I keep a $5,000 short position in Welltower. It’s my hairshirt. I know it won’t change anything. My penance will not help mankind. I continue to view Welltower (WELL) as the most absurdly overvalued real estate investment trust in the market today. The company is a provider of senior living residential facilities. Welltower mesmerizes all who worhsip at the orthodox church of demographics. “Thou shalt not question thy trend of aging baby boomers” is the first commandment obeyed by all who kneel at the altar. Yet here I am. Tilting at windmills.
Welltower hovers near the $100 billion market capitalization level. No REIT can match Welltower for its voracious pace of expansion which exceeds double digit percentages on an annual basis. It has been an incredible growth story. But growth requires capital, and capital comes from the addition of new shares and debt. REITs by their tax-advantaged status, must distribute most of their net income to shareholders, so retained earnings are usually a small source of investment capital.
Issuing new shares and debt for growth works just fine for as long as you can earn a return above the cost of capital. More shareholders aren’t a problem as long as the pie is bigger. Fail to do so, and the music eventually stops. REITs become dilution machines. Welltower is on the cusp of such an inflection. The company has raised nearly $21.5 billion in new shares since Covid. It has worked so far, but Welltower now struggles to cover its shareholder distributions. Will the market eventually figure it out?
Welltower’s real estate is valued by the market at an eye-watering implied capitalization rate of just over 2.5%. The FFO yield is 2.5%, and dividends yield a paltry 1.76%. In fairness, housing the elderly is more than just real estate. Services are a key part of the menu. But here’s where it gets worrisome: Welltower is unable to cover it’s current dividends with operating cash flow. By my estimation, about 25% of the company’s dividends to shareholders are funded through the issuance of new shares. The music is playing. The chairs are in a circle.
Just for fun, let’s look at BXP. One of the leading office landlords, BXP has seen its challenges since Covid. The stock trades with a $12.8 billion market cap and offers a 5.44% dividend yield. The implied cap rate for some of the nation’s premier office buildings is about 6.22%. This seems like a reasonable cap rate, until you start asking this question: “Who are the next buyers of these office buildings?” Pension funds probably aren’t lining up to acquire these assets. No more trophies. Class A in appearance, Class A in rentability, but probably not Class A in the transaction market.
Lest you be tempted by the 5% dividend yield, you should know that BXP also struggles to pay that dividend with cash flow.
So, it’s a quick look at a couple of REITs this week. It’s Father’s Day, so brevity is best.
I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all. Ecclesiastes 9:11
Until next time.
Note: The estimate of maintenance capital expenditures for Welltower is based on 1.41% of depreciated assets in service. This is the average level of improvements as a percentage of total assets for the past six years. Also, some of you may think that I am unfairly punishing these two REIT’s by deducting capital expendiures from net operating income. I will say that my experience has been that you can’t have it both ways. You can’t add back depreciation AND exclude capital expenditures.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
Kewpie Mayonnaise is a household staple in Japan. It was introduced to the country in 1924 after Toichiro Nakashima enjoyed the condiment during a visit to the United States. Today, Kewpie has been elevated to cult status. You can even visit the company “terrace” in Tokyo. Many Western chefs say it’s the best mayonnaise in the world. Kewpie is serious about its appeal beyond Japan and just opened a new production facility in Tennessee.
Japanese mayo uses only egg yolks, so it has a more yellowish appearance than, say, Hellman’s. Creamier and mellower than it’s US cousin, Japanese mayo receives a distinct character from the addition of apple cider vinegar and monosodium glutamate (MSG). The American version of Kewpie omits MSG. Purists say don’t bother. Go straight to the Japansese original for the best flavor. MSG gets a bad rap in the States, but aficionados rave that the addition of monosodium glutamate triggers the famous “fifth taste” known as umami.
