Description

Anyone want a free put option on California real estate? California Coastal (CALC) is a second-rate homebuilder that basically breaks even but has one very valuable asset—ownership of 350 acres of pristine coastal wetlands in southern California. CALC recently got approval to pillage this wilderness… uhh, develop this land… into 349 beautiful single family homes. Alex949 mentioned this potential when the company’s market cap was 1/10 of today’s—great call on his part. But now, I think the stock represents less of a great call and more of a great put.

First, the wetlands, called Bolsa Chica Mesa. The value here is derived from 2 parcels. One is being sold to California’s wildlife conservation board for $65m. This is mostly protected by existing NOLs, so is worth around $63m on an after-tax basis. The other part will be developed into 349 homes of roughly 2,700 sf apiece. The 10-K lays out the company’s assumptions on timing, sales price per square foot, building costs, etc. I reproduce them here (the first set of assumptions is management’s, the second is mine):

homes 349.0 349.0
sf/home 2,722.1 2,722.1
price/sf 525.0 587.5
total revs 498.8 558.1
cost of lots 41.9 45.4
cost of homes 159.6 195.3
profit 297.3 317.4
after-tax 218.4 230.4

I went through a few hundred home listings on realtor.com to get a sense of where homes are priced for ocean-view and non-ocean-view properties. I found price/sf of around $375 for without view, and $600/sf for with view. I then assumed that this property was particularly desirable and used the metrics of $850 for with view and $500 for without view, with 25% of the homes having an ocean view. This gives me the blended price of $587, vs the company’s assumption of $525. However, I increased build costs from $320k to $350k per home to incorporate the move in basic materials prices over the last 6 months.

Puzzlingly, the company states that:

Generally, homebuilders expect to earn a gross profit of 8% of the sales price of homes

I am giving them the benefit of the doubt that they are being highly conservative (to say the least) as this margins for the project as I have laid them out should be around 57%.

So I think this project is worth $230m. This is without penalizing them for any marketing, sales commissions, corporate overhead, etc. It should commence selling (as per the company; I would argue that delays have been the hallmark of the project so far) in early 2007; assuming most homes are sold in 2008, discounted at 12%, this gives a current value of $165m.

All other existing projects can be modeled explicitly. I have laid them out here, using generous gross margins. The 10-K states expected gross profit as $39m. Note that they own almost no land, and mostly use options.

jasper chino corona santa fe lancaster
Homes 8.0 23.0 105.0 18.0 170.0
price/home ($m) 0.7 0.6 0.5 1.3 0.5
cost/home 0.4 0.5 0.4 0.9 0.3
gross profit 2.2 3.0 10.5 6.3 22.1

total gross profit 44.1
less: sg&a 5.0
less: tax 15.7
Total 23.5

They also have a joint venture to develop 900 units in the city of Oxnard. I assume they will make $150k in gross profit per unit (I think this is generous), keep 35% of the profit (per their JV agreement), and I discount that to the present at a similar rate as Bolsa Chica as development should take place 2007-2008. It is worth $22m.

Finally, on any remaining assets I give them a 1.5x multiple on book value of $60m (after stripping out the carrying cost of Bolsa Chica).

Putting it all together:

value of 103 acres, nol protected 63.0
value of upper mesa, dcf derived 164.8
1.5x book value 90.0
existing projects 23.5
Oxnard 22.1
Total 370.8

This compares to a market cap of $375m. I would argue that the market is already incorporating all potential value from existing projects and then some, and that the investor is getting a free put option on a) any hiccups in the development process and b) a significant downdraft in home prices in the most frothy of all frothy home markets in the nation. If prices drop to 2004 levels, the stock is worth 30% less than today. If there is any sort of real estate recession such as the early 90’s, the stock is worth a fraction of that, as it is a sub-scale, second-tier homebuilder with no landholdings operating in the most stretched market in the country.

Catalyst

any softness in california real estate; hiccup in permitting or building process for bolsa chica project