UCP - UCP Inc.

[no_thanks]

Really excited about this one I got from the Coho Capital Letter.  They are a recent spin-off from Pico Holdings.  A homebuilder with approx. 6,659 lots in the area just south of San Francisco and the Puget Sound area of Seattle.  They spent $190M on lots in 2008-2009.  They are selling for P/B of 1.2 vs. avg. of 1.8.  In 2011, their avg. lot sales netted 100k, vs. 31K its current EV is implying. 

 

The attached letter does a much better job of going over the relevant points.  Let me know what you think.  TIA.   

Coho-Capital-2013-Year-End-Letter-PDF-Version-1.pdf

[Guest Dazel]

 

It's cheap....but Pico is cheaper.

 

Dazel

 

[SI]

Love when I spoke with one broker on the price 2 weeks ago and he agreed it is cheap but he called out the liquidity and the drought as reasons the stock is "dead money".

 

Who knew Wall Street was full of weatherman?

[Guest Dazel]

 

 

you should speak to the real estate brokers in the area....we did.

 

wall street is dumb.

 

what was its beta again? stupid.

[Guest Dazel]

 

And if wall street were weathermen...they would be buying pico for its water assets...getting UCP for a few cents on the dollar.

 

dazel

[no_thanks]

Love when I spoke with one broker on the price 2 weeks ago and he agreed it is cheap but he called out the liquidity and the drought as reasons the stock is "dead money".

 

Who knew Wall Street was full of weatherman?

 

Just curious, what is the reason to talk to a broker? 

[SI]

wanted to find out about the IPO botch job, how did the deal break the buck.

[Guest Dazel]

 

 

pico should have sold UCP whole not an ipo. It was a mistake.

[SI]

they still can and today's price is likely higher than what they got back then and defn higher than what the mkt gave them.

[intensityjp]

Interesting find.  My partner and I have been buying property primarily at trustee sales here in Northern California for the past five years. This idea seemed like one right up our alley since we have some pulse on the market in the area.

 

Still going over the S-1 and latest quarterly filings but the first thing that popped out to me regarding the 6,659 lots and the implied per lot valuation mentioned in the thread of 31k is that it does not take into account that 2,278 of the lots are controlled through options and are not funded on the balance sheet yet. 

 

From the S-1 as a comparison, they had 726 pending lot sales which required 35mm to close. The lots in the bay area were around 65k, fresno 26k and Washington 45k per lot. 

 

Based on those numbers it seems like the controlled inventory as of Sept 2013 of 2278 will require around 80-100mm (perhaps more) to close based on geographic distribution and respective price/lot. 

 

[no_thanks]

Interesting find.  My partner and I have been buying property primarily at trustee sales here in Northern California for the past five years. This idea seemed like one right up our alley since we have some pulse on the market in the area.

 

Still going over the S-1 and latest quarterly filings but the first thing that popped out to me regarding the 6,659 lots and the implied per lot valuation mentioned in the thread of 31k is that it does not take into account that 2,278 of the lots are controlled through options and are not funded on the balance sheet yet. 

 

From the S-1 as a comparison, they had 726 pending lot sales which required 35mm to close. The lots in the bay area were around 65k, fresno 26k and Washington 45k per lot. 

 

Based on those numbers it seems like the controlled inventory as of Sept 2013 of 2278 will require around 80-100mm (perhaps more) to close based on geographic distribution and respective price/lot.

 

Thanks for the feedback.  This doesn't make it sound like nearly as good a value as the Coho letter described it as.  They should have the cash to fund these, but with the implied lot value of 31K vs. the lot values you mention for the three locations, it looks like it is pretty accurately valued here.  I wonder what it is that is leading to the two different valuations between you and Coho? 

 

Anyway, appreciate the reply, and best of luck to you and your partner.  Sounds like a fun job. 

[greenbriar]

I think there's still upside even if you discount the options to $0.

 

Assumptions:

Assume lot options are worth $0.

