Isras is a leading real-estate development company with a valuable portfolio of retail, residential and office properties owned and under development all across Israel. Following an excellent 2015, Isras Investments reported a strong Q1-2106. The recent addition of Isras into the TelAviv100 stock index also helped push up the stock price as investors became aware of the company and its cheapness (both absolute and relative to peers).

We invested in Isras right after management announced a new dividend policy where they would pay out an annual dividend equal to 35% of FFO (about 3% dividend yield). Our thesis was that the company is shifting its focus from extensive real-estate asset development to real-estate asset management.

We continue to hold the stock today as its book value of 1.83B ILS understates the Company’s true economic value for several reasons. First, Isras values its yielding assets at 7.75%-9% cap rates which are above market rates. Second, Isras owns land assets recorded at low historical purchase costs which have not yet been marked up on its books. Third, Isras has tax loss assets that are not on its books. The company trades for less than book value and about 80% of our estimate of adjusted book value. In comparison, peers trade for about 120% of book value implying significant additional upside for Isras.

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The above commentary has been excerpted from a letter to clients of Emerging Value Capital Management.

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