Monday, September 26, 2022
HomeValue InvestingTCI Multi-Household JV Portfolio for Sale

TCI Multi-Household JV Portfolio for Sale

*Disclaimer: That is one other carefully held, illiquid micro cap*

Final week, Bluerock Residential Progress REIT (BRG) agreed to be acquired by Blackstone (excuse the small victory lap) for a wholesome sub-4% cap charge on their multi-family portfolio, surprisingly Blackstone was prepared to take BRG’s (presumably non-arm’s size) lending portfolio which I believed is perhaps an obstacle to a deal taking place.  We all know the multi-family sector is getting loopy (particularly in sunbelt markets) when even a REIT with a poor governance construction sells out versus grifting on associated celebration offers to the top of time.  The pure subsequent query, what different poor governance construction multi-family shares are on the market and will one thing like this deal occur once more?  Which brings me to Transcontinental Realty Buyers (TCI) and its largest shareholder American Realty Buyers (ARL).  I’ve add this advanced to my bushy “hidden” multi-family actual property bucket alongside HMG and BBXIA.

TCI is likely one of the unique REITs (it transformed to a c-corp a few years in the past attributable to possession focus limitations), it goes again a number of many years and may very well be described as pioneer in poor governance conditions (nearly like an RMR REIT earlier than RMR).  Again in 2001, the Wall Avenue Journal ran a entrance web page story on Gene Phillips, the controlling investor in a sequence of actual property firms that had (and nonetheless have) cross possession pursuits and associated celebration transactions: Earnings Alternative Realty Buyers (IOR), Transcontinental Realty Buyers (TCI) and American Realty Buyers (ARL).  There’s even a Invoice Ackman reference within the article, his previous fund Gotham Companions, went activist on TCI.  Gene Phillips died in August 2019, the belief for his 7 youngsters at the moment are the controlling shareholders through Realty Advisors, Inc (“RAI” – not publicly traded).

These three firms nonetheless exist, their relationship is a little bit of Russian nesting doll, RAI owns 90% of ARL, ARL owns 78% of TCI (RAI owns one other 7% in TCI instantly) and TCI in flip owns 81% of IOR (RAI owns one other 2% in IOR instantly).  Every step of the best way, there’s an exterior supervisor, Piller Earnings Funding Administration (wholly owned, by you guessed it, RAI), that collects a 0.75% of belongings yearly, 7.5% of web revenue and 10% of asset sale capital good points above an 8% hurdle.  None of those entities pay a dividend, they beautiful a lot solely exist as charge income streams for the Phillips’ heirs at this level.  The accounting is complicated as a result of there are intra-complex loans excellent and ARL consolidates TCI and TCI consolidates IOR, it is one massive mess to untangle.

Many of the belongings are on the TCI degree (to get much more complicated, technically “Southern Properties Capital” or “SPC” of their filings is the wholly owned subsidiary of TCI that owns a lot of the belongings and secures the Israeli bonds), the place it will get attention-grabbing as we speak is in 2018, TCI bought the overwhelming majority of their multi-family portfolio (53 buildings within the sunbelt, now 51) right into a JV (named Victory Abode Residences or “VAA”) entered into with Macquarie.  On 11/21, the 2 introduced an settlement the place they’d promote the properties within the JV (with TCI primarily taking again/shopping for 7 of them) in early 2022.  The JV portfolio is held on TCI’s (and ARL’s) guide utilizing the fairness technique of accounting, there’s additionally an odd mezzanine mortgage that’s equally owned by the JV companions that needs to be handled as fairness, both manner, the carrying worth of the portfolio is discreet on the steadiness sheet, seemingly by a large margin.  From the newest TCI 10-Q:

To mark-to-market the JV, here is the Q3 working outcomes:

If we annualize Q3 NOI, I get a couple of $69MM run-rate, at a 4% cap charge that is an asset worth of $1.726B, there’s $856MM mortgage, TCI owns 49% (Macquarie has 49%, after which TCI’s former CEO surprisingly nonetheless manages the JV and has 2%), for a $426MM pre-tax, pre-fees worth to TCI.  Out of that quantity, TCI owes Macquarie $34MM left on an earnout that the 2 went to arbitration over (most likely a slightly web unfavorable readout, there have been 10 properties underneath building included within the JV portfolio, guessing to-date these did not stabilized as anticipated when the contract was struck, however the setting is totally different now, even marginal properties are seemingly performing nicely).  After which exterior supervisor Pillar goes to get a reduce of the sale proceeds and there might be taxes to pay since TCI is a c-corp and never a REIT.  However even in spite of everything that (I am actually not even positive easy methods to estimate it) there nonetheless appears to be loads of margin of security right here on condition that TCI’s market cap is just $337MM (utilizing a $39 share value).  And once more, TCI is shopping for 7 of the properties from the JV, so they are not going to get ~$400MM money dropped of their lap, it’s going to be some fraction of that.

On prime of the VAA JV, TCI owns actual property instantly in three buckets: multi-family, business and growth land.

Equally annualizing the Q3 NOI (“Revenue from section” right here appears analogous NOI) for the multi-family section and placing a 4.5% cap charge on it (shifting it up a contact for enjoyable/since its not in the marketplace) and I get about $145MM in asset worth.  For the business aspect (largely workplace, one retail property), utilizing a 7% cap charge, I get about $135MM in asset worth.  These really feel too conservative as it’s a bit under the depreciated guide worth (if we ex-out the land under) on the steadiness sheet.

Then I am at all times a sucker for growth belongings and uncooked land, right here TCI acquired an enormous plot (~2900 acres on the time) of land (“Windmill Farms”) exterior of Dallas again in 2011 by way of some convoluted restructuring:

On November 1, 2011, we acquired 100% of the membership curiosity in Bridgeview Plaza, LLC. On September 21, 2010, we bought our funding in EQK Bridgeview Plaza, Inc. to Warren Highway Farm, Inc. (“WRF”), a associated celebration underneath widespread management, for a gross sales value of $8.3 million to be paid through an assumption of debt of $6.2 million and seller-financing of $2.1 million. On October 4, 2010, WRF filed a voluntary petition in search of reduction underneath Chapter 11 of the chapter code. The accepted chapter plan was efficient November 1, 2011, whereby TCI, for its contribution to the plan, was given 100% fairness possession within the entity. Throughout the time period that WRF owned the fairness curiosity, it had additionally acquired 2900 acres of land generally known as Windmill Farms land situated in Kaufman, TX, beforehand held by ARL, for a gross sales value of $64.5 million. ARL offered $33.8 million in seller-financing with a five-year observe receivable. The observe accrues curiosity at 6.0% and is payable at maturity on September 21, 2015. WRF assumed the present mortgage of $30.7 million, secured by the property.

The land is situated in Kaufman County, TX, which is southeast of Dallas and never essentially the most fascinating a part of the metroplex, however as Dallas continues to warmth up, the sprawl has moved in the direction of TCI’s land.  By my math, they’re right down to 1,420 acres at present, listed here are the latest gross sales costs from the previous few years:

Throughout the 9 months ended September 30, 2021, we bought a complete of 134.7 acres of land from our holdings in Windmill Farms for $19.0 million, in mixture, leading to good points on sale of $9.2 million.

Throughout the yr ended December 31, 2020, we bought a complete of 58.8 acres of land from our holdings in Windmill Farms for a complete of $12.9 million, leading to a complete achieve on sale of $11.1 million.

I do not need to get all HHC/JOE math on individuals, however the carrying worth for all their growth land is $42MM, and the typical value they’ve transacted with homebuilders the final two years is $165k/acre, now we do not understand how a lot growth capex or time it could take the promote the remaining 1,420 acres, however the worth is definitely greater than $42MM.

After which there’s the 81% stake in IOR, IOR’s mortgage guide is filled with associated celebration transactions (just like BRG’s mortgage guide) used to fund TCI’s flats and growth exercise, it was most likely meant to be a real mortgage REIT, however now’s only a nano cap that’s unlevered and homes a lot of the mortgage guide on TCI/ARL’s steadiness sheet.  Once more, no dividend, solely exists to generate charges.  However the guide worth is $107MM, so 81% of that’s $87MM (IOR trades for lower than half guide worth, may very well be attention-grabbing by itself if the advanced does fold up?).

