Description
Even grizzled VIC veterans may have trouble finding a U.S. company with more unrealized fundamental value than American Community Properties Trust (ACPT). As I will show below, NAV can be reasonably estimated at nearly $350 million while the current market value of the equity is just above $100 million.
This name was written up by Adanah in October 2001 at $5.10 per share and by me in March 2004 at $8.50. While the stock has appreciated nicely in the meantime, the valuation is arguably just as attractive today. With the housing market in a slump, this may be somewhat of a contrarian idea at the moment. However, ACPT has done an excellent job of building cash reserves, plus value in its income-producing portfolio. These assets provide a foundation for the stock, while the land assets provide opportunity for significant appreciation and free cash flow.
ACPT continues to be a fairly complex company and I recommend a review of the two prior write-ups – plus, of course, the SEC filings – for background. I will attempt to summarize some of the key assets and developments, then run through my NAV calculation.
ACPT is concentrated in two areas – the St. Charles master-planned community in Charles County, Maryland, and the San Juan, Puerto Rico metro area. ACPT currently owns 5,909 apartments, many of which were built by ACPT or its predecessor, and nearly all of which are in these two regions. Because of the age of some of these apartment projects, ACPT’s balance sheet is severely understated. At year-end 2006, the apartments were on the balance sheet at a depreciated value of $156 million, while mortgages totaled $262 million. As a new property leases up in 2007, I expect annual NOI from the apartment portfolio to approach $30 million. At a 7.5% cap rate – which may be conservative – the market value of these apartments is estimated at $400 million. The NAV analysis uses this value, as well as an adjustment to reflect the minority interests held by limited partners in some of the older projects.
St. Charles, a planned community about 20 miles south of Washington, D.C., has been under development for more than 30 years and is currently home to more than 20,000 people. Growth in Charles County has been steady and ACPT has a strong, strategic position with ownership of more than 4,000 acres of master-planned property. ACPT is currently working with Lennar to build out Fairway Village, the third of five planned villages in St. Charles. Lennar is currently building single family homes and townhomes in St. Charles and is under contract to purchase more than 1,600 lots from ACPT over the next eight years or so. At March 31, ACPT had 197 lots ready for delivery to Lennar.
Single family home sales have slowed in St. Charles, though the community remains “affordable” for the Washington area with average new home prices in the mid-$400,000’s. Townhomes are selling well, though, with average prices in the $300,000’s. Townhomes and smaller single family homes should help Lennar live up to its minimum commitment of 200 lots per year. The contract with ACPT is helpful to Lennar, both because it gives Lennar an exclusive in St. Charles and because the lot price – 30% of the home selling price – adjusts with market conditions. Under this contract, ACPT has been realizing gross margins of approximately 45% and cash flow margins estimated at more than 60%. Clearly, there is near-term uncertainty regarding both home prices and sales volumes.
Capital expenditures for St. Charles are high in 2006 and 2007 because ACPT is completing two major roadways that bisect the development. The north-south St. Charles Parkway and east-west Billingsley Road are being completed to four lanes and will serve as major thoroughfares for the region. ACPT has obtained $27 million of 15-year bond financing from the county to finance these and other improvements. Once these projects are complete, ACPT’s capital spending should be significantly reduced. These projects improve access to the residential developments, and also enhance the value of ACPT’s commercial property. For example, ACPT has recently begun marketing 50 acres of the 94 retail/commercial acres it owns at the southeast corner of St. Charles Parkway and Billingsley Road. While timing is uncertain, I expect that the 50 acres will eventually sell for more than $10 million. ACPT also plans to accelerate development of St. Charles by building a 184-unit apartment building and developing a 120-unit condominium project with prices in the high $200,000’s.
In Puerto Rico, ACPT also owns: a Class A office building, an interest in a building that was finance-leased over 30 years to the State Insurance Fund, the last 38 condominiums in a 160-unit project that should sell out this year (construction debt has already been paid off), and several land parcels. The Hill Top condominium parcels at Parque Escorial are prime, in-fill parcels in a major commercial and residential project that has been built out over the last 20 years. ACPT plans to build condominiums that it expects to sell, beginning in 2009, for approximately $350,000 each. Depending on market conditions, ACPT may also elect to sell parcels to other builders.
