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UDFI - United Development Funding IV


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I am struggling with this one. Any comments welcome. Below are some of my notes:

 

1. UDFI is a dark REIT: the most recent unaudited FS is as of Sep 30, 2015 (very out-dated): $684 m total assets, $510 m common share equity, 30.7 m S/O, $16.6 BVPS. Most of assets were notes receivables in real estate projects in Dallas/Austin, Texas. See page 45-49 of Form 10Q filed on Nov 9, 2015.

 

2. UDFI was targeted/shorted by Kyle Bass in 2015/2016: the most recent update here: https://www.globenewswire.com/news-release/2020/01/22/1973613/0/en/UDF-Files-Brief-to-Oppose-Kyle-Bass-and-Hayman-Capital-Appeal-to-Texas-Supreme-Court.html

 

3. Paid two dividends in 2019: $0.065 per share each, $0.13 total. The current share price was $1.6 as of 4/17/2020.

 

4. NexPoint Advisors/James D. Dondero were accumulating shares: they filed SC13G in 2019 (6.7%) and SC13G/A in 2020 (9.6%)

 

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The bull case is pretty well articulated in a 2019 VIC pitch. If you haven't read that piece I suggest you do. It's actually one of my larger positions. Lots of uncertainty and unknowns but barring some disasters I think you can make a pretty convincing case it is worth multiples of its current market cap.

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The bull case is pretty well articulated in a 2019 VIC pitch. If you haven't read that piece I suggest you do. It's actually one of my larger positions. Lots of uncertainty and unknowns but barring some disasters I think you can make a pretty convincing case it is worth multiples of its current market cap.

 

Thanks. It's a very bullish post.

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Doing some work on this today. I would appreciate if writser or anyone else familiar with the situation could weigh in on the following questions:

 

1) Has management made any statements regarding why no financials have been released since the Q that ended Sept 30th 2015? What is stopping them from filing the 10-K for 2016? In other extended filings deliquencies situations discussed on this board (SMCI, Solitron Devices, and TLF), the reasons for the deliquencies have involved laborious inventory restatements, but that clearly isn't the case here.

 

2) Does the lawsuit against Hayman have much merit? While some of the Hayman claims were hyperbolic, and possibly in bad faith, United Development settled with the SEC for millions of dollars, PCAOB disciplined its former auditor, and the it has been unable to file financials for years.

 

3) I would characterize some of the actions reported by the PCAOB as ponzi like:

 

"During the 2013 audits, the engagement teams learned that UDF IV transferred $1.2 million to UDF III in January 2014 so that UDF III, which otherwise lacked sufficient cash, could make distributions to its investors that same day. The engagement teams also understood that the transfer had been recorded as loans by UDF IV to third-party borrowers and paydowns of loans by those same borrowers to UDF III, even though: (a) UDF IV and UDF III's joint management had initiated the transfer, without the prior request or approval of any third-party borrower; (b) the transfer flowed directly from UDF IV to UDF III without notice to any third-party borrower; and © UDF IV and UDF III's joint management had unilaterally selected which third-party borrower and loans it would use to record the transfer, and did not finalize that selection until after the transfer had already been completed."

 

https://udfexposed.com/assets/content/105-2020-002-Whitley-Penn.pdf

 

4) With the exception of the former Chief Accounting Officer, the entire management team appears to be unchanged. Given all that has transpired I find that disturbing.

 

5) Any thoughts on the two distributions in 2H 2019? Why those amounts? Why those dates (four months apart?)? The company used to pay $0.1367 per month.

 

6) From the 3/2019 VIC article: "UDF IV has been repaying its debt down from $170.9 to $7.5m, per 5 August 2017, as per 8-K filings." I can't locate a 8-K that states this.

 

 

 

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1) No, haven't really heard a good explanation why this is taking so long.

 

2) I'm not a lawyer, but if you read this: http://www.udfonline.com/litigation/ then it seems that it is not without merit. And while settling for a couple of millions with the SEC isn't exactly good news, you're also not able to do that if they think you're a massive fraud.

 

3) It's certainly sketchy.

 

4) True

 

5) Whatever the reason, I think it can only be a positive right?

