WCI Communities: Niche Homebuilder Trading Below Understated Book Value

| About: WCI Communities, (WCIC)
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Summary

~10% discount to BV is understated as it excludes appreciation of real estate holdings carried below current resale value (at values established in 2009 as it exited bankruptcy).

One set of 12 undeveloped condo-tower pads carried at $0.65 per share is worth closer to $3 based on comparable sales; WCIC owns another valuable block of 3,500 home sites.

Niche focus on Florida market with attractive demographics; as ~half of sales are all-cash (rest have high down-payments), there is less financing risk and lower cancellation rates.

Operating cash flow is understated as it includes significant real estate purchases; increasing inventory is not a concern as the average home sales price increased ~6% y/y.

Relatively low net debt/equity of 34% and $88M of cash limits downside.

WCI Communities (WCI) is a lifestyle community developer and luxury homebuilder of single- and multi-family homes in the coastal Florida markets. WCI develops amenity-rich, lifestyle-oriented master-planned communities, catering to move-up, second-home and active adult buyers. Headquartered in Bonita Springs, Florida, WCI is a fully integrated homebuilder and developer with complementary real estate brokerage and title services businesses. During 2015, WCI re-entered the tower business when it began construction of a 75-unit luxury high-rise tower in Bonita Springs, Florida.

There are several attractive financial characteristics warranting an investment in WCI. Its overall financial position and results of operations are strong and the stock trades below reported book value. We also believe that reported book value is understated as certain valuable real estate assets are recorded on the company's balance sheet at an amount below the current resale value. These assets are carried at values established in 2009 as it exited bankruptcy, benefiting from fresh start accounting. One is a set of 12 undeveloped condo-tower pads, on the balance sheet at $0.65 per share, but worth closer to $3 based on comparable sales. Management noted a recent single tower pad comparable sale with a sales price of $40 million. These pads benefit from real scarcity value in this area. Another is a block of 3,500 home sites that also reflect fresh-start accounting from 2009.

WCI is well-financed and the leverage risk is low. The net debt-to-equity ratio is only 34%, and WCI held $88 million of cash at June 30, 2016. WCI is profitable and, after adjusting for real estate purchases, generates good cash flow from operations. In addition to the positive balance sheet, income and cash flow characteristics, the stock is priced at a low earnings multiple and, as mentioned, a discount to book value. WCI earned $35.4 million for the year ended 2015 ($1.34 per diluted share), and $16.1 million for the six months ended June 30, 2016, ($0.60 per diluted share). The trailing 12-month price-to-earnings ratio is about 12x.

In the most recent six months, cash declined from $135.3 million at December 31, 2015, to $88.3 million at June 30, 2016. The reason for the decline relates primarily to real estate purchases. Operating cash flow for the six months ended June 30, 2016, was negative $42.9 million. However, that includes $73 million of net cash used to purchase property. Adjusting for the purchased real estate results in positive operating cash flow of $30 million. Net debt to equity was 34% compared to 23% at December 31, 2015.

As of June 30, 2016, WCI had a backlog of 586 units contracted for sale at an aggregate purchase price of $305 million compared to a backlog of 569 units at an aggregate purchase price of $271 million as of December 31, 2015. The average home sales price for new orders was up roughly 6% in the most recent year-over-year quarterly comparison. The sales agreements are generally not conditioned on the buyer securing financing. Given its target buyer demographics, on average, its homebuyers tend to rely less on mortgage financing for their purchases and typically provide higher deposits and down payments compared to homebuyers nationally. During the years ended December 31, 2015, 2014 and 2013, approximately 49%, 58% and 44%, respectively, of WCI’s homebuyers were all-cash buyers. This was a contributing factor to its low cancellation rates of 7.4%, 6.8% and 4.7% of gross orders during 2015, 2014 and 2013, respectively.

WCI includes the purchase of real estate as a use of cash in the operating section of the cash flow statement. In 2015, WCIC increased its real estate inventory just over $100 million to $554 million. Adjusting for this $100 million increase in real estate inventory would result in positive cash flow from operations of about $62 million.

At a current price of about $17, there is a 9% discount to the June 30, 2016, reported book value per share of $18.61. As discussed above, we believe that the reported book value is conservative as it does not include the appreciation in value of certain valuable real estate holdings. For the year ended 2015, WCI grew book value per share by 8.3%. BVPS increased to $18.61 at June 30, 2016, (up 4% from December 31, 2015). Assuming a reasonably consistent economy, WCIC should be able to continue to grow book value at 8%+ per annum.

In summary, we believe WCI is a well-financed company with impressive financial results and is trading at a discount to its intrinsic value. It has significant focus and expertise in one of the best real estate markets in the country (favorable climate, caters to aging demographics in the U.S., significant and consistent population growth, etc.). Offsetting these favorable investment attributes investors should be mindful that WCIC is not geographically diverse with its Florida focus. Lastly, WCIC's home sales are correlated to the stability of financial markets.

Disclosure: I am/we are long WCIC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The specific security identified and described does not represent all of the securities purchased, sold, or recommended, and the reader should not assume that investment in the security identified and discussed was or will be profitable.