|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||255||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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|Current Price (C$)||5.50|
|Market Cap (C$ MM)||254.6|
|Enterprise Value (C$ MM)||266.5|
Genesis Land Development Corp is a Western Canadian based real estate development company. Since the Company’s inception in 1992, Genesis has accumulated a land portfolio that includes ~2,000 net acres in
At its current market price, Genesis is trading at a roughly 40% discount to a net asset value that only incorporates conservative values for the land portfolio. Furthermore, we believe the inherent leverage of Genesis’s land portfolio to
Alberta & Calgary Macroeconomic Background:
Before profiling the Company’s
The same strength exists in the commercial real estate market, where extremely low vacancy rates, increasing lease rates, and cap rate compression have led to significant appreciation in market values. More specifically, the office markets are experiencing vacancy below 1%, and lease rates have nearly doubled over the last two years, with new lease rates for class-A buildings above C$40/sq ft. Similarly, shopping center economics have trended upward considerably, with vacancies at less than 1%. Lease rates have also experienced positive trends, and range from C$20-25/sq ft for a neighborhood strip center to C$90/sq ft for a high end shopping center.
Genesis has five significant tracts of land in the greater
Although the Company has historically had little turnover in its portfolio except for select lot sales to external homebuilders, Genesis is now entering a much more aggressive phase for turning over its land portfolio. This plan has three significant parts: (1) internal homebuilding under the Majestic (higher end), Evolution (middle market), and Reliant (entry level) brand names (2) more aggressive lot sales to external homebuilders, and (3) commercial real estate development. The paragraphs below profile each of the Company’s land parcels and their specific development plans:
Genesis owns 685.5 net acres in
Genesis is also planning an 85 acre, 850,000 square foot shopping center in
The Canals North & Bayside:
Genesis owns 569 combined net acres in the Canals North and Bayside, which are located in Airdrie, a suburb north of
Genesis is also planning a 50,000 sq ft commercial property in Bayside. This commercial property will be used to anchor the Canals North and Bayside communities, and will be primarily retail space with a maritime theme. The development is partially pre-leased, with current lease rates projections of C$30 per sq ft. The project is under construction, with an expected completion date of mid 2008.
Taralake is located in Northeast Calgary, a 15 minute drive from downtown
Municipal District of Rocky View:
Genesis owns 450 acres in Rocky View. This is divided between
Genesis land owns 160 acres in Cochrane, in a development called Mitford Crossing. Cochrane is roughly 35 minutes west of downtown
The Company recently announced the purchase of 1,140 acres in Radium Hot Springs for C$5.7 MM a deal that is expected to close in April 2007. Located roughly 100 miles west of
The Woodlands is a 121 acre plot in central BC. This project was put on hold in 2000 because of weakening economic conditions in the area; however it has since been reinitiated in late 2006. Since then, 58 lots have been completed, and are ready to be sold in mid 2007. Genesis plans to sell these lots to third party home builders.
Genesis owns a 1,623 acre plot in Buena Vista Ranch, roughly 150 miles northeast of
Our analysis suggests that at conservative estimates for current land valuation, Genesis has over C$8 per share of net asset value.
