UCASU: Thinking Past Uncertainty to Invest for the Future

OTC:UCASU

With so much uncertainty in the world, looking at one's investments, much less thinking about where to invest, might be towards the bottom of many people's "things to do while staying in" list. Successful investment strategies include looking at opportunities when the instinct is to hunker down.

The pandemic has created tremendous turmoil in the markets and in people's lives. Businesses, stocks, and commodities have all been hard hit. The recent drop in demand for crude oil led to negative crude oil prices on certain May futures contracts. At the same time, the crisis has sparked conversations about the need for long-term investments – whether for public health surveillance, economic and societal supports, climate or infrastructure. Real estate companies are one way for investors to support this shift to long-term thinking while also diversifying their portfolios.

Real estate certainly isn't recession-proof, but not all real estate investments are alike, nor are all recessions. The 2008 recession started in residential real estate. Both assets and the value of the securities financing those assets came under intense scrutiny. Traders used colorful terms such as "mark to make believe" when referring to real estate backed securities at the time. Disruption in the financial markets eventually led to reduced consumer demand and a slow in business.

The current economic situation appears to be taking the reverse path. The pandemic and stay-at-home orders have slowed business and consumer demand. Business owners and the jobless are struggling to pay rent, negatively affecting commercial real estate. Properties are taking more time to sell, but the impact on residential real estate seems minimal as people cut back on travel, entertainment and other discretionary spending or draw down savings rather than sell their homes.

During recessions, real estate assets have tended to be less volatile than stocks, bonds and commodities. However, real estate investment companies vary in strategy, structure and size. Many publicly-traded real estate companies invest in properties that generate a steady stream of rental income. These companies are likely hurt by the current slowdown which in turn may affect their ability to maintain investor payouts.

On the other hand, limited partnerships, which don't necessarily make regular cash distributions to investors, can take a longer-term approach to real estate investments, focusing on areas undergoing significant change but which may not meet the near-term returns that public-market investors seek. One company, UC Asset LP UCASU, is a publicly-traded vehicle for those who seek private-partnership-like real estate investments.

UC Asset LP is a four-year old real estate investment company focusing on residential real estate for renovation, redevelopment and resale in the Atlanta Metroplex. The general partners are "Larry" Xianghong Wu and Gregory Bankston. Wu, an experienced portfolio manager, founded UC Asset LP with capital entirely from China-based investors who seek to diversify their portfolio and mitigate risks back in China. These investors want a conservative investment strategy that produces long-term and sustainable value growth while focusing on wealth conservation. Bankston brings fifteen years of real estate development and management expertise to the partnership.

Real estate companies as an investment

Real estate companies typically invest in commercial properties such as: office buildings, multi-family apartments, retail space, developments, hotels, resorts, and industrial property. Some companies specialize in niches: residential, medical buildings, technology buildings, malls or fast food. Revenues and profits come from leasing income, property management fees and capital gains. Some companies are able to self-fund much of their growth by leveraging increased value in their existing portfolios or through excess leasing/management income; however, most companies depend on the capital markets to fund new investments.

Publicly-traded real estate investment companies are structured as either real estate investment trusts (REITs) or limited partnerships (RELPs). Each structure provides tax-advantaged returns to investors through regular distributions and long-term asset appreciation. Investors may benefit from share price gains over time.

REITs are the most common form of publicly-traded real estate investment companies. Over time, REITs have provided consistent income streams that tend to be higher than typical dividend yields along with share price appreciation. REITs offer investment diversification and are relatively liquid.

RELPs are Master Limited Partnerships (MLP) whose shares (called units) trade on public exchanges just like shares of corporations. Instead of being shareholders, RELP investors become limited partners. Most MLPs are in the energy space, but there are two large, well-known RELPs on the market, Brookfield Properties, LP (BPY-NYSE) and New England Realty Associates LP (NEN-NYSE). UC Asset LP, is the only RELP traded on the OTC and the only publicly-traded small-cap RELP. RELPs are best suited to long-term investors seeking above-average returns without the need for regular cash distributions.

UC Asset LP – opportunistic real estate investment with a long-term focus

UC Asset LP went public with a Regulation A offering that was qualified in 2018 and began trading on the OTC on January 2, 2020. UC Asset has raised approximately $8.6 million to date including a $0.3 million private placement in March 2020. In its first two years of operation, assets under management (AUM) grew by 364% and net equity per share rose by 50% all without the use of leverage.

To date, the Company has acquired 28 residential properties, primarily in Atlanta's northeastern suburbs. Management improves the properties by renovating remodeling, or rebuilding.

• Renovations: involve improving both infrastructure and surfaces in the existing structure. Renovations generally require small investments in permitting, capital and time. Renovation projects include minor space reconfiguration, updating kitchens and bathrooms, and repairing/replacing water and power lines and the heating/cooling systems. Nineteen of UC Asset's projects were renovations, and most were completed in four or five months.

• Remodeling: includes all of the improvements of a renovation along with major structural changes such as adding to the building's footprint, adding bathrooms or relocating kitchens and baths. Remodeling projects necessitate more time and funds and are completed in seven-to-nine months. Remodeling projects also have the potential for higher ROIs than renovations.

• Rebuilding occurs when the land has significant value and it more cost-effective to tear down the existing structure and build a new home. The Company focuses on areas where other rebuilding projects have been successful as it is critical to avoid over-improve a property if the neighborhood prices won't support the investment.

