Myth vs. Reality

Based on a thorough examination of SEC filings, county records and various court documents, Hayman believes that shareholders in UDF’s public companies are being victimized by a Ponzi-like real estate scheme and that UDF has been misleading investors for years. Historically, numerous corporate executives, in other controversial situations, have made claims that have turned out to not be true. In the case of UDF, there are legitimate reasons to question the validity of various claims that UDF management has made. Based on Hayman’s research and knowledge, the following claims and various other statements made by UDF are inaccurate or otherwise misleading. UDF management’s statements, as it defends its practices, should be met with skepticism and not accepted at face value.

UDF Claim: UDF’s business model is sound.

The Reality Is:

  • Financing undeveloped land for years (a decade in at least one case) at 13% interest is not sound.
  • Concentrating 67% of a loan portfolio in ONLY two borrowers is not sound.
  • Buying non-performing loans from affiliates at 100% of the original loan balance plus years worth of accrued interest is not sound.
  • Using cash from new investors to repay existing investors is not sound.

UDF Claim: Hayman lacks an understanding of the residential real estate development cycle.

The Reality Is:

  • Kyle Bass, founder and principal of Hayman Capital Management LP (“Hayman”), was one of the few investors who predicted the U.S. housing crisis, based on a deep understanding of a flawed real estate funding mechanism (subprime loans) in the U.S. housing market.
  • Hayman understands that a “residential real estate development cycle” that involves financing undeveloped land at 13% annual interest for over a decade does not constitute a cycle.

UDF Claim: Management “identified the housing bubble and avoided lending in frothy markets.”

The Reality Is:

  • UDF management did not identify the housing bubble.
  • UDF I was financing real estate developments in a highly levered way through 2007.
  • UDF I defaulted on several development loans (liabilities) during the housing crisis.
  • UDF I, as of the end of 2014, still held loans (“assets”) on its balance sheet which matured in 2007, 2008, and 2009, loans that have not been repaid and likely will never be repaid.
  • UDF management lacks credibility.

UDF Claim: 100% of UDF IV’s loans are fully collectable.

The Reality Is:

  • UDF IV’s two largest borrowers account for 77% of loans and are both in financial distress.
  • UDF IV’s largest borrower recently defaulted on a first lien loan due to a third-party.
  • UDF IV’s largest borrower recently defaulted on a second lien loan due to UDF IV.
  • UDF IV has loans that are past due, most of which are owed by its second largest borrower.
  • UDF IV’s second largest borrower is the subject of a bankruptcy petition filed by UDF III.

UDF Claim: There is not a material conflict of interest between UDF and UDF's largest borrower.

The Reality Is:

  • The CEO of UDF and the CEO of UDF's largest borrower, Centurion American, currently own or recently owned a private jet together.
  • Centurion American and a private UDF affiliate co-own a Dallas high-rise condo building.
  • Centurion American and a private subsidiary of UDF I shared a 50/50 partnership to purchase and sell residential lots near Austin, Texas.
  • UDF IV over-lent to Centurion American, which redirected the excess funds to UDF I without any apparent economic reason to do so.
  • None of this is disclosed to the public shareholders of UDF III, UDF IV, and UDF V.

UDF Claim: Transactions with UDF’s largest borrower, Centurion American, are at “arms’ length.”

The Reality Is:

  • Centurion American accounts for 43% of UDF III, 67% of UDF IV, and 62% of UDF V.
  • Loans owed by Centurion American typically do not generate any actual cash income.
  • When loans owed by Centurion American are due, the loans are almost always not repaid.
  • When loans are not repaid, the loans are repeatedly extended, without an extension fee.

UDF Claim: UDF’s directors and officers have purchased shares in the open market.

The Reality Is:

  • UDF IV’s share price closed at $17.20 on December 9, 2015.
  • UDF IV asserts that its book value per share is $16.63 as of September 30, 2015.
  • An officer of UDF IV actually sold shares on December 11, 2015 at $7.27 per share [not pursuant to a 10b-5 plan].
  • The other directors and officers have bought a total of 4,480 shares combined at an average price of $9.44 – a total investment of approximately $42,000 – in the past month.
  • If the shares are so undervalued, why have directors and officers not invested more?