Cursory Glance At Multifamily Shows I’m Still Right

I’ve been right about multifamily since 2011. A certain cadre of analysts I love to hate on have been wrong for the same timeframe.

I’m not going to get into a detailed breakdown of the argument or the recent numbers that came out. But I will give you a very brief, very definitive explanation for why I am and will remain in a winning position, invested in the likes of AEC and MAA, and that will do.

Multifamily occupancy is at 95%+. Multifamily occupancy has remained at 95%+ for years. Multifamily occupancy will continue to remain at 95%+ for years yet to come.

Very much to the contrary of what certain professional analysts would like you to believe, this was not “obvious, mainstream knowledge” which “everyone totally saw coming”. Moreover, it certainly is not “irrelevant” or “priced in”.

Apartment occupancy through the 80′s was averaging in the mid 80% range. In the 90′s (interestingly enough) it expanded to the low 90% range. It was not until the boom (and subsequent bust years) of the 2000 bubble era that this present level of 95% was even challenged. Perhaps companies were caught underbuilding inventory. Perhaps they just got good and filling space. I don’t know.

As the housing market took off in those early 2000 years, that occupancy level began to subside and many analysts began calling for a return to the 80′s (in occupancy terms, by way of a deathspiral in demand for apartments). In tow with this expectation, multifamily CEO’s began repositioning their businesses for less renters, less lease space. Apartment demand was dead, we were told.

Except that it wasn’t. In an effort to absorb the shock from fewer renters year over year, multifamily new development was virtually nonexistent for half a decade. Yet, as you all know, the actual result was very much the opposite. A colossal failure of housing ensued, and demand for multifamily apartments has risen dramatically.

Every new building that gets brought online is hitting 95% occupancy virtually overnight. The demand is so hot, companies like AEC and MAA can’t build fast enough.

I want you to take a minute to look at AEC’s acquisition and development budget. Look at MAA’s next.

This is, as one might say, “kind of a big deal.”

These companies are cheap; they don’t have much premium baked in. You can pick them up and pocket 5% dividends for years, while you wait for their stock price to go on a nice little 30-40% run, no problem. Look back, find you’ve averaged 10% annually, call it a decade.

Sure, eventually the cycle will run it’s course and the stocks will take a hit on overdevelopment. But how much money do I stand to make in the meantime?

On HCLP and Secondary Offerings In General

Following the glory of obscene growth potential yesterday – in the form of long term supply agreement amendments being announced – HCLP followed up by declaring a secondary offering. After hours and to the open, the price was off 5%.

I cannot in good conscience sit by and allow this to pass unaddressed. For you see, many of you have a very cliche, knee jerk opinion of companies raising money, which I have commented on before now.

Why is this? What is it about secondary offerings that you hate so much?

Myth One: They’re Dilutive

There is a major opinion in markets, unquestionably, that secondary share offerings inherently ruin the performance for existing shareholders.

The logic goes something like this – ahem – “ABC makes $100,000 per quarter, with 1 million shares outstanding, and I earn $0.10 a share. If they issue another 100,000 shares then I only make $0.091!”

Let’s just quickly break down this scenario and why it’s wrong.

First off, if a company sells shares, they take money onto their balance sheet. Especially right now, where new shares are routinely sold at prices FAR beyond their worth, the new cash on the balance sheet more than overcompensates for the loss of earnings, at least in the short term. If my company is selling stock at 20-30X earnings, it’s sort of a buffer to that dilution fear, isn’t it? Actually, lots of secondary offerings immediately make money for existing shareholders.

I only clearly lose if management is somehow selling stock for less than it’s worth; in which case they will most likely be sued up a tree. If they’re selling it at par, for fair value, then by definition it’s a wash (fair value including some form of discount for future earnings potential).

And then there’s the biggest question: what is management planning on doing with the money? Are they squirreling it away in non-marketable warehouses they plan on building, perhaps somewhere in Antartica? Or are they, like most businesses, trying to grow? And what is the potential of that growth? If opportunities that attract that new money have higher earnings per share than existing net operations, then all prior shares in existence will have benefited from the new equity.

