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United Capital Corp (AFP) is a very closely-held, diversified company of which Chairman and CEO A.F. Petrocelli and his wife Beverly effectively own 74.7%. I am leading off this brief analysis pointing out this control as it is important for potential investors to know that Mr. Petrocelli has substantial influence. While I prefer to see management with a stake in the business, this type of control can be worrisome to investors. Many investors are concerned that decisions will be made for the benefit of management and not the minority shareholders; especially when it comes to executive pay, benefits, stock options and related party transactions.

I will start with executive pay. Mr. Petrocelli seems compensated very well at $1.6 million in base salary and bonuses. However, it is important to note that his base salary and annual bonus has only increased 18.5% since 1991. The other three executives have base salaries and bonuses in a range of $390K to $425K. There are also substantial stock options outstanding, many of which have an exercise price at less than half of the current market value of the stock. Most of the outstanding options are held by the company's Chairman and CEO.

In 2008, Mr. Petrocelli made an offer to acquire all outstanding shares of the stock for $23.00 per share. At the time, this represented a 17% premium over the average trading price of the stock for the five trading days leading up to the offer date. According to the press release, the offer was made in the best interest of the shareholders due to an unexplained decline in the stock price. However, many believe this opportunity was being used to get undervalued assets cheap. The offer was withdrawn two weeks later, citing improved market conditions.

If you are hoping that Mr. Petrocelli with retire soon and relinquish some control to outsiders, think again. The company has two positions with the title Vice President - Real Estate Operations and both positions are held by son-in-laws of A.F. Petrocelli.

If you can get past some of the lucrative perks of insiders, this tightly-controlled, diversified company with interests in commercial real estate, hotel operations and engineered product manufacturing has made what appear to be sound investments over the last few years for the benefit of all shareholders. Below I have summarized each segment along with recent performance data.

Real Estate

The company's real estate segment consists of shopping centers, retail outlets, restaurants, office buildings, child care centers and other miscellaneous properties. The company's real estate operations are located throughout the United States, but is more heavily concentrated in the eastern half of the U.S., particularly the Northeast. The company also makes high-yield, short-term loans secured by properties management considers attractive. The company currently has approximately 150 properties and more than three million square feet of rentable space. Most of the company's properties are under long-term net leases, which means the tenants are responsible for nearly all expenses related to the property during the term of the lease.

In the fall of 2010 the company took title to the Bentley Long Island dealership located in Jericho, New York. The facility is 61,000 square feet and is situated on four acres just off the Long Island Expressway. The company originally purchased a $13.4 million non-performing note at a discount that was secured by the dealership in 2009. Separately, the company added a 116,000 square foot industrial building to its portfolio in late 2009. The industrial building is located in Cranbury, New Jersey, just off the New Jersey Turnpike at Exit 8A and is fully leased.

For the year ended December 31, 2010 net revenues for the real estate segment increased 7.3% to $20.9 million and operating income 3.5% to $12.23 million. For the first quarter of 2011 sales continued to rise up 8.1% to $5.3 million and operating income was flat at $3 million.

Hotel Operations

The company currently has four hotel properties in its portfolio. Below is a list of the properties with a link to their respective websites.

  • The Wellesley Inn located one mile north of Atlanta Hartsfield Airport is an independent six-story hotel. The hotel contains 191 guest rooms as well as 2700 square feet of meeting space.
  • The DoubleTree by Hiton Hotel Miami Airport Convention Center is located just south of Miami International Airport. The hotel contains 334 guest rooms, 20,000 square feet of meeting space and 24,000 square feet of retail space. This property was acquired through the purchase of a mortgage note that was in default. The company acquired title to the property in the summer of 2009 and began a $10 million renovation project in the fall of 2009. The renovations are now substantially complete.

  • The DoubleTree by Hilton Hotel Hartford is just one mile from Bradley International Airport. The hotel contains 200 guest rooms and was recently renovated.

  • The Radisson Hotel - Utica Centre contains 162 guest rooms and 15,000 square feet of meeting space.

