Strange

In 1990, Jeremy Irons won an Oscar for his portrayal of the mercurial and debonair Claus Von Bülow in Reversal of Fortune. Von Bülow captured tabloid headlines for the attempted murder of his Newport socialite wife, Sunny (Glenn Close). The case seemed hopeless. Only Claus had access to the insulin that left Sunny in a diabetic coma. Evidence was only part of the problem. Claus was not exactly a warm and fuzzy guy. With his angular chin and vaguely European accent, the ascot-wearing Von Bülow was aloof and arrogant. Against the odds, the young professor Alan Dershowitz (Ron Silver) and his earnest team of Harvard Law students delivered a stunning acquittal. 

At the end of the movie, Claus sits in the back of his chauffeur-driven Jaguar as Dershowitz bids him farewell, saying: “You know, it’s very hard to trust someone you don’t understand. You’re a very strange man.” As the door closes, Von Bülow deadpans, “You have no idea.” 

“Strange” is subjective, of course, and context matters. Claus was probably a normal guy if your scene was 1970s ski chalets in Gstaad. To a working class jury in 1980s Rhode Island, he was eccentric. 

If you’re on the artificial intelligence bandwagon, everything might seem pretty normal right now. Short term interest rates are coming down and we may be on the cusp of a new information technology miracle. In this exuberant era where the NASDAQ sets new records nearly every day, Omaha’s Warren Von Büffett seems strange. After all, he’s sitting on $240 billion of T-bills. Imagine selling all that Apple stock right when this AI thing is just starting to take off!

What’s strange? What’s normal? I like Jodi Picoult’s thoughts on the matter: “I personally subscribe to the belief that normal is just a setting on the dryer.” Ms. Picoult usually digs deep into matters of the heart, but she could just as easily be opining on the current state of financial markets.

The value of corporate equities as a percentage of GDP has only been this high two other times. While most of us mortals must pay our debts by forking over cold hard cash to the lender, huge numbers of heavily indebted firms are paying their interest bills by issuing IOUs. You need to squint to see the spreads on corporate bond yields. It turns out that nearly losing one presidential candidate to assassination, and the other to dementia doesn’t have much of an effect on markets. Did I mention there are two wars with nuclear implications going on? How about the collapse of the world’s second largest housing market? Nope, hold my beer because the QQQs keep ripping higher. 

I remember the Three Mile Island meltdown. It was not an auspicious moment in American history. We had kind of a Jimmy Carter-malaise thing going down, and our status on the world stage was being put out to pasture by Ayatollah Khomeini. We couldn’t even manage nuclear power plants very well. When they said we’re re-starting Three Mile Island again because we need so much power to run these AI chips, my bullshit detector issued an alert. 🚩

Welltower (WELL) is a company that Claus Von Bülow might prefer: Very strange, indeed.  Welltower stock behaves like it belongs among the exalted world of artificial intelligence  – surging ahead by 45% over the past six months alone. Given the levitating stock price, it probably shouldn’t come as a surprise that Welltower’s CEO quoted Jensen Huang in his last shareholder letter. The excitement fades pretty fast when you realize that Welltower operates in the staid world of housing elderly folks.

While other senior living companies trade within a justifiable range of the value of the underlying assets, Welltower seems divorced from reality. By my reckoning, the company trades at a premium of over 40% to its underlying bricks and mortar. Welltower is a Toledo-based owner of senior living facilities that trades at a market capitalization of over $80 billion, or $132 per share. However, a reasonable valuation of the real estate indicates that the stock should trade closer to a level of $50 billion. That computes to a share price near $80.

As a real estate investment trust (REIT), Welltower is required to pay out most of its earnings as shareholder distributions. Yet the yield on offer is a paltry 2%. Growth can only be achieved by adding external capital, and Welltower has issued billions of dollars in new stock since the debt markets became less hospitable. In December 2022, the company also gained the dubious distinction of a write-up by Hindenburg, the famed short-seller, for questionable dealings with the mysterious Integra Health Properties.

Moreover, Welltower is not a simple business. WELL has a complex collection of disparate facilities throughout the country operated by a diverse set of managers. Many facilities are net-leased to other operators leaving Welltower the simple role of cashing rent checks as a landlord. Many others are operated hands-on by the company. Looking after the elderly is a tough business. You need skilled medical staff to run these properties in addition to a legion of cleaners and minders. The government is constantly looking over your shoulder (especially after the whole Covid fiasco), and Medicare money comes with strings attached.

Welltower also acts as sort of a bank for senior housing developers, with over $1.7 billion of notes receivable on the books. To complicate matters further, WELL also owns a collection of outpatient medical clinics.

There are certainly many reasons to praise Welltower. The company disposed of $5 billion of struggling assets during the dark times of Covid, and rebounded with a $10 billion acquisition frenzy over the past three years. Welltower added another $2 billion of development during that time. In 2023, operating income (including depreciation) increased by over 30%. 

Hindenburg’s questions aside, I don’t see anything nefarious about Welltower. It is just really expensive. Welltower is a business which earns returns on capital around 6% and returns on equity around 7-8%. This won’t set your nanna’s pulse racing. Through 6 months of 2024 reporting, operating income has only risen 5%. Meanwhile, notes receivable from operators have doubled since 2022. Who’s borrowing from Welltower at 10% interest rates? Probably not the most seaworthy. The firm racked up $36 million of impairments in 2023 and $68 million for the TTM period to June 2024. These aren’t horrible figures, but they show that not everything comes up smelling like roses in the senior living business. 

Management recently guided for $4.20 per share in funds from operations (FFO) for 2024. This preferred metric for real estate investment trusts adds back depreciation and other non-cash items. I reverse-engineered the guidance for FFO to arrive at a pro forma net operating income (NOI) for 2024 of $3.3 billion. This NOI calculation takes FFO a step further by removing debt service costs and the administrative costs of running the company to arrive at an unleveraged, asset-level value for the business. 

In fairness to Welltower, the increase in NOI is substantial compared with the $2.7 billion generated in 2023. The company has certainly improved operations, pruned underperforming assets, and had much stronger occupancy levels as the post-Covid senior market has recovered. A 22% increase in NOI is impressive for any business, especially a real estate company with slow-moving assets. 

How does $3.3 billion of net operating income translate into asset values? I capitalized the income using 5.97% to arrive at a gross asset value of $55 billion. 

The 5.97% “cap rate” was derived using the following logic: I simply applied the spread for Welltower’s Standard & Poor’s BBB credit rating to the “risk-free” 10-Year Treasury yield of 4.07% to arrive at a current debt cost of 5.15%. I assumed that the company earns an equity yield just 1% higher than this cost of debt (6.15%) and weighted the equity percentage at 85%. One could argue that this 5.97% cap rate is slightly high. Perhaps I could impute a bigger weighting to the less-expensive cost of debt. After all, Welltower has been able to raise debt at much lower rates in the past.