Claim: whether or not a secondary offering is dilutive depends very much on what management is going to do with the money.

Myth Two: Debt Is Always A More Effective Way To Finance A Company

There’s another specious tidbit circling business community colleges. “So you have an opportunity to pursue; equity or bonds? Well offering bonds to finance the job will always have a bigger payoff for shareholders.”

Again, I find this claim to be wanting. The argument is weak from the onset. But please first note what I am not about to argue. I am not arguing that this claim is always false. But it is clearly also not always true.

If I raise money on a project, at best existing shareholders will be able to make a return above both the principle of the notes and the interest you owe on the bonds.

How is this that different from raising new money?

To start, the principle of the bond corresponds to the price per share of the equity raise. Turning these two objects over, we can see that, at least in our present environment, new shares being sold for more than they’re worth, from one perspective secondary offerings have a superior element to them for existing shareholders – existing shareholders can actually make money off the transaction (see above).

If my company issues debt, how have I benefited besides through “future possible earnings”? I cannot make money on the transaction. By nature of issuing a bond, every cent will need to be repaid (or else carry severe implications for myself as a shareholder). I personally have not directly benefited.

If my company issues stock at a big mark up – like they can right now – as a shareholder I have probably made money. New shares in a healthy market add more to the balance sheet than the new money receives in return.

After turning over the principle/equity issue, now let’s look at the dilution. Well, surely dilution corresponds to the interest on the bonds, does it not?

Where do you suppose interest gets paid? From the Ether? It comes directly from existing operations. If you’re lucky, the new/expanded business venture management is pursuing earns enough to offset both the principle of the bond and the interest and you, as a shareholder, make money on top. Otherwise, it’s a drag on earnings and…you guessed it – dilutive.

Now it could be parsed over here that debt’s return is finitely, contractually limited, so if a company raises debt to finance a project and that project has a fat payoff, then equity will always get more than in the alternative world where the project was financed through a secondary.

While this is technically true when peered at through the very narrow lens of a profitable, big payoff growth story, it overlooks two important points of view. The first is that 1) the game changes completely if a project does not make money, in which case the equity raise if vastly superior to the debt issuance (since the new equity will have diluted the loss for existing shareholders) whereas the debt, being a higher claim than stock, will compound the losses. The second being 2) a company can always just raise debt after a secondary (or vise versa) – and frequently many of the impacts of either a secondary or a debt issuance can be reversed or even transformed in the other direction (market prices permitting).

Claim: whether or not debt is superior to secondary offerings depends very much on a case by case basis for a company. Current debt levels, the possible payoff of the business growth, downside risks, interest rates, and market premiums for secondary must all be carefully considered. This business rule of thumb is overly simplistic.

Beware Billionaires Pushing Leverage

I couldn’t just let this stand unchallenged. Sometimes debt is the answer, but other times it’s best to just issue some more equity. It isn’t fair to turn the choice into a bumper sticker that management has to adamantly follow.

And so often, raising debt is exactly the wrong answer.

Some of the biggest pushers of corporate debt are so often big activist shareholders with goals ill-aligned with the regular mom and pop retirement accounts; people looking for a quick buck and possessing dubious intentions. Guys like Dan Gilbert in Detroit who are just too happy to fuck over an entire company of hardworking employee shareholders in a start up tech advertising company, then leave them holding nothing (and subsequently being supported by Michigan’s Supreme Court…cough cough). (For the record, that had nothing to do with debt, I just felt like spelling out what a piece of shit Dan Gilbert is).

It’s a long standing favorite of activist shareholders to take a big position in a lackluster company with low leverage, then pressure them to take on as much debt as possible, fling it around on the balance sheet to beat some poorly defined analyst metrics and make an illusion of growth, spice it up into a popular position, then unload the company for a fast gain on multiples expansion.

The only way it gets better for the hedge fund guys is if they can pay out as much of that leverage to themselves, either in special dividends, or – better – by bullying management into buying their private assets at a premium (you don’t have to share with anyone else that way).

At the end of the road, you have a lackluster and profitable company transformed into a glitzy and unprofitable one. That isn’t growing a business; it’s liquidating one.