Assume fully-owned lots net 50K instead of 100K.

 

 

Calculations:

Number of fully-owned lots = total lots - options = 6659-2278 = 4381

Discounted lot value = (100K * 0.5) = 50K

Percentage ownership of UCP LLC = (1-0.577) = 0.423

 

 

Total lot value = 4381 * 0.423 * 50K = 92 million

Current enterprise value = 72 million

 

So upside still seems to be ~28% with these very pessimistic assumptions. 

 

If you assume the more optimistic case where the options are worth 20K each and the fully owned lots actually net 100K, then you can start seeing the Coho case for 100%+ upside.

[no_thanks]

Thanks for breaking that out for us.  That must be what they are seeing, and are feeling pretty confident we are closer to 100k vs. 50k for lot values. 

 

I guess rising interest rates would hurt them though.  I am feeling pretty confident that it is a safe bet, but we will see. 

 

Has PICO said what they are planning to do with the rest of their stake?

 

 

[Packer16]

One rule of thumb you can use for lot values in 15 to 20% of a home sales price (after improvements -finished lot not raw land).  So if you know where the lots are located you can see what home prices are selling for and come up with a rough estimate in addition to using the local transactions.

 

Packer

[no_thanks]

Well, these results don't look to great.  Hopefully I am just missing something.

 

UCP, Inc. (NYSE: UCP) reported Q4 EPS of ($0.25), $0.37 worse than the analyst estimate of $0.12. Revenue for the quarter came in at $29.6 million versus the consensus estimate of $30.03 million.

 

Revenue from homebuilding operations in the fourth quarter rose by $16.2 million, to $25.9 million, as compared to $9.7 million for the same period last year. The improvement was primarily the result of a 170.8% increase in the number of homes delivered to 65 during the 2013 period, as compared to 24 homes during the 2012 period. An increase in the number of selling communities to nine communities at year end 2013 compared to four at year end last year was the primary driver of growth in deliveries. Average selling price declined slightly to $398,000 during the fourth quarter of 2013, as compared to, approximately $406,000 during the fourth quarter of 2012. The decrease in average selling price was primarily a result of geographic mix.

 

Revenue from land sales for the three months ended December 31, 2013 was $3.7 million compared to $20.1 million in the same period in 2012. This decline in land development revenue reflected both our shift in focus to our homebuilding operations during 2013 and moderated demand for land in the second half of 2013.

[GregS]

Given UCP's small size and how they are trying to ramp up their homebuilding, I think we have to expect choppiness in their results.  It makes it a tough company to value, and you really have to go with price to land values.  Of course, the land values aren't worth that much if they can't build profitably.

 

The soft GM on homebuilding is concerning, which they attributed to having lots of newer communities with introductory pricing.  Homebuilding was up YoY but flat sequentially, which isn't surprising given Q4 is going to be seasonally weaker.  There was also general slowing in the housing market, which the company noted.

 

One item that struck me was their statement that they will now engage in spec building.  The fact that they didn't do this was one of the things I liked about the company.  They explained it by saying they need to jump start new communities especially with spring buying season coming, and that the data they see in the housing market support building on spec.  I suppose that's true - I wouldn't be interested in this if I didn't like housing fundamentals.  But that's also how homebuilders get in trouble.  I felt like the no spec building was something they touted in their investor presentation from last year, and I went back to the website to check, but it's now gone.  I was just looking at the presentation this week but didn't save a copy.  Interesting.

[jeremykgold]

q2 results

 

http://online.wsj.com/article/PR-CO-20140811-909304.html

[Evolveus]

The semi-recent CoHo Capital presentation on UCP was pretty compelling in regards to lot values vs current market value of UCP shares.

[racemize]

The semi-recent CoHo Capital presentation on UCP was pretty compelling in regards to lot values vs current market value of UCP shares.

 

Are you referring to the annual letter, or is there something more recent?

[BG2008]

Link?

 

The semi-recent CoHo Capital presentation on UCP was pretty compelling in regards to lot values vs current market value of UCP shares.

