With so much uncertainty in the world, looking at one’s investments, much less thinking about where to invest, might be towards the bottom of many people’s “things to do while staying in” list. Successful investment strategies include looking at opportunities when the instinct is to hunker down.
The pandemic has created tremendous turmoil in the markets and in people’s lives. Businesses, stocks, and commodities have all been hard hit. At the same time, the crisis has sparked conversations about the need for long-term investments – whether for public health surveillance, economic and societal supports, climate or infrastructure. Real estate companies are one way for investors to support this shift to long-term thinking while also diversifying their portfolios.
Company description: UC Asset LP (OTC:UCASU) invests in real estate primarily in and around Atlanta. In its first four years of operation, the Company focused on improving residential properties to meet growing demand for high-end residential properties in Atlanta’s northern suburbs. The demand was generated by a large number of companies relocating to Atlanta and building their offices in Atlanta’s northern suburbs, away from the city’s traditional business hubs in Buckhead and Downtown Atlanta.
UC Asset has raised approximately $8.6 million to date including a $0.3 million private placement in March 2020. From 2016 through 2019, net equity per unit grew 39%, an 8.58% year over year compound growth. Applying an IRR to UC Assets commercial portfolio strategy, average annual returns of 15-20% over the next five years on an individual project basis are not a stretch.
In response to economic changes from the pandemic, the Company announced in April that it was shifting its investment focus to commercial real estate space, where it intends to provide supportive cash flow to cover mortgage payments to owners in exchange for equity ownership in the property. We see this strategic change as positive for several reasons: 1) it is an actionable response to a rapidly changing economic environment; 2) it is an approach that we see is being more easily scaled over the long-term than the Company’s initial residential focus and 3) it fits in with UC Asset’s goal of “serving the underserved markets.”
Under the LP structure, the general partner (GP) receives a management fee equal to 2% of assets under management (AUM). In addition, the GP participates in the profits at a rate of 20% above an 8% annualized return to the LPs (compared with 10% prior to January 2020); the GP’s share of profits increases to 40% above an 18% annualized return to the Limited Partners.
Financials: UC Asset has raised approximately $8.6 million to date including a $0.3 million private placement in March 2020. In its first two years of operation, assets under management (AUM) grew by 364% and net equity per share rose by 50% all without the use of leverage. From 2016 through 2019, net equity per unit grew 39%, an 8.58% year over year compound growth.
UC Asset reported a net increase in net assets from operations per unit in two of the past three years. In 2019, net assets from operations totaled $0.37 million (including $0.74 million in unrealized gains), compared with $(0.26) million in 2018 (including $0.03 million in unrealized losses). On a per-unit basis, net assets from operations increased $0.07 in 2019, compared with $(0.05) in 2018.
In 2019, shareholders’ net equity increased 5.1% to $8.78 million from approximately $8.35 million at the end of 2018. Shareholders’ net equity declined to $8.06 million in the March quarter from a $(1.0) change in net assets from operations in the quarter, partially offset by a $0.3 million Series A funding.
Valuation: Our initial target price for UC Asset is $4.50 per unit. We use a multiple of 3x 2024E net asset value (NAV) per unit of $1.96, discounted back at 15%. UCASU currently trades at 1.5x its 2019 per unit NAV. We expect a longer track record, the possibility of accelerated growth, and greater corporate visibility to widen the NAV multiple.
Sensitivities: Our financial forecasts and valuation may be affected by several forces including: mix of real estate investments, overall global, regional and local economic conditions, policy changes affecting tax treatment of real estate, demand for real estate ownership vs leasing, interest rates, leverage used and the access to capital.
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