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Harbor Custom Development: Value Play In An Overheated Market

WY Capital profile picture
WY Capital


  • Real estate development company in the highly supply-constrained Puget Sound region.
  • Low risk land acquisition strategy in which HCDI can exit at multiple points in time for profits.
  • Fast revenue growth should continue as HCDI expands into new markets and unveils new housing products.
  • Trading at significant discounts to homebuilder peers like Toll Brothers and Lennar at the current enterprise value.
  • Management has decades of experience in real estate, owns a substantial percentage of the stock, and has been buying recently.

Harbor Custom Development (NASDAQ:HCDI) is an anomaly in an overheated stock market. While many IPOs are more than doubling at open, HCDI has collapsed over 50% from its open price of $7.5 and is languishing near all-time lows. If you look more closely, however, HCDI seems incredibly undervalued compared to peers despite strong growth and liquidity.

Real estate market

Today, HCDI operates in the Puget Sound real estate market, which has seen prices soar over the past few years due to strong population and industrial growth coupled with low housing supply. As you can see below, almost every region measured is seeing price appreciation:

Source: Seattletimes

Strong price action has continued into 2021, with news of the coronavirus vaccine fuelling the market. Many new listings have been snapped up in less than a month and many buyers are offering prices way above list price. This kind of market is ideal for a developer like HCDI as new developments can be sold out very quickly, as you can see below.

Source: Investor presentation

HCDI's strategy also includes expanding into other markets with strong fundamentals that would be preferred by residential homeowners like job growth, highly ranked education system, diversified economy, etc. So far, HCDI is planning to expand the Austin and Sacramento markets in Q1 2021 to build houses in the price range of around $1mil. Construction is expected to start in H2 2021.

About Harbor Custom Developments

Founded in 2014 by Sterling Griffin, HCDI is a real estate developer involved in every part of the land development cycle including – land acquisition, entitlements, construction of project infrastructure, home building, marketing, and sales.

Source: Investor presentation

HCDI reduces the risk of buying land by providing multiple exit points at different stages of the development cycle. This includes selling entitled land to downstream

This article was written by

WY Capital profile picture
Looking out for underrated companies that could shape the future of humanity, or just provide strong returns over the long run. Note that my opinions could change after conducting more research or based on anything, honestly. DYODD

Analyst’s Disclosure: I am/we are long HCDI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (277)

we have a new home for HCDIP discussion board: Richard's new article on HCDIP
HCDI Q3/2021 earnings: 20 cents per share!

350% above expectation!
HCDI is Quad Growth Story:

Market growth,
revenue growth
earning growth
PE Expansion
Opportunistic growth in every stage of the housing market

Tailwind from Lennar
Housing tailwind
Low mortgage rate tailwind
Biden $4 trillion crazy plan that would inject $500 billion to Section 8 housing market. The secret is that Section 8 is paying a higher rate than the current market rent!!
Need more houses tailwind!

Buy HCDIP to get $2 per share divvy with a hidden 5.5556 perpetual call option on HCDI!!!

Senior folks, you got plenty of time to wait while clipping 16.6666666667 cents coupon per month until the natural redemption of HCDIP as HCDI marching towards $7.....
Gridbird profile picture
@HCDIP Top Pick Can I assume HCDIP Top Pick, OK HCDIP, and OK HCDI are all one and the same?
HCDI has about 13 million shares now. Q3 earning is $3.6 million. It is growing revenue at 130% rate y o y.

let's just assume it earns $4 mil per quarter. it would be $12 million per year.

so it is earning about $1 per share.

at $2=HCDI, that would be PE=2.

let's see how long before the market would adjust the price to reflect that reality.

buying more HCDIP, clicking 16.667 cents coupon per month until final conversion to stock when HCDI=$7!!!

@HCDIP Top Pick even at $7=HCDI, at steady $4 million per quarter earning, that would be PE=7!!!
Rob G. in Vegas profile picture
@HCDIP Top Pick Are you buying more HCDI down here at $1.83/share?
@Rob Grande I rather buy HCDIP since it has 5.5556 HCDI embedded.

however, HCDI at 1.83 is strange considering it has just said Q3 earning is $3.6 million (about 20 cents per share). Q4 earning would be even higher. if we just assume it earns 20 cents per quarter, it would have 80 cents per year. PE would be 2.5 with HCDI at $2.

we need some institutional buying. Retail alone would not be enough. that is one reason why it had a hard time raising more money.

unless it is a fraud, this is a great opportunity.
Q3 2021 Earning is announced!

