What is the real value of the HRAC portfolio?
Dec 17, 2019 14:54:59 GMT
disappointedinvestor likes this
Post by theanalyst on Dec 17, 2019 14:54:59 GMT
I offer the following observations with respect to the most recent HRAC Assets Schedule A (received on
Nov 14, 2019):
1. Assets Sold
The NAV of the assets under this heading was written down by $872,209 between 30 Apr. '19 and 30 Jun '19.
As a consequence what would have been an Anticipated Loss of $253,334 is projected as an Anticipated
Gain/Recovery of $618,875 (far right column). Not only does it mask the fact that there has been a write down
in NAV, the values listed under Balance of Assets (2nd column from right) is based on the Current List Price of
the assets. There is nothing in the past to suggest that HE has any success at selling HRAC real estate at list
price. This is misleading to the casual reader as it leaves the impression that there will be a gain on the sale of
these properties when in fact there is an Anticipated Loss relative to NAV reported in the HRAC Assets spread
sheet distributed just 2 months earlier in May 2019.
2. Assets Listed for Sale
Similarly the NAV of the assets under this heading has been written down by $663,000. As a consequence what
would have been projected as an Anticipated Loss of $1,591,969 just 2 months earlier is reduced to a loss
$928,969. Again this assumes the 13 properties listed in this category can be sold to net the values listed under
the column headed Anticipated Net Sales Revenue - at best a suspect assumption based on history. The
comments above in 1. Assets Sold with respect this being potentially misleading apply equally here.
3. Complete Construction/Lease Up to be Listed
The spread sheet reflects $5,802,747 in Carrying/Development Costs on these 7 properties being capitalized to
30 Jun '19 and projects future investment of $9,366,629 or $15,169,376 in total (about 47% of NBV at 30 Jun
'18) will be required to complete before listing for sale. Based on Anticipated Net Sales Revenue of
$52,800,000 a $4,065,850 gain is projected. The same caveat as indicated above with respect to the risk of
accepting the projections of Anticipated Net Sales Revenue applies here. We have no information as to how
long HRAC may have owned these properties or how long it may take to complete their development and close
their sale but one has to at least wonder if it will prove worthwhile measured on a DCF basis.
4. Obtain Site Plan/Draft Plan Approval and List for Sale or Develop
HRAC has already incurred Carrying/Development Costs on these properties of $6,493,000 and projects
spending another $6,625,000 plus expenses for rezoning/permitting/severing etc. the last 4 on the list. No
projection of aggregate Anticipated Net Sales Revenue or Anticipated Gain/Recovery (Loss) is given for this 7
property segment of the portfolio nor is there anything more than a "best guess" projection of the time it could
take to complete and sell the properties. Any projection of gain or loss would be pure conjecture at this time.
5. Portfolio Concentrations
The 30 Jun '19 Net Asset Value of the HRAC Assets is $95.3 million of which $60.3 million or 63% is
identified in the spread sheet as requiring further development or rezoning etc. in some fashion if maximum
value is to be realized. Without considering the full out-of-pocket expense of carrying costs until the properties
are sold it is projected that a further investment of $17.9 million will be needed to complete the 8 properties
identified as requiring completion. If the properties are to be developed as appears to be HE's current plan the
portfolio is heavily exposed to development risk including the discounted value of cash flow over an extended
period.
Eight of the properties are located in Moncton, NB. In the aggregate these properties are reported to have a
30/JUN/19 Net Asset Value of $24.4 million (25.4% of the total HRAC NAV) and it is projected that Cost to
Complete will be $14.6 million (81.5% of total projected Cost to Complete for the entire portfolio). Although
Moncton is reported to be growing considerably faster than the national average it remains a small city with a
population of only 85,000 (2017).
6. 11 Bay Street, Thornbury (land for 6 condos)
In the May issued spread sheet this property was listed as a development property with 30 Apr '19 NBV of
$941,985, a projected cost to develop of $4.8 million and Anticipated Net Sales Revenue of $7.5 million. In the
more recent spread sheet it is listed as having a 30 Jun '19 NBV of $943,002 and Anticipated Net Sales Revenue
of $1.1 million. You have reported that it is currently listed at $1.2 million so obviously HE has decided not to
develop the property notwithstanding the significant gain they were projecting following completion just 2
months earlier. There is no doubt a back story but I am not aware of it.
7. Valuation and Accounting Issues
My review of the HRAC Assets spread sheet prompts more questions than it answers as to the veracity of the
numbers and the validity of the methodology used in determining value.
