Harvey Capital 2025 Mid-Year Update
A commentary on our performance during the first half of 2025
Harvey Capital I LP investors,
This will serve as the 2025 mid-year update. It’ll be mainly a narrative-based update to inform you about what we own, why we own it and what happened during the prior 6 months. I’ll include a truncated income statement and balance sheet, but the more comprehensive update will be sent in early January going over our full year results. As always, if you’d like to chat about anything or want more info, please reach out anytime!
Equity investments
Below is our asset allocation for equity investments, which excludes loans receivable. I view those as a separate segment than the equity investments we have made and will talk more on that a bit later. The investments that trade publicly are stated at market value, and the ones that trade privately are stated at historical cost.
DSP RB Meadows – This is a private multifamily syndication we invested in that owns a 148-unit BTR apartment community in Martinsburg, WV. This was a 2023-built property acquired at an attractive price and is run by an experienced operator. I’ve talked in prior updates in-depth about this and you can refer to those if you’d like more info.
DSP RB West Wind – Another 2023-built BTR community consisting of 95 units. Same operator as the one mentioned previously. More details can be found in prior updates.
Copper Properties Liquidating Trust – This is a publicly traded trust formed to liquidate the real estate holdings of JC Penney. I have talked on this extensively in prior updates and have a full writeup that can be found here.
Peakstone Realty Trust – Publicly traded office/industrial REIT that I spoke of in the 2024 annual update.
Tejon Ranch Co. – This is a new addition to the fund that we invested in during early April of this year. The setup is that this is a publicly traded company founded in 1843 that owns about 270,000 acres of contiguous land about an hour north of Los Angeles, CA. From their inception to the early 2000’s they were a sleepy landowner and monetized their holdings via several ancillary revenue streams such as farming, grazing, mineral and water rights.
Fast forward to today and they have transformed into a prominent residential and commercial real estate developer with a very valuable asset that is largely hidden in their financials. The jewel in their crown is Tejon Ranch Commerce Center (TRCC), a 1,450 acre, 20 million sf mixed-use development that is generating a substantial amount of recurring revenue and appears almost certain that this will grow into the future. It appears that this is trading at about 1/3 of a conservative fair value.
Now we get to the bad news and why this is severely undervalued: management has been abysmal. Poor capital allocation and excessive executive compensation have plagued Tejon for a while. For instance, over the last 15+ years they have sunk over $300 million into some residential developments and have generated zero return on this. That is unfathomable. At the same time, they chose to develop parcels of TRCC with partners when they could’ve done it 100% themselves had they not blown their resources on these senseless land entitlement projects.
In 2024 there was an activist who wrote a couple open letters encouraging shareholders to withhold their proxy votes from certain directors at the upcoming election. The result was a resounding message from a frustrated shareholder base showing that change was needed. Shortly thereafter, this activist and Tejon made an agreement giving them a seat on the board.
Fast forward to late March of this year and another activist (Bulldog Investors) stepped in, this time running a campaign to get three board seats. This is when I took note as these guys are very smart and very good at running proxy contests to effect change. They have made a living doing this for over thirty years.
I got to know one of Bulldog’s partners, Andy Dakos, through this and ended up working with them to write an open letter to shareholders encouraging them to support their election to see much needed change within Tejon.
My thesis for this investment was simply, if Bulldog gets three of their nominees elected to the board then change will likely come soon and I will build my position much larger. And if they didn’t get elected there still seems like enough of a mandate from shareholders is there where management either needs to get their act together or they might not be gainfully employed much longer. Their assets had become too valuable for them to fly under the radar as a sleepy land company with overpaid executives that are not acting in a shareholder-oriented manner. The results from the 2024 election clearly indicated there is a frustrated base of shareholders and, in my opinion, the incumbent directors and management will be replaced eventually if they do not course correct.
The result from this election was that Bulldog ended up getting one of their three director nominees elected. While this wasn’t the desired outcome, I still believe they will be able to lobby for much needed change. Depending on how that pans out I will either add to or reduce the position over time once I have more data.
Millrose Properties – I have spent an inordinate amount of time on this one, so if I get it wrong it is certainly not due to lack of analysis! In early 2025 Lennar, the second largest U.S. homebuilder, announced details about an upcoming division they were spinning off to its shareholders.
This was an interesting setup for a few main reasons; the first is because when a company or division is spun off, there is often a lot of indiscriminate selling from the shareholders receiving these shares, which can drive the price down to an attractive level. For instance, Lennar is in the S&P 500 and a lot of index funds track this. Millrose has a much smaller market cap than Lennar and is not in the S&P, which means that all the index funds will be “forced” sellers of Millrose when they receive shares through the spinoff due to them not being allowed to own this.