My counter-argument would be that a lower cap rate would be too aggressive for a business that has a mixture of assets, ongoing charge-offs for underperforming notes receivable, and a collection of diverse and unpredictable operators assigned to the facilities. Finally, I am not making any allowances for capital improvements at existing properties. These assets require nearly $600 million per year in upkeep that is not reflected in NOI. They are, however, certainly an ongoing cash obligation for Welltower. I am being very generous by excluding them in the value computation.

To arrive at a net asset value, I added cash of $2.6 billion as well as construction in progress at book value, and unconsolidated equity interests at 1.5x book value. After subtracting debt of $14 billion, Welltower’s net asset value pencils slightly above $48 billion.

You may say that I’m not appropriately valuing the future. There’s more upside at Welltower, says you. Yes, there is more upside. Unfortunately, as a REIT which is required to distribute its earnings to shareholders, incremental growth can only come from external capital: Sell more stock or raise more debt. When you’re earning returns on capital in the 6% range and you’re borrowing at 5%, you don’t have tremendous opportunities for upside. 

I am short Welltower. It’s a $132 stock that should be priced to yield in the mid 3% range around $80-85. 

I could leave you with some Jim Morrison lyrics. Instead I will give you something special by Wire. Or you may prefer REM’s 1987 cover version:

“There’s something strange going on tonight.

There’s something going on that’s not quite right

Joey’s nervous and the lights are bright

There’s something going on that’s not quite right.”

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.

/by

Find me in the club with a bottle full of bub

I was in a couple of clubs this past week. Let’s start with the fun club. The Irish band Fontaines DC played a sold-out Slowdown on Saturday night. The band went on at 9 and I almost missed the opener. Maybe they saw the prevalence of white males over the age of 40 and reckoned it would need to be an early bedtime. This is a Grammy-nominated group of guys in their 20’s touring in support of their fourth album, so we’re not talking Van Morrison here. Where were all the kids? It made me think of the recent article with the hypothesis that rock and roll died with Kurt Cobain. This is a pretty dramatic take on the music industry, but I think a lot of youngsters are gravitating towards hip-hop and EDM where most of the sonic barriers are being broken.

You could hear the appeal to an older set: Carlos O’Connor has the guitar stylings of a Jonny Greenwood, and listeners of a certain vintage surely hear echoes of Nirvana, The Pixies, The Church, The Cure and even Weezer in the mix. Grian Chatten has an impressive vocal range and his cadence can sound almost like a Dublinesque Eminem at times. Maybe it’s the cyncial nature of the songs. After all, the band’s most powerful track “I Love You” has a chorus of “Say it to the man who profits, and the bastard walks by.” Jaded stuff. Excellent music, nonetheless.

Dublin rockers would sneer at the other club I visited last week. Jim Grant held his annual conference in New York, and I decided I wanted to see some different rock stars: Stan Druckenmiller on slide guitar and Bill Ackman on drums. Druckenmiller got the most headlines when he said that his old boss, George Soros, would be a little disappointed that he hadn’t committed more capital to his high-conviction trade: Short the long end of the yield curve. In a country running peacetime deficits of roughly 7-8% of GDP where neither presidential candidate has made a peep about a balanced budget, a long duration Treasury has much to blush at. Toss in a recession and war, and you have real downside risk holding anything longer than two-year paper. He was also firm is his belief that no foreigners were safe investing in a China controlled by Xi Jinping, despite David Tepper’s recent optimism.

I was most intrigued by Boaz Weinstein’s presentation. This chess prodigy was a Deutsche Bank managing director at 27. His firm, Saba Capital, has targeted the closed-end fund universe where wide discounts to underlying net asset values can persist for a long time. Saba has pressured some managers to narrow the discounts by taking large positions in the funds and gaining sufficient board control to advocate buying back shares or liquidating altogether.

Weinstein was particularly vocal about his legal brushes with BlackRock. The battles with the asset management behemoth have been contentious (and expensive), and it was slightly appalling to hear about the lengths BlackRock would go to suppress actions that could benefit widows and orphans trapped in underperforming closed-end vehicles. Saba’s Closed-End Funds ETF trades a with the ticker CEFS and has a current distribution rate of 7.62%. There’s limited downside, and you get to earn a nice yield while you let Mr. Weinstein work his craft. Seems like a good club.

Michael Green’s presentation on the distortion of passive vehicles in the market was compelling, but I couldn’t help but think he was preaching to the choir. I invite you to read his thought-provoking pieces. His point has validity: The concentration of market capitalization in the biggest stocks is increasingly reinforced by the automated passive funds which allocate towards a market-cap weighted index. Passive funds have made a mockery of most performances of the managers in the audience, however, and I had a feeling that Larry Fink was sitting down at Hudson Yards watching the proceedings remotely with a smile on his face.

I can tell you who is not in the club: Warren Buffett. The man is sitting on nearly $300 billion of cash. Sure, he could be hedging the likely increase in capital gains taxes should the Democrats take control. He could be getting his “affairs in order,” as they say. But for a guy who famously says you shouldn’t time the market, it feels an awful lot like market timing to me. I offer the chart from Jennifer Nash at Advisor Perspectives:

Corporate equities as a percentage of GDP have rarely been so high. The Fed is cutting rates into an environment of very loose financial conditions. What could go wrong?

So where are the clubs that I want to hang? I mentioned Saba’s ETF above. A few weeks ago, I talked about relative value at Peakstone Realty Trust (PKST) and the ethanol producer REX American Resources (REX). Sam Zell’s (RIP) Equity Commonwealth has a no-brainer preferred yielding north of 6%. I’m supposed to hang out in the real estate club, but developing apartments at a 6.5% return on cost with a looming oversupply of units at rents that need to be 30% higher than pandemic era prices seems like an unfriendly wager.

I’d rather hang out with Barry Sternlicht. He can often be found on CNBC lately crying the blues and talking his book, but the guy is a legend. Starwood will probably have some messes to clean up, but they will also seize opportunities to profit from distress. Meanwhile you can hold STWD at a 9.5% dividend yield with the best capital allocators in the business. It makes illiquid and highly leveraged suburban Omaha apartments seem like a visit to the yearbook club after school. Anchored to old memories, the club is far too optimistic that the good times will return. Go to the reunion in 30 years and see what decades of high leverage and “equity” subordinated to a 9% preference can do to a guy. It ain’t pretty.

I tried to get interested in Heartland Express trucking (HTLD) recently. The company’s stock has seen a lot of insider buying in recent months. I can make an argument that HTLD is selling at a discount to its intrinsic value. It trades at an EBITDA multiple of about 7x. If you figure free cash flow can hit $115 million in 2024 during a freight recession, then there should be a lot of upside. The recent market cap is around $900 million for a company that could be worth $1.2 billion.

My enthusiasm waned quite a bit when I noticed that much of the aforementioned cash flow came from a lack of investment in trucks. Heartland depreciated nearly $100 million of its vehicles in the first six months of 2024, but only invested about $3 million (net) in new trucks. By comparison, local company Werner Enterprises depreciated $146 million of vehicles during the first six months of 2024 and reinvested a net $118 million in new equipment. The freight market is probably recovering, but it will take a lot of capital for Heartland to modernize its fleet. This one’s a pass for me.

