So, I set out to learn everything there was to know about XIN's two recent purchases, the $54 million plot in Williamsburg, Brooklyn and the $162 million purchase in Beijing.
Unfortunately, there's not much data available. XIN filed 6-K's for both purchases, but they don't add much detail to the bare bones descriptions of the deals in the press releases. I guess we'll have to put together whatever data we can ourselves. I used to live in Manhattan, so I've got a tiny bit of information on Williamsburg, but I know nothing about Beijing real estate.
I think the biggest question for all of us is whether the prices paid by XIN for the two parcels of land are good deals. If you know anything about that, please post. If you have any other data about the two purchases -- anything at all -- please post that, even if it's only speculation.
One impression I've gotten from scanning the board the last couple of days is that people want to read a cash verification success into these two purchases. That's a natural desire, but I think before the market's going to agree with that viewpoint, it'll need to be told how much (if any) of the combined $200 million purchase price was paid in cash. Obviously, the higher the proportion of that number that XIN paid in cash, the better it functions as a "stand-in" for a Cash Verification.
So far, XIN hasn't released any details that would be helpful on the cash verification front for either deal (something like "and then we handed Mr. Beijing RE Developer $50 million in cash, as we signed"). If the company wants to make a positive impression on the perception of fraud front, it should consider releasing those details.
Of course, even if these purchases aren't helpful on the perception of fraud issue, they may add value to XIN in terms of future profits. The only problem there is that until the perception of fraud problem's dealt with, the P/E multiplier to the share price for those increased future profits is likely to remain a number less than 2.
I. Williamsburg, Brooklyn.
If you do a Google maps for the Williamsburg location (Kent Ave and S. 8th St., Brooklyn), you can see its excellent location. Located next to Waterfront Park, it appears as if its west and south facing units will have a view of the downtown skyline, while its north facing units might have a view of midtown. Obstructions to views are difficult to tell from a map, though, so if anyone has a friend in Brooklyn willing to do them a favor, some pics from the lot looking in all four directions would be handy.
When I lived in New York in the mid/late 90's, Williamsburg was considered a hit and miss neighborhood being pressured by sprawl from the Bed-Stuy neighborhood to its north. Since then, however, Brooklyn's undergone some hardcore gentrification and my friends who still live in the city assure me that Williamsburg is everything its PR firm publishes about it: a trendy, up-and-coming, happening sort of place. In short, I think this is a good location.
If anyone has any feel for whether $54 million is a good price for such a location in NY, please post.
This will be a very short section, as I know nothing about Beijing real estate. $162 million sounds like a lot to me, but maybe I'm just comparing it to the $54 million for the Williamsburg plot.
Does anyone know more? Did XIN get a good deal? How does the weird sounding auction process XIN went through to buy this land work? How many units can they create out of the 130,000 square meters of gross floor area?
Why do they have to sell 10,000 square meters to the Beijing government for public housing? In the US, that would imply a project being placed inside the development, but surely that must not be what it means in a Chinese context (as projects do not have a desirable impact on adjacent land values)?
@Hmmm, to answer your question whether XIN got a good deal on both projects, I would say neither should be considered a deal. That is how real estate auction works. Developers compete with other developers to get the parcel of land by price. Sometimes, developers may intentionally bid up the price for strategic reasons, but hardly anybody can get a steal type of deal just because they are many competitors there. One exception, Evergrande, one of the top developers in China, alleges it paid for less than the average price for its land acquisition. One reason pointed out by Citron Research is that Evergrande involves in bribery to get good deals from the local government.
The law of competition makes good deals in land purchase rather rare for developers. The only difference is that the future gross margin would vary based on future price. If a developer consistently predict future RE price more accurately than anybody else, it will consider the average price he paid a "deal".
@GV, thanks for the insider's view on the real estate auction process in China. Am I getting too hung up on the word "auction"?
When I think of an auction, I automatically think of a gathering of bidders with a guy at the front who talks super fast and takes ever rising bids in a very fast, very fluid buying situation that ends with the words "Going once, going twice.....Sold!"
Is that the kind of process XIN went through to buy the Beijing property, or is that maybe just a translation problem of a more "normal" real estate purchase?
They will not pay all cash for either deal. It is just not prudent. For example, a company has 100 million in cash. The bank is willing to lend dollar for dollar at 5 %. The company's GP is 25 %. Scenario A the company pays all cash. The profit is 25 (100 x 25). Scenario B the company borrows from the bank to do the project. The profit is 40 (200 x 25 % - 100 x 5 %). The company only has to pay the interest to the bank. Any profits over the borrowing costs go to the shareholders. If they paid all cash, management is a bunch of pinheads and deserves a 1.35 P/E valuation.
The district in Beijing is not the best. The location being near the subway might trump it. Some have said it is not a great area now but the second airport is suppose to be built in the district. The second airport is slated for 2017, which is not in the current five year plan. It just some fat cats bargaining chip until it gets into the five year plan. It may happen but likely it won't.
