Finding under the radar investment opportunities, and acting on them, can deliver exponential rewards. Here’s one catching our attention- UC Asset LP (OTCQX: UCASU), a limited partnership company that invests in real estate, primarily in the Atlanta area.
The stock is trading at $2.05 per share and trades between 0 and 200 shares per day. That’s not a bad thing, necessarily. Remember, this is a genuine under-the-radar stock, so by accruing shares patiently, the opportunity to book exponential gains is in play once new investors tune in to the UCASU story. Notably, shares have traded as high as $2.40 this year and also touched the sub-dollar levels at $0.32 per share. Now trending back toward its highs, the question begs- what’s causing the move?
Well, several things. The company raised $8.6 million to date and added another $300,000 in March 2020 through a private placement deal. That’s a perfectly decent balance sheet for an emerging company. Better still, though, from an operations perspective, net equity in the company surged to 39%, helped by a healthy compounding growth rate of 8.58% from 2016 to 2019. Also attractive is the improvement to its balance sheet, where proactive moves helped UCASU strengthen its portfolio and boosted cash reserves in late 2020 by selling $2.5 million in properties that generated roughly $1 million in gross profit.
A report of its 2020 financial results is expected later this month. Here’s what’s in play:
Cash And Strategy Combine
As noted, UCASU plans to report full 2020 financial results this month. Investors were provided Q4 2020 results that included the profitable sale of a large tract of land outside Dallas for $1.3 million and the sale of some of its Atlanta residential property for its full asking price of $1.35 million. Those sales are helping to build a respectable war chest for future acquisitions.
In fact, by mid-year, UCASU expects to accrue between $4-7 million in cash that it plans to use to purchase new assets in the post-pandemic economy. The focus is shifting away from purely residential, and plans are in place to enhance its focus on commercial and mixed-use development.
And as the plans develop, the company’s property portfolio may still be growing. That’s despite general consumer market weakness and noting that residential real estate markets remained strong, even bullish, as remote working and learning created a new type of demand from buyers looking for larger spaces and/or relocation from city centers.
Moreover, businesses learned that Zoom meetings and other similar platforms can often replace large office space. That’s bad news for landlords but potentially great news for companies like UCASU that are targeting a niche opportunity through mixed-use property purchases.
This is where the company is being innovative and intelligent. By building its cash reserves, UCASU expects to position itself in a position to maximize opportunities in a commercial market that may soon see a day of reckoning. In other words, mainstream media isn’t covering the undercurrent of a radically disrupted real estate market. However, UCASU is paying attention, and they believe they developed a strategy to deliver both short and long-term rewards. Here’s how:
The pandemic has hidden a big secret…many landlords across the country are not getting paid rent by their tenants. Evictions have been put on hold by the government, and despite financial relief to renters, that money is not always making it to the landlord’s in-box. These government regulations have all but quieted the usual market pressures associated with the residential real estate trade. However, these forbearances also played a role in investment property values that have yet to see meaningful pressure lower. Thus, the timing was good for UC Asset, who in April of last year began to diversify out of residential investments and into opportunities to provide mortgage support to commercial property owners whose cash flow has been disrupted by the pandemic. A business model was born.
Real Estate Innovation And Investment
Starting that ball rolling, in June of 2020, UC Asset closed its first commercial property support investment in a rental property. And with the pandemic still raging, agreements to continue rent/mortgage forbearance in the commercial markets limited new investment opportunities through 2020. Obviously, it’s hard to pay a mortgage with no income. Thus, UCASU came to the rescue. But now, they are assessing post-pandemic demand for that product.
Clearly, with vaccinations ramping, it’s a reasonable assumption to expect that these temporary supports will not continue indefinitely. Thus, 2021 is likely to return to more normalized business and ignite interest in commercial investment opportunities.
When that happens, cash can be king. While no company intends to add harm to an already bad situation, the market’s reality suggests that when forbearance agreements are terminated, the economic pressures to owners caused by the pandemic will surface. Then, they will have to face the pent-up cost of back debt, make capital investments to retool properties to meet new health protocols, and try to recoup thousands of dollars in back-rent or start the tireless eviction process on potentially hundreds of families.
Moreover, a Zacks report suggests that approximately $430 billion in commercial real estate debt comes due in 2021, which may cause property owners to seek new investors or liquidate their properties. Both instances fit into UC Asset’s newly formed business strategy. In fact, UCASU is developing two investment strategies.
Filling A Much Needed Niche In Commercial Real Estate
As noted, UCASU is finding an innovative and potentially lucrative niche to fill. Two strategies can get that done. The first is through exposure to providing commercial real estate mortgage support. An example of how it works came in June when UCASU purchased its first commercial property support investment in a rental property with a market value of $850k.
When the deal was made, the current owner earned a profit from the property before the pandemic but had not collected rent for five months. Unfortunately, he still has a remaining mortgage balance of over $400k. In the deal with UCASU, that owner will receive a cash payment to compensate for its existing equity. In return, UC Asset will take over the mortgage and is entitled to purchase the property for $1 after its mortgage is paid off. The deals will vary in terms, and no two are likely the same. However, despite the complexity, both UCASU and commercial property owners are eager to make a deal. Thus, UCASU can be a proverbial savior to property owners.
As profitable as that opportunity can be, UC Asset management is also positioning to take advantage of other market opportunities. They recognize that its commercial mortgage support program has a limited investment window, and the penetration into the market has been slow. And with lenders, landlords, and government mandates postponing a picture of actual demand, UCASU knows they face other competitive pressures.
Thus, a second strategy is born. Here, UCASU wants to help revitalize neighborhoods through its SHOC (shared home office concept) program that includes a commitment to invest in underserved communities around Atlanta. Their initiative took a step forward in September when UCASU announced plans to revitalize clusters of distressed residential properties in neighborhoods close to major airports. Then, they renovate them into cost-efficient home offices and market them as shared accommodations on platforms such as Airbnb (ABNB) in a bid to serve business travelers who prefer renting a shared home-office compared to staying at a conventional hotel.
It’s a genius idea at a time when the world has changed. And by the end of December, UC Asset announced an initial capital commitment of $1 million to pilot its SHOC strategy. In an update, management said its goal is to form a $10 million portfolio of shared home office properties over the next year. Returns from those properties could be substantial. And demand, especially from people not yet comfortable in large group settings, may surpass available offices.
So far, the company has successfully invested in individual residential properties near Atlanta’s main airport. Those purchases put the SHOC strategy in play. Moreover, with these SHOC locations revitalizing neighborhoods and at the same time offering a place to work, UCASU believes that community stakeholders and local boards will embrace the projects. Clearly, the timing is right for a model of this type and fits nicely into a post-pandemic business landscape.
UCASU may not be out to change the world’s view of how a 100-story office building should look. Instead, they are making headway to show that better options can exist…and if they make millions of dollars along the way, that’s fine, too. UC Asset LP may indeed be a sector game-changer.
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