I’m working on a write up for Welltower (WELL). I mentioned it several weeks ago as a very expensive stock with slightly dubious amounts of asset churn. There is a lack of a clear strategy with medical office buildings paired with B-quality senior living assets. The company is a REIT and yields a sub-par 2.2%. The stock has risen 54% over the past 12 months and trades hands at a $76 billion market cap. It strikes me as absurdly overvalued and is my strongest candidate for a short position. You can talk all you want about favorable demographics, but the earnings are weak and the operating costs are not improving as more states impose minimum staffing requirements. Medicare reimbursements are dropping and the company is highly levered.

Until next time.

Appendix: Heartland Trucking income statement and return on capital.

/by

It just doesn’t matter

I had a thesis: The pandemic boom in camping and water sports is over. Find a stock that didn’t get the memo and sell it short in the hopes of making a profit on the decline. I thought I had found such an overpriced nugget in the form of Patrick Industries (PATK), an Elkhart, Indiana maker of a lot of stuff that goes into recreational vehicles, recreational boats, and recreational powersports. It’s fairly, um, recreational, and therefore totally discretionary. They also have a division that makes parts for the housing industry.

The days of social distancing are over. Camping and water sports had an incredible two-year run. Remember “glamping”? That seemed to pass from our lexicon faster than ayahuasca at a sweat lodge. Thor Industries (THO), one of the biggest RV makers, saw sales increase from $8 billion in 2020 to over $16 billion in 2022. Thor will do well to exceed $10 billion in 2024. Meanwhile, Patrick’s stock price put the hammer down on Thor. PATK is up 273% over five years and 90% over the past twelve months. Is Patrick a stock that I would sell short? No.

Patrick will have sales of about $3.6 billion in 2024. It trades at about 21 times earnings with a market capitalization of $3.2 billion. The enterprise value to EBITDA multiple for PATK is 11 and the company generates over $350 million in free cash flow per year. Most importantly, Patrick seems to be pretty good at acquisitions, spending about $1.8 billion over the past six years. Take Sportech, for example. Patrick acquired the company in January for $315 million from a private equity firm.

Sportech, of Elk River, Minnesota generated revenue of $255 million in 2023. Based on the pro forma numbers in the Patrick 10-Q, it looks like Sportech generated about $26 million of EBITDA during the first six months of 2024, so it seems like Patrick paid a multiple of around 6 times EBITDA. The public markets give Patrick a multiple above 10 times EBITDA, so presto-chango you have a nice return on the investment without doing any heavy lifting.

Now, if you take out Sportech, the results at Patrick for the first half of 2024 were flat-to-down. Net sales excluding the acquisition would have been $1.8 billion for the first six months of 2024 which is slightly below the levels of 2023. The acquisition machine needs to keep rolling at Patrick in order to keep the shares elevated. This seems possible – Patrick may offer a sanctuary for beleaguered suppliers to the RV and marine industry. If the boom is over, Patrick may be able to swoop up some more acquisitions at bargain prices.

Just for grins, I decided to conduct a rough valuation of Patrick using steady-state income and capitalizing the free cash flow by the weighted average cost of capital. Bruce Greenwald would call this an “earnings power valuation”. I employed a weighted average cost of capital of 7.63% on free cash flow of $373 million to arrive at a value of $4.9 billion. Subtracting debt of $1.5 billion and adding cash of $43 million results in an EPV of $3.4 billion – roughly in-line with the current market cap.

Shorting a stock requires a steely certainty that the company is either a. An unsustainable bubble, or b. Engaging in some kind of accounting deception. Patrick meets neither criteria. Do, I think Patrick could be heading down the road of making unwise acquisitions simply to paper over underlying weakness in the core business? It’s possible. Returns on capital have dwindled (see appendix) to the high single-digit levels. Is that the result of overpaying for some businesses, or simply the cyclical trough the industry faces? Hard to say, but I wouldn’t try to bet against management.

Right on cue, the RV industry received a jolt this morning with the release of a report by Hunterbrook Media accusing Winnebago (WGO) of selling defective RVs and a looming warranty crisis. PATK dropped about 3.5% on the news. It may be something. Or not.

Tripper: Important announcement – Some hunters have been seen in the woods near Piney Ridge trail and the fish and game commission has raised the legal kill limit on campers to three. So, if you’re hiking today, please wear something bright and keep low.

Appendix: Patrick Industries operating results 2017-2024 TTM to June 30 with associated returns on capital.

/by

It takes a soul to love the prairie

Are the Cornhuskers back? They seemed unstoppable in the first half. Fun times. The stadium was electric. The second half was a little underwhelming. I’m not so sure about the post-game field invasion by the students. Let’s hold off the pandemonium until we get some bigger wins under our belt. Despite all the flashy antics from the Sanders family, Colorado probably just wasn’t that good.

I rushed the field on a freezing November afternoon in 1991. We came from behind to beat Oklahoma. It was a Big 8 championship. In a testament to just how good our offensive lines were during the Osborne era, our quarterback on that day was neither Gill, Frazier, Crouch, nor Frost. Not even Gdowski. It was none other than the merely adequate Keithen McCant. Of course, he was backed in the I-formation by the Omaha Central grad, Calvin Jones. The future All-American 200-lb machine was only in his sophomore year.

Looking around Memorial Stadium, it is readily apparent that Nebraska is truly dependent upon agriculture. You can’t miss all those seed and insecticide banners among the flashing Dororthy Lynch signs. We tend to forget this in Omaha. We’re an ag state, but lately the state of ag isn’t so great. Corn at $4 a bushel won’t buy you much name, image and likeness recognition.

You might think that the ethanol business would be a good place right now. Reasonable gasoline prices and lower corn input costs should help the ethanol producers improve their margins. Unfortunately, Omaha’s Green Plains (GPRE) doesn’t seem to be heading in the right direction. The company is losing money and they are the subject of an activist investor campaign seeking to liquidate the business.

GPRE trades around book value; they’ve got some debt but it is mostly in the form of low-rate convertible notes. I think someone with better industry knowledge can decipher whether or not the stock is bargain at it’s nearly 52-week lows. It would have to be someone who can conduct a sum-of-the-parts valuation. I decided to not hurt my brain too much and search for a profitable ethanol producer instead.

REX American Resouces (REX) seems to be the kind of ethanol investment that makes sense. The Dayton, Ohio company has a market cap near $750 million and zero debt. They had nearly $350 million of cash on hand at the end of July, and they are currently plowing profits into a plant expansion. Sales run about $800 milion per year with gross profits approaching $100 million last year. Operating margins for the fiscal year ending Janaury 2024 were above 8%. I generally dislike businesses that rely on government mandates to sustain their operations, but with nearly 40% of all corn being grown for ethanol it seems unlikely that the program will ever be ended.