360% earning gain over Q2
revenue gain 130% Y o Y

HCDIP divvy covered 300%!

Q4 earnings will be even better.
the harvest season of all these deals!
They will owe us an explanation on the secondary, ie where the proceeds are being invested and why it was so urgent.
Income Q3 > 3 X Q2
revenue Q3/2021 > 250% of Q3 2020

You can buy anything with HCDI, HCDIP, HCDIZ, HCDIW

earning growth, PE expansion, Revenue growth.

The goal is to redeem HCDIP as HCDI marching toward $5

Buy buy Buy!!!
solid $15. marching to the $16 in Nov.
Rob G. in Vegas profile picture
@OK HCDIP Did you see that Think Equity just pulled these shenanigans again with FATBP?

Offering 1 million preferred shares at $18 that are redeemable at $25. FATBP was trading near $24 before the secondary.

Thank goodness I sold it in late September. Like the great song from The Who..."We Won't Get Fooled Again".
0xfc profile picture
@Rob Grande I also let go of my FATBP at the same time as HCDIP. Both are Think Equity. Thank goodness I got lucky with that.

So both companies are somehow flawed in my mind. There has to be a reason behind this nonsense. You cannot tell me that both companies needed an infusion of cash for some "hot deal".
@0xfc Greek shippers come to mind..
Buy Oct 27 to grab that 16.67 cents dividend per share!
Oct. 28 is Ex dividend day
Firmly at $15 (close to it)=HCDIP

still the vest value in town!

13% current yield paid monthly (great for senior); 40% discount from par;
$2.5 hidden HCDI call Option;

HCDI is making money hand and fist!
0xfc profile picture
@HCDIP Top Pick I lost faith in them. I don't even follow it anymore. Only reason I noticed was due to your comment to this post.

I do hope everyone does well though. If this company can just perform in a normal fashion it should do OK. I just do not care for upper mgmt. Trust has been lost.
Rob G. in Vegas profile picture
@0xfc Common down to $1.75/share. Good God. I'm still holding my HDCIP, but it is a tiny position held in my high-risk bucket.

What investors need to understand is that management buried (diluted) both the preferred and common shareholders with that $15/share preferred secondary.

Might be a long, long time before the common bounces back to anywhere near $3/share. At least we get paid to wait in the preferred.....for now.
@Rob Grande Yes a failed spec play on my part.. I'm ok with a term long breakeven expedition..
Investment company Hohimer Wealth Management, Llc (Current Portfolio) buys Global Payments Inc, Las Vegas Sands Corp, Sanofi SA, Harbor Custom Development Inc, Silverback Therapeutics Inc, sells Alibaba Group Holding, Smith & Wesson Brands Inc, Bristol-Myers Squibb Co, Lumen Technologies Inc, iHeartMedia Inc during the 3-months ended 2021Q3, according to the most recent filings of the investment company, Hohimer Wealth Management, Llc. As of 2021Q3, Hohimer Wealth Management, Llc owns 174 stocks with a total value of $476 million. These are the details of the buys and sells.
New Purchases: GPN, LVS, HCDI, SBTX, HYLD, ET, LWLG,
Strong move today on HCDIP. still the best deal in town.

Once it reports Q3 earnings, we are looking at about $18
Rob G. in Vegas profile picture
@OK HCDIP HCDI common down to $1.95....my goodness. Never saw a management team destroy shareholder value more than this one, but nice to see the preferred creeping back up....for now.
@Rob Grande there was a news today about a Fund buying HCDI (new purchase).
Q3 earnings should put it on the radar screen.
@Rob Grande Investment company Hohimer Wealth Management, Llc (Current Portfolio) buys Global Payments Inc, Las Vegas Sands Corp, Sanofi SA, Harbor Custom Development Inc, Silverback Therapeutics Inc, sells Alibaba Group Holding, Smith & Wesson Brands Inc, Bristol-Myers Squibb Co, Lumen Technologies Inc, iHeartMedia Inc during the 3-months ended 2021Q3, according to the most recent filings of the investment company, Hohimer Wealth Management, Llc. As of 2021Q3, Hohimer Wealth Management, Llc owns 174 stocks with a total value of $476 million. These are the details of the buys and sells.
New Purchases: GPN, LVS, HCDI, SBTX, HYLD, ET, LWLG,
all HCDI markets had a huge price up-swing.