It’s all fun and glam right now, with interest rates so low. However, as debt needs to get turned over next decade, we’ll get to see who was actually working for their company versus who was trying to rob it.

It All Comes Down To Trust And Timing

Do you trust your management, or don’t you? Secondary offerings and debt issuance can both go bad if the mood is right. What is the money being used for and what are the risks?

Is the company pulling a lot of strange moves on their filings? Are the cash flows pages telling the story of a company that isn’t actually taking in more cash, despite a great “growth” story? Are classes of shares being thrown around like a bowl of alphabet soup?

And what are prospects of the business looking like? Is demand for products growing? Does the company have more business than they can possibly service? At the end of the day, this is likely to be the biggest factor in the success or failure of any business. Debt versus secondary offering will probably play a backseat, if management is working as a proper fiduciary in a hot business cycle.

Update: I purchased more shares of HCLP for $62.47

I’m A Seller Into This Rally

The market is running and I have made much profit. My gains this year stand respectably north of 15% with the summer closing behind us.

HCLP is back to announcing omnipotent re-pricing and supply extensions. Natural gas continues to see robust expansion to the glory of BAS and ETP. CCJ defies the uranium market. AEC and MAA are riding a multifamily wave that almost no housing analysts foresaw. And the coal market is stealthily shoring up BUT and NRP, with fundamentals that will catch the mainstream opinion off guard. Even the silver market has held onto some pittance of gains this year.

To be sure, the past 18 months have been a glorious time to be alive.

But that will all end soon enough.

It is not just any specific prophesy of doom I’m latching onto here. For the most part, we’ve seen the ability of markets to price out specific events. But I have gone back through every stock market crash since the establishment of the Federal Reserve, and what I have seen (albeit with what little data is available) is a left skewed distribution of such frequency that makes me think the chances of our current state of affairs casually drifting past the 7 year mark without recidivism are…poor.

So I will raise cash going into Fall (as I have several times in the past). And knowing that if I am wrong, there will be plenty of time to make yet more money.

Speak Of The Devil And He Shall Amend HCLP’s Supply Agreements

Cain Hammond Thaler, 10:41 pm last night:

Even here I am a long term holder of HCLP; I think we see it go on a hundred dollar roll at least by the end of next year. A lot depends on if supply agreement announcements keep coming.

Thomson Reuters, this morning:

Houston, Texas – August 11, 2014 – Hi-Crush Partners LP (HCLP), or Hi-Crush, today announced the entry into an amendment to its supply agreement with Weatherford. The amendment increases the annual committed volumes under the supply agreement on certain grades of frac sand. In the supply arrangement, Weatherford agreed to pay a specified price for a specified minimum volume of frac sand each month.

“We are pleased that Weatherford has chosen, once again, to expand our relationship by entering into this amendment,” said James M. Whipkey, Co-Chief Executive Officer of Hi-Crush. “Weatherford`s increased commitment for volumes further underscores the demand for Hi-Crush sand as we bring on new production capacity this year.”

Suffice to say, it’s going to be a coke filled second half of the year for HCLP. My straw is ready and I smell $80 on the horizon.

HCLP is going higher.

Trade: Sold Shares Of CCJ Bought On 8/1, Retaining Core

On August 1, anticipating a looming bounce off of oversold levels, I bought some extra shares of CCJ for $19.30. I sold those for a small loss today for $19.10.

Just adding back cash – the market feels terrible and the extra cream to my position was supposed to be all about easy money.

This Market Is A Real Bummer

One of my newest positions, ETP, co-reported earnings (alongside ETE, a familial body) that rose 50% year over year, soundly crushing estimates. The partnership is putting out almost 7% in distributions annually and distributable cash flow lifted 11%.

The partnership is modestly priced and more than a fair buy here. The only conceivable issue in the report I saw was that they’re paying out a little more in distributions than they take it, at the moment (and not for long if this kind of growth keeps up). And a little over a month ago ETP announced plans to build a new pipeline from the figurative gold mines in the Bakken region in North Dakota to their existing distribution network in Illinois…and the new capacity is allegedly already filled.