In addition, the company purchased a mortgage note secured by the Ocean Place Resort & Spa in the fall of 2010. The facility is 12-stories high and contains 254 guest rooms and a 35,000 square feet conference center. The hotel is on 16 beachfront acres and according to A.F. Petrocelli is the "only destination with direct beach front access along the North Jersey Coastline." The company recently reported the borrower filed for Chapter 11 bankruptcy protection. The company will pursue legal remedies and most likely attempt to obtain title to the property.

The hotel segment saw 2010 net revenues jump over 61% to $27.84 million and operating income was $2.1 million compared to a loss in 2009. The sharp increase was primarily due to the addition of The DoubleTree by Hilton Hotel located in Miami that was acquired in the fall of 2009. Sales continued to rise in the first quarter of 2011 up 11.1% to $8.4 million. Operating income for the first quarter increased 36.6% to $1.34 million.

Engineered Product Manufacturing

The engineered products segment manufactures knitted wire products for use in airbag components, noise reduction elements, EMI electronic shielding, as well as air, liquid and solid filtering devices used by the automotive, aerospace and other industrial markets. The company also designs and manufactures transformers under the EPOXYCAST™ and AFP Transformers for use in motor drives systems, machine tools, industrial furnaces, semiconductor fabrication equipment and utility substations. The company's custom magnetics are used in transit vehicle traction systems as well as components in solar and wind energy, nuclear power, and electric vehicle batteries.

Net revenue for this segment increased 38.6% to $31.9 million in 2010 and the segment reversed a 2009 loss and reported operating income of $1.8 million. Sales continued to rise in the first quarter of 2011 and were up 17% to $8.9 million. However, operating income dipped 26.9% in the first quarter of 2011 to $335K due to increased materials cost and additional expenditures related to the expansion of the company's Mexican manufacturing facility. The segments two largest customers, Autoliv (ALV) and General Motors (GM), accounted for 13.9% and 10.4% of 2010 sales respectively.

Conclusion

United Capital finished strong with revenue growing 35% to $80.7 million and income from continuing operations increasing 100% to $12.1 million or $1.25 per diluted share. This strength continued into the first quarter of 2011 with a 12.6% increase in revenue to $22.6 million and a 219% increase in income from continuing operations to $9.8 million or $1.02 per diluted share. However, net income was boosted by a nearly $9 million gain on the sale of securities in the first quarter. Operating income, which excludes the securities gains as well as interest income, dividend income and income tax expense, rose a more modest 7.7% to $3.8 million in the first quarter.

The company was very active during depressed market conditions, acquiring major real estate assets including the Bentley dealership in Jericho, NY., the hotel in Miami, a 116,000 square feet industrial building in New Jersey and a note secured by the beach front hotel also in New Jersey. In the fall of last year, the company also took a 9.9% interest in PNBK Holdings, LLC which owns 88% of Patriot National Bancorp, Inc. (PNBK).

The company also appeared to use the depressed market to make efficiency improvements at its engineered products segment and lower costs by reducing work force, restructuring processes, managing operating expenses and expanding its lower cost Mexican operation, where over 50% of manufacturing is now done.

The company's balance sheet is pristine with over $113 million in cash and marketable securities and total liabilities of just under $80 million. In addition, the company's approximately 150 properties are carried on the books at a seemingly modest $100 million. The company's rental properties are nearly 100% leased so improvements in the real estate segment will likely be driven by acquisitions or sale of existing properties above book value. The engineered products segment has continued to show improvement as the economy has recovered and appears poised to continue improved results in 2011. Meanwhile, the hotel operations segment saw tremendous growth in revenues during 2010 due to the Miami hotel. And then the company potentially has the New Jersey beach front hotel on the hook.

With only modest short-term catalysts in place, this is definitely an investment with a long-term time horizon. If you like to get paid while you wait though, find another alternative as the company has been very stingy with dividends over the years.

Source: United Capital Corp.

Disclosure: I am long AFP.

Source: United Capital's Market Crisis Acquisitions and Streamlining Should Begin to Pay Off