Good quick presentation on asset allocation, TeleDyne, and stock buybacks
https://beowulfcap.files.wordpress.com/2015/07/capital-allocation.pdf
From @beowulfcapital
Value
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: http://files.shareholder.com/downloads/AMDA-12151O/328302052x0x834426/F0365A62-CE81-4781-9ECC-855E16B22E6D/REITweek_Presentation_6-10-2015_Final_2_.pdf
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:
Source: http://seekingalpha.com/article/3047506-reality-check-on-reits-and-rising-rates
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.
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.
http://investors.irtreit.com/Cache/1001196690.PDF?Y=&O=PDF&D=&FID=1001196690&T=&IID=4235858
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)
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.
http://www.greenlightre.ky/FinancialInformation/InvestmentReturns.aspx
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.
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:
http://forums.capitallink.com/greece/2013/
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.
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.
2013 Review
A very quick review of the ideas presented on this blog:
RiskArb –
All deals presented closed thankfully. Deals include DELL, NXY, and SPRD
Value –
GCOM was eventually taken over
ATNY is about unchanged and still bullish
BPY has been a very poor performer but still bullish based on discount to Book Value.
GCOM Offer $14.15/sh
Apologies for the delay in posting, I have been busy managing the many headaches in existing positions. GCOM was eventually purchased for $14.15/sh which on first look seems like the low end pushed by activist investors. The original thesis is here. The Yahoo summary page is already inundated with lawsuits from shareholders and I think there is a small possibility of a bump in the offer.
http://finance.yahoo.com/news/wasserstein-co-acquire-globecomm-systems-131500297.html
BPY updates
BPY quickly sold off upon posting the idea, along with other REIT’s and interest rate sensitive stocks. The current price (21.50) now reflects a 4.65% yield (which management forecasts to grow at 3-5% annually) and an updated BV multiple of 0.88x . Wells Fargo had a note on parent BAM dated 4/4/13 which calculated the BV based on current market prices of the components of BPY. At that valuation date the price of BPY was 23.95. Even after this spectacular sell off we have seen in the space, BPY continues to get cheaper.
Perhaps one of the criticism of BPY as explained in the Wells Fargo note, is the rationale for owning this entity versus the component entities (GGP, BPO, RSE) While the current value is simply the sum of these components, the management presentation states that BPY will allow retail investors access to the strategic real estate transactions such as investments in Canary Wharf. More importantly, Brookfield had taken advantage of the depressed real estate prices in 2008 & 2009 and have “built in” growth via increases in rent from the excellent prices they were able to offer to initial tenants. See Pg 19 & 20 of Investor Presentation.
I believe that once the market realizes that this entity has delivered 16% per year returns for investors, with some of the other spinoffs performing even better, that the discount to book value will become a premium. The worst case scenario is it may take a few deals under the belt to get investors comfortable.
Speaking of worst case scenarios, the recent spike in interest rates and volatility is unfortunate as it makes investments in REIT’s less attractive to safer bonds. This is a very valid argument and a development that needs to be watched closely, but not only for this investment, but for all stocks. I can’t predict exactly with any accuracy the direction of interest rates, my only contributions are anecdotal evidence that the Real Estate market in the North East remains quite hot and I would think that any turn in the underlying fundamentals of Real Estate would take awhile to show in asset prices. That said, a pair trade with IYR or another REIT or even short bonds would probably make sense.
BPY Brookfield Property Partners
Brookfield Property Partners (BPY) is a recent spinoff from Brookfield Asset Management (BAM). The investors presentation outlines the company and the investment thesis quite well. In my research I came across an excellent writeup that is far better written and researched then I could possibly write, I encourage you to read it:
Here is the simplified thesis: BPY currently trades at 0.91 Book Value, this compares with the following (BAM – 1.52x, BIP – 1.54x, GGP – 2.5x) If BPY trades at 1.25x the stock could appreciate 36%. It currently aims to pay out a 4% yield while you wait. Management has some forecasts for growth in the book value:
Despite the company being a spinoff, it is in essence the exact same company and management as the original BAM. This includes the excellent long term track record and ~15% annualized returns they have been able to deliver over the years. Once again I encourage you to read the blog link as it does a far superior and thorough job explaining the company. The major risks are interest rate risk and of course property prices and the overall economic environment, which are typical risks of any equity investment. The bottom line is this represents a low risk, high reward investment with an excellent yield.
ATNY (API Technologies) Update
An update to the last post on API Technologies, the company recently sold a division for $51MM in proceeds to a strategic buyer. The proceeds of which will be used to pay down debt, the division accounted for $26.2MM in revenues. The press release is here.
Some quick math, the company currently has $185MM in debt at 11% interest (very high!) which results in ~$20.3MM in interest payments per year. A reduction of 51MM would equate to 14.75MM in interest or a savings of $5.5MM per year.
The companies EBITDA margin: 39.6 (FY12) / 280MM = 14%
Subtract Revs lost from sale and recalculate expected EBITDA = 254 * 14% = $35.5MM EBITDA
Adjusted EV = 332 – 45 = $287MM (assumes 45MM used to repay debt)
287 / 35.5 = 8x EV / EBITDA
The sale of a business decision seems contrary to the vision of an electronic component supermarket at first glance however the buyer seems to be more focused on sensors and measurements. In the press release the CEO stated that it is focusing on the RF components so this could very well fit into the vision. And 51MM seems like a decent deal, 2x sales and 6x EBITDA for the division. Reducing the debt load is also VERY important given the extremely high interest rate currently charged.
It seems the business is now in the process of being cleaned up but it could take a few quarters before we start to see positive EPS and a profit. The recent quarter still included large one time charges that hopefully we won’t see going forward.
Value Cap Trader 