Kewpie (2809.T) has a market cap of ¥481.8 billion ($3.34 billion). The company’s shares seem reasonably priced. The stock trades at an earnings multiple of 17 and an EV/EBITDA multiple around 8. Sales have grown better than 5% per year for the past three years.
But Kewpie’s much smaller competitor is a better bargain. Kenko Mayonnaise (2915.T) is a distant second in the Japanese market with FY 2025 sales of ¥91.7 billion – less than a fifth of Kewpie. Kenko trades at ¥1829 for a market capitalization of ¥28.9 billion ($200 million).
The stock is very cheap, trading at an enterprise multiple of 1.5 times EBITDA. Kenko carries just ¥3.8 billion of debt and holds cash and securities of ¥21.3 billion. The stock has declined 23% from its 2024 peak. I believe Kenko trades at a market price that is half of its intrinsic value.
I performed a valuation of the business using an earnings power valuation method (EPV) which capitalizes free cash flow at an appropriate discount rate – the weighted average cost of the company’s capital.
First, I normalized operating income at a 2.94% margin which represents the average for the past five years. The resulting ¥2.7 billion of operating income was adjusted by subtracting taxes and adding ¥2.4 billion of depreciation. Next, deductions were made: ¥822 million for capital expenditures and ¥206 million for working capital. The sum of ¥3.25 billion is Kenko’s normalized unlevered free cash flow.
The denominator in the value equation is 7.72%, a figure representing the weighted average cost of capital. The market value of Kenko’s debt accounts for 10% of the company’s capital. Under current bond market conditions, the after-tax cost of debt is 1.78%. The cost of equity was computed at 8.4%. This represents a 6.91% premium to the current Japanese 10-Year bond yield of 1.5%. The capitalized gross value for Kenko at a weighted average rate of 7.72% is ¥42 billion.
Cash and securities were added to this amount, with deductions made for the market value of debt, pension liabilities and about ¥1.9 billion for long-term payables. The final EPV amounts to ¥57.8 billion ($400 million) or ¥3,654 per share.
The potential upside is 100%.
Too good to be true? Perhaps. Kewpie has a dominant brand, and it is unlikely that Kenko can increase market share without significant additional marketing expenditures. Kenko is a well-regarded product and it is popular in the Kansai region which includes Osaka, Kyoto and Nara, but it’s customers aren’t fanatics.
There’s also the problem with the aging domestic population. Japan’s population is shrinking. Kewpie has begun to carve a path to global growth, but the same can’t be said for Kenko. Where will growth come from?
Kenko has also suffered from erratic financial results. Operating margins have ranged from 5.3% in the most recent year ended March of 2025, to barely north of zero in FY2023. Returns on capital are in the low single digits.
I am also troubled by the possibility that Kenko’s free cash flow doesn’t accurately reflect the cost to maintain the plant and equipment. Depreciation is double the amount spent on capital expenditures. As Japan finally shakes off the curse of deflation, shouldn’t capital expenditure costs match or exceed depreciation levels?
Finally, corporations may finally be exiting the dark tunnel of deflation only to stumble into the harsh light of higher interest rates. Japanese yields have almost doubled since October, rising about 70 basis points. This is a stunning move. A massive unwinding of Japanese credit could lead to a serious fiscal reckoning and a recession. At the very least, higher rates could exert a gravitational pull on levitating stock prices.
Despite all of these concerns, Kenko still holds investment appeal. Kenko offers a wide margin of safety. Mayonnaise has become a central component of Japanese cuisine. Owning the second-best brand seems like a tasty choice… especially when its on sale.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
In the 1950’s, some of Ben Graham’s disciples would exchange investment ideas. They weren’t managing vast amounts of capital at the time, so investors like Bill Ruane and Walter Schloss might pass along a thesis about an undervalued business to Warren Buffett and vice versa. They called the practice “coat-tailing.” By teaming their resources, their coordinated efforts might trigger a change at a company. New leadership, asset sales, dividends, etc. By the 1960’s Buffett kept his ideas to himself. He was wealthy enough to hoard his best plans.
