Value / Moat Analogy

Analogies are a great tool for communicating an idea. Below is an interesting letter comparing great businesses with competitive moats to Redwood Trees.

Book recommendations from article:

Titans – Biography of John D. Rockefeller

Chapters of My Life – Memoir of Frederick Taylor Gates, Advisor to Rockefeller


Click to access East-Coast-Q3-2014-Letter_-Grove-of-Titans.pdf


Click to access East-Coast-Q3-2014-Letter_-Grove-of-Titans.pdf

Click to access East-Coast-Q3-2014-Letter_-Grove-of-Titans.pdf

Click to access East-Coast-Q3-2014-Letter_-Grove-of-Titans.pdf

Click to access East-Coast-Q3-2014-Letter_-Grove-of-Titans.pdf

Value / Moat Analogy

CORR CorEnergy Infrastructure Trust (6.49)

CorEnergy is the first publicly listed REIT that focuses on energy infrastructure. The REIT invests in midstream and downstream energy assets that perform utility like functions. Examples are pipelines, storage terminals, transmission etc.

Recent presentation:

In a nutshell, the company is applying a carry trade, if return on assets > cost of capital then it should provide fairly steady returns. It is currently trading with ~8.5% dividend yield and ~10x FFO/Sh.

I found this idea through twitter by @TMFDeej and subsequently he tweeted this article from Seeking Alpha which does a very good job of summing up the position:

My summary is as follows:

1) Market valuation is depressed because it’s assuming volatility of the underlying tenants due to lower energy prices. The latest acquisition (GIGS) is owned by EXXI which has been struggling as of late.

Counter argument is that the assets are vital to the tenants and energy prices would have to be dramatically lower for tenants to cease operations. The author believes that number is around $20/bbl.

2) The author also assumes that the GIGS acquisition would be accretive and raise FFO to ~0.90/sh and therefore it is trading 7x FFO.

3) A risk the author does not go into is interest rate risk. This is a similar risk as my previous idea in IRT (which incidentally went down significantly after posting and I continue to like.) I did some looking around about performance of REITs in rising interest rate environments and found some interesting results:



Of further interest is in the comment section:

If you look at the trailing ten year total returns of the NAREIT All Equity REIT index since it’s inception in 1972, there has never been a period when the annualized total return has dropped below +5%, and it was only for a few months during the credit crisis. If i could communicate anything through our monthly write-ups, it would be that it is very difficult to lose money on high quality commercial real estate over a full cycle. The beauty of REITs is that they own increasing streams of cash flow with properties that tend to appreciate over the long term. Short term movements may create trading opportunities, but the long term thesis has worked historically, and i don’t see that changing anytime soon.

So in conclusion, this company is offering a very attractive dividend on assets that should provide stable to rising cash flow dependent upon the stability of the tenants. To be honest, I’m not sure how to validate the authors’ claim on EXXI and oil prices, but will be an interesting learning opportunity.

CORR CorEnergy Infrastructure Trust (6.49)

IRT – Independence Realty Trust (8.90)

Investing (as in life) is sometimes about timing. When I began writing this article, IRT was trading in the mid 8.50s and has subsequently rebounded to the high 8’s. Although still attractive for a LT holding if you agree with the thesis, I’ll cut short any in depth analysis for the sake of time…

IRT is an apartment REIT focusing on entry-level apartment housing in mid-market cities. If you think new entrants to the workforce and millennials will be forced to rent as opposed to buy then they are in the sweet spot. Personally, I don’t know any 20 somethings with enough saved for a 20% down payment and NYC housing affordability is a complete joke.

I don’t want to take up too much screen space as the investors presentation is fairly straightforward and easy to understand. The main website also includes a nice little map of the country with all the properties listed.

The important thing to consider is the stability of cash flow to finance the juicy 8% dividend yield (as of 5/7/15) and the distributions are paid monthly.

There is risk of further dilution as the company wants to expand by purchasing additional units. On May 4th, a number of FORM D registration statements have been filed for issuance of equity and the company sold off hard after missing earnings by a few pennies. I think Wall Street is worried about further dilution and the aggressive growth strategy by management.