I am bearish on both projects, more on the New York than Beijing. If projects have a GP in the 25 to 30 area, it is all good. I will wait to see what the earnings call brings. It is tough to get stoked on any deal as the stock is priced based on the dividend and not earnings.
The public housing is part of every project. It is a political football for those that have and those that don't. China was communist. The land the company is buying, in theory, belongs to the people of China. All the people of China are not ok with land being exploited by the capitalist class. The public housing is the way they deal with the problem. Every project has a certain amount of public housing. I get the feeling there is a minimum required by regulation then it is a way to jiggle the price on the project. I do not know that for sure.
Everything in Chinese real estate is price on a square meter basis. So the number of units isn't the important issue. The buyer looks at the number of square meters, price per square meters, and the location. If there is not enough bedrooms, they are Chinese. Grandma can sleep on the floor. No poetic license.
I understand the desire to see something in the press release about funding. The state of the art on press releases is to disclose only those new facts that will become public knowledge. Since, the company did not disclose anything different on the funding. The funding will be according to the normal procedure, 50/50. The company needs to comply with SEC regulations while not painting a sue me target on their chest. Public disclosure regulations are one royal pain.
Before some troll comes along and say "Oh yeah, well General Motors doesn't do it that way.", keep in mind no one goes to jail or gets fined for a bad press release. You just get sued. So, you have to make a cost/benefit decision. If you do not want to get sued you disclose what the SEC requires and not anything else.
1. Is "GP" gross profit? As you know, I'm always in favor of quantifying when possible, but for your example to apply in XIN's case, wouldn't it need a second, alternative use for its cash at the same profit rate that each of these deals offers? Do we have any reason to believe that's the case for XIN?
2. I defer to anyone with knowledge of Beijing real estate, but why so bearish on the Williamsburg development?
I did notice in the article someone (incredibly) tracked down on the "News Related to NY Purchase" thread that the real estate agent hoped to get "close to the asking price of $52.5 million" for the lot that XIN ended up paying $54 million for, but that overpayment doesn't seem too terrible to me. What gives you the willies about Williamsburg?
3. Thanks for the public housing info. I figured it couldn't be the same as here.
4. Sorry to hear that's not poetic license about grandma!
5. Legal analysis is actually my strongest investment skill. In fact, back in the day, I wrote more than my share of press releases for our clients. There's no hard and fast rules to disclosure of details. SEC requirements are always minimums: a company must give at least X amount of disclosure every time it does Y. But a company can, and many do, disclose far more information than those statutory minimums. If there's some benefit to XIN in releasing the payment details (for example, if they really did just shell out over $100 million in cash), then they're perfectly within their rights to do so. The SEC's never going to object to too MUCH disclosure.
I'm not sure I fully follow on the risks of too much disclosure point. You can definitely get sued if you're lying in a press release, but as long as you're reasonably careful and have even a moderately talented legal staff, that really shouldn't be a problem. When I wrote press releases, most of the resistance I got from corporate officers were concerning disclosures they felt might help competitors uncover trade secrets or personal connections (a friendship with the selling party or something) that they didn't want revealed.
@Casey, what exactly makes you feel bearish on both projects? Meanwhile, you may have seen my bearish statement regarding these two projects. I do not feel these two projects make too much strategic sense. The change of heart on 2nd and 3rd Chinese city strategy embedded huge risk for XIN.
"(something like "and then we handed Mr. Beijing RE Developer $50 million in cash, as we signed")" That made coffee almost come out my nose. so you think they carrie 50 million in cash. LMAO oh BTW go see what info on financing usa developers put out in a pr on purchases.
@harley, so when I wrote that XIN's payment of $50 million in cash would help on the cash verification issue, you thought I meant $50 million in actual, physical cash?
Apparently, you're an EXTREMELY literal guy. So, for you, and any others like you, the actual, physical embodiment of the $50 million cash payment isn't important.
Most cash payments are made by wire transfer, but whether it was wire transfer or check or cashier's check or any other possible physical representation doesn't make any difference. The point of importance is that XIN had the $50 million (or whatever the cash component was) and paid that money to the seller, not what form that payment took.
Clear? (And by clear I don't mean "Is it clear outside?" or "Is your computer screen clear?" or any other literal interpretation you might want to read into the question; what I'm asking is if you now understand what I was talking about.)
What does "pay cash" mean? Do borrowed money count as cash too? Their leverage is too low, they held too much cash too little debt, they need to borrow a lot more like other Chinese developers to expand more quickly. They were way too conservative and low profile, now finally they are on the right track. Once they become more recognized in China, investing dollar will follow.
There's one other bright spot in all this. Even if these purchases turn out to be essentially just normal purchases leading to normal developments, XIN's PR department is finally doing its job properly, in terms of press releases.
Who knows? If this keeps up, IR might even start answering emails.