It is in: Seattle, Austin, Sacramento, Punta Gorda (FL)

the selection: huge metro, high income, high housing price appreciation!

Freddie Mac House Price Index (FMHPI)
Highest Price Appreciation

Metro 2020M8~2021M8 1975M1~2021M8
Coeur d'Alene ID 46.2 1572
Boise City ID 45.6 1273
Idaho Falls ID 40.2 726
Pocatello ID 39.8 642
Austin-Round Rock TX 39.6 1456
Missoula MT 39.1 1406
St. George UT 37.7 832
Bend-Redmond OR 34.9 1720
Logan UT-ID 34.4 1017
Cape Coral-Fort Myers FL 34.3 716
Lake Havasu City-Kingman AZ 32.9 823
Sebring FL 32.8 227
Ogden-Clearfield UT 32.2 1062
Provo-Orem UT 31.9 1083
Punta Gorda FL 31.8 717
Naples-Immokalee-Marco Island FL 31.5 1353
Port St. Lucie FL 31.3 712
Phoenix-Mesa-Scottsdale AZ 30.6 1042
Lewiston-Auburn ME 30.5 769
Stockton-Lodi CA 30.2 1344
Spokane-Spokane Valley WA 29.9 1201
Prescott AZ 29.4 991
Salt Lake City UT 29.2 1344
Reno NV 29.1 1110
Sebastian-Vero Beach FL 28.9 417
Flagstaff AZ 28.8 1000
Homosassa Springs FL 28.6 616
North Port-Sarasota-Bradenton FL 28.4 1005
Pueblo CO 28.2 726
Carson City NV 28.0 1145
Rocky Mount NC 28.0 357
Tampa-St. Petersburg-Clearwater FL 28.0 1021
Deltona-Daytona Beach-Ormond Beach FL 27.8 777
Knoxville TN 27.5 740
Lakeland-Winter Haven FL 27.4 675
Sierra Vista-Douglas AZ 27.3 524
Yuma AZ 27.3 445
Crestview-Fort Walton Beach-Destin FL 27.2 1251
Kingston NY 27.2 1047
Riverside-San Bernardino-Ontario CA 26.8 1407
Pensacola-Ferry Pass-Brent FL 26.6 806
Rapid City SD 26.5 650
Ocean City NJ 26.3 1513
Jacksonville FL 26.2 837
Asheville NC 26.0 1081
Goldsboro NC 26.0 394
Ocala FL 26.0 445
Burlington NC 25.9 569
Lewiston ID-WA 25.8 983
East Stroudsburg PA 25.5 414
Merced CA 25.2 1077
Walla Walla WA 25.1 1123
Atlantic City-Hammonton NJ 25.0 740
Muskegon MI 25.0 1010
Huntsville AL 24.9 546
Myrtle Beach-Conway-North Myrtle Beach SC-NC 24.9 539
Tucson AZ 24.9 792
Charleston-North Charleston SC 24.8 1172
Colorado Springs CO 24.8 946
Raleigh NC 24.8 872
Bellingham WA 24.7 1709
Jackson TN 24.7 327
Mount Vernon-Anacortes WA 24.7 1549
Palm Bay-Melbourne-Titusville FL 24.6 855
Olympia-Tumwater WA 24.5 1129
Durham-Chapel Hill NC 24.4 882
Decatur AL 24.3 373
Portland-South Portland ME 24.3 936
Santa Cruz-Watsonville CA 24.3 2578
Vallejo-Fairfield CA 24.3 1470
Modesto CA 24.2 1284
Fayetteville-Springdale-Rogers AR-MO 24.1 564
Hilton Head Island-Bluffton-Beaufort SC 24.1 650
Las Vegas-Henderson-Paradise NV 24.1 834
Sacramento--Roseville--Arden-Arcade CA 24.0 1515
almost all its assets are land holding or housing projects. as long as housing stay hot and liquid, HCDI has a lot of flexibility to sell lands if it needs short term liquidity.

preferred divvy safe for now.
Philipsonh profile picture
Then why did they issue a preferred secondary undercutting their own shareholders by 40%.
and why do you tout in incessantly, unless you have a vested interest in it.
@Philipsonh of course, vested, aren't you? or you are a discruntle ex-employee?

@OK HCDIP vested, can't you tell?
don't lose your mind for one single stock. there are plenty of others.
0xfc profile picture
Woooo. What an absolute dumpster fire of a situation. I would not hold HCDI or HCDIP for any reason at all at this stage. What they did was inexcusable. I cannot think of a bigger stab in the back of investors then this. I am almost positive a year or two down the road we will find out that the preferred div will be suspended and your only chance to recover anything will be the conversion. That is how you will have to calculate this mess.