So following what can only be described as a stunning performance, the market is roundly bidding up units of ETP, correct?

WRONG

ETP has given back all the morning ramp following the exciting earnings beat, and ETP is now struggling to hold just half a percent gain on the day.

That’s just the kind of market we have right now. You can hear the oxygen rushing out of the trading floor. I have a couple similar positions that have all left analyst estimates in the dust (mostly after having already been revised higher), and yet they just can’t catch a bid.

Cursory Glance At Multifamily Shows I’m Still Right

I’ve been right about multifamily since 2011. A certain cadre of analysts I love to hate on have been wrong for the same timeframe.

I’m not going to get into a detailed breakdown of the argument or the recent numbers that came out. But I will give you a very brief, very definitive explanation for why I am and will remain in a winning position, invested in the likes of AEC and MAA, and that will do.

Multifamily occupancy is at 95%+. Multifamily occupancy has remained at 95%+ for years. Multifamily occupancy will continue to remain at 95%+ for years yet to come.

Very much to the contrary of what certain professional analysts would like you to believe, this was not “obvious, mainstream knowledge” which “everyone totally saw coming”. Moreover, it certainly is not “irrelevant” or “priced in”.

Apartment occupancy through the 80′s was averaging in the mid 80% range. In the 90′s (interestingly enough) it expanded to the low 90% range. It was not until the boom (and subsequent bust years) of the 2000 bubble era that this present level of 95% was even challenged. Perhaps companies were caught underbuilding inventory. Perhaps they just got good and filling space. I don’t know.

As the housing market took off in those early 2000 years, that occupancy level began to subside and many analysts began calling for a return to the 80′s (in occupancy terms, by way of a deathspiral in demand for apartments). In tow with this expectation, multifamily CEO’s began repositioning their businesses for less renters, less lease space. Apartment demand was dead, we were told.

Except that it wasn’t. In an effort to absorb the shock from fewer renters year over year, multifamily new development was virtually nonexistent for half a decade. Yet, as you all know, the actual result was very much the opposite. A colossal failure of housing ensued, and demand for multifamily apartments has risen dramatically.

Every new building that gets brought online is hitting 95% occupancy virtually overnight. The demand is so hot, companies like AEC and MAA can’t build fast enough.

I want you to take a minute to look at AEC’s acquisition and development budget. Look at MAA’s next.

This is, as one might say, “kind of a big deal.”

These companies are cheap; they don’t have much premium baked in. You can pick them up and pocket 5% dividends for years, while you wait for their stock price to go on a nice little 30-40% run, no problem. Look back, find you’ve averaged 10% annually, call it a decade.

Sure, eventually the cycle will run it’s course and the stocks will take a hit on overdevelopment. But how much money do I stand to make in the meantime?

On HCLP and Secondary Offerings In General

Following the glory of obscene growth potential yesterday – in the form of long term supply agreement amendments being announced – HCLP followed up by declaring a secondary offering. After hours and to the open, the price was off 5%.

I cannot in good conscience sit by and allow this to pass unaddressed. For you see, many of you have a very cliche, knee jerk opinion of companies raising money, which I have commented on before now.

Why is this? What is it about secondary offerings that you hate so much?

Myth One: They’re Dilutive

There is a major opinion in markets, unquestionably, that secondary share offerings inherently ruin the performance for existing shareholders.

The logic goes something like this – ahem – “ABC makes $100,000 per quarter, with 1 million shares outstanding, and I earn $0.10 a share. If they issue another 100,000 shares then I only make $0.091!”

Let’s just quickly break down this scenario and why it’s wrong.

First off, if a company sells shares, they take money onto their balance sheet. Especially right now, where new shares are routinely sold at prices FAR beyond their worth, the new cash on the balance sheet more than overcompensates for the loss of earnings, at least in the short term. If my company is selling stock at 20-30X earnings, it’s sort of a buffer to that dilution fear, isn’t it? Actually, lots of secondary offerings immediately make money for existing shareholders.

I only clearly lose if management is somehow selling stock for less than it’s worth; in which case they will most likely be sued up a tree. If they’re selling it at par, for fair value, then by definition it’s a wash (fair value including some form of discount for future earnings potential).

