Melcor comment November 5, 2017

Melcor’s Q3 results were strong (in my opinion) with a year-over-year increase in funds from operations of 25%. The number of single family lot sales was up by 58% and the average price was relatively stable but it appears that somewhat more of the lots involved a joint venture partner. The gross profit on lot sales is lower than in peak years but is still reasonably good at 35%.

These shares are selling at just 51% of book value and about 11 times trailing adjusted earnings (which is similar to funds from operations in this case.)

I already have a huge exposure to this company but I would be tempted to add to that on this report if the share price does not increase on the news.

It’s always possible that market for new building lots in Alberta is about to collapse and/or that the market value of its rental buildings will collapse but based on the results reported here these shares appear to remain significantly undervalued. There are many indications that the economy in Alberta continues to recover from the 2014 decline in oil prices.

The report also indicates that while Melcor is owed $6.2 million by the recently bankrupt Reid Built Homes, it retains title to those lots and has concluded that this receivable is not impaired.

Unfortunately it may remain the case that great patience will be needed as the share price may take a long time to move back closer to book value (currently $29.30). Meanwhile I expect book value to increase most quarters though it would decrease if the market value of its properties declines such as due to vacancies or lower market comparable transactions.