Plus all this talk of warrants. How many of you even got them? You had to buy direct. Most here bought on the open market and have squat in warrants.

Just think of the most devious situation HCDI can do and that is probably your end result. The common is not going anywhere for a very long time.
@0xfc you can buy HCDIZ at 40 cents, and HCDIP at $14, a discount off secondary offering @$15. pig gets slaughtered. you have to be nimble and take actions. buy and sell as the action called for.
The Deal of the Century! HCDIP

0) $15, 40% discount of its par value at $25. no worry about being called or redeemed (would be happy if called or redeemed).
1) $2 divvy paid monthly (16.667 cents per month per share. better than quarterly)
2) Perpetual Call Option on HCDI. let's analyze the value of this Call Option.

Conversion price is $4.5 at $25 par (each HCDIP==5.556 HCDI).
4.5*15/15=$2.7. thus if you buy HCDIP at $15, you get a perpetual Call Option on HCDI at $2.70 strike (5.556 HCDIP)

there is HCDIZ warrant.it has a 5 year life, $2.97 strike. therefore, the call option of HCDIP has a better term (never expire, lower strike).
HCDIZ=40 cents. we will assume HCDIP's call option is 45 cents (sounds fair)?
$0.45 * 5.556=$2.5.

3) when you back out that call option premium of 2.5 from $15, you get $12.5.

you can either short HCDI or HCDIW and HCDIZ to lock in this value. BTW, HCDIZ at 40 is kind of low. a real 5 year call at $2.97 would trade near $1 easily.

4) $2/12.5=16% yield. It is a preferred dividend so it is not set quarter to quarter by BOD on stock dividends. there is some kind of certainty that senior folks like. it is the cumulative dividend.
5) HCDI made money in Q2. will make money in the foreseeable future.
6) Revenue growth $70%

let me know if you can find any other stocks near that kind of valuation.
@OK HCDIP now, HCDIP just dropped to $14.
buy buy buy!!!

"5) HCDI made money in Q2. will make money in the foreseeable future.
6) Revenue growth $70%"

Can mgmt produce these outcomes?..
Worst case scenario another raise in the distant future?.. We'll see..
@rusty13 just be nimble. if it does another one, sell, then buyback.
i sold at $23.5 the moment I knew the secondary. then buy back at $15. i got 50% more HCDIP. why not? (plus HCDIZ).

if you look at the news release, it is buying land nonstop.
waiting for some kind of sale. did not happen. I guess I may have to buy around $14.
With the new issuance this no longer has the risk profile of a preferred anymore, but a high yield common. (1.2 million shares of HCDIP + 2.4 million of the IPO) * $0.50 quarterly div = $1.8 million per quarter to pay preferred. Compared to $1.1 million in operating income last quarter, so clearly they have their work cut out.

Still, couldn't pass up buying more under $14 and this now makes up about 3% of my portfolio. Anyone looking to harvest losses (up to the $3000 limit) into another homebuilder might wanna look at PSMMY, currently yielding ~9%
gimmeecoffee profile picture
I own this and LSEA. After seeing the nice funding PR put out by LSEA this morning, one can see which company is better run (Hint: NOT HCDI) I would hope someone on their next conference call rips into them for the brutal way they treated the shareholders with their crappy ass dilutive offering.
@gimmeecoffee how much divvy does LSEA pay? 2 cents a year or o.ooo1 cents per year?
if you are a senior gentleman, you need monthly income, the divvy that pays monthly, and >10% to maintain your luxury lifestyle.
Philipsonh profile picture
Just informational. If HCDI needed money so badly and so fast, they could have accessed a company like symbol BRMK, Broadmark Realty, a Reit which makes exactly the types of loans that Harbor needed without undercutting their original preferred issue shareholders.
buy all you can! HCDIP=$13.6 with 15% yield!
@OK HCDIP The lawyers will be out after this fiasco and they will be looking for people who seemed to know what was going to occur.
@CraftBrew lawyer? for what? still $2 divvy, same conversion. no terms have been changed. good luck with that.

time to buy is now! HCDIP
@OK HCDIP You may need to warn anyone buying this company that it is very speculative and mgmt may be not aligned with shareholders.. I'm buying but with spec money only.. So far the past few months were complete fails if you put money here..
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