And then there’s the biggest question: what is management planning on doing with the money? Are they squirreling it away in non-marketable warehouses they plan on building, perhaps somewhere in Antartica? Or are they, like most businesses, trying to grow? And what is the potential of that growth? If opportunities that attract that new money have higher earnings per share than existing net operations, then all prior shares in existence will have benefited from the new equity.

Claim: whether or not a secondary offering is dilutive depends very much on what management is going to do with the money.

Myth Two: Debt Is Always A More Effective Way To Finance A Company

There’s another specious tidbit circling business community colleges. “So you have an opportunity to pursue; equity or bonds? Well offering bonds to finance the job will always have a bigger payoff for shareholders.”

Again, I find this claim to be wanting. The argument is weak from the onset. But please first note what I am not about to argue. I am not arguing that this claim is always false. But it is clearly also not always true.

If I raise money on a project, at best existing shareholders will be able to make a return above both the principle of the notes and the interest you owe on the bonds.

How is this that different from raising new money?

To start, the principle of the bond corresponds to the price per share of the equity raise. Turning these two objects over, we can see that, at least in our present environment, new shares being sold for more than they’re worth, from one perspective secondary offerings have a superior element to them for existing shareholders – existing shareholders can actually make money off the transaction (see above).

If my company issues debt, how have I benefited besides through “future possible earnings”? I cannot make money on the transaction. By nature of issuing a bond, every cent will need to be repaid (or else carry severe implications for myself as a shareholder). I personally have not directly benefited.

If my company issues stock at a big mark up – like they can right now – as a shareholder I have probably made money. New shares in a healthy market add more to the balance sheet than the new money receives in return.

After turning over the principle/equity issue, now let’s look at the dilution. Well, surely dilution corresponds to the interest on the bonds, does it not?

Where do you suppose interest gets paid? From the Ether? It comes directly from existing operations. If you’re lucky, the new/expanded business venture management is pursuing earns enough to offset both the principle of the bond and the interest and you, as a shareholder, make money on top. Otherwise, it’s a drag on earnings and…you guessed it – dilutive.

Now it could be parsed over here that debt’s return is finitely, contractually limited, so if a company raises debt to finance a project and that project has a fat payoff, then equity will always get more than in the alternative world where the project was financed through a secondary.

While this is technically true when peered at through the very narrow lens of a profitable, big payoff growth story, it overlooks two important points of view. The first is that 1) the game changes completely if a project does not make money, in which case the equity raise if vastly superior to the debt issuance (since the new equity will have diluted the loss for existing shareholders) whereas the debt, being a higher claim than stock, will compound the losses. The second being 2) a company can always just raise debt after a secondary (or vise versa) – and frequently many of the impacts of either a secondary or a debt issuance can be reversed or even transformed in the other direction (market prices permitting).

Claim: whether or not debt is superior to secondary offerings depends very much on a case by case basis for a company. Current debt levels, the possible payoff of the business growth, downside risks, interest rates, and market premiums for secondary must all be carefully considered. This business rule of thumb is overly simplistic.

Beware Billionaires Pushing Leverage

I couldn’t just let this stand unchallenged. Sometimes debt is the answer, but other times it’s best to just issue some more equity. It isn’t fair to turn the choice into a bumper sticker that management has to adamantly follow.

And so often, raising debt is exactly the wrong answer.

Some of the biggest pushers of corporate debt are so often big activist shareholders with goals ill-aligned with the regular mom and pop retirement accounts; people looking for a quick buck and possessing dubious intentions. Guys like Dan Gilbert in Detroit who are just too happy to fuck over an entire company of hardworking employee shareholders in a start up tech advertising company, then leave them holding nothing (and subsequently being supported by Michigan’s Supreme Court…cough cough). (For the record, that had nothing to do with debt, I just felt like spelling out what a piece of shit Dan Gilbert is).

It’s a long standing favorite of activist shareholders to take a big position in a lackluster company with low leverage, then pressure them to take on as much debt as possible, fling it around on the balance sheet to beat some poorly defined analyst metrics and make an