Growth and equity issuance is OK as long as the capital is utilized properly. Something important to consider in the due diligence, one has to analyze their past transactions to gain confidence in management.

No matter what, with a REIT, interest rates are the bigger risk IMHO. I can only offer the opinion that interest rates won’t go too high as the economy is structurally weaker than it looks. You don’t have world wide QE on full tilt for show. Plus, sometimes real estate is a good hedge in case of inflation…sometimes. At least rents should rise alongside any potential inflationary scares?

Apologies for the brief write-up as I just want to get it out there, please feel free to ask any questions but to be honest, there is a pretty robust discussion on seekingalpha in the comments suggestion that I suggest anyone interested in the name to check out. The bottom line for me is good & steady yield in a thesis I like (lower end rental units diversified across the country)

IRT – Independence Realty Trust (8.90)

RDA Update

Well that was quick. Within days of my posting, RDA dropped over 5% and closed $16.60 today. To reiterate, the takeout price is $18.50. Quick stats:

Gross Spread: 11.4%

Annualized Return: 49.2%

Market Implied Probability: 30%

So what happened? The day before month end (important for people like me) there was an article from China stating the following:

Shanghai Pudong Science and Technology Investment (PDSTI) has obtained the National Development and Reform Commission’s (NDRC) extended approval of its proposed USD 15.5 per share takeover offer for RDA Microelectronics [NASDAQ: RDA], a source familiar with the situation told this news service. The NDRC has extended its preliminary approval to PDSTI for another six months, from 6 May to 6 November, the source added.

According to the new rules, Tsinghua still needs to obtain the NDRC’s preliminary approval for its offer for RDA.

PDSTI had initially made an offer at $15.50/sh for RDA and was trumped by Tsinghua Unigroup at $18.50. BOTH entities are known as state owned enterprises (SOE).

In China, it is customary (but not a defined rule) that any SOE bidding for a company receive preliminary approval from the NDRC in what’s known as a “road pass” The aim of the pass is to prevent bidding wars and driving up the cost for the Chinese state.

The stock is reacting as if NDRC will not approve Tsinghua’s bid and instead award PDSTI the company at $15.50/sh. This would obviously suck for any RDA shareholder.

This changes the equation in a very peculiar way. Previously it seemed from company filings that approval would not be an issue, there was no mention of a road pass, and with the new NDRC rules it seemed Tsinghua simply had to register the deal since it was < $1B and in a non-sensitive industry.

However! DealReporter had alluded to something similar in a January article here:

China’s National Development and Reform Commission (NDRC) is unlikely to grant Tsinghua Unigroup pre-clearance for its proposed bid for RDA Microelectronics [NASDAQ:RDA] prior to the expiry of an outstanding approval that was first given to rival bidder Shanghai Pudong Science and Technology Investment, a source close to NDRC told this news service.

The company issued a response to this article:

We have been maintaining close discussions with Tsinghua Unigroup regarding the regulatory approvals required to complete the Merger, and have provided Tsinghua Unigroup with assistance and information in such regard in compliance with the Merger Agreement. We and Tsinghua Unigroup will continue to cooperate with each other in obtaining the relevant approvals that are required for the consummation of the Merger. We also understand from Tsinghua Unigroup that it is on track to obtain the preclearance of the Merger from the National Development and Reform Commission of China.

In an amended agreement, the company offered RDA a $70MM break fee ($1.50/sh) and extension if approval was not granted:

Pursuant to Article 13 of the New Catalog, if no sensitive country/region or sensitive industry is concerned, overseas investment projects involving an investment amount between US$300 million and US$1 billion no longer require approval from the National Development and Reform Commission (the “NDRC“), but instead are only required to complete the registration with the NDRC. The NDRC is currently in the process of preparing the relevant implementation rules.

Given all this information and its current PX, if one were initiating a new position, the deal looks very attractive for the following reasons:

1) $1.10 downside for $1.90 upside. I think there is still a better then 30% chance of closing. Anyone new to the deal is getting very attractive pricing.

