M
. B A R R Y S T R U D W I C K
1 2 E A S T E A G E R S T R E
E T
B A L T I M O R E, M A R Y L A N D 2 1 2 0 2
TEL. 410 -727- 6444 FAX. 410- 783-9070
E-MAIL: B ARRY@NOLOAD.COM
This
is a confidential communication. This summary and assessment
is only going out to a very select group
of friends who asked me for my personal comments on
the Gran Pacifica project. Please do not copy
this or
send it to other people without first asking me personally.
I don't want these personal observations and
comments spread around. Sorry for the delay, but I had
to wait for the photos from another attendee. I think
they really help understand the project without you're
having been there. - MBS
The
Nicaragua Report - Update
I
can't believe that it's been almost two years since
I first wrote "The Nicaragua Report" after visiting
Nicaragua for the CAIIS conference and learning about
the investment opportunity in the Gran Pacifica Marriott
project. Since then, I have not only watched the project
with a great deal of interest as an investor, but I
have also become actively involved in other Central
American real estate projects as a principal. This active
involvement (which has been primarily in Costa Rica)
has sharpened my focus on the issues pertaining to Gran
Pacifica as a specific investment. In addition, these
insights and the appreciation of the large differences
between the maturity and risk/return characteristics
of the different Central American real estate markets
has helped me develop a strategy of a multi-country
real estate portfolio to act as a hedge against a falling
dollar and to profit from the graying baby boom. While
it is beyond the scope of this report to discuss these
strategies, please feel free to contact me about other
articles or pieces I have written on these topics.
In
recent months a number of readers of the initial report
have asked for an "update", which is contained below.
Where appropriate, I'll also take the liberty to add
a few new observations gained over the past several
years.
The Bottom Line:
Gran Pacifica is well capitalized and remains an attractive
investment. The upside potential might actually be larger
than I estimated 2 years ago and significantly lower
risk than 2 years ago. The largest hurdle remains obtaining
financing for the Marriott Hotel, but the management
team is attacking this situation aggressively. Even
in the worst case scenario of the hotel project unraveling,
the liquidation value of the entire project is likely
to be significantly greater than the current market
capitalization of the outstanding stock.
I would continue to recommend the purchase
of Gran Pacifica equity as part of a diversified investment
strategy with holdings in international real estate.
Caveat:
Gran Pacifica remains a project for investors with a
7 to 10 year horizon and it remains a project with significant
risk. While the project has matured in the past two
years it remains, in essence, a "venture capital" type
of deal with significant risk and a lack of liquidity,
making it inappropriate for many investors.
Return to Nicaragua
While I have had frequent updates on the progress
of the project from both Mike Cobb (project general
manager) and Joel Nagel (CFO and General Counsel), last
summer I thought it was time to again visit Nicaragua
and the Gran Pacifica project first hand. With my wife
and children in tow, I spent 5 days in Nicaragua with
Mike Cobb and visiting Gran Pacifica. During
our stay we not only visited the project and explored
the country, but I was amazed at how quickly Nicaragua
is emerging from the
shadows of the Sandinisita years. While my family loved
visiting the colorful markets and the attractions like
the volcanoes, I was captivated by the economic evolution
that was clearly underway. The Road to Gran Pacifica!
Nicaragua
Today
My overall impression of Nicaragua was that I was very
impressed (stunned?) by how rapidly Managua and the
entire country were evolving, even in the brief 18 months
since my last visit. Without question, the intertwined
vines of democracy and capitalism have taken root and
are spreading across the country. The shadows of the
Sandinistas are fading rapidly. My kids had lunch at
a Burger King in Managua and even got "the Incredible
Hulk" toys with their meals. But it's all about the
franchises: TGI Fridays, Pizza Hut, Blockbuster Video,
Hertz, Avis .. You name it, and Nicaragua now has it.
While the cultural virtues of the McAmericanization
of Nicaragua are debatable, from an economic progress
perspective it shows great strides in a short period
of time and perhaps a Big Money "seal of approval".