On the suitable aspect of the steadiness sheet there’s $185MM of Israeli bonds (they do report on IFRS there, others have translated the filings to give you related findings) and $178MM in direct mortgage debt, for a complete of $363MM in long run debt on the TCI degree.  There are different belongings, money, loans that are not in IOR, associated celebration offers, however they’re exhausting to untangle and I might most likely get it fallacious, so very excessive degree swag:

  • $350MM for the VAA JV after charges and taxes (a few of that is the retained worth of the 7 properties)
  • $280MM in owned properties
  • $150MM in land
  • $87MM in IOR
  • ($363MM) of long run debt

Or about $500MM to TCI, or ~$60/share (most likely conservative right here, there a variety of unknowns), it trades for $39/share with a transparent catalyst the JV sale within the first half of 2022.  

One other option to play TCI — I’ve reluctantly selected this path — is through the much more illiquid ARL.  ARL’s market capitalization is $187MM, the one vital asset they personal is an 80% stake in TCI, so shopping for through ARL you are successfully shopping for TCI fairness for $230MM (I may very well be fallacious right here, there are intracompany loans, exhausting to inform what’s what, however I feel they web out (minus some minority curiosity leakage)?).  Now there are extra dangers to ARL, you are one step from TCI and are relying on the low cost being closed by the entire advanced being collapsed (ARL has no cause to exist in spite of everything).  

That’s unlikely to occur, I am most likely too bulled up on sunbelt flats, however with the household patriarch gone, the children do not look like carefully concerned right here, craziness within the multi-family sector, possibly the JV sale is the catalyst to only collapse the entire thing or use the money to take out minority traders through a go-private provide.  The grift is egregious right here, nevertheless it’s actually solely on the minority shareholders and that is a comparatively small piece of the pie (90% of ARL * 78% of TCI = 70% + 7% instantly owned = 77% look by way of possession of the multi-family portfolio), promoting out on the prime might be value greater than stealing from ~23% of out of doors shareholders all through the advanced.  If a sale or going-private deal does not occur, its most likely simply an okay funding, it’s going to nonetheless commerce an enormous low cost, however ought to bump up a contact, versus proudly owning TCI most likely reacts higher within the base case state of affairs that the JV sells for going markets charges and TCI simply reinvests the proceeds to maintain the rip-off going.

Different ideas:

  • TCI did obtain a $44/share buyout provide, however the proposal hasn’t gone anyplace and was most likely only for publicity anyway.
  • TCI’s guide worth is ~$41/share, given how mis-marked the VAA JV is on the steadiness sheet, and that GAAP accounting typically understates actual property worth (historic value minus depreciation), its uncommon {that a} multi-family firm would commerce at a reduction.  Each highlights the undervaluation and the markets skeptical view that it ever will get resolved.  Equally, ARL guide worth is $21/value versus a $11.50/share value.
  • Shopping for again the 7 properties is sort of a “dangerous truth” to a full sale/liquidation thesis, however with the money, would possibly find yourself getting a low-ball going personal provide that also leads to a passable outcome.  If that is the case, most likely finest to personal TCI instantly (speaking myself out of ARL proper now).  My finest guess is these are a few of unique growth properties that may not be totally stabilized and will not fetch full worth in a aggressive public sale.
  • Macquarie is the grownup within the room, will need to maximize worth and reduces any associated celebration dangers to the precise sale of the JV, however the administration grift issue stays elsewhere within the advanced.
  • Brad Phillips, Gene’s son, is the president of a life insurance coverage agency.  There are 58 individuals in response to LinkedIn that work at Pillar Earnings Asset Administration, it seems they do not handle appreciable belongings exterior of ARL/TCI/IOR.  One article I discovered lists Gene Phillips’ property at $3.5B, so there is perhaps different belongings exterior of this mess, presumably they might take out minority shareholders and run this as a household workplace, not that they’ll after all.

Disclosure: I personal shares of ARL (would possibly add TCI instantly too), (and nonetheless holding HMG, BBXIA, BRG calls)



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