The second development in Puerto Rico is Parque El Comandante, located on Route 3 approximately six miles east of Parque Escorial and adjacent to (but not including) the El Comandante horse track. ACPT’s predecessor purchased this property when it built a new track to facilitate the development of the previous site as Parque Escorial. El Comandante has been waiting in the wings, but is now ripe for development. Access to this project was significantly improved by the 2006 completion of the Route 66 toll road, which cuts through the southern part of ACPT’s property. ACPT is now working to obtain approvals for the first 77 acres of the project on the Quarry Site – so called because of its current use. As disclosed in the latest 10-K, ACPT expects to obtain approvals and sell the first 51 acres by the end of 2008 for approximately $20 million. Further development and sales may proceed over a period of roughly 10 years.
I had hoped to keep this brief, but that’s proving to be a challenge. Without further ado, here’s my estimate of NAV:
Financial & Other Assets
$33M Unrestricted Cash
$21M Restricted Cash
$16M Receivables from County Bonds and Other
$12M PP&E, Deferred Charges & Other
$28M Deferred Tax Assets
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$110M
Income Properties
$400M Consolidated Apts. ($30M NOI @ 7.5% cap)
$10M Escorial One Office Bldg. (56,000 ft. @ $175/ft.)
$9M State Insurance Building Partnership ($740,000/year @ 6% discount)
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$419M
St. Charles Development
$18M Finished Single Family Lots (152 @ $120,000)
$3M Finished Townhome Lots (45 @ $75,000)
$32M Unfinished Fairway Single Family Lots (911 @ $35,000)
$13M Unfinished Fairway Townhome Lots (514 @ $25,000)
$4M Heritage Joint Venture Lots (252 @ $15,000)
$5M Fairway Multi-Family Units (469 @ $10,000)
$3M Commercial Acreage in Backlog (12 acres @ $220,000)
$23M Other Commercial Acres (230 @ $100,000)
$25M Future Residential Acres (2,477 @ $10,000)
$7M Future Commercial Acres (740 @ $10,000)
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$133M
Puerto Rico Development
$10M Condominiums (38 @ $260,000)
$16M Hill Top Lots (448 @ $35,000)
$3M Parque Escorial Commercial Acres (2.7 @ $1.1M)
$19M Quarry Site Acres (77 @ $250,000)
$20M Other El Comandante Acres (408 @ $50,000)
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$68M
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$730M Total Asset Value
Liabilities & Minority Interest
$281M Non-Recourse Debt
$28M County Bonds & Other Recourse Debt
$36M Other Liabilities (excluding deferred income)
$37M Estimated Minority Interest in Apartments
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$382M Total Liabilities & Minority Interest
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$348M Net Asset Value ($67/share)
I wouldn’t expect ACPT’s stock to trade at NAV, in part because NAV doesn’t account for overhead costs or for the taxes that would be payable if ACPT’s assets were sold in bulk. However, I believe ACPT trades at a much steeper discount to NAV than companies such as JOE or NEN. The discount should be reduced if ACPT continues to increase its unrestricted cash (currently $6/share), if earnings grow, and/or if ACPT adopts shareholder-friendly policies such as increased dividends or share buybacks. At 50% of estimated NAV, ACPT's stock would be about 70% higher than the current level.
For these purposes, I will touch only briefly on my financial forecast. Earnings are difficult to forecast, particularly when ACPT’s tax structure is as complex as it is. However, I’m currently looking for earnings this year in the range of $1.00-1.20/share. If commercial land sales in St. Charles and/or Parque El Comandante ramp up over the next couple of years and if the new condominium projects begin selling in 2009 as planned, earnings in 2009 could easily exceed $2.00/share.
As I described in 2004, ACPT is more a cash flow story than an earnings story. I roughly estimate that ACPT will generate $20 million in free cash flow in each of the next three years. Cash flow will be lumpy, based largely on the timing of land sales and capital expenditures. Over time, however, ACPT should be able to amply reward its shareholders as it harvests cash from its real estate holdings.
Two final notes. First, ACPT’s status as a publicly traded limited partnership most likely contributes to the NAV discount. ACPT originally intended to be taxed as a REIT, but that strategy failed for a number of reasons. Given its current position, ACPT might be better off if it converted to a regular corporate tax status. Second, please rely on your own due diligence. My firm currently owns shares of ACPT, but may buy or sell at any time and without notice.
Catalyst
1. Continuing generation of free cash.
2. Increased realization of asset values.
3. Increased dividends.