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# QAD's Real Estate Is Understated On Its Balance Sheet

At the time of QAD's IPO, the company owned 28 acres and 54,000 square feet of office space which it was carrying on the balance sheet at \$8.9 million. During fiscal 2005, the company took on \$18.0 million of financing and constructed its new headquarters on the property. Thus, QAD's total real estate investment was \$26.9 million.

Based on our (and other) valuation estimate(s) of \$50M+, QAD's property is currently understated on its balance sheet by about \$25 million.

To double-check this calculation, we utilized a second methodology:

Since the time of its IPO, land price indexes in the area have risen between 135% and 170%. Based on the carrying cost at the time, the company is likely sitting on at least \$12-15 million of unrealized gains on the original property. Of course, this assumes a 1997 purchase date and is solely based on the original financing and carrying values. Regardless, we'll stick with the lower figure (\$12M) for the sake of conservatism.

By comparing the geographical breakdown of QAD's property & equipment balance to its geographical revenue breakdown, we estimate that its Santa Barbara headquarters (land + building) is now being carried on the books at just over \$20 million. That's \$6.9 million lower than the original \$26.9 million. In addition, the \$18 million loan it took to construct the new headquarters now has a balance of \$16 million (all data as of the end of its 2012 fiscal year).

Via simple arithmetic, we calculate a second estimate of unrealized profit:

\$12M + (\$26.9M - \$20M) + (\$18M - \$16M) = \$20.9M

This brings us pretty close to the original \$25 million estimate. Keep in mind, if we go with the higher end of the \$12-15 million range above, our second estimate becomes \$23.9 million.

Considering QAD's cash and deferred revenue balance, this \$21-25 million is an significant addition to the company's true net-asset value. Juxtaposed against its free cash flow and maintenance revenue stream, it becomes easy to see the value represented in its current share price.