 

6) https://www.sec.gov/Archives/edgar/data/1440292/000114420417024992/v466294_ex99-1.htm

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Was typing some stuff but Hielko was faster .. I'd add:

 

1: Some info in this letter to the SEC from late 2018: https://www.sec.gov/litigation/apdocuments/3-18832-event-5.pdf . Summary: UDFI had to find a new auditor - auditor wasn't able to get any work done during legal proceedings. Document is an interesting read, gives you some insight in the whole mess and it offers AN explanation for the delayed filings. Whether it is a GOOD explanation ..  Also, of course there they stated they expected to file 2018 financials before July 2019 - again 9 months overdue.

 

2: Hard to judge. Definitely there were some shady things going on at UDFI. On the other hand, Bass was marketing a distressed opportunity fund to try and buy the UDFI assets in a fire sale during his campaign (details in here: https://www.sec.gov/litigation/apdocuments/3-18832-event-12.pdf). Not exactly a class act and a bit strange if your short pitch is 'it's a Ponzi'. Also, after an extensive SEC investigation UDFI insiders had to pay a fine, yes, but nobody is in jail and in fact nobody was even barred from continuing to manage UDF. That doesn't exactly suggest a Ponzi scheme nor gross criminal conduct. Also, so far the court rulings suggest the UDFI case isn't completely without merit.

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  • 1 month later...

Thanks for the extensive responses, very helpful. I did end up buying a little bit of UDFI -- tough to pass up the possibly of tremendous (multiples of current stock price) latent value. It is the epitome of a deep value type investment.

 

News out yesterday that SEC is apparently investigating Bass over his short attack on the company. I may have been much too quick to write off UDFI's lawsuit against Bass/Hayman.

 

https://www.bloomberg.com/news/articles/2020-06-14/sec-probing-kyle-bass-s-statements-over-udf-short-position-dj

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Thanks for the extensive responses, very helpful. I did end up buying a little bit of UDFI -- tough to pass up the possibly of tremendous (multiples of current stock price) latent value. It is the epitome of a deep value type investment.

 

News out yesterday that SEC is apparently investigating Bass over his short attack on the company. I may have been much too quick to write off UDFI's lawsuit against Bass/Hayman.

 

https://www.bloomberg.com/news/articles/2020-06-14/sec-probing-kyle-bass-s-statements-over-udf-short-position-dj

 

Surprised no price jump on the news.....

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The following snippet caught my attention:

The U.S. attorney’s office in Dallas is continuing a criminal investigation into UDF, according to people familiar with the matter.

 

Is this a new investigation?

 

Surely it's a continuation of the same investigation that resulted in the February 2016 FBI raid? It has been well over four years, I think an argument can be made that, if charges were going to be brought, we already would have seen it.

 

The MiMedx situation is probably a more typical timeline: Justice Department opened investigation in 2018, and charges were brought in late 2019.

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The following snippet caught my attention:

The U.S. attorney’s office in Dallas is continuing a criminal investigation into UDF, according to people familiar with the matter.

 

Is this a new investigation?

 

Surely it's a continuation of the same investigation that resulted in the February 2016 FBI raid? It has been well over four years, I think an argument can be made that, if charges were going to be brought, we already would have seen it.

 

The MiMedx situation is probably a more typical timeline: Justice Department opened investigation in 2018, and charges were brought in late 2019.

I'm not so familiar with how things work in the US, but is it common for investigations to be officially closed at some point (and if yes, when?).

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The following snippet caught my attention:

The U.S. attorney’s office in Dallas is continuing a criminal investigation into UDF, according to people familiar with the matter.

 

Is this a new investigation?

 

Surely it's a continuation of the same investigation that resulted in the February 2016 FBI raid? It has been well over four years, I think an argument can be made that, if charges were going to be brought, we already would have seen it.

 

The MiMedx situation is probably a more typical timeline: Justice Department opened investigation in 2018, and charges were brought in late 2019.

I'm not so familiar with how things work in the US, but is it common for investigations to be officially closed at some point (and if yes, when?).

 

Great question.

 

The short answer is "I don't know."