Once a property has been improved, it is put on the market for resale or temporarily leased if the resale market is soft. Seventeen Atlanta properties have been completed and resold. Of the remaining properties, two are pre-construction, three are under renovation, one is on the market for sale, one is in contract and four are currently leased.

Atlanta – Among the Fastest Growing Metro Areas – Fifty Years and Counting

Atlanta has long been a major business hub in the southeast. Coca Cola (KO-NYSE), Home Depot (HD-NYSE), Delta Airlines (DAL-NYSE), UPS (UPS-NYSE) and Turner Broadcasting Systems (T-NYSE) were founded or headquartered in Atlanta for many years. The area has consistently attracted new business and growth for half a century. In the 1980s, Atlanta's population grew by 25% from 1.6 to 2.2 million. After a brief economic slowdown from 1989-1991, Atlanta roared back in the 1990s. Payrolls surged 43% during the decade (twice the rate of the US), fueling growth in housing and consumer businesses. The 1996 Summer Olympics introduced Atlanta to the global stage and businesses followed. Atlanta's population grew 60% to 3.5 million by 2000 and another 28% to 4.5 million by 2010 and currently estimated at 5.8 million. In 2019, Atlanta was the fourth fastest-growing metro area according to US Census estimates. The Atlanta Regional Commission forecasts 8.6 million residents by 2050.

Exhibit 1: Population in Metro-Atlanta

Source: United Nations World Population Prospects - 2019

UC Asset has focused investment in Atlanta's northeastern suburbs. Thirty years ago, the areas along Atlanta's perimeter (I-285) such as Dunwoody, Sandy Springs and Marietta were bedroom communities with an easy drive to offices in Buckhead and Downtown Atlanta. The area offered larger homes at lower prices when compared with established in-town neighborhoods such as Buckhead, Midtown and Ansley Park. Buyers also chose to live near the Perimeter for high-performing schools and lower taxes in DeKalb and Cobb counties, compared with Fulton County. As Atlanta expanded its public transit rail system to these areas in the 1990s, office parks sprung up around the rail stations and employers such as UPS, State Farm, Intercontinental Exchange (ICE-NYSE) and Mercedes (DAI.DE) moved to the area. Employer migration drove demand for upscale housing in neighborhoods where many of the existing homes were built in the 1970s. Several factors have enabled Atlanta to consistently expand over the past fifty years and set the stage for continued growth.

• Diversified economic base: Atlanta's top employers include financial services, transportation, logistics, technology, retail, entertainment, broadcasting, automotive and consumer products. Atlanta is home many preeminent healthcare providers and the Centers for Disease Control and Prevention. Atlanta's Hartsfield-Jackson Airport has been the world's busiest airport for the past 20 years handling 100 million passengers annually.

• Wide range of employment opportunities: Atlanta companies seek workers from all education and skill levels. Atlanta is generally more affordable for most workers than many other cities; however, income inequality is growing and so is the housing gap. To address this deficiency, Atlanta's mayor has committed to building 20,000 additional units of affordable housing by 2026.

• Consistent business and economic policies: In addition to tax credits and other incentives for businesses, economic and business policies in Georgia have been remarkably consistent for several decades. The state tax rate has changed only once in fifty years, moving from 6% to 5.75% currently.

• Commitment to infrastructure: Government's commitment to improving infrastructure to keep up with population growth. In the 1990s, Atlanta's MARTA rail system expanded in every direction, growing to 50 miles of track stretching from Atlanta-Hartsfield Airport in the south and north to Sandy Springs. Many jobs moved into office parks that sprung up around the new rail stations while commuter lots encouraged drivers to use public transit to alleviate downtown traffic congestion. In December 2019, the Atlanta Regional Transit authority voted unanimously to further expand public transportation through a combination of heavy rail, light rail and connections to existing Amtrak commuter rail. By 2025, Atlanta seeks to add 29 miles of light rail and 22 miles of heavy rail, effectively doubling the size of the existing rail system. These additions will help relieve traffic congestion by expanding both work locations and commuting options.

Future Opportunities

As the Company gains assets and experience, it looks to diversify its business both geographically and strategically.

• Underserved markets: UC Asset plans to invest in distressed neighborhoods that are part of Atlanta's redevelopment and affordable housing plans. For example, the Atlanta Beltline, a multi-purpose development centered on 22-miles of abandoned railway tracks, includes over 5,000 units of affordable housing along with redevelopment of existing housing in the distressed neighborhoods west of downtown Atlanta.

• Commercial and multi-family properties: UC Asset also intends to invest in income-generating properties including apartments and commercial space. Investments are likely to focus on particular niches such as student apartments and small, detached business spaces. Income generating properties may be used to fund further projects and/or provide periodic distributions to investors.

• New Development: UC Asset owns a tract of land outside Dallas which it plans to divide into 40-70 lots for upscale homes. The Company is likely to draft overall development plans, divide the lots and make the initial infrastructure investments before bringing in co-developers/partners.

Summary

There are many benefits to investing in real estate. Over time, real estate tends to provide tax-advantaged attractive returns that exceed inflation. But for individuals, the investment in time, expertise, capital outlays and risk are significant hurdles. Publicly-traded RELPs are a way for individual investors to partner with management capable of targeting, vetting, acquiring and reselling or operating long-term assets for appreciation. Without the pressure to make regular distributions, RELPs have more options and flexibility in their investment strategies than REITs. This flexibility may provide more downside protection for investors in the current environment. UC Asset combines an experienced management team with an attractive investment track record, backed by a stable base of long-term investors is well positioned to both manage through the slowdown and leverage opportunities on the other side.

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