By Beth Senko, CFA
OTC:UCASU
READ THE FULL UCASU RESEARCH REPORT
UC Asset continues to diversify its real estate investment strategies. On September 29, the Company unveiled a new strategy to invest in land and above-ground-properties for cannabis growers. The Company views this as a high-return, low-risk asset, where there are few players. This new strategy joins UC Asset’s current investment activities focusing on revitalizing underinvested properties in Atlanta and converting them to income-generating investments.
From June 2020-June 2021, the Company grew its assets and its net equity per share by 20% without additional financing. As of 6/30/21, UC Asset had $2.7 million in cash on its balance sheet, compared with $0.2 million a year earlier. The increase in cash came from sale of several single-family residential properties in Atlanta and a parcel of land outside Dallas in late 2020 – all above book value.
Strategy 2016-2019: renovating residential real estate to meet changing demand
From 2016-2019, UC Asset focused on acquiring, improving and reselling residential properties. Identifying attractive investment properties and completing improvements in a timely, cost-effective manner were the keys to success. This strategy relied on rapid property turnover and reinvestment and during this time, the Company acquired and monetized nearly 30 properties.
The residential market remained strong through most of 2019, and UC Asset entered 2020 with several properties under contract at prices that would have put the Company on track for $2 million in cash after the sales. As the pandemic disrupted the economy, real estate sales came to a near halt beginning in March 2020, and three properties in-contract were cancelled. In order to have cash to complete several other investments, the Company sold two properties to cash buyers at prices below book value to increase its cash reserve.
Pandemic pivot – a blessing in disguise
Economic disruption from the pandemic left many solid businesses with significant, intermediate- term liquidity issues. Those who own properties, or who rent to commercial customers, are finding it difficult to make mortgage payments – putting their equity at risk. UC Asset identified this situation as a potential opportunity and made strategic adjustment of its investments.
In our view, it turned out to be a blessing in disguise.
• The pandemic caused a shortage of supply of both construction labors and materials, and resulted in an unexpected surge in home demand (particularly in the suburbs), which enabled UCASU to exit a number of properties at better-than-expected prices. Where UC Asset was selling properties below book value in March 2020, a few months later, the Company was selling its remaining residential properties at or above asking price. By the end of 2020, the Company had offset its loss in the first half of the year, and recorded a small annual profit.
• As a result of its divestitures in mid-to-late 2020, till the first half of 2021, UC Asset had $2.7 million in cash and equivalents on its balance sheet at June 20, 2021, up from $0.2 million in the year-earlier period. Meanwhile, the pandemic has been much longer than originally anticipated. The commercial support contracts were prefaced on a relatively short time period to return to normality. This may create opportunities in commercial properties, for UC Asset to take advantage of using its strong cash position.
2021 – Back to the Future
In September 2020, the Company announced plans to revitalize clusters of distressed residential properties in neighborhoods in close proximity to major airports, renovate them into cost-efficient home offices, and market them as shared accommodation on platforms such as Airbnb, to serve business travelers who prefer renting a shared home-office than staying at a conventional hotel. The Company refers to this as “SHOC” (shared home office concept). UC Asset announced an initial capital commitment of $1 million to pilot its SHOC strategy. According to management, the goal is to form a $10 million portfolio of shared home office properties over the next several years.
The Company acquired its first SHOC property in April 2021. The property is adjacent to downtown Atlanta and across the street from the popular Martin Luther King Jr. Park and Museum.
UC Asset has successfully invested in individual residential properties near Atlanta’s downtown in the past. The SHOC strategy is more comprehensive and its success will likely require buy-in from community stakeholders and local boards – which the Company has started to do. We believe the timing is good for starting these discussions and we look forward to additional details before we add this to our forecasts.
Another strategy is revitalizing historical buildings as a hub for further development. The first is the Rufus Rose House, the only Victorian mansion remaining on Atlanta’s Peachtree Street. Rufus House was added to the National Register of Historic Places in 1977 and was designated a landmark building by the City of Atlanta in 1989. Rufus House has changed hands twice in recent years as plans to convert the building to a restaurant and a performing arts center both failed to materialize. While the Company did not disclose the purchase arrangement for the property, it is seeking to raise funding for renovations primarily through the sale of NFTs. If successful, this is a low-cash way to both acquire and renovate properties, while also building rapport with key community factions.
On September 29, UC Asset unveiled its newest strategy – investing in land and on-ground structures designated for cannabis cultivation. The Company has originally considered this strategy in 2018, but management believed lacked the resources to do so prudently. With most states moving to decriminalize/legalize cannabis for medical and/or recreational use, management believes that it is a good time to take this step. In 2016, management made a small debt investment in a medical plant grower and signed an LOI with a major hemp farmer in China with the goal of acquiring farmland in China to grow hemp and extract CBD. The recent deal converts the Company’s Dallas farmland parcel to medical cultivation, in partnership with local CBD extraction company. The farmland is collateral for UC Asset’s debt investment in the partnership and earns an 8% return on stable cash flow. Additional upside is possible through a debt-to-equity conversion.
Our target price for UC Asset is $4.50 per unit. We use a multiple of 2.5x 2024E net asset value (NAV) per unit of $2.79, discounted back at 15%. UCASU currently trades at 0.94x its 2020 per unit NAV. We expect a longer track record, the possibility of accelerated growth, and greater corporate visibility to widen the NAV multiple.
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