Description

There are many reasons to dislike NAUH: for starters, it is a microcap, for-profit education company that became public via a SPAC in 2009. Maybe it’s a dearth of interesting opportunities, but I believe NAUH has a significant margin of safety from cash, real estate and the less controversial nursing program. Furthermore, NAUH is currently trading with a mid-teens to 20%+ normalized adjusted FCF yield (see below).

NAUH operates a hybrid physical/online for-profit education business with 37 physical locations in 11 states. The company is currently entering a harvest phase after adding 20 locations since 2009 – importantly only 2 locations are awaiting regulatory approval, which is expected later this year. This significant expansion, combined with some company-specific and industry challenges, has depressed margins. Furthermore, the company operates a legacy apartment rental business which further enhances the margin of safety. 

I look at valuation in three ways and all suggest there is a significant margin of safety:

• Sum-of-the-parts: around $5.50-7.60 per share

The 15x rental income multiple may seem aggressive but Freddie Mac estimates the national multifamily cap rate is 6.4%.

• Adjusted normalized FCF yield: I estimate adjusted normalized FCF is around $9-14mm which is equivalent to a mid-teen to 20%+ FCF yield after adjusting the market capitalization for the excess cash and capitalized leases (but not adjusting for the apartment value).
   
• Implied valuation: After adjusting the EV for cash, capitalized leases and real estate value, the implied education segment value is around $49mm. This corresponds to 4.3x trailing and 1.9-2.7x normalized EBITDA, respectively. Furthermore, NAUH’s nursing program, which educates approximately 11% of NAUH’s total student population, would be worth $36mm (75% of the adjusted EV) if you apply the $31,000 per student acquisition price that APEI paid for Hondros, a for-profit nursing school, in August 2013. I should note my valuation assumes no revenue growth, which will likely prove conservative over a multi-year period. Credit/student growth has been strong over time and the company regularly increases prices in the low single digit area.

Education Segment

NAUH operates a hybrid model which combines physical locations with online learning. The physical locations (new locations are around 4000-5000 sq. ft.) facilitate face-to-face interactions for career planning, academic advising and payment discussions. Around 70% of the coursework is completed online.  Notably, conversions are 4-5 times higher in a physical presence than purely online. Despite the high returns on capital and scalable business model, for-profit education is not a great business due to the student body’s dependence on government-backed student loans. Regulation is and always will be a risk.

The company’s nursing program is a significant, potentially hidden, source of value as highlighted above. According to the Bureau of Labor Statistics, the number of professional nurses is expected to grow from 2.7 million in 2010 to 3.5 million in 2020.

The big opportunity is a normalization in the EBITDA margin. NAUH produced an 11.2% LTM margin, but was in the 18-21% range in FY2010-11 and management targets 18-20% in 18-24 months. This goal may be aggressive (I use 14-20%), however current margins are significantly depressed by the new campuses and some management decisions related to growth. Specifically, management promoted many high-value enrollment counselors to management positions at the newly opened schools, which has meaningfully decreased enrollment counselor productivity. Management compensation is based on these aggressive margin targets.

The 2- and 3-year Cohort Default Rates (CDR) are 14.9% and 21.5%, respectively.

Real Estate

NAUH generates around $1.1mm in rental income from multi-family apartments and owns a number of condominiums, as well as undeveloped land. Although real estate is a legacy operation with a 50+ year history, management has stated that the company is looking focus on education and not real estate (“we are still looking; the right time, right opportunity, to move those real estate holdings”, “we're in the education space and that's where we're looking to focus our time and effort and resources and it's not real estate development”). There are signs that the company is seriously looking to monetize the real estate: the company sold the Rapid City location but continues to own rental properties and apartments. However, Michael Buckingham, the son of the Chairman, is the president of the real estate operations.

Capital Allocation

NAUH pays a significant dividend of $0.045 per quarter, which is equivalent to a 5.5% yield. The company has repurchased shares since 2011.

Management / Board / Ownership

Chairman Robert Buckingham owns 54% of shares outstanding and Camden Partners, the SPAC sponsor, owns nearly 9%.

Catalyst