Tuesday, March 28, 2023

VAA JV Properties Offered, What’s Subsequent?

Over the weekend, information got here out that Transcontinental Realty Buyers (TCI) and their accomplice, Macquarie, sold the assets inside their Victory Abode Apartments joint venture for a total of $2.04B (which was the unique thesis from my December 2021 post for some background).  On an annualized Q1 2022 NOI foundation the sale was executed at a 3.85% cap charge, on a ahead foundation it’s most likely a bit above 4% as rents are resetting significantly greater on this sunbelt portfolio.  Given the present financial backdrop, that worth looks like an amazing exit for TCI as I used to be nervous shareholders can be upset with no sale or one across the latest $1.4B appraised worth (as disclosed on p13 of their recent 10-Q).  The sale is a bit difficult in that 53 properties have been offered in whole with 7 of these properties being offered again to TCI on the similar valuation as the remainder of the portfolio.  After paying off mortgage debt and transaction charges, TCI expects to internet $320MM in money from the sale after $100MM they’ve earmarked for taxes.

The sale is predicted to shut inside 75 days (~early September), put up deal closing TCI will display screen extraordinarily low-cost on a worth to e-book foundation as their fairness VAA three way partnership is being carried on the books for $50.6MM whereas they’re netting $320MM in money plus the worth of the 7 holdback properties, that delta in my estimation nearly doubles the e-book from $45/share to $86/share.  Shares commerce for round $43, even after the sale announcement, about 50% of proforma e-book worth.

The sale press launch provides restricted particulars, however utilizing the Q1 10-Q and a few swag math, we will again into the worth of the 7 holdback properties.

A $2.04B topline price ticket, minus the $851MM of mortgage debt, nets $582+MM in worth to TCI.  Then backing out the remaining earnout owed to Macquarie, some transactional prices and the corporate’s estimate of taxes, the plug to get to $320MM is about $125MM in worth for the holdback properties.  I am most likely off there, in order all the time, right me if I made any main errors.

Then Pillar, the exterior supervisor owned by the controlling shareholders, is due an incentive charge for the capital features associated to the VAA sale, the mathematics is difficult and troublesome to mannequin out, however they’re due 10% of any capital features above a 8% annualized hurdle charge.  TCI estimates their tax charge at 21%, if the corporate’s estimate of $100MM in taxes is correct, let’s simply guess the motivation charge is roughly $35MM for our functions.

With some basic math, including the web money to TCI, estimated worth of the holdback properties, subtracting out the motivation charge and the earlier carrying worth of the JV partnership.  I get the under proforma e-book worth.

As soon as Q3 earnings come out and e-book worth is reported (November timeframe if it closes in Q3), perhaps some quantitative methods take discover?

In fact, e-book worth tends to understate the worth of actual property firms as a consequence of depreciation and historic value components.  Beneath I’ve taken most of TCI’s steadiness sheet and pulled it aside, I am lacking a pair issues of their restricted money and their different property, there’s restrict disclosure round these two line objects.  I’ve put market multiples on the multifamily and industrial segments, grossed up their land at their Windmill Farms improvement to roughly equal what the going charge for his or her acreage has been just lately.  I get somewhat beneath $100/share in NAV, which might be on the conservative aspect.

One potential supply of hidden worth is of their convertible loans, right here they lend cash to builders with the choice to transform the mortgage to 100% fairness possession within the properties.  The phrases aren’t disclosed however 6 of the 9 improvement loans in that bucket are on stabilized property.

However the large query stays, what’s going to TCI do with the proceeds from the asset sale?  Within the press launch, the corporate says:

the Firm intends to make use of of many of the money stream it should obtain from the aforesaid in subsection 3 above to make new investments and to develop its multifamily residential property portfolio.

That does not sound too promising for the prospect of minority shareholders being purchased out and certain why it did not pop on the JV sale information.  However the controlling shareholders personal 85% of TCI (principally through ARL), leaving ~1.3 million shares within the float, if insiders provided shareholders $65 that may be an $85MM test, effectively inside reserving “many of the money for brand new investments” and would additionally switch $45+MM of worth to insiders if my NAV is plausible.  They’ve by no means had this a lot liquidity earlier than, the patriarch died three years in the past, Pillar Asset Management has a new CEO that has inherited this loopy construction, perhaps we see one thing occur as soon as the deal closes.

Different ideas/objects:

  • Sure, that is externally managed, there is a 0.75% administration charge on gross property plus a ten% charge on internet revenue and capital features.  Not tremendous shareholder pleasant, however they’re actually solely grifting on the 15% of minority shareholders.  I do not see a number of profit to them staying public even with the administration charge construction, they have not tried to develop (they do not even difficulty shares to themselves, share depend has remained regular over time), there’s public firm prices that they are bearing (on three totally different ranges, ARL, TCI, IOR), it might appear to take advantage of sense to make the most of the large low cost out there by tendering for the remaining float.
  • The company construction right here is de facto complicated, nearly all of TCI’s property are within the Southern Properties Capital entity that was created to difficulty bonds in Tel Aviv.  The industrial properties, the remaining and holdback multi-family properties, all ought to present loads of collateral to again the excellent Israeli bonds giving them liquidity to do a young supply.
  • ARL and TCI are each coming into the Russell 2000 on Friday.  ARL traded unusually for some time, buying and selling effectively above parity with TCI, I switched from ARL to TCI, however it’s price monitoring each of them sooner or later.  I am guessing many of the index shopping for has taken place forward of the reconstitution however given the extraordinarily low float (what a dumb index that would come with both of those at their full market cap!) we might see some unusual worth motion.
  • One lazy error in my again of the envelope mannequin — one of many properties within the wholly owned multi-family section was included within the asset sale, so there’s doubtless a tiny little bit of double counting, however should not be too materials.  There’s restricted disclosure to parse aside, so I simply ignored it. 

Disclosure: I personal shares of TCI

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