2) If the NDRC were to reject Tsinghua bid, this would be a huge embarrassment for deal making in the country. Especially in light of the changes in NDRC approval that were meant to create a more ‘business friendly’ environment. The difference in bids amounts to $150MM, hardly a sum that should matter for the PRC. Is it possible that they decide to make an example out of this deal? Absolutely, but it would definitely have an effect on all investors.

3) There is no precedence for disregarding a superior bid and accepting a lower one. In fact, a few deals in the past have involved counter bids without ‘road pass’ clearance:

Some examples indicate that multiple NDRC road passes are possible.

In early 2012, Chinese concrete pumping giant Sany Heavy Industry Co., Ltd obtained a NDRC road pass for the acquisition of German company Putzmeister only weeks after Sany’s biggest rival, Zoomlion, had received a road pass in connection with its own bid for Putzmeister. Sany – which was accused by Chinese press of not “playing by the rules” – gazumped Zoomlion by signing a binding agreement with Putzmeister before it had even obtained a NDRC road pass.

When asked to comment on the issue of road pass “exclusivity” in the context of the Sany/Putzmeister deal, an NDRC official was quoted as saying that it was “not necessarily the case” that a Chinese company should have exclusivity by virtue of a road pass.

Early stage outbound investment saw Shanghai Automotive Industry Corp (SAIC) trump China National Blue Star Corp’s bid for Korea’s Ssangyong in 2004, arguing SAIC alone had received approval to bid for Ssangyong. In 2012, unusually Beijing Enterprises Group intervened in Sinopec’s and ENN’s unsolicited joint bid for Hong Kong listed China Gas Holdings, increasing its stake and undermining the Sinopec/ENN bid.

4) There has been no official statement regarding anything from NDRC, Tsinghua, PDSTI, or RDA. Barring the DealReporter article, nothing has changed except the company is waiting for the May 8th deadline to register the deal. So you now have an important question, do you believe the DR ‘source’?

5) There has been chatter that NDRC had sent Tsinghua a letter criticizing the higher bid due to lack of ‘road pass’ however, similar to above, no party has come forward. If there was, why would this not be public knowledge? According to the paragraph below, Tsinghua could make a ‘rectification’ or take a penalty. So even if they did screw up, it doesn’t look like rejection is the natural outcome. It could very well have a simple solution.

The new rules provide that investors who undertake substantive work without a road pass, will be criticized by NDRC in a circular and ordered to make a rectification. Where violations are serious and may cause substantial damage to the interests of the State, NDRC can coordinate with other relevant departments to impose a penalty on that enterprise, and submit or refer the case to the competent authorities to investigate. It remains to be seen how such liability regime will operate in practice.

source (

Conclusion: We have a he said/she said game. There is no ‘official’ response or criticism, only media reports from an unnamed source. One that has been pushed by DR two times already. However it cannot be disregarded, and as it seems the deal is contingent upon some Chinese officials and lobbyists, etc. the edge has been greatly diminished then a few days ago. That said, the risk/reward of the stock looks to accurately reflect this risk and it doesn’t make sense to sell unless further news comes out.

Edit 5/9:

There has been a lot of activity. First PDSTI responded to RDA board:

This morning RDA responded to PDSTI:

It sure sounds like a pissed off shareholder dropping hints through their media contacts in order to get more for themselves. Sour grapes.

RDA Update

RDA Merger Arbitrage

RDA Microelectronics is a merger arbitrage opportunity with a very attractive spread. It was purchased in Nov of 2013 for $18.50 per ADR ($17.70 Last) :

The acquirer is Tsinghua Unigroup, which recently acquired SpreadTrum Communications, another profitable deal I discussed here.

The transaction is subject to approval by the shareholders of RDA, and antitrust and other regulatory approvals, and is not subject to any financing condition. The transaction is expected to close in the first half of 2014.

In December of 2013, RDA received Shareholder Approval: The final hurdle is approval from Chinese authorities. Similar to the SPRD deal, Tsinghua is a Government owned entity. Additionally, China has recently changed their approval process:

Since this deal is valued at $910MM, the company should be pursuing ‘registration’ as opposed to regulatory approval. This would make the process far simpler. The rules go into effect on May 8th so the company is likely waiting for this deadline to go ahead with registration.