REX plans to spend $150 million to expand its One Earth facility in Illinois. At the end of January 2024, entities affiliated with REX shipped approximately 716 million gallons of ethanol over the preceding 12 month period, of which 290 million gallons can be attributed to the parent company. Most imporantly, REX is generating returns on capital in excess of 30%. The strong balance sheet allows the company a wide berth to weather another cyclical turn in the corn and energy markets. The stock is trading well below it’s highs from earlier this year. REX looks like an attractive investment.

Peakstone Realty Trust

I’m still gnawing away at my Peakstone Realty Trust (PKST) analysis. The company has a market cap of $500 million and currently yields slightly less than 7%. They have a marquis client roster with a focus on industrial warehouses, and (gasp) office space. Peakstone has about $1.4 billion of debt to go with $2.5 billion of (undepreciated) real estate, but most of the interest rates are capped in the 4.5% range. The weighted average life of remaining lease terms exceeds seven years, so there is a long runway here. The company has sold off some troubled office. This one’s not for the faint of heart, but if you had to make a bet on babies being thrown out with bathwater, you should consider PKST.

Total net operating income for the trailing twelve months was $191.8 million. I capitalized these amounts by sector using 6.5% for industrial, 7.5% for “other,” and 20% for office and arrived at an asset value of $1.73 billion. Subtract the debt and add the ample cash balance of $461 million, and the net asset value is nearly $800 million. The stock is selling for $13.70 and the assets seem to pencil at $21 a share. You might even call this a margin of safety.

These aren’t self-storage facilities in Hastings, people. We’re talking Amazon warehouses here. The office? You’ve got the Freeport McMoRan HQ building in Phoenix, for example. Class A stuff. Is there more downside in office? Maybe. Is a 20% cap rate something I just pulled out of the air? A little bit. Certainly, the next step is to evaluate the office portfolio on a building-by-building basis and decide what is a zero and what is valuable. There’s also this troubling notion of the market being fairly efficient most of the time, and 25 cents aren’t just lying around waiting to be picked up. But sometimes that quarter on the ground really is there for the taking.

/by

No country for old men

At the risk of sounding like Jimmy Carter, I felt a sense of malaise at this year’s commercial real estate summit. Last week, the Omaha conference reached its 35-year milestone under the guidance and creativity of the indefatigable attorney and developer, Jerry Slusky. Maybe it was the panel discussion that devolved into career counseling for young brokers by a grizzled veteran. Perhaps it was the lack of statistics on rental trends and square footage absorption, leading a developer to wanly muse about seeking out markets where “demand exceeds supply.” This revelation produced solemn nods and much chin-stroking from the pilgrims.

Lenders assured me that none of their loan books had the faintest whiff of distress, yet a panel on the subject implied otherwise. One general contractor told me that many of his clients in the southwestern portion of the US are going ahead with apartment projects “even though the numbers don’t work” because they know they are locking in today’s cost basis for the future. I had no response to this business plan. Using such logic, one could have made this justification to move forward on a real estate development at virtually any moment in the past 75 years.

It was the irascible Creighton economist Ernie Goss who brought out the wet blanket. I love an economist who is one-handed. There aren’t many. Dr. Goss gamely mixed John Maynard Keynes with Warren Zevon, befitting a professor who could pass for Bob Dylan’s cousin. Goss talked about the agricultural sector in gloomy tones. Corn at $4 a bushel is no bueno for Nebraska. His most sobering reminder was the chart showing that interest on the national debt now exceeds spending on national defense. No empires have survived this inflection point. All that Aztec bullion filled Spain’s coffers for two centuries before an overextended domain began to unravel in the late 1800’s. France sold its New World colonies to pay for Napoleon’s conquests. Lest one thinks such fate can’t befall the holder of the world’s reserve currency, it was Britain with her once-invincible pound sterling that was hobbled by two world wars and went cap-in-hand for an IMF bailout in 1976. George Soros heaped further ignominy on the beleaguered pound in 1992.

I can be prone to cynicism. It’s a blind spot, and an especially poor trait in a real estate developer where one’s raison d’etre is the rosy future. But I can’t help but feel there is a bit of the “end-of-the-Roman-Empire” feeling around. There’s bacchanalia galore with stock indexes hitting all time highs, private jets whisking families on vacation, the return of the Hummer, liquor lockers at private clubs, multiple country club memberships, CNBC masquerading as due diligence, billions of dollars in NIL money for college athletes, the de-facto legalization of THC and sports gambling, and Nebraska finally going all-in on it’s own casino gambling. Meanwhile, the low end of the income spectrum faces insurmountable home-ownership costs and pain in the grocery aisle. There are two wars being waged on the doorstep of NATO, a former president was nearly assassinated, and the current president all-but-admitted he was too senile to serve another term. And yet! And yet. What’s the VIX at? 100? Nope, try a benign 15.79. Credit continues to flow. Jerome Powell just declared victory. Game on.

You’re starting to ramble. Are you turning into an old man? Well, I don’t think of myself that way, but in actuarial terms the answer is unfortunately, “yes”. But there’s a place for old men. I’m not talking about ending up like Sheldon Levene in Glengarry Glen Ross. I’m envisioning Clint Eastwood here. Cigar and a Smith & Wesson. Let’s take another wise old Omaha guy I like – Warren Buffett. Berkshire Hathaway owns $235 billion of Treasury bills after significantly reducing holdings of Apple. Buffett may be old, but he’s not cynical. I can’t recall an annual meeting where the words “America’s best days lie ahead” weren’t uttered. However, in this instance, I prefer to watch what the man does, not what he says.

Dude, this is bumming me out, and your Hollywood references are beta. Let’s move along to that book you’re reading.

Ok. I’m about halfway through Nate Silver’s On the Edge: The Art of Risking Everything. It’s a fun read, but I think Silver could have used a better editor (pot, meet kettle). We follow his poker exploits, head down his sports betting rabbit-hole, take a tour of the venture capital industry, and then make an off-road excursion into the bizarre downfall of Sam Bankman-Fried. These are members of “The River,” Silver’s term for those who think in terms of probabilities and make wagers using their best estimates of positive expected value (EV). Yet, so much of what passes for rigorous evaluation of odds based on massive amounts of data often coalesces into little more than well-informed gut instincts. Silver seems to recognize this despite his continued attempts to explain most decisions in probabilistic terms. Take bluffing, for instance. Poker players smoke out a weak hand with a massive bet. Brute intimidation can often work better than the best statistical calculator. Venture capitalists are guilty of herd mentality and they have been conned by the likes of Adam Naumann and Elizabeth Holmes more often than they care to admit.

I am not a mathematician, and my knowledge of statistics is only good enough to read a Nassim Taleb book without a thesaurus. Nor am I a gambler. However, one character seems to be missing from Silver’s book – the 18th century Swiss mathematician Daniel Bernoulli. Silver relegates him to the footnotes. It was Bernoulli who first started to ask why people didn’t take certain bets, even though the probability might yield a positive expected value. Bernoulli figured out that the value of a bet was in direct proportion to the utility of the additional wealth to be gained. A rich man probably wouldn’t take long odds if it meant a major loss of capital, but a poor man has little to lose on a longshot. If you want a great discussion of Bernoulli and his role in finance, pick up The Missing Billionaires by Victor Haghani and James White.

