Crossroads is a fantastic business that has emerged from a complex situation involving a bankruptcy and subsequent merger. It is listed on the pink sheets with very limited public information(non-reporting), but those able to unearth the material will find a highly compelling investment opportunity. The business has significant competitive advantages, an experienced management team, and is growing in the high teens. After researching the company for months, we believe there is a very clear path to the company’s equity at least tripling in value over the next three - four years with a continued growth runway beyond that, all coupled with material downside protection.
Background and Context
The legacy Crossroads was a speculative patent litigation play that did not work out for investors, as their litigation claims reached the US Supreme Court and were all ultimately defeated. All that remained were massive NOL’s that had been accumulated over the previous two decades, and an additional portfolio of untested technology patents. Management realized that the NOL’s and public shell were valuable and embarked on a pre-packaged reorganization that would leave the structure and NOL’s intact.
The plan was to create a “new Crossroads” that was infused with equity and debt capital, then merge with a profitable private company. Old management would resign, and the company would delist from Nasdaq before re-emerging on the pink sheets. As expected, most investors indiscriminately dumped their shares due to the uncertainty and fact that it is rare for equity to emerge from bankruptcy with any value.
In December 2017, the plan came to fruition as Crossroads acquired Capital Plus Financial (CPF), a provider of affordable housing and mortgage financing to underserved communities. In conjunction with the aforementioned capital infusion, owners of CPF received $30.8M of cash and 2.9M newly issued Crossroads shares in the transaction. The transaction allows CPF to shield its significant profits with the NOL’s and created liquidity for existing shareholders. We have been studying CPF and think we have found a gem of a business. It serves a real societal need and has structural advantages that will allow it to capitalize on a long reinvestment runway. Additionally, the company is supported by an excellent board and management team that runs the business in a conservative and shareholder friendly manner.
CPF serves low to moderate income Hispanic populations as a one-stop shop in their pursuit of home ownership. It currently operates in three geographic markets within Texas – Dallas/Ft. Worth, Houston and San Antonio. There are two sides of the business that create the full-service platform. The first is the home. CPF purchases blighted homes and rehabs them so the buyer can move in without having to make any further improvements. The second is financing in the form of a traditional 30-year fixed rate amortizing mortgage which is provided, carried and serviced by CPF. We’ll walk through the process in some more detail. The company’s mission is highlighted below:
As a community development financial institution (CDFI), Capital Plus Financial provides capital to markets identified as underserved by the community. Capital Plus Financial focuses on homeownership in these underserved markets which will result in positive economic and social impact to the community. Capital Plus Financial originates first lien residential mortgages in low to moderate income communities across Texas.
Originating mortgages in these communities on homes purchased and significantly remodeled by us, helps enhance and sustain our ability to provide critical social services to the communities in which we live and work, positively impacting our quality of life. We believe this is part of a comprehensive solution to revitalize and grow our region.
Capital Plus Financial lends to low to moderate income documented Hispanic borrowers. Approximately 50% of our borrowers have no credit score and the majority are first time homeowners.
First, CPF procures homes to resell, identifying targets in low-income census tracts. They acquire a home for about $80k and invest $20-25k over a three-month period to rehabilitate the property. During this process, CPF acts as general contractor by sub-contracting out the individual projects to other contractors with whom they have relationships. Having density and a history in these markets allows them to negotiate better rates while avoiding the risk of keeping sub-contractors on payroll.
Once the house is ready, it is handed over to an internal marketing team that is comprised of local community members. The house is then marketed through word of mouth and social media with no traditional brokers involved. They announce an open house which usually draws 6 – 15 visitors, and a buyer is normally identified within two open houses. Buyers are free to bring their own financing but more often than not the prospect is interested in help financing the home purchase. At that point, the potential buyer is turned over to an internal loan officer who begins the underwriting and loan process. CPF is very careful to document borrowers against traditional underwriting criteria, and requires documentable evidence of the ability to support the required payments e.g. legal status, W-2, bank statements etc. In whole, closing takes approximately four to six weeks, during which time CPF begins to market their new properties to the other interested families. This gives the company great insight into demand, which to date has been insatiable.
In the end, the finished home is solid for roughly $125-165k, a price at which the typical buyer is able to comfortably support the required payments. Additionally, the buyer tends to have a very positive experience as they have been shepherded through the process by a CPF employee who is familiar with their community and culture. As home buyers have a quality experience, word of mouth becomes a powerful tool that helps build the pipeline of potential buyers.