Acreage Value per Acre (C$) Value (C$MM) At cost 4,859 $503.7
Symons Valley (Residential)
$195.0 Symons Valley (Commercial)
$63.8 Taravista and Taralake
$476.3 British Columbia
Radium Hot Springs
$5.7 Buena Vista Ranches
$19.5 The Woodlands
Current Share Price
$5.50 Market Cap
254.6 After Tax NAV of Property
388.9 Other Assets, net
-12.1 Current NAV
376.8 Current NAV per share
Value per Acre (C$)
Although our NAV analysis is theoretical as the company is not liquidating, it is an important analysis for measuring what we believe to be the Company’s conservative land value in the current market environment. Land is not the most liquid of assets, but we believe our estimates include enough of a discount to account for the land’s illiquidity. While land prices obviously don’t always appreciate, we believe that economic signals point to continued land price appreciation over the next two or three years for the Company’s
Furthermore, our NAV analysis gives no credit to value that will be added to the pure land value from the Company’s commercial development and homebuilding operations. Of the two, we are particularly excited about the roughly 280 acres that the Company has designated for commercial development, most notably the 85 acre Sage Hill Crossing project. Although still a couple years away from opening, the valuation metrics of the project are extremely compelling. For the purposes of our NAV analysis above, we valued the Sage Hill property at C$750,000 per acre, a value that was reportedly offered to Genesis for the property a couple years ago. In reality, we expect the property to have a far greater value as the Company proceeds toward the opening of the property. In our discussions with management, they have indicated that they plan to sell a combined 30 acres / 350,000 square feet to two big box retailers for a price of greater than C$1.0 million per acre, representing a total pre tax value of approximately C$30 million. In addition, Genesis plans to build out and lease the remaining 55 acres / 500,000 square feet at very favorable terms. Under current market conditions, the Company can build out this remaining property for approximately C$200 per sq ft, and lease the space for at least C$30 per sq ft, representing a return on invested capital of 15% (excluding the land, which they own for a minimal cost basis). Therefore, for a capital investment of approximately C$100 million, the Company can earn net rental income of at least C$15 million. Given that shopping center cap rates in
Our feeling is that the homebuilding operations will not add nearly as much value as Sage Hill Crossing, but if executed appropriately should add incremental returns of 10+% to the pure land sale alternative. A typical Genesis home takes approximately 8 months to build, and in current market conditions where homes are selling in just over a month, the Company’s expectation for 18+% gross margins and 7% SG&A as a percent of sales should yield at least the aforementioned 10% incremental return. We remain a bit cautious, however, because the Company is attempting to go from no home sales in 2004 to nearly 200 in 2007, and up to 1,500 by 2009. However, their recent acquisition of Point Grey Homes, which has proven annual capacity to produce 150 homes, should help them as they make the transition. Unless the homebuilding operations actually yield negative operating margins (which is difficult to imagine), they won’t detract from the underlying land value, which typically sells for 2x book value and has an incredibly low cost basis.
Melcor (ticker MRD on the
Risks and uncertainties:
As we see it, there are five primary risks related to an investment in Genesis: (1) oil price risk, (2) management/operational risk, (3) construction cost risk (4) liquidity risk, and (5) currency risk.
As we mentioned earlier, the recent boom in the
The second risk worth noting is management and operational risk. As we have described earlier in this report, management is attempting to make the difficult transition from a pure land developer to a fully integrated land developer, homebuilder, and commercial developer, with fairly limited experience outside of pure land development. There is certainly the possibility that they may struggle in one or more of these areas, and this may negatively affect the valuation and the market’s perception of the Company. It’s also worth pointing out that management owns roughly 40% of the outstanding stock, giving them significant insider control. While this is certainly a concern, it is also reassuring to know that management has “skin in the game”, and key personnel have the majority of their net worth tied to the success of the Company.
Genesis is also exposed to construction cost risk. As unemployment has reached record lows in
Liquidity risk is also worth noting. As of the time of this writing, the stock has traded roughly 90,000 shares per day over the last three months, representing only USD $400,000 value traded per day. On many days, the stock will trade ‘by appointment’, and the average volumes are skewed by a handful of days where significant blocks have traded. While Genesis’s relative illiquidity is a concern, we are hopeful that institutional interest in the story will increase over time, and volume will increase as a result.
Finally, Genesis is exposed to Canadian dollar currency risk as it conducts all of its operations in
On April 2nd, Genesis reported its 4Q 06 financials, posting numbers that are beginning to reflect the Company’s transition toward a more fully integrated operating model and aggressive monetization of its land portfolio. For the quarter, the Company sold 37 homes under its internal brand, up from 15 during the third quarter, and 11 in the second quarter. Additionally, after selling only 18 lots to external builders in the first three quarters of 2006, Genesis sold 63 lots to external builders during the fourth quarter. The Company also forecasted that in 2007 it expects to sell at least 180 homes under its internal brand and an additional 370+ to external builders. Also, Genesis believes they will experience gross margin expansion in their homebuilding operations, as they take advantage of economies of scale and increased single family home prices in
We believe that Genesis represents an attractive long term investment, and believe that our NAV estimate of C$8.23 per share is well on the conservative side, providing considerable downside protection to our investment. We are also confident that as the Company begins to aggressively pursue a strategy of asset sales and internal homebuilding and commercial development, the net asset value should prove to be quite a bit higher, perhaps even by multiples. We expect the 4Q 06 earnings, expected at the end of March, to represent the start of a string of positive news flow reflecting the Company’s strategic transition. As mentioned earlier, we are also particularly excited about the Sage Hill Crossing shopping center development, and believe that it alone might have almost as much value as the entire enterprise value of the Company. We believe that investors with a long term orientation will be rewarded by investing in
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