[spartansaver]

Just bumping, anyone looking at this since the share price has been depressed from earlier levels?

[Lowlight]

Link?

 

The semi-recent CoHo Capital presentation on UCP was pretty compelling in regards to lot values vs current market value of UCP shares.

 

Attached is the link I believe you were looking for.  I found it today in my search for information on the company.  Looks like this includes all of the presentations from the MOI conference in 2014.  I haven't been able to get through them all though but found the names interesting.

 

http://www.valueconferences.com/wp-content/uploads/2014/06/ideas14-presentations.pdf

 

Seems like UCP hasn't been discussed in a while despite losing 33% of its value in recent months.  I have only recently come to look at the company so have little to offer regarding insights into the company's position.  I see the stock tanked around third quarter earnings release and has fallen further since.  In 2014, the company acquired Citizens Homes to gain a foothold in the Southeastern US and raised debt financing of $75 million.  I live in Atlanta, GA and can attest to the rebound in the housing market here, especially within specific pockets where lot inventory declined quickly after the recession.  We have seen price appreciation in areas back to post-recession levels and I expect that many areas of the country are seeing the same.  Additionally, jumbo loans seem to be a product that many banks wish to offer as a portfolio product so I would suspect that California home buyers are finding access to fairly cheap and easy capital.  So with all that said, I'm surprised to see the company selling off so much.  The lot position has a fairly large value, even after excluding the lot options (which are certainly worth something).  Was interested if anyone else has begun looking back at UCP given the sharp decline.

 

 

 

 

[no_thanks]

Thanks for the link.  Something I have a problem with is getting interested again in a company that I lost money with.  Not really rational...  Anyway, yea they have got to be hitting a some sort of strong support due to valuation here pretty soon.  I will start trying to follow it again.  Looks like they are selling for below book value at this point. 

 

I am in ATL as well, if you ever want to get a drink or something. 

[GregS]

UCP is selling at around 75% of book value despite the fact that book value is almost certainly understated.  About 39% of UCP’s land holdings were purchased during the 2008-10 time period and 55% was acquired prior to 2012.  Since their real estate is carried at cost basis yet has appreciated since the downturn, the true value of UCP’s real estate is higher than its accounting value.  The stock has been down, likely because UCP has been transitioning from a land developer to a homebuilder and has not yet achieved profitability.  However, given current trends, this may be about to change.

 

UCP was bought by PICO holdings (ticker: PICO) in 2008 as a vehicle to purchase distressed real estate.  UCP went public in 2013 at $15 and PICO still owns about 57% of the company.  There’s an article about PICO in last week’s Barron’s if you are interested in learning about the company.  UCP has land and homebuilding operations in California, Washington state, Tennessee, North Carolina and South Carolina (the last three states were added when they bought Citizens Homes in March 2013).

 

What is the true value of UCP’s real estate assets?  I don’t know, but at 75% of an understated book value, I don't need a scale to know the man is fat.

 

So can the homebuilding operations achieve profitability?  Are there other means to monetize the assets?  Yes and yes.

 

UCP is focused on increasing sales and margins and recent results show the efforts are working.  In Q2, home deliveries were up modestly, rising 11.6% to 154 units.  Homebuilding revenues were up only 1.5% to $50.8m thanks to a lower ASP (geographic mix – home prices are lower in the SE).  Net orders, however, were up 54.9% to 206 units and the backlog increased 121% to 274 units ($112.1 million).  ASP for the backlog is $409k vs. $330k for Q2 (suggesting a mix shift to the West).  UCP is seeing sales accelerating and can expect higher revenue both from unit volume and ASP.  The pace of deliveries has slowed a bit as UCP transitions from spec sales to dirt sales, which is why the increase in orders didn’t translate to an bigger bump in deliveries.