The second reason it appeared there would be forced selling was because this was considered a taxable spinoff, which is less common than the typical tax-free spinoff. This means that Lennar shareholders who receive Millrose shares are taxed based on the fair value they receive. This creates “phantom” income since there is no cash received and can cause many shareholders to simply liquidate in order to have the funds available to pay taxes on it. Especially if they are indifferent about Millrose it to begin with.
The third main reason is because there is simply not much crossover between those desiring to own REITs and those desiring to own homebuilders. REIT investors are generally focused on income and homebuilder investors are focused on capital appreciation.
This made the setup very interesting as it seemed likely that there would be a lot of selling pressure which could drive the price down to an attractive level. Now, what is Millrose?
Millrose is a publicly traded land banking company that is first-of-its-kind. Land banking is extremely valuable to large homebuilders of today. More and more homebuilders are adopting an asset-light model that was pioneered by NVR about 30 years ago. Instead of owning land throughout the entire development process, builders prefer to own land only during the vertical construction of the home when it is built. They assume less market risk and have a cleaner balance sheet by doing this way.
For the horizontal construction, which is the time it takes to get all the land developed (roads, sidewalks, plumbing, electrical, etc.) builders would prefer the land to be on someone else’s balance sheet but they still want to control it. This is a have-your-cake-and-eat-it-too dilemma.
This is where the concept of land banking comes into play. Land banking companies offer a solution where they step in to buy the land for the homebuilder and then write an option agreement where the builder can control the land and have the right, but not the obligation, to purchase the land by a set time and for a predetermined price. “Wall Street” likes nimble, capital-light companies as opposed to clunky landowners with heavy balance sheets, making more and more builders adopt this model. It also allows builders to focus more on their core competency, which is constructing and selling homes.
Millrose filled a gap here as most land banks are private and do not have permanent capital. They have private investors backing them and generally they have a finite time horizon before returning capital to their backers. Millrose, on the other hand, is a public company and can provide an “evergreen” capital solution to these builders.
In Millrose’s case, they charge the builder an option fee that is simply an interest rate paid on the amount of funds deployed. They also receive non-refundable option deposits from the builder generally around 5% and there are option termination fees on top of this should the builder cancel the option.
Prior to the spin date, Lennar laid out what Millrose would be receiving in the form of land, cash, etc. and it was not difficult to calculate what they would be earning solely through their relationship with Lennar. The wild card was whether they’d be able to generate third party builder interest (spoiler: they absolutely have).
The challenge came in trying to compare this to other similar companies in order to value it. There simply aren’t any. Forestar Group is the only one somewhat similar, although they are majority-owned by DR Horton and I wouldn’t consider a good comp.
I ultimately concluded that since Millrose indicated their commitment to paying out 100% of net income to shareholders, this will be very bond-like in that the dividend and expectation that it will continue into the future is what will be judged by the market.
Upon the first day trading and thereafter for about a month and a half, this traded very cheap. It amazed me how straightforward this one was laid out; how you could calculate what they’d be earning and what the minimum dividend would be (due to how REITs must pay out at least 90% of earnings) --- and still --- the market priced this extremely cheap. As soon as their first dividend was announced this re-rated upwards, and they have subsequently released their first quarterly report indicating demand from third party builders is very strong and they are getting these option agreements done at significantly higher rates than the ones with Lennar.
The downside I see, which is what I focused most of my energy on, is Millrose getting stuck with a bunch of entitled land. However, I don’t view that risk as something that terrible in the most prosperous nation in the world where we are short 1 million housing units give or take. This land is obviously not worth zero and there are also additional mechanisms in place to lower the risk of that happening that I won’t get into.
Ultimately, it is our entry price that de-risks this the most, in my opinion. At the price we paid, I see this being an asymmetric bet where the upside far outweighs the downside. I am betting that over time, the market will conclude that Millrose has a good business and over time the discount will narrow. As Millrose has seen in the past few months, there is ample demand from builders for this product and they are only capturing a relatively small piece of the total pie. Here is a more in-depth breakdown of this company for those curious!
Debt investments
In the past I mentioned that over time we would focus more on equity and less on debt. The debt investments were meant to be a way to generate a decent return while waiting for equity opportunities to come along. In hindsight, there was a big opportunity cost here that hurt us on one occasion. I mentioned this in the prior update, but due to funds being tied up in some loans we made, I was not able to get as much into Copper Properties as I would have liked prior to the price running up. That was an expensive lesson on opportunity cost!