Silver brushes right past Bernoulli’s revolutionary discovery. In a parenthetical aside, he writes “If you had a net worth of $1 million, would you gamble it all on a one-in-50 chance of winning $200 million and a 98 percent chance of having to start over from scratch? The EV of the bet is $3 million, but I probably wouldn’t.” Probably wouldn’t?!?! How about “no way”! Unless you are very young and have immense confidence that you can re-earn your million-dollar nest-egg, you’re not going to take that bet.

The marginal utility of wealth is critical to understanding the business wagers called “investments.” A venture capitalist on Sand Hill Road with $200 billion of assets under management will not agonize over staking $20 million on an AI-powered start-up that automates logistics in warehouses if it has a chance for asymmetrical upside returns. A solo investor with a net worth of $20 million would never take on such a venture alone, despite his or her immense personal wealth. Kahnemann and Tversky famously uncovered the psychology behind such thinking. Humans are risk averse. Most of the time expected pain of loss is greater than the appeal of a gain.

All of this talk of Bernoulli and wagering based on one’s wealth rather than simply the expected value of a bet reminds me of another Warren Buffett gem: When discussing the failure of Long-Term Capital Management which was headed by Nobel laureates and nearly brought markets to a standstill in 1998, Buffett remarked:

But to make money they didn’t have and didn’t need, they risked what they did have and did need. That is foolish. That is just plain foolish. It doesn’t make any difference what your IQ is. If you risk something that is important to you for something that is unimportant to you it just does not make any sense. I don’t care whether the odds are 100 to 1 that you succeed or 1000 to 1 that you succeed. If you hand me a gun with a million chambers in it, and there’s one bullet in a chamber and you said, “Put it up to your temple. How much do want to be paid to pull it once,” I’m not going to pull it. You can name any sum you want, but it doesn’t do anything for me on the upside and I think the downside is fairly clear. So I’m not interested in that kind of a game. Yet people do it financially without thinking about it very much.

I think we’ll leave it here for now. Coming soon… I have crunched some more numbers on Peakstone Realty Trust (PKST), and I think it trades at a 30% discount to it’s net asset value. You also get a 6% dividend while you wait. Elsewhere, Iron Mountain (IRM) seems to be infected with the same kind of data center hype that is artificially buoying the legacy data center stocks Digital Realty Trust (DLR) and Equinix (EQX) – companies that inflate their earnings by minimizing their depreciation and distorting operating cash flow by attributing far too much weight of capital expenditures to “growth” vs “maintenance”. Finally, I ran some numbers on Carnival Cruises (CCL) with the thesis that it would make a good short. It’s leveraged to the hilt. There were no COVID bailouts for cruise operators who are domiciled in tax-havens. Sorry, you can’t have it both ways. It seems I am wrong about CCL. Barring a major consumer slowdown (not entirely out of the question), the stock seems fairly valued. Until next time.

/by

The secret life of the gas station

I’ve read a lot of business books and I have to say that The Secret Life of Groceries now ranks in my top four. It’s right up there with Power Failure: The Rise and Fall of General Electric, Shoe Dog, and the Enron book by Bethany McLean, Smartest Guys in the Room. Benjamin Lorr spent over four years working alongside the army of the invisible who feed us every day. Lorr introduces readers to the groundbreaking approach of Trader Joe, but quickly descends into the harrowing world of industrial fishing where human slavery still exists. The indentured servitude faced by many long-haul truck drivers is only slightly more uplifting. You can learn about the battle for shelf space by following the journey of the unheralded condiment known as “Slawsa”, but your stomach will get queasy reading about everything from industrial chicken plants to the seafood counter at Whole Foods. The writing is masterful.

It’s probably time for a similar book on the convenience store industry. The growth of commercial roadside stores seems to encapsulate all that is right and wrong in our post-industrial society. The bright lights, shiny logos, ice-cold refrigerators, and elaborate coffee kiosks say much about our need for instant gratification, instant calories, and lack of time. Gleaming canopies with antiseptic white LEDs beckon drivers in need of gas for the automobile, but hydrocarbons are merely an appetizer. Fat margins are earned from products that mostly make you fat. What’s your addiction? The gas station can give you a quick fix. Candy, soft-drinks, alcohol, cigarettes, lottery tickets, caffeine and even pizza and brisket can be found in the widening world of convenience. Low-wage employees are surprisingly friendly. Or are those nervous smiles? Anyone heading through the door could turn out to be packing heat and looking for cash, or a strung out junkie searching for a place to sleep.

There’s a reason why Buffett fought hard for the Pilot truck stop empire with the Haslam family. The profits are staggering. (Note: a recent article in the Knoxville, Tennessee paper has a wonderful story on the Omaha son who reached the highest levels of business and now runs Pilot.) Have you seen the returns on capital for Casey’s? My, oh, my they are something to behold. When Casey’s bought Buchanan Energy and the associated Bucky’s chain for $580 million in 2020, I thought they were crazy. That’s an amazing amount of coin for 94 retail stores and 79 dealer locations. Guess what? Casey’s barely broke a sweat. Adding pizza to the stores was sheer genius. More margins. Pile ‘em on. My favorite convenience store owner? Alimentation Couche-Tard, the Quebec giant owner of Circle K and Couche-Tard. I just like saying the name. Buying your Zyns from a French depanneur seems tres exotique.

The chart on Casey’s looks like they sell graphics chips. Au contraire. Just potato chips.   

Casey’s is a $13 billion market cap company trading at nearly 28 times earnings. The stock is not cheap. CASY is the third biggest chain now with over 2,500 stores in 16 states. Adding $5 billion of market cap to a convenience store business in eight months seems a little excessive to me, but hey, when the stock market trades on vibes… you get Fireballs. Casey’s is based in the Des Moines suburb of Ankeny. Iowa is also home to the headquarters of Kum & Go (another store name that people love to say for some reason).

Not all parts of the automobile service world are going up and to the right like French pole-vaulter Anthony Ammirati. Take car washes. Somehow Omaha managed to go for thirty years with a bunch of sad little spinning brush machines at the back of gas stations. These soapy muppet tunnels were augmented by about three full-service “touchless” emporiums that faced varying degrees of near-insolvency. The VIP at 90th and Center wasn’t just a lounge back then, kids.

Now in 2024, there are car washes everywhere! Apparently, we’ve had it wrong for 30 years. Our cars have been in desperate need of more washing! Or at least that’s what the guys in private equity thought. Sign people up for a subscription model to get a car wash whenever they want in a gleaming new facility and your total addressable market is every car owner in existence. If I see one dirty car in Omaha from now on, well that’s just a damn shame. There’s no excuse. You want a car wash? The choices are endless.

