have lost all of its investment. Instead, however, UDF’smanagement diverted funds to UDF I and used UDF IV’s public shareholders as the source of capital. UDF management facilitatedthis by using its largest borrower, Centurion American and its principal, MehrdadMoayedi(collectively “Centurion”), as the conduit.
UDF management directed UDF IV to lend $12 million to Centurion in order to acquire UDF I’s defaulted bank loans from the estate of the lending bank. In conjunction, UDF management directed UDF IV to over lend to a Centurion affiliate, which used the excess funds (approximately $8-$10 million) to funnel cash back to UDF I in late 2011 / 2012.What should have been a $12 million loan four years ago (2011), now has a balance of approximately $30 million today (as of 9/30/2015) on UDF IV’s books, across threeloans. As part of the scheme, UDF I received an $8 million payment, purportedly for “advisory services and assistance with the property.”
Why did the payment for these so-called “services” and “assistance with the property” –funded by UDF IV –go to pay UDF I (rather than UDF IV) given that “management” for UDF I is largely the same as “management” for UDF IV? In reality, the payment to UDF I represents what we believe to be a transaction to facilitate UDF I recouping its past losses, which was funded by UDF IV and directed by UDF management, using its largest “borrower,” Centurion, as a willing conduit.Based on the available public information, there does not appear to be any legitimate business purpose for the transaction or any other economic rationale for the series of transactions. This insider transaction was also not disclosed to UDF IV public shareholders.
Williamsburg Is A Centurion Development In Fate, TX
Williamsburg Was A UDF Development In Fate, TX
Williamsburg Is Located In Fate, TX (Near Rockwall)
What Williamsburg Phase I Looked Like When UDF I Defaulted
CTMGT Williamsburg Acquires The Defaulted Loans
In total, $12.1 million was required to acquire the Premier Bank defaulted loans ($8.7 million + $3.4 million)
UDF IV Financed CTMGT Williamsburg’s Acquisition
- UDF I defaulted on loans, which should have resulted in a 100% loss for UDF I’s private limited partners
- UDF I’s equity partner (Meritage) walked away from the deal, assigning its interest in the joint venture back to UDF I
- UDF IV (public shareholders) lent to Centurion to acquire the loans multiple years later
This establishes that UDF I was levered and long real estate entering the financial crisis; it also begins to establish UDF management’s poor investing track record
See full slide below.