It is a dilemma for me because these loans are low risk (in my opinion) and generally pay something like 2-5% origination fee and 10-15% annual interest. For instance, there is someone that I lend small loan amounts to that are typically around $30,000-60,000. These funds are essentially in 2nd lien position used as reno funds on house flips.
From cradle to grave these are usually 3–4-month durations. If we take $50,000 at 5% origination fee and 15% interest, and assume the life of the loan is 4 months, we would collect $2,500 from the origination fee and $2,500 from the interest accrued, totaling $5,000. That is a 10% absolute return in 4 months or a 30% annualized return. That is hard to pass up.
The solution to the FOMO I get from passing on these loans is a small line of credit we now have secured to our portfolio. We can now borrow in the 7-7.5% range (it is floating so could go up or down) and use these funds to make these loans. It is a simple game of arbitrage where we are borrowing at X and lending at X plus a spread.
In the same example above, assuming our borrowing rate is 7%, we would generate $3,833.33 net interest and have none of our own cash tied up, allowing us to maintain dry powder for equity opportunities to come along. And with that, my FOMO is cured.
Our first 18 months and looking forward
Below are some summary financials showing our income statement and balance sheet over the previous 18 months, broken up in 6 months intervals. These include both realized and unrealized gains, and our accounting method is cash, which I believe gives a more accurate depiction of our financial situation as cash must be received before income is booked. See below:
As evidenced here, we began to hit our stride in the second half of 2024 when we began focusing on public markets. I feel fairly confident in this approach and believe this will lead to decent results over the long term.
Our focus will continue to be on the public markets, trying to find ways to exploit the difference between publicly traded real estate and privately traded real estate valuations. We are simply looking for ways to acquire real estate below market via ownership in publicly traded companies where there appears to be a catalyst on the horizon to unlock the value.
Put very simply, we are looking for situations where we can buy something for $.50 where it seems likely that, for one reason or another, it will be sold or valued at $1 within a predictable timeframe.
Our focus on land, property, and other hard assets with minimal debt provides a much more stable valuation “floor” compared to technology companies, for instance. The value of tech companies, which often relies on intangible assets, can rapidly diminish when new innovations render their products obsolete. Whereas, hard assets tend to be a bit more durable. Meaning, if things go south and I got something wrong on an investment, we should live to fight another day.
My goal with every investment made is to understand our downside and focus on that far more than the upside. I believe if I’m right a few more times than I’m wrong, and on the ones that I am wrong, the results are not catastrophic, the net result should be positive. We will likely struggle to keep up with a general market that is euphoric and (in my opinion) overvalued as it is now, but over the fund’s 8-year lifespan I like our chances competing with the market and can sleep well at night knowing what we own and why we own it. Especially compared to some of the goofy stuff going on currently that feels like the late-1990’s dot com era or the 2021 meme stock craze.
On the topic of frothy markets, I found an interesting chart a few months ago I wanted to share here:
This chart plots the S&P 500’s price-to-earnings ratio at various times since 1988 and the following 10-year annualized returns. Clearly, the price you pay matters. Anyone who believes the market will continue returning what it has returned over the last few years is likely in for a rude awakening at some point. I have zero clue when that’ll be, but my contention is that our strategy will shine brighter in a down cycle than in an up cycle, relative to the overall market. Let’s just hope that if and when that happens, we have some cash on hand!
Tax implications of Big Beautiful Bill
There’s been no shortage of opinions on this matter and I’m not here to add another one. I do want to comment on a few things I noticed that should have a positive impact on our fund, however.
Qualified Business Income (QBI) Deduction – This deduction is made permanent from the bill and is increased from 20% to 23%, which should benefit us as some of the real estate we own qualifies as a trade or business.
Bonus Depreciation – This bill restores 100% bonus depreciation, which was currently at 60% and in the process of being phased out.
Section 199A Dividend Treatment – Qualified REIT dividends will now get a 23% deduction indefinitely (originally it was 20% set to sunset at the end of 2025), making this income more tax-efficient.
There is more than this, but I wanted to highlight the ones that should have the greatest impact on us. With these changes and more of our income shifting over time from short-term to long-term capital gains, we should be in a good position to grow in a tax-efficient manner.
The next update can be expected at some point in early January, marking the year-end update. If anyone has any questions, please feel free to reach out to me any time. You can email me at will@harvey-capital.com or give me a call/text at 703-677-7991. Take care!
In Christ,
Will Harvey III
IMPORTANT: This communication is for informational purposes only and is intended solely for the general knowledge of the recipient. It does not constitute an offer to sell or a solicitation of an offer to buy any securities, nor shall any securities be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful. Any offering of securities will only be made pursuant to a confidential Private Placement Memorandum (PPM) and other definitive legal documents, which must be reviewed by the prospective investor.