I’m going to go out on a limb here with this prediction. There will be a lot of car washes for sale in about three years. Oh sure, some will be fabulous businesses. Dropping by Menards? Get a car wash. Stuck on Dodge St? Get a car wash. Huge amounts of fixed capital investments, low labor costs, a subscription model. Ka-ching. In fairness, the average age of a car is 12.6 years, so there is something to be said for people wishing to preserve their principal mode of transportation.

Well, if there’s one thing private equity is good at it’s finding a business model and beating the absolute sh*t out of it. Yes, there’s that competition problem: a lot of people with infinite amounts of cheap capital had the same idea. At the same time. Plus, did I mention huge fixed capital costs? That operating leverage cuts both ways. When volumes aren’t there, the losses pile up quickly – especially when there’s a lot of debt (and debt masquerading as leases). Oh, and the nice equipment requires expensive chemicals, expensive water, and breaks down eventually. So, you can see the risks. The only publicly traded car wash company, courtesy of an escape act from Leonard Green & Partners, is Mister Car Wash.

Despite the stock collapsing from an IPO debut of $20 per share in 2021, MCW still trades at a market capitalization of $2.43 billion. The company has $1.8 billion of debt and operating leases. Sales grew at a lackluster 5.77% in 2023 at the Tucson-based company, and operating income for the first six months of 2024 is basically flat compared with 2023, at $97.5 million.

The problem with Mister Car Wash is very apparent: It simply is not improving returns on capital and economies of scale. More locations in a saturated market are not a recipe for shareholder value creation. Should a car wash chain be selling at more than fifteen times EBITDA? Probably not.

/by

Old dollars

Rocco Schiavone is a chain-smoking police investigator who has been banished to the Valle D’aosta in the Italian Alps in the humorous and dark cop drama that bears his name. Early in the series, Rocco introduces us to his version of Dante’s hell. Murder is a “level 10 pain-in-the-ass”. Dealing with magistrates is at level 8. A closed tobacco shop is level 9. If Rocco owned apartment buildings, he’d probably list capital improvements on old buildings as a level 7.

We own and operate a collection of older buildings that were constructed in the late 1960’s and early 1970’s. Let me tell you something. They eat money. Sh*t breaks all the time. Literally. Air conditioners, pavement, carpets, decks, windows, appliances. Depreciation is real, my friends. Yes, it’s a lovely tax-deductible non-cash expense in the early days when a property is new. But as the depreciation wanes, you find yourself replacing capital items at a cost well in excess of the tax benefits.

This is the problem of old dollars. It’s even worse in an inflationary environment. If you have a parking lot that was built in 1990 for $20,000, you’ve got zero depreciation benefits today. It’s over. Now you need to replace the pavement. Guess what? It costs $35,000. The greatest inflation in 40 years in the pandemic boom made this problem so much worse. About $10,000 of that parking lot cost increase occurred in the span of four years. Four years! Maybe Rocco would elevate this to a 9.

Buffett lamented the pain of inflation when discussing Berkshire Hathaway’s BNSF railroad. He figured it would cost $500 billion to replicate the railroad today. Depreciation and amortization amounted to $2.5 billion in 2023. In 2024, the railroad announced a $3.9 billion improvement plan. Old dollars vs new dollars. Inflation destroys old dollars. Level 9 agony.

Therefore, a capital-intensive business that is not expending asset replacement dollars at levels significantly ABOVE current depreciation is probably under-investing in the year of our Lord, twenty twenty-four. Take Verizon (VZ). There are only three major wireless carriers in the US. The word “oligopoly” comes to mind. The dividend yield is so tempting at 6.6%. You might think that it’s the sort of holding widows and orphans should cling to for the quarterly stipend. Yet, you would be sorely mistaken.

Verizon doesn’t earn enough to cover it’s dividend when you take into account the immense investment needed to maintain a robust wireless network. Verizon is making capital expenditures that are roughly equivalent to depreciation charges. Four years ago, you might think this was a satisfactory situation. Today? They are behind the curve.

Verizon revenues have been flat for three years at $133 billion. Depreciation on a $307 billion asset base runs to roughly $17 billion per year. The market capitalization for VZ is $168.8 billion and the company has net debt of $148 billion. I think debt-holders will do just fine, but the equity holders will continue a slow grind into obscurity. The company can’t afford it’s hefty dividend of $11 billion per year, and if you account for investments in wireless licenses, the business is cashflow negative.

Defenders may argue that Verizon has been on a costly multi-year 5G network investment path that is about to wind down. I suspect not. If there’s one thing we know about bigger, stronger, faster technology demands, there will be a 6th, 7th and 8th generation waiting in the wings. I’m not even considering the ball-and-chains legacy land line business, pension fund requirements, and the whiff of litigation from aging lead-encased wires from the NYNEX days.

Capital expenditures amounted to $18.8 billion in 2023, so they are running about 7% higher than depreciation. What about inflation? If construction costs are 40% higher in four years and BNSF is spending 40% more, shouldn’t Verizon? The stock’s 30% decline since 2021 reflects a dwindling return on capital. Returns have declined from a healthy 12% in 2021 to just about 7.8% today. Let’s file Verizon in the value trap category. Avoid the siren song of that big dividend.

/by

Too Hard

I’m getting a little weary of Charlie Munger quotes, to be honest. Don’t get me wrong, there’s no question that we recently lost an intellectual giant and a man of high moral character. His investment acumen and the genius ability to cut straight to the heart of a matter was legendary. But I think the elevation of his aphorisms to a form of business gospel reduces our own capacity to think for ourselves. He was just a man. Mortal. It’s ok to have heroes, but it’s not safe to put them on pedestals.

I imagine Munger could be insufferable at times. A real crusty bastard. Did you ever see his dorm design for USC? He must have been a dynamo when he was earning his capital as a lawyer and real estate developer. You probably regretted getting in his way. He was unapologetic about his desire to be rich and I’m sure he never suffered fools gladly. Ah, but yes, at his core he was among the wisest of the wise. So, after a long-winded preface, here is my Charles Munger quote: “If something is too hard to do, we look for something that isn’t too hard to do.”

I’m filing Welltower in the “too hard” category. Welltower (WELL) is a $62 billion market cap REIT that owns senior living facilities and medical office buildings. WELL is also a bank of sorts. It lends money to developers of properties. It has JVs with a bunch of developers. Some of the assets are leased triple-net to operators, many are operated directly by Welltower. The company is also a prolific issuer of new stock and an expert at churning real estate. It’s head-spinning and hard to completely grasp. This is a company whose CEO, Shankh Mitra, quoted Jensen Huang in the annual report. I’m not saying that running real estate for old people doesn’t have much in common with NVDIA. Ah hell, who am I kidding? This is the vibes economy. Everything runs on NVDIA.

In fairness to Mr. Mitra, he also candidly told a 2023 audience, speaking of the industry, “On average, in the last 10 years we haven’t made any money for capital [providers].” The oversupply conditions of the middle part of the last decade were just beginning to recede when COVID hit. Now, prospects for better economics seem to finally be destined for senior housing operators due to the unfeasibility of new supply and the rapid aging of the boomer generation. The stock market seems to agree. The stock has run up 24% since the start of the year as occupancy and margins vaulted upwards.

