|Shares Out. (in M):||22||P/E||0.0x||0.0x|
|Market Cap (in $M):||387||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-39||EBIT||0||0|
AV Homes is a small cap company that we think is very well positioned due to the combination of outstanding management, land inventory worth 2x the current share price, a strong balance sheet and a strategy for realizing land value as the company transitions to a multi segment homebuilder. The company’s land holdings are in Florida, Arizona, and North Carolina. The company will jump from 6 communities to 30 by the end of the year. Texas Pacific Group bought 43% of the company at $14.65 last June. The CEO, Roger Cregg, was formerly the CFO of Pulte, taking it from $300 million to $16 billion in revenue over 15 years. There is limited sell-side coverage, and the company is finally making money again. The only analyst covering the stock had modeled a return to profitability in 4Q15 with EPS of $0.07 a share. Two weeks ago the company reported EPS of $0.08 in 4Q13. With a large acquisition poised to add inventory and backlog, and with momentum in its organic communities continuing to build, AVHI is on track for a strong 2014. The company faces even better prospects over a longer time horizon.
We recently visited two of the company’s Florida communities: Solivita, an active adult community, and Bellalago, a primary residential community. Both are located about 20 miles south of Orlando in Poinciana, Florida. Bellalago sits on a beautiful large lake with numerous waterfront properties on large lots. Homes are typically priced from $275K-$350K. Solivita is a large and growing community with a high-quality hospital located across the street. Proximity to healthcare is one of the top three reasons why new residents move to an active adult community. CantaMia, a third major community, is located outside Phoenix. Initial results there are encouraging. Another Arizona community, Eastmark, is scheduled to start selling by the end of 2014. Over the next 12 months, AVHI’s community count will expand dramatically. The recent acquisition of Royal Oaks, a Florida builder that was acquired for $65 million cash, alongside planned organic and inorganic growth initiatives, will take the total community count from 10 last year (4 of which have closed out) to 30 by the end of 2014.
We believe AVHI is undergoing a fundamental transformation from being a land holding company to a full service homebuilder in multiple geographies and segments (first time buyer, move up, second move up, active adult). In other words, the value gap should be closed as rooftops go on lots and land inventory is monetized. The company is also making acquisitions to fill gaps in its lot pipeline (some areas aren’t suitable for development today but will be well positioned 2-3 years down the road), enter new geographies and penetrate new market segments. A major catalyst will be the build out of the Poinciana Parkway. Commute times to Orlando will be cut in half upon its completion in early 2016. A significant portion of the 12-mile parkway will be open and ready for use in late 2015.
We value AVHI in three ways. On the most basic level, we look at the land on the balance sheet today and assign reasonable values based on expected selling prices. AVHI is selling homes today for about $250,000. As an industry standard, lots generally comprise ~20% of the value of finished homes. We therefore value the fully developed lots on AVHI’s balance sheet at $50,000 each. We apply a 50% discount to semi-developed lots and an 85% discount to raw lots. We value the company’s raw acreage (over 15,000 acres) at $5,000 per acre based the current, per-acre market value of public land companies such as Tejon Ranch Co., Maui Land and Pineapple Company, Inc., and Amrep Corporation. Finally, we value AVHI’s commercial land holdings (1,600 acres) at $60,000 an acre. Add $2 per share in cash and over $6 per share in the form of a deferred tax asset (currently off balance sheet) and we see fair value well north of $30. Keep in mind this assigns no value to the operational team, strategy, brands, and leadership. (Note: this cash balance does not reflect the Royal Oak deal as we are also not counting the 2,500 lots Royal Oak brings to the table.)
|Units||Est. Per-Unit Value||Total Value (millions)|
|Commercial & Industrial Acres||1,619||$60,000||$97.1|
|Total Value (millions)||Per-Share Value|
|Lots & Raw Acreage||$525||$23.87|
|Net Cash on Balance Sheet||$40||$1.82|
|Deferred Tax Asset||$140||$6.37|
We also think AVHI is undervalued based on a peer multiple of book value. A peer group consisting of 10 homebuilders trades at a median TEV / Tangible Book multiple of 2.8x vs. AVHI’s 1.3x. If AVHI were to garner this median multiple, it would trade above $35. We actually think it should trade at the higher end of the peer group’s multiple range of 1.5x to 7.7x given low-cost basis holdings, significant inventory and, perhaps most importantly, overly aggressive write-downs in recent years.
|TEV / TBV|
|Beazer Homes USA Inc.||7.0x|
|DR Horton Inc.||2.3x|
|MDC Holdings Inc.||1.5x|
|Meritage Homes Corporation||26x|
|Taylor Morrison Home Corporation||7.7x|
|Toll Brothers Inc.||2.3x|
|AV Homes, Inc.||1.3x|
Finally, and we think most interestingly, we look at AVHI from an earnings power perspective. AVHI closed over 2,000 homes in FY2006, generating $835 million in sales and over $250 million in EBITDA. With the Royal Oak inventory and organic growth initiatives coming online, we think AVHI will conservatively sell approximately 800 homes in FY2014 vs. 481 in FY2013 (per the recent conference call, Royal Oak sold “over 300” homes in 2013). Management was able to put up 5.9% EBITDA margins on last quarter’s revenue of $54 million. With significant improvements in operating leverage in 2014, we think the company will push double digit EBITDA margins in the not-too-distant future. Over a longer-time horizon, a mid-teens EBITDA margin seems achievable. A couple years out, we think investors will be looking at a business with well over 1,500 closings per year and $50+ million in EBITDA.
In summary, we see a tremendous investment opportunity in AVHI. Downside appears limited given a strong balance sheet, a considerable deferred tax asset and, most importantly, substantial land holdings. Add to these assets a tremendous leader in Roger Cregg and an impressive and aligned board (board members collectively own over 55% of shares outstanding) and we see considerable. We would be surprised to see the stock below $16 and believe there is upside to $40 over the next 12-18 months and potentially much more to come over the subsequent 2-3 years.
Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell shares at any time without updating the board.