 

The long answer is "What is the incentive for Justice Department to ever officially end an investigation?" By doing so it basically admits that it spent years of time and lots of taxpayers' the Fed's money on an effort that never resulted in any charges. It also means that it looks somewhat  stupid if an unexpected new development causes the case to have to be reopened.

 

I would think many cases remain "open" even if no real work is actually being done on them. Eventually the statute of limitations will kick in, making it impossible to bring charges.

 

 

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Albeit a few years old, the below document was some good info:

 

https://www.instituteforlegalreform.com/uploads/sites/1/DeclinationsBooklet.pdf

 

"In many of today’s white collar criminal

investigations, whether conducted as to

corporations or individuals, the decision

to investigate will bring to bear “all the

force of the government itself,”

in a way that can also mightily affect investors

and other stakeholders. Criminal

investigations, whether conducted

internally by a corporation’s outside

counsel, or by government enforcement

agencies, or some combination thereof,

present significant costs in the form of

both legal fees as well as collateral costs,

such as a chilling effect on investment and

innovation, distracted management, and

harm to the reputations of the individuals

and businesses under investigation.

 

These costs are felt not only by the

corporation’s investors, but also by senior

management and employees suspected

of malfeasance who may face their

own unique personal toll in the face

of a criminal investigation. In many

cases, these individuals turn out to be

innocent actors standing at the fringes

of the suspected misconduct who, while

never ultimately prosecuted, also never

have the bell unrung as to whether they

were truly cleared or why DOJ declined

to pursue charges. Individuals who are

never indicted or charged still incur

the often paralyzing costs and burden

of investigation and it can be difficult

to determine when the investigation

has come to an end. According to DOJ

statistics, in 2009 it took a median of

453 days for United States Attorney’s

Offices to reach a declination decision.8

By contrast, the same DOJ data shows that it

takes less than a month for U.S. Attorneys

to reach a decision to file charges."

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I've been very slowly digging into this and wanted to throw a few comments/questions out there and then one request resulting from my own pure laziness.

 

From in market DD, i have heard that the CEO of UDF is slippery, unsavory, self serving, etc like many private REIT managers.  While it seems there is little chance of fraud given the progress of these suits, it seems pretty obvious there were massive conflicts.  And this is an externally managed REIT, sooooooo, is there any strong argument that when there is clarity on the financials, they are not just going to go back to making crappy land equity (ooops, I mean land loans) to their friends and sending the mother company big fees?  In the vein of conflicts, I believe their biggest borrower is widely known as a great salesman...but not necessarily real estate investor.  Though on second thought, maybe thats what you need to be to sell lots!

 

Any thoughts on NexPoint/Highland owning almost 10%? Or am I not adding correctly and its more.

https://www.nexpointgroup.com/wp-content/uploads/2020/06/NHF-12.31.19-Annual-Report.pdf

http://investors.udfiv.com/Cache/IRCache/752ac659-360a-5228-d3f9-dda37a8036e7.pdf

 

For the lazy ask, I'm trying to get a read on the land collateralizing their loans (assuming that so much interest has accrued that they effectively own the land (which is really the game in in event).  Does anyone have a nice neat chart of the properties collateralize the land (or seen a write up where that exists)?  While they will remain nameless, I have some in market folks who have been in this biz for a few decades who have offered to help get a read on the positions to figure if they are ripe for sales this cycle, next cycle or after we are gone.

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CEO is probably shady as f*ck. I think UDF will always trade at a discount because of this even if they get out of this mess.

 

Moayedi from Centurion American Development Group seems pretty 'legit' for a developer, being in the space in that area since the 90's and still active.

 

There's a comment on VIC from the originial writer which goes more into depth about which loans are paid or have yet to be paid. I don't know of an overview of their collateral other than what they showed in Q3 '15. I'm curious to hear your findings if you can get some more info.

 

 

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  • 3 weeks later...

NexPoint isn't happy about the lack of disclosure, might sue to force an annual meeting, and wants everyone to know about its displeasure.

 

https://www.sec.gov/Archives/edgar/data/1356115/000119312520192037/d14490dex992.htm

 

I view this as a very positive development. An institutional shareholder publicly pressuring management is exactly what this situation needs.

 

The very first sentence of the letter is particularly promising: "express our continued interest in a transaction with the Trust"

 

 

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