Despite Mr. Mitra’s humility, there’s not much for me to like about the company as an investment. A REIT with a mixed collection of properties doesn’t deserve to trade at a higher multiple than apartment buildings, and certainly not better than medical office buildings. The demographic story has legs, I’ll grant you that. But you can say that about Skechers slip-ons or Hey Dudes.

I was first intrigued by Welltower late in 2022, when Hindenburg published a report questioning the absorption of some troubled JV assets. The short-seller specifically cast doubt upon the relationship with Integra Healthcare Properties. There was a lot of mystery about Integra. Hindenburg called it a phony transaction. Integra’s website is still just a collection of canned photos of smiling elderly folks with zero substance (at least they updated the copyright date to 2024!). Crickets from the market.

In my view, the only thing Welltower is guilty of is being exceptionally underwhelming. Welltower generated $6.4 billion in revenues during 2023. Property operating expenses absorbed 59% of revenues vs 52% of revenues in 2018. The industry sees itself getting back to pre-pandemic margins as staffing issues abate. I’m not so sure. States have ramped up calls for minimum staffing levels. The industry is also facing a lot of scrutiny about Medicare reimbursements. I don’t know enough about these challenges, so I can’t opine about the true risks to the company. I just know they exist.

What I can tell you is that I don’t think Welltower has much room to expand its distributions to shareholders above it’s current paltry yield of 2.35%. Once you deduct maintenance capital items from operating income and interest on over $15 billion of debt, there’s not much left.

No matter how many assets the company churns, the return on capital seems mired in the mid-single digits. The company has issued over $14.4 billion of stock since 2018, acquired $18 billion of assets during the period, while selling $9.9 billion. All this huffing and puffing hasn’t produced a formula that shows it can distribute increasing levels of cash to shareholders in a sustainable way. It is not unfair to say that some of the distributions are being funded with new equity. That’s not a great recipe. And for a CEO that says there aren’t many opportunities for new construction, the deal guys didn’t get the memo because Welltower had about $1 billion of construction in progress at the end of 2023.

Apparently, the market completely disagrees with me about the Welltower story. A 25% stock increase for a senior housing play is impressive. I am equally impressed that Welltower just raised over $1 billion of new debt at 3.25%. Is it pure debt? No, not for Welltower. It’s another dilutive offering. A convertible note due in 2029 that vests once the stock price rises 22.5%. I’m not sure who buys such debt when the five-year Treasury yield can be had for 4%, but it was probably a couple of fund managers who were feeling as frisky as Wilfred Brimley and Don Ameche in swim shorts.

So, I bid you adieu, Welltower. Low returns on capital, poor coverage on a low dividend yield, a churn of assets, acting like a loan shark, pumping new stock and forming a lot of unconsolidated JV’s… sounds like this one’s just too hard.

The easy column. I missed a fat pitch. I looked at it and didn’t have time to get my bat off my shoulder. It may not be too late, but I still need to dig deeper. Hat tip to Adam Block on social media who noticed Peakstone Realty Trust (PKST) was trading around $11 per share on July 10, giving the REIT a market cap of about $382 million. It sported a dividend yield north of 8%. Alas, it ran up 20% in two days. It still trades well below the $39 per share of last summer, so there may be juice left in the squeeze.

Peakstone had $436 million in cash at the end of March with a book value of real estate (excluding depreciation) in the neighborhood of $3.3 billion. Yes, there is debt of $1.4 billion. It costs Peakstone about 6.75% to finance the loans which roll over during the 2025-26 period. So, there’s loan renewal risk as well. But this is a pretty good portfolio of assets. The buildings consist of office and industrial space, but they’re mostly leased to single users with high credit such as Pepsi Bottling, Amazon and Maxar. Total square footage of the assets is 16.6 million. Net operating income for the quarter was $47.6 million. As far as I can tell, the market was essentially ascribing zero value to the assets at the beginning of last week. Even if you figure a monstrous 12% capitalization rate on an annualized run of quarterly NOI, there is adequate cushion above the debt. Seems like one to dig into. Easy? No. Simple to comprehend? Yes.

/by

Postive leverage

The Code of Hammurabi dates back to 1750 BC. These ancient laws contained the essence of the first banking contracts for managing loans. The farmer would borrow a bushel of seeds, reap the harvest, give the king about seven bushels of rye and keep three bushels for the family. In the modern parlance of Hammurabi’s descendant Jamiz ur-Dimon, a sound business endeavor earns positive leverage: the return on one’s capital investment should exceed the cost of borrowed money – the rate of interest. What happened if the loan required the farmer to pay back eleven bushels? It would probably end with the removal of a finger or three.  

Business in the front, party in the back

As crazy as things got during the pandemic boom, the basic premise of positive leverage remained intact. Purchases of apartment complexes yielding 4.5% bordered on insanity, but at least lending rates could be found in the 3% range. Now, we have entered a strange, new post-pandemic era. Buyers of apartments have reduced their purchase prices in order to earn a higher rate of return on their capital. Low 5% levels are the reported “capitalization rates” that many buyers are willing to pay. This sounds logical until one realizes that the cost of fixed rate debt today is about 6%. Watch your fingers.

Why would a buyer accept such a meager deal? Three reasons. One, they are willing to earn a return on their own equity that is below the cost of debt. This seems nonsensical. Very liquid low-risk alternatives abound in the form of humble T-bills or, say, Chevron stock with a 4.2% dividend yield. Two, some believe interest rates will decline in the future. There are signs that such joy awaits: The Fed seems poised to reduce rates as inflation slowly approaches the target 2% level.

The third reason takes the opposite tack. There is a belief that inflation will lift rents faster than expenses in future years, and negative leverage will pleasantly reverse itself. This theory has merit. The greatest supply of apartments since the 1970’s is about to come to an end. Construction costs and interest rates have risen so high, that most new developments are unfeasible. Home purchases are out of reach for most Americans. The incumbents have a long runway to raise rents once the period of apartment oversupply abates. This is the theory behind KKR’s purchase of Lennar’s multifamily portfolio.

Flared trousers are back in style.

Publicly traded apartment real estate investment trusts (REITs) benefit from a low cost of debt and continue to earn positive leverage. Unlike their private competitors who must grovel for 6% permanent loan rates and 7% construction loan costs, the REITs have healthy balance sheets and can borrow at 5%. Mid-American Apartment Communities (MAA) and AvalonBay (AVB) are two of the largest landlords, and they are projecting returns of 6.5% on their (much reduced) development pipeline.

Both firms locked in low-rate long-term financing during the pandemic. Even as notes mature, healthy balance sheets at MAA and AVB provide pricing power in the bond market. In early January, MAA raised $350 million of debt at 5.1% for ten years – just slightly above a 100 basis point spread to the Treasury note. Assuming their development yields hold to projections and leverage is in the 30% range, they should be able to drive returns on equity to low 7% levels. Not fantastic, but sufficient to sustain dividend yields in the 3%-4% range and grow values in line with the broader economy. Both companies reported record low levels of resident turnover as home purchases have become less affordable.