In the meantime, the spread has widened out considerably. It currently offers a 4.2% GROSS spread and 14.7% annualized yield based on 90 day (3 months) closing. With a $15 break price, the market implied probability is only 80% which seems unusually low.

There has been some chatter in the media regarding some shareholders and employees being somewhat disappointed in the deal:

While employees may be upset due to cultural differences, it should not have an effect on approval IMHO as once registration is complete, so should the merger.


Merger Agreement:


Termination Fee: 450 RMB or about $72MM USD


RDA Merger Arbitrage

Greek Bank Updates

News flow in the past few days has been fast and furious. I’ll recap the highlights as best as possible:

1) Greenlight RE, run by David Einhorn, lists Alpha Bank as one it’s largest positions: As of 28-February-2014, the largest disclosed long positions in our investment portfolio are Alpha Bank A.E., Apple, gold, Marvell Technology, Micron Technology and Oil States International; our investment portfolio is approximately 118% long and 71% short.

2) Chatter of Piraeus Bank as well as Alpha returning to debt markets:

3) Alpha Bank released it’s earnings as well as a plan to raise 1.2B euros primarily to repurchase HFSF preference shares. While the headline reads dilution, the investment presentation seems to justify the action and may mitigate some of the dilution. The pref’s have a step up feature the longer they are outstanding as well as a conversion feature. Additionally it removes the dividend restriction for the future.

Pg 26
Pg 26
Pg 28
Pg 28
Pg 29
Pg 29

Click to access 2013_Q4_Financial_Report.pdf

4) TBV is stated as 0.68 euros per share, which is about in-line with last quarter.

5) In Q4 2013, our stock of NPLs decreased for the first time since the economic downturn in Greece, mainly due to increased remedial measures. As a result, our NPL ratio declined by 20bps in Q4 to 32.7%.

Click to access Deltio_Typou_20140310EN.pdf

6) For some general thoughts on investing in Greece, there is a nice repository of presentations, notable investors are Marathon, York, and FIG:

All in all it seems like some positive developments in the cap structure are coming. It is also encouraging to see the first decrease in NPL since the crisis as I believe this will likely be a driver of fundamentals. Unfortunately it seems the equity will be diluted but the amount is still uncertain and this is likely a LT positive as it removes the HFSF overhang. I will be interested to see if Greenlight or other international investors are involved in the offering.

Greek Bank Updates

ALBKY – Alpha Bank

This is a highly speculative play on the Greek banking sector. I don’t pretend to be an expert or even a novice at analyzing banks, let along European Banks, this thesis is more quantitative and based primarily on the length of the financial crisis and the historical precedence. It is best summed up in the following chart:




The financial distress in Greece is currently the longest running crisis in the sample. Additionally, there has been some positive momentum including upgrades from some of the rating agencies.

Stournaras Says Greece May Sell 5-Year Bonds in 2nd Half of 2014

Portugal Said to Hire Banks for Sale of Bond Due in 2019

I am currently long ALBKY common which trades OTC here in US and on the Athens Stock Exchange. 1 common in Athens equals 4 ADR’s in US. I have taken random samples and the pricing is fairly efficient. The reason for this is mainly leverage as the ADR trades for $0.25 currently. NBG is the obvious play and both will likely benefit. SAN is another interesting play on a European banking recovery.

As stated before, valuation is quite difficult. Not to mention accurate share counts as there has been large dilution as well as warrants and debt, all of which is probably outside my pay scale. I will make an attempt to understand these going forward and post any updates. However quickly, using a multiple of Price to Net Tangible Book Value, ALBKY trades at 1x, NBG at 1.8x, SAN at 1.6x

However, the Greek banking system, at least the survivors were forced to make acquisitions. Alpha Bank in particular was forced to purchase Emporiki Bank which leverages it’s fortunes on Turkey of all places. 

Interestingly enough, I have been quite impressed with the disclosures and investment presentations on these banks. I find them far better then many US companies.


ALBKY – Alpha Bank