How so? Most, if not all, franchise operations do extensive
market research on both the demographics and purchasing
power of the local market. If there wasn't a market
for the American convenience culture, they wouldn't
be there in numbers. This is also a part of the necessary
infrastructure that prospective American retirees and
tourists will look for prior to making an investment
in Nicaragua, or Gran Pacifica more specifically.
Recap and Update
Here is a quick recap of the major points as I see them
with respect to the potential investment in Gran Pacifica
since our last report:
1)
At my latest meeting with the management of Gran Pacifica
in Belize two weeks ago, they indicated that they will
only be raising $2.6 million of additional equity for
the land development company, thereafter the project
will be self financing. In other words, the window is
about to close on this opportunity.
2) Gran Pacifica has also made a good deal of progress
and the risk in this project is significantly reduced
from two years ago. In part this is reflected in the
higher per share price being offered by the project.
3) The share price of Gran Pacifica has risen from $10
at the time of writing the original report, to $15 per
share today. The price increase has been based on the
attainment of certain milestones in the development
process. Further increases are expected later this spring
as lots start selling and other bench marks are reached.
To restate the obvious, this reflects a 50% gain for
investors who entered into the project when the report
was first written.
4) My overall assessment is that the shares on a risk
adjusted basis still offer excellent upside potential.
I have reviewed the original estimates I had for the
"best" and "worst" case scenarios and consider them
both to be either quite reasonable or overly conservative
at this point. Even with the increases in share price
from $10 to $15 per share, I think the "worst case scenarios"
are still valid and, if anything, overly conservative.
5)
On the downside, basically, I have a hard time seeing
a liquidation value of the project which would not at
least return the capital invested in the project. Further,
as the project is 100% equity financed and has no debt,
I don't see a series of events that would or could force
liquidation.
6) The upside of the project, in my estimation, has
actually increased. My personal experience in Costa
Rica has shown the retail market is just now beginning
to take off, which is driving the value of the large
developable tracts upward. The Los Suenos Marriott project
in Costa Rica (Gran Pacifica's role model twin sister/clone
in Costa Rica) recently sold 51 of 55 condo units in
a "Pre- Construction Sales Party" at $350,000 per unit..
in 1 and one half hours!
7) As far as Nicaragua is concerned, in the past two
years the nearby Agora Publishing-sponsored Rancho Santana
project has had exceptional progress and is now marketing
single family "ocean view" lots at $65,000 per quarter
acre .and getting it! That's a yield of $260,000 per
acre. Clearly my old "worst case" estimate of $30,000
per acre is way below current market value, so even
doubling this at $60,000 per acre would only put us
at ¼ the price of our nearest "comp". Using this
new "worst case" scenario of $60,000 per acre would
produce a return in excess of 50% after 1) adjusting
for the increase in the Gran Pacifica share price over
the past several years from $10 to $15 2) selling a
total of only 500 acres out of the total of 2,200 and
3) after returning $10,000,000 of equity to investors.
8)
Objectively, I still find the Rancho Santana numbers
incredible (incredulous?) and feel the true current
market in Nicaragua should be closer to $30,000 to $40,000
for ¼ acre lots in a gated Marriott anchored
project, or something more in the $120,000 to $160,000
per acre yield leaving our new "worst case scenario"
at 50% of the low end of our current assessment of the
actual market or about ¼ what Rancho Santana
claims to be getting. Whatever the actual numbers are,
the market will ultimately tell us when we start selling
our own lots. But in the interim, clearly the market
in Nicaragua is moving up and consumer acceptance of
Nicaragua is increasing. Surf break at the hotel site
9) With respect to the upside potential, since I wrote
the Nicaragua Report I have been actively involved with
my own real estate developments in Costa Rica (www.delpacifico.net)
and have a sharper awareness of the strength of the
retail market. The Marriott Los Suenos outside of Jaco
Beach is the target that Gran Pacifica is clearly trying
to emulate. The success of this project in Costa Rica
has been incredible. In the past 2 years, since I wrote
the last report, Los Suenos has done over $100,000,000
in land and condo sales. Let me repeat that, $100,000,000
in land and condo sales since I wrote the last report!