Not everything is rosy for the REITs. The apartment supply hangover has arrived to pandemic boomtowns like Dallas, Atlanta, Houston and Nashville. Indeed, both MAA and AVB offered some sobering news: rents on newly vacant units were trending negatively in the first quarter. MAA, focused primarily on sunbelt markets, posted a negative 6.5% new lease rate. AVB was closer to negative 0.5%. Fortunately, high resident retention and rent increases of 5% on renewal leases kept the top line growing at both companies. Neither of these stocks is cheap. Taking projected 2024 funds from operations (FFO) – the preferred measure of operating earnings for a publicly-traded REIT – AVB trades at an FFO yield of 5.35% and MAA trades at a 6.43% forward FFO yield.

Meanwhile Farmland Partners (FPI) presents the perils of negative leverage. FPI owns and manages farms (177,000 acres) and has a market capitalization of $553 million. FPI shares peaked at $15 in 2022 and sit at $11.50 today. The dividend yield is a paltry 2.09%. Corn prices have round-tripped during the past five years from $4 per bushel in 2019 to $8 per bushel in 2021, and back to around $4.25 today. Not even Russia’s invasion of one of the world’s top grain-producing nations was enough to sustain wheat prices much higher than $6 per bushel.

You and Whose Army? Corn prices since 2019, Source: Macrotrends

Given these daunting agricultural prices, FPI doesn’t offer shareholders much value. The company generated $57.5 million in revenues in 2023 and had $31.3 million of EBITDA. The company spent about $25.6 million on interest and divdends to preferred shareholders, leaving just $5.7 million for common shareholders. This diminutive profit is not sufficient to cover the common shareholder dividends of $12.2 million.

FPI has been selling land to cover its dividend, and really, this is probably the best path forward – sell assets, reduce debt and retrench for the future. The floor on the stock is probably the market value of the land. A swag number of $6,000 per acre means there may be well over $1 billion of land vs $480 million of debt and preferred stock.

Positive leverage feeds your family. Negative leverage only feeds the king.

/by

Totti, Totti, Totti

I remember watching the World Cup back in 2006. Italy won the tournament after Zinedine Zidane of France was sent off for headbutting Marco Materazzi in one of the most infamous moments modern football, er, soccer. The network must have thought Americans would get bored watching guys kick a ball around for 90 minutes, so they decided to scroll instant messages from worldwide fans across the bottom of the screen during several games.

Everyone remembers the headbutt and red card, but I remember a message on the screen. It was a Roma fan’s tribute to Italy’s beloved midfielder Francesco Totti that is forever etched in my memory. “Totti, Totti, Totti…We love him so much we name our dog Totti”. I don’t know what it was about this message of devotion to a piccolo cane italiano, but the little pooch earned a place in my heart. In my imagination, Totti is a gray Italian dachshund who loves to mangia soppressata. Oh Totti, ti amo.

I’m a day late. Already, my goal of therapy writing investment insights on a bi-weekly basis has gone the way of Monsieur Zidane – straight down the tunnel and into the locker room. But hey, rain or shine, we’re gonna walk Totti. Scrivi bene!

Who needs a meme when you can have a statue?

Before we get to the Totti of the matter, here’s a musical diversion that blew my mind. Seven Nation Army’s signature bass line is not from a bass guitar. It was actually played by Jack White on a Kay hollow-body guitar. According to Rick Beato, he used a DigiTech digital whammy pedal with the octave-down setting. Maybe I shouldn’t have been surprised. After all, Jack White is a masterful musician and the White Stripes were pretty much a drum/guitar duo. I never saw White Stripes live, so I had no reference point. Totti for you, my friend.

You like some Totti, you say? I think I have a couple of dividend ideas. Equity Commonwealth has a preferred yielding just below 6.5% and trades slightly less than the call price of $25. Equity Commonwealth was founded by the legendary Sam Zell to take advantage of commercial real estate bargains. Sadly, Zell passed away last year. Distress that he predicted in the industry was postponed due to all that pandemic juice. Present management sits on a cash pile of $2 billion and a handful of assets. They have said that if they can’t come up with a strategy to deploy the funds, they will wind down the business. The common is appealing, but the preferred is a fairly low risk way to park some cash.

A more adventurous dividend can be found in BCE, Inc. This is the old Canadian Bell. Like the AT&T of yore, it contains a lot of good (fiber optic and cellular networks, some tv networks), a lot of bad (legacy landlines, pension funds, debt), and some intangibles (37% of the Maple Leafs & Raptors, 20% of the Canadiens). The business is basically sound ($30 billion USD market cap) and the dividend is well-covered with a yield above 8.5%. The stock is down 50% since 2022 as government funds to boost the expansion of fiber optics networks were dialed back (pun for the boomers). They have curtailed capital expenditures and are laying off 9% of the workforce. I intend to do a deep dive on BCE because there may be some hidden value in a break-up and I like the positive Canadian demographic trend. I think you are adequately compensated for what is probably, at worst, a stagnant business. In a world of NVDA go up, 8.5% dividend checks sound like a snoozer but that’s where we be at. Vibes. 🔥

I took the Myers-Briggs test for the third time in my life yesterday. Wait for it. The first letter is an “I”. Shocking, I know. The rest of it actually was a surprise. I came in with an INTJ. Now, this made me well pleased. Uncle Warren is an INTJ. Zuckerberg, Musk? INTJ. F#%*ing Schwarzenegger is an INTJ! This is a small segment of the population. Rare air. Yes *silently pumps fist*.

I don’t recall exactly where I scored back when I took the M-B in my 20’s. I think it was INTP. Can’t remember. My Mom, a world-famous and passive-aggressive “I”, didn’t scrapbook those results. But this score contrasts sharply with my result from two years ago: INFP. I didn’t like that one. Too much feeling. Too many emotions. Now, it is true that some cool people are INFP’s. Creators. Bob Marley, John Lennon, Kurt Cobain, William Shakespeare, Johnny Depp. But not a lot of 4-star generals, Navy Seals, or NBA legends on that list. That’s probably not accurate. Dennis Rodman has got to be an INFP. You catch my drift here. Doris Kearns Goodwin isn’t pitching any biographies of INFPs to Penguin Classics. These are Oprah’s guests.

Questions naturally arise when you read the cast of characters. Did Arnold Schwarzenegger really sit for a Myers-Briggs exam? Did William Shakespeare truly prefer a quiet pub lunch with his mates to the crowded midsummer fayre? I am now on a search for the deeper meaning behind these two personality test results. INFP? INTJ? Who am I? Can I be both? Can I have Bob Marley’s soul and Zuckerberg’s bank account? It doesn’t work that way. Sorry. Or maybe it does? Maybe we are all coins with two sides? Janus with two faces. Jesters with two masks. Totti the man…Totti the dog.

/by