Genesis Land: A Home Builder Left Behind By The Market (OTCMKTS:GNLAF)

Home builders have been on an absolute tear since the market lows earlier this year. Even lower rates combined with fears of the pandemic have driven sales of new homes higher, and home builders have seen their stock prices react positively as a result. From the March lows, Toll Brothers (TOL) and Beazer Homes (BZH) have seen their stock prices triple, while The New Home Company (NWHM) has seen its stock price rise a whopping 400%, to name a few examples.

But there is one home builder that has been left behind in this market frenzy, despite benefiting from the same factors as its peers. That company is Genesis Land Development (OTC:GNLAF), which also trades as GDC in Toronto.

Valuation

Genesis trades at a massive 68% discount to its book value. Most of its business is conducted near Calgary, Alberta, which may scare investors away because of the battered oil and gas industry for which that city is famous. However, the company’s results posted last week demonstrate that Genesis is benefiting from the same trends that its industry counterparts throughout the continent are seeing.

Revenue more than doubled as home orders rose over 100%. Much of that fell to the bottom line, as quarterly earnings were $3.8 million. The company generated operating cash flows of $9.9 million in the quarter. Keep in mind that Genesis’ market cap is just $62 million.

Leverage

As a result, the company’s net debt has fallen from $36 million six months ago to just $14 million as of September 30th. Some companies justifiably trade at large discounts to book value thanks to massive amounts of leverage that increase shareholder risk of permanent adverse events. That is not the case here, as the company’s debt to equity ratio is less than 7%.

Genesis’ “real estate held for development and sale” of $191 million is a whopping 14x the company’s debt level, giving the company plenty of capacity to expand its presence if management sees an opportunity to do so profitably.

Management

Sometimes a company rightfully trades at a massive discount as management has a history of working against shareholders and/or its incentives are not aligned with shareholders. That is not the case here. The company is essentially controlled (~40% ownership) and run by Smoothwater Capital, a private equity firm. Smoothwater’s owner has been buying shares of Genesis as recently as October, picking up almost 50,000 shares at around the current price.

Capital Allocation

When management is also a large shareholder, you can expect management to act in the interest of shareholders. Genesis does repurchase shares in the open market from time to time. The company bought back just over 100,000 shares in its most recent quarter.

But the company’s preference for returning capital appears to be through special dividends. Genesis has paid out about $30 million in special dividends since 2017. That’s almost half of the company’s current market cap.

Considering the company’s solid current financials and its low leverage, Genesis may soon pay another special dividend. However, if it does not, I wouldn’t be too bothered; considering the hot market in which the company operates, there may be other uses of capital that are more beneficial for shareholders. Because management and shareholders are aligned, shareholders can rest easy knowing that their capital is being employed with the intent of maximizing returns.

Conclusion

Genesis is cheap, safely capitalized, generating strong profits, and has a management team that is aligned with shareholders. The downside at the current price looks very limited compared to the upside potential.

Disclosure: I am/we are long GNLAF. 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.

Source Article