I am coat-tailing this week on the research of Altay Capital, a value investor with a focus on Asian companies. Altay recently posted a compelling investment case for Kinki Sharyo (T.7122), a Japanese manufacturer of railroad vehicles based in Osaka. With a market capitalization just below ¥10.5 billion ($72 million), the company is primarily focused on light rail and subway passenger vehicles. The domestic Japanese market accounted for 69% of sales in FY 2024, but their work can also be seen riding the mass transit systems of Los Angeles, Boston, Dallas, Seattle and Phoenix. Kinki Sharyo delivers cars to the Doha and Dubai metro systems as well. Altay Capital believes that the company is a candidate for a full takeover by its parent, Kintetsu, which holds over 40% of the stock.
Kinki Sharyo is incredibly cheap. Trading at an EV/EBITDA multiple of 2x, the company could be worth more than double its current share price. I won’t elaborate on the characteristics of the business, or some of the pros and cons. Altay’s article provides all the rationale you need. My intention here is to simply offer a few more calculations to bolster the investment thesis.
I am attracted to the real estate. Kinki Sharyo generates about ¥700 million of net income annually from commercial properties in Osaka. The fair value of these assets amounts to approximately ¥10.25 billion. There’s more. Kinki Sharyo just closed the books on fiscal year 2025 in March with over ¥6.3 billion of cash on the balance sheet. The company holds another ¥6.3 billion of liquid investment securities. On the liabilities side, the business has debt and leases of ¥5.4 billion and pension liabilities of ¥2.9 billion. We haven’t looked at the railway business yet, and the net assets already exceed ¥14.5 billion.
Per my customary practice, I employed an earnings power valuation of the business. First, I normalized operating income over six years. This included the loss-making year of the pandemic in 2020 as well as the surge of deliveries in 2024 which produced ¥4.3 billion of operating income. FY 2025 EBIT was 234 million yen. The six-year average is ¥1.265 billion. Next, ¥708 million of real estate income was subtracted, along with taxes, and just over ¥1 billion representing FY 2025 capital expenditures. ¥1.3 billion of depreciation was added back to arrive at normalized unlevered free cash flow of ¥635 million. This numerator was capitalized by 6.54%, a figure representing a weighted average cost of capital.
The WACC was computed using a cost of debt at 2.65% and a cost of equity of 8.75%. Although Kinki Sharyo pays barely more than 1% for its debt, I employed a rate that is 119 basis points over the current Japanese 10-year yield of 1.46% for the debt which accounts for 34% of capital. Kintetsu is rated BBB, so I applied the US spread to the Japanese yield. On the equity side, I took the risk premium for Japanese equities and default spread for Japanese bonds of 6.91% and added it to 1.46%. I figured 69% of equity is attributable to Japanese sales. The remainder was weighted towards US equity costs and about 12% for revenues derives from the “rest of the world”. My cost of capital feels a little low, but borrowing in yen keeps it that way.
The value of the rail business, by my computation, is just about ¥9.7 billion. This is rabout 85-90% of the depreciated book value of the company’s plant and equipment. By comparison, Alstom of France, trades at about 85% of book value. I added cash and securities, the Osaka real estate, and subtracted debt and pensions. To be conservative, I subtracted ¥3.5 billion of the cash because it is pledged as collateral for contracts in progress. The net calculation sums to ¥20.8 billion, or ¥3,022 per share. Kinki Sharyo is trades for half this amount. A true bargain.
The railcar business is cyclical, capital intensive and subject to the challenges of winning a new contract and delivering products over many subsequent months. The risks of an underpriced bid, production delays, raw material expense fluctuations and potential warranty claims all weigh on Kinki Sharyo. There is no denying that sales declined significantly in FY 2025 and there is little visibility into future bookings. The large infrastructure spending boost to transit systems in the United States is over. Maintenance contracts in Japan and growth in emerging markets will be needed to drive future sales. Despite these challenges, the share price reflects a wide margin of safety. The stock trades for less than the sum of investment assets on the balance sheet.
