On Thursday, fellow Real Money contributor Jon Heller asked if I still owned shares of AV Homes (AVHI), formerly Avatar Holdings. I have written about this stock several times over the past few years and, of course, I still own it. A stock dropping from the $20s to $6 and then almost doubling back to $11 is not going to scare me. In fact, this action is probably closer to the norm for many of my long-term stock selections!
It was a timely question, as I am backing my belief that sunshine always wins in the long run by moving to Florida at the end of the month. I haven't visited the stock since my year-end piece on homebuilders, so it's a good time to check in with this Florida and Arizona builder.
The company shook things up a bit back in February. Management changed the name of the company and separated their brands into active adult and regular communities. The Joseph Carl brand will conduct business for most of the planned communities and regular real estate operations, while the 55% divisions of the company will be known as Vitalia. AV Homes shrank its board from nine to six, laid off half its work force and decided to sell some non-core land holdings to focus on their key markets. Much of the 17,000 acres of land the company plans to sell is in the Orlando area -- which is one of the healthier local economies in Florida, thanks to a certain mouse named Mickey and his happy companions.
The changes seem to be working well for AV Homes. Although the company reported a loss for the first quarter, the number of signed contracts rose by 108%. The total dollar value of the contracts was up by 91% and the total backlog more than doubled its 2011 figure. The company reported land sales of $9.1 million as it began to implement the sales of noncore holdings. Consistent with overall market trends, the average selling price fell, but the price of active adult communities actually rose a bit on a year-over year basis.
The stock is cheap on an asset basis. Unlike most home builders, over the past few years, this company has done an impressive job of hoarding cash and 25% of the assets on the books are cash and equivalents. The shares trade at about 63% of tangible book value right now. The total market capitalization is $154 million and my conservative estimate of liquidating value is $140 million -- so you are not paying much for the operating business of the company. When the economy eventually begins to improve, the company will have tremendous earning power thanks to the cost-cutting measures it has taken during the downturn. This would be eventually reflected in the stock price.
This is not a short-term story by any means. I started buying this stock when it was trading above $20 a share. Consistent with my slow-and-small approach, I have added to my position several times -- my last purchase price was around $8 back in September. I am still under water by an impressive amount at this point, but this is one of those stocks I bought to hold until the Florida markets return to favor. As long as there is snow and sunshine, a significant percentage of the population will choose to move to places like Arizona and Florida. Historically, this has magnified the boom/bust cycle in these regions. We just saw a huge boom, followed by a dramatic bust. Over the next decade, I have no doubt we will see another boom and that AV Homes will see its earnings and stock price soar again. In the last boom, this was a $70 stock, and I suspect it will be in the next one as well.
One of the keys to success as an individual investor is patience. Often stocks such as AV Homes will test and try that patience. However, investing in distressed real estate during a collapse has long been a fantastic way to build wealth over time. Buying Arizona and Florida real estate operations with sound balance sheets and strong management should prove very rewarding to true long-term investors.