When United Development Funding IV reported earnings in November, all was rosy with the Grapevine-based real estate financing firm.
During a conference call, CEO Hollis Greenlaw touted “another very strong quarter,” with third-quarter earnings of $14.3 million, or 47 cents a share, and a special distribution approved for shareholders. Executives said the strong North Texas housing market would continue to present attractive opportunities for the company.
But just a month later, a different story emerged with anonymous accusations that the company was defrauding investors. Its stock plunged. In February, the source of that whisper campaign, Dallas hedge fund manager Kyle Bass, disclosed that his company, Hayman Capital, was shorting UDF stock. On a website titled udfexposed.com, Bass alleges that the finance company is a “billion dollar house of cards” that is headed towards bankruptcy, calling it a “Ponzi-like” scheme.
We have done an enormous amount of work on this and we believe it is not as it seems.
Dallas investor Kyle Bass
UDF called the allegations “false and misleading” but that didn’t stop its stock from sinking. UDF shares, which were trading over $17 a share before the allegations hit the Internet in mid-December, sank below $7 and then fell even further after the FBI raided the company’s headquarters. Three shareholder lawsuits have been filed in U.S. District Court in Fort Worth.
The attack from Bass, who gained fame and fortune by shorting the subprime mortgage market before the last housing crisis, has shined a spotlight on the obscure but fast-growing company, headquartered on Municipal Way near Main Street in Grapevine.
The hedge fund acknowledges on its website that they will profit if the stock price of UDF IV falls, and given this financial incentive we believe the hedge fund intends to continue disseminating misleading information.
Hollis Greenlaw, CEO, United Development Funding
Reviewing its public filings, the story laid out by United Development Funding couldn’t be more different than the tale being spun by Bass.
UDF IV is one of more than a dozen corporate entities created by Greenlaw and his partner, Todd Etter, since 2003 under the United Development umbrella, but the only one that is publicly traded. According to its most recent 10-Q filing, the trust originates, purchases or participates in secured loans made to residential developers for acquisition and development of single-family home lots or mixed-use developments, home construction or model homes. It also invests in land.
The bulk of its lending is in Texas, with 68 percent concentrated in Dallas-Fort Worth. About 67 percent of its loans were tied to Centurion American, a big home developer based in Farmers Branch that has done projects in Trophy Club, Southlake, Coppell and other communities. Centurion American is also involved with the Entrada development in Westlake.
UDF IV, previously a non-traded REIT before going public in 2014, reported total assets of $684 million as of Sept. 30, liabilities of $173.9 million and nearly $19 million in cash. It had $6.8 million set aside as an allowance against loan losses. Not exactly the looks of a company about to go bankrupt, as Bass alleges.
UDF IV’s sole employee is its Chief Operating Officer Stacey Dwyer, who was hired in 2014 after spending 22 years at the well-respected Fort Worth-based homebuilder D.R. Horton, including several years as executive vice president and treasurer.
Bass basically alleges that UDF is using money raised in new rounds of fundraising to pay off investors in previous funds, “perpetuating a Ponzi-like real estate scheme across multiple funds.” He claims that “the UDF structure has begun to implode.”
The company says it has not had any realized losses in its UDF IV portfolio and claims that Bass shows “a lack of understanding of the residential development project life cycle.” It also questioned Bass’s motives, pointing out that he’ll make a lot of money by driving the stock price down.
In an interview with The Dallas Morning News, Bass acknowledged as much but said that doesn’t mean he’s wrong. “We have done an enormous amount of work on this and we believe it is not as it seems,” he said. “Every time we have peeled back a layer of the onion it’s only gotten worse.”