Tulip Mania or Dollar Hedge?
Is cryptocurrency a fantasy like Dutch tulips of the 1630’s, or is it a legitimate store of wealth? On the legitimate side would be the sophisticated blockchain system of accounting ledgers which offers a technologically advanced method of universal counting, sorting, and exchange. Then you have the uncertain future facing a US dollar eroded by inflation and foreign distrust. Gold has served as a store of value for centuries. Perhaps cryptocurrencies are the modern equivalent.
The case fo crypto-mania seems easier to prove. The original bitcoin was “minted” by a computer algorithm generated by an unknown programmer called Satoshi Nakamoto. The ”currency” has proven to be useful for criminals, but few others. And then there’s the world of “memecoins”. These are tokens that their creators sell to the public which represent, well, nothing at all. Exhibit A: Fartcoin. All the fartcoins in existence amount to $1.25 billion. We’re talking real money. The idea that something known as fartcoin has a value higher than zero is pure madness. Imagine presenting your financial statement to a bank and listing Fartcoin as an asset.
If you haven’t read any of Matt Levine’s columns, you need to. Nobody is better at separating the ridiculous from the sublime in modern finance. One of his favorite topics is the ability to buy stock in publicly traded companies that hold bitcoin. The most famous of these entities is MicroStrategy (MSTR), which is now known simply as Strategy, and led by the visionary (and/or delusional) Michael Saylor. If you buy stock in Saylor’s company you own shares in a business valued at $109.3 billion. Strategy holds bitcoin in the aggregate amount of $38.76 billion. They issue new shares, and they use the proceeds to buy bitcoin. On and on it goes. A perpetual money machine.
But there’s an obvious problem here. When you buy a share of MSTR, you are buying $1 of bitcoin for $3. Why would a rational human being undertake such a transaction? Why not just buy $1 of bitcoin for $1? Well, maybe you think that Saylor and his management team have better insights into managing this “portfolio”. What would you pay for such a brilliant management team?
Well, Berkshire Hathaway might be one comparison. Despite Warren Buffett’s retirement, Berkshire has some of the finest managers in the world. A lot of people talk about Warren Buffett’s capital allocation skills, but few discuss his ability to spot a talent. Berkshire Hathaway trades at a price to book value of 1.69x. It has never exceeded 2 times. We aren’t even talking about the dilution problem with MSTR. Berkshire hasn’t issued new shares in a generation. MSTR is constantly issuing $3 shares to buy $1 of assets.
Well, maybe you would rather hold bitcoin through a company because you trust the stock market more than the crypto market. You’re not sure you want to open an account at Coinbase. You might be a little nervous reading about the periodic hacks that occur at these “financial institutions”, or the horror stories of “lost wallets”. There are alternatives here too. One could simply buy the iShares bitcoin trust managed by BlackRock. Trading with the symbol IBIT, the ETF has a market capitalization of $56.5 billion. It’s price to “book” is 1x.
As Jim Chanos has pointed out, there is a way to hold these opposing views through arbitrage. You can believe that cryptocurrency has long term value and also believe that a speculative mania of vast proportions is currently underway. How does one go about making money from such cognitive dissonance? The trade would be to sell short MSTR while simultaneously holding a long position in IBIT. Over time, these contrasting positions should converge.
The Jam
You might have figured out that Paul Weller is one of my music heroes. The Jam released Down in the Tube Station at Midnight in October of 1978 and it reached 15 on the UK singles chart. It’s one of my favorite tracks and probably in my top five by The Jam. It’s definitely the best song I know about riding subway trains. I’d hate to see terminal decline set in for the El or MTA. It’s a convenient way to travel in a big city. As long as you don’t encounter “thugs who smell of pubs, and Wormwood Scrubs“, that is.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