 

Margins are moving in a positive direction.  Homebuilding gross margin was 17.1% in the second quarter, up 50 bps from Q1.  Management is targeting a 20% gross margin, but said they will be unlikely to hit that target until next year.  The higher ASP in the backlog suggests that GM will continue to rise in the second half (higher ASP suggests higher mix to the West, where UCP has delivered a higher GM).  UCP was actually able to reduce G&A expenses by 6.6% YoY.  G&A stood at 11.8% of total revenue, which is still too high but is improving.  Sales and marketing expenses was 8% of total revenue, which also needs to come down.  The upshot was 17.1% gross margin, SG&A at 19.8% of revenues, leading to an operating loss.  But their control over G&A expenses is very encouraging, and rising home deliveries and revenues should allow UCP to achieve further operating leverage.

 

Here’s the CEO on the earnings call:

Analyst:  You mentioned in the past when you were on the road that you are laser focused on profitability and a few other mentions of it on this call. Do you think it’s possible to be near breakeven or better in the quarter that we are in or I guess you are halfway through?

 

Dustin Bogue - President and CEO:  Yeah, we feel pretty good about Q3 and Q4, we are not providing specific guidance right now but the metrics that we are really truly focused on is gross margin and order growth, which we are achieving on both. If you look at our backlog margin which again we haven't provided specifics on, but as management, we’ve seen pretty strong growth in margin over the next two quarters.

 

Let’s run some rough numbers for next quarter and see how it might go.  Assume estimated deliveries of 200 versus their backlog of 274 (which would be a bit higher rate of deliveries out of the backlog vs Q2).  ASP assumed at $375k (vs. $409 ASP in the backlog).  Honestly, I’m just guessing at some numbers here, but these are realistic given the most recent quarter, trends, and management comments.

 

Q3 estimates:

($1000’s)

Deliveries   200

ASP   375

Revenue   75,000

GM   17.5% (improvement from 17.1% in Q2)

Gross profit  13,125

S/M   6000 (8% of revenue)

G&A   6700 (3% increase over Q2)

Op. income  425

Op. margin  0.57%

 

This gets us pretty close to breakeven.  Any further improvement in sales and margins will lever up nicely.  UCP still has work to do, but they are very close to being profitable and might get there this quarter. 

 

This estimate doesn’t include any revenues or profits from land sales, which may provide another source of profits for UCP.  Majority owner PICO is under enormous pressure to monetize their assets, including their stake in UCP.  Central Square Management filed a 13D for PICO last week.  Central Square called for PICO to sell UCP to a homebuilder in need of lots, believing UCP could sell for at least $11 per share book value, and possibly $14 per share to reflect fair market value of the real estate.  PICO has declined to discuss any such moves in detail, but has repeatedly said they are confident UCP management is exploring all alternatives for creating shareholder value.  For its part, UCP management has indicated that there is strong demand for lots particularly in the South SF Bay and  Seattle, and they do expect to see some sales throughout the year.  Land sales are unpredictable and irregular as they tend to be opportunistic, but all signs point to some asset sales later this year.  With pressure on PICO and recent M&A activity in the homebuilding industry, more significant transactions are also possible.

 

That said, PICO’s track record and realizing value is quite poor (hence the activist).  I think the biggest risk to UCP is that homebuilding gets to about breakeven but doesn’t really improve from there.  The stock would probably languish until that changed or they sold the company, which may take some time.

 

Balance sheet: $38.4m cash, $159.5m debt, 37.1% net debt to total capitalization.  The stock price is $8.16, up almost 9% since earnings yesterday morning and about 17% since its low a month ago.

 

Comments welcome.

 

[SI]

Hard to argue with the analysis at these prices so I agree but the risk/reward even up is better at Pico. Pico is in a business with higher barriers to entry, more geographically advantageous, less competition, more downside protection, not subject to the int rate environment, much stronger cyclical & secular story, no debt and at a greater discount to intrinsic value if you believe the management that controls Pico and UCP. I grant you that it is more complex but complexity is the friend to the value investor and usually the source of larger pricing discounts even if you do not believe management or the 3 activists knocking on the door.