With this being said, Gran Pacifica's 10 year goal of
$300,000,000 in sales is not unrealistic.
10) Los Suenos is currently able to get $200,000 and
higher for a single family ¼ acre lot. However,
it should be noted that Los Suenos which should be at
a significant premium to Gran Pacifica due to 1) it's
in Costa Rica 2) which has proven retail demand 3) and
a better health care system 4) and a better consumer
perception of political stability, etc. 5) and very
importantly.. Los Suenos has a marina.
11)
Construction has actually started at Gran Pacifica and
this new bridge onto the property was completed last
summer. Currently a master boulevard and electricity
is being brought onto the property.
12)
As a sign of maturity, Gran Pacifica will start selling
residential lots in May of this year, meaning investors
will immediately start seeing a return on their investment.
Based on the structure of the company, 90% of all cash
will be distributed to shareholders with the remaining
10% being withheld for additional infrastructure.
13) From the beginning, we have said to focus your analysis
on the land development company not the sexier hotel
project. The rationale is quite simple: the hotel company
stock might make a nice return but the existence of
the hotel multiplies the value of the underlying land
at Gran Pacifica by a factor of 5 X or 10 X, perhaps
even more, relative to the value of other comparable
land in Nicaragua. It's also a lot easier to calculate
the potential revenues and profits from "selling dirt"
than it is predicting what the net on a hotel is after
guessing about occupancy rates and operating expenses.
If the deal based on the dirt is a clear winner, then
the hotel stock is just icing on the cake.
14) This raises the question of "what is the value of
the land?" We could simply do this on a per acre basis.
Since the ranch was acquired for about $2,500,000 and
there have been about $7,500,000 in improvements and
expenses, the total cost basis in the property is about
$10 million or $4,000 per acre. We can then dilute this
for management's retained equity share, which raises
the cost basis to about $8,000 per acre.
15) With an estimate of cost established, we can now
compare against a liquidation value. Here we need to
split the parcel to the value of the beachfront and
then the value of semi-improved interior acreage. With
3.6 miles of beach we have 19,000 linear feet of beach
in a semi-remote area but which also has permits and
approvals for development. Prime resort beach footage
in Costa Rica or Belize might be worth $5,000 to $7,500
per foot. But more remote beach frontage might be only
worth $1,000 to $1,500. If we use the low end number
of $1,000 per linear foot as a base price until the
financing of the Marriott becomes clearer, we have a
value of $19,000,000 just for the beach front. (19,000
linear feet of beachfront @ $1,000 a foot = $19,000,000).
Assuming this leaves 2,000 residual "internal" semi
improved acres at a price of $1,000 per acre we would
have an additional $2,000,000 of equity or a total project
valuation of about $21,000,000. In other words, a very
modest value of $1,000 per foot for the beach frontage
and $1,000 per acre for the residual in liquidation
would recapture investors' equity. These are very low
numbers reflecting a very limited downside risk on the
project.
16)
After the hard asset of the land the most important
asset that Gran Pacifica has is the Marriott project.
Once this project actually breaks ground, the price
of the beach property and the interior land increases
by 5 X or more. In other words, once the Marriott breaks
ground, I think the value of the project is at least
$100,000,000.
17)
We have long maintained that the Marriott Los Suenos
Resort in Costa Rica is the exact model for the Gran
Pacifica project. Three years ago when I first visited
Costa Rica I was amazed to find that Los Suenos had
sold $45 million in land and condominiums in its first
4 years and most of that had come in the prior 12 months
since the opening of the Marriott hotel in 2000. Now
as an update on this, the total land and condo sales
of Los Suenos as now over $175,000,000!!! This is the
potential of Gran Pacifica.
18)
Maybe the most important point in this report ... The
biggest challenge facing Gran Pacifica is in getting
the financing to build the Marriott Hotel. A recent
change in the Nicaraguan law no longer makes using the
Nicaraguan tax credit law a viable strategy to raise
the funding of the hotel. This has forced an entire
change in the hotel financing strategy and has pushed
back the opening of the hotel by 1 year. However, Nagel
and Cobb have been very proactive and impressive in
getting a new tax bill passed to create in essence a
special revenue bond for the hotel that will be repaid
by a room tax. I have personally sat in on meeting with
the Ministry of Finance and the IMF on issues related
to this. It is clear to me that the project has very
high levels of government support and they want this
to happen.
19)
Now that the legislation appears to be ready, the challenge
for Cobb and Nagle will be to find people/institutions
to actually buy these bonds. However, this deal will
be a little challenging to place as $35 million is a
relatively small bond issue by Wall Street standards.
This is compounded the lack on investment banking firms
working in Nicaragua at this time. While I suspect it
will take some time to find the correct underwriter/re-seller
of these bonds, eventually Cobb and Nagel will find
the right major firm or boutique.
20) The bonds will be priced attractively with a 10%
to 15% coupon and also with an "equity kicker" of ownership
in the hotel. Projections show them to be repaid in
less than 5 years with even low occupancy rates on the
hotel. I have discussed the possibility of having an
allocation of these high yielding bonds for my friends
and clients. If you think this might be of interest
to you, please contact me directly.
21) Mike Cobb has moved to Nicaragua to oversee the
project full time. In additional Mike has been adding
members to the
project management team such as a senior construction
manager, golf course designers and a national resort
design group to work on the master plan. While we still
have some concerns over the experience of Mike in certain
areas of "major" real estate
development, he has certainly proven up to the task
and has made the necessary additions to the team to
keep the project moving. Here are the answers to a couple
of questions that came to mind as I was writing this
update.
Question: Where is the project?
The project is 45 miles due west of Managua as the crow
flies which puts it within 1 hour of the international
airport.
Question:
How do you get there?
We rented a car from Hertz ($45 a day) and drove to
the project. It took about 1 hour. Above is a picture
of the Road to Gran Pacifica which is paved with "Samosa
Stones" which makes repairing pot holes very easy and
inexpensive. But there was a second reason for this
unusual construction technique ..a touch of vertical
integration; the Samosa family owned the company that
made the pavers! Regardless, you'll notice it's in great
shape, straight as an arrow and nary a bump.
Question:
What is the investment Opportunity today?
Gran Pacifica is raising its final $2.5 million of equity
at a price of $15 per share. Minimum investment unit
is $50,000. To date the total capital raised for the
project has been about $7.5 million. There is no debt.
Question:
When should I start to see a return?
I was surprised to hear that residential lot sales will
start later this spring, so there will be some small
returns this year and next. The structure of the partnership
is that 90% of the net sales proceeds will be distributed,
with the remaining 10% retained for infrastructure build
out. But realistically, look for significant returns
at least several years down the road.
Question:
Is Nicaragua safe?
While I initially had some apprehension, I feel now
perfectly safe visiting the markets and towns within
the country. My wife and children absolutely loved it.
And you'll find Nicaragua a bit more "colorful" than
Costa Rica.
Question: What about the water?
Unlike Costa Rica where the water is safe to drink,
you must be careful in Nicaragua. However, this is not
an issue for Gran Pacifica as it will have its own water
treatment facility and be a self contained universe
for the gringo tourist.
Question: Will there be golf?
The Gran Pacifica project will have 27 holes of golf.
The course has already been staked out and construction
would start about 6 months before the opening of the
hotel.
Question:
Are they sub-development opportunities, Such as to develop
a condo community, another hotel or even an entire
housing community?
For experienced developers looking to develop a significant
project within Gran Pacifica, there are currently opportunities
for major subdivisions within the project. Please contact
me directly to discuss these.
Question:
What about a Marina?
The current focus is on the hotel, but in conversations
with management I have stressed the importance of a
marina to the project. I believe that this will happen.
However, if you might be interested in putting together
a group to finance or develop a marina, please contact
me directly.
Question: What's my next step?
If you want to ask a specific question or to find out
how to invest, please
contact me Email
to christopher@costaricabooks.com |