Net Asset Value. At what value is a property recorded on the HRAC balance sheet immediately following
foreclosure? To illustrate the point I refer to the Perth property. In court filings HMIC claimed as of May 16,
2019 it was owed $28.9 million by the borrower (Homes by Design). This included $16.0 million in principal,
$2.0 million in costs, $10.6 million in interest and $220 thousand in other fees. The spread sheet reports NBV at
30 Apr. '19 of $10,205,323. Without any explanation this was revalued up by $3,469,532 and at 30 Jun '19 NBV
was recorded at $13,715,000. The Anticipated Net Sales Revenue for this property is $14.5 million or about
50% of debt owed HMIC on which the borrower defaulted.
Upward Revaluation of Assets. Over the 2 months between 30 Apr '19 and 30 Jun '19 two properties were
revalued upward by and amount more than sufficient to offset 7 properties that were marked down in value. The
2 properties receiving upward revaluations were the Perth property noted above and the Minas NS property.
The notes to the audited financial statements indicate "The assets are carried at the lower of cost and NRV when
being constructed for sale in the ordinary course of business or at the lower of cost and fair value less costs of
disposal when held for sale". No matter how these assets are viewed "lower" is the operative word and it is
unclear how these upward revaluations can be justified.
Capitalization of Carrying/Development Costs. Between 30 Jun '18 and 30 Apr '19 the NAV of the HRAC
portfolio was increased by $5.3 million and by a further $3.5 million between 30 Apr '19 and 30 Jun '19 as a
result of capitalizing Carrying/Developments Cost on the basis of a dollar for dollar. I question that a dollar
spent on carrying and development automatically adds a dollar in value to the property.
Anticipated Net Sales Revenue as a Basis for Projecting Gain/Loss on Sale. In 1. and 2. above I have suggested
that any numbers projected on this basis should be viewed with suspicion.
Accounting for Changes in Value of HRAC Assets. Intuitively I would have thought that net changes in the
value of HRAC properties (e.g. revaluation up or down, addition of capitalized carrying/development cost) and
sales at other than NBV would be reflected in the Shareholder's Deficiency account on the Balance Sheet. That
does not appear to be the case as the Shareholder's Deficiency as recorded in the audited financial statements
has remained level for the past 3 years. Unless by sheer coincidence the pluses and minus's were equal!!
8. Conclusions
With the limited information available it is impossible to determine with any certainty the value of this portfolio
or to propose a plan as to how it should be monetized to ensure maximum return based on DCF projections. To
do so would require at a minimum a deep dive into the individual property files and fresh appraisals of all
properties. It is however fair to conclude the:
a) challenge will be difficult
b) property values are over-stated in the spread sheet and audited statements
c) the risk of downside is greater than the opportunity for recovering any of the deficiency already recorded on
the balance sheet.
Nov 14, 2019):
1. Assets Sold
The NAV of the assets under this heading was written down by $872,209 between 30 Apr. '19 and 30 Jun '19.
As a consequence what would have been an Anticipated Loss of $253,334 is projected as an Anticipated
Gain/Recovery of $618,875 (far right column). Not only does it mask the fact that there has been a write down
in NAV, the values listed under Balance of Assets (2nd column from right) is based on the Current List Price of
the assets. There is nothing in the past to suggest that HE has any success at selling HRAC real estate at list
price. This is misleading to the casual reader as it leaves the impression that there will be a gain on the sale of
these properties when in fact there is an Anticipated Loss relative to NAV reported in the HRAC Assets spread
sheet distributed just 2 months earlier in May 2019.
2. Assets Listed for Sale
Similarly the NAV of the assets under this heading has been written down by $663,000. As a consequence what
would have been projected as an Anticipated Loss of $1,591,969 just 2 months earlier is reduced to a loss
$928,969. Again this assumes the 13 properties listed in this category can be sold to net the values listed under
the column headed Anticipated Net Sales Revenue - at best a suspect assumption based on history. The
comments above in 1. Assets Sold with respect this being potentially misleading apply equally here.
3. Complete Construction/Lease Up to be Listed
The spread sheet reflects $5,802,747 in Carrying/Development Costs on these 7 properties being capitalized to
30 Jun '19 and projects future investment of $9,366,629 or $15,169,376 in total (about 47% of NBV at 30 Jun
'18) will be required to complete before listing for sale. Based on Anticipated Net Sales Revenue of
$52,800,000 a $4,065,850 gain is projected. The same caveat as indicated above with respect to the risk of
accepting the projections of Anticipated Net Sales Revenue applies here. We have no information as to how
long HRAC may have owned these properties or how long it may take to complete their development and close
their sale but one has to at least wonder if it will prove worthwhile measured on a DCF basis.
4. Obtain Site Plan/Draft Plan Approval and List for Sale or Develop
HRAC has already incurred Carrying/Development Costs on these properties of $6,493,000 and projects
spending another $6,625,000 plus expenses for rezoning/permitting/severing etc. the last 4 on the list. No
projection of aggregate Anticipated Net Sales Revenue or Anticipated Gain/Recovery (Loss) is given for this 7
property segment of the portfolio nor is there anything more than a "best guess" projection of the time it could
take to complete and sell the properties. Any projection of gain or loss would be pure conjecture at this time.
5. Portfolio Concentrations
The 30 Jun '19 Net Asset Value of the HRAC Assets is $95.3 million of which $60.3 million or 63% is
identified in the spread sheet as requiring further development or rezoning etc. in some fashion if maximum
value is to be realized. Without considering the full out-of-pocket expense of carrying costs until the properties
are sold it is projected that a further investment of $17.9 million will be needed to complete the 8 properties
identified as requiring completion. If the properties are to be developed as appears to be HE's current plan the
portfolio is heavily exposed to development risk including the discounted value of cash flow over an extended
period.
Eight of the properties are located in Moncton, NB. In the aggregate these properties are reported to have a
30/JUN/19 Net Asset Value of $24.4 million (25.4% of the total HRAC NAV) and it is projected that Cost to
Complete will be $14.6 million (81.5% of total projected Cost to Complete for the entire portfolio). Although
Moncton is reported to be growing considerably faster than the national average it remains a small city with a
population of only 85,000 (2017).
6. 11 Bay Street, Thornbury (land for 6 condos)
In the May issued spread sheet this property was listed as a development property with 30 Apr '19 NBV of
$941,985, a projected cost to develop of $4.8 million and Anticipated Net Sales Revenue of $7.5 million. In the
more recent spread sheet it is listed as having a 30 Jun '19 NBV of $943,002 and Anticipated Net Sales Revenue
of $1.1 million. You have reported that it is currently listed at $1.2 million so obviously HE has decided not to
develop the property notwithstanding the significant gain they were projecting following completion just 2
months earlier. There is no doubt a back story but I am not aware of it.
7. Valuation and Accounting Issues
My review of the HRAC Assets spread sheet prompts more questions than it answers as to the veracity of the
numbers and the validity of the methodology used in determining value.
Net Asset Value. At what value is a property recorded on the HRAC balance sheet immediately following
foreclosure? To illustrate the point I refer to the Perth property. In court filings HMIC claimed as of May 16,
2019 it was owed $28.9 million by the borrower (Homes by Design). This included $16.0 million in principal,
$2.0 million in costs, $10.6 million in interest and $220 thousand in other fees. The spread sheet reports NBV at
30 Apr. '19 of $10,205,323. Without any explanation this was revalued up by $3,469,532 and at 30 Jun '19 NBV
was recorded at $13,715,000. The Anticipated Net Sales Revenue for this property is $14.5 million or about
50% of debt owed HMIC on which the borrower defaulted.
Upward Revaluation of Assets. Over the 2 months between 30 Apr '19 and 30 Jun '19 two properties were
revalued upward by and amount more than sufficient to offset 7 properties that were marked down in value. The
2 properties receiving upward revaluations were the Perth property noted above and the Minas NS property.
The notes to the audited financial statements indicate "The assets are carried at the lower of cost and NRV when
being constructed for sale in the ordinary course of business or at the lower of cost and fair value less costs of
disposal when held for sale". No matter how these assets are viewed "lower" is the operative word and it is
unclear how these upward revaluations can be justified.
Capitalization of Carrying/Development Costs. Between 30 Jun '18 and 30 Apr '19 the NAV of the HRAC
portfolio was increased by $5.3 million and by a further $3.5 million between 30 Apr '19 and 30 Jun '19 as a
result of capitalizing Carrying/Developments Cost on the basis of a dollar for dollar. I question that a dollar
spent on carrying and development automatically adds a dollar in value to the property.
Anticipated Net Sales Revenue as a Basis for Projecting Gain/Loss on Sale. In 1. and 2. above I have suggested
that any numbers projected on this basis should be viewed with suspicion.
Accounting for Changes in Value of HRAC Assets. Intuitively I would have thought that net changes in the
value of HRAC properties (e.g. revaluation up or down, addition of capitalized carrying/development cost) and
sales at other than NBV would be reflected in the Shareholder's Deficiency account on the Balance Sheet. That
does not appear to be the case as the Shareholder's Deficiency as recorded in the audited financial statements
has remained level for the past 3 years. Unless by sheer coincidence the pluses and minus's were equal!!
8. Conclusions
With the limited information available it is impossible to determine with any certainty the value of this portfolio
or to propose a plan as to how it should be monetized to ensure maximum return based on DCF projections. To
do so would require at a minimum a deep dive into the individual property files and fresh appraisals of all
properties. It is however fair to conclude the:
a) challenge will be difficult
b) property values are over-stated in the spread sheet and audited statements
c) the risk of downside is greater than the opportunity for recovering any of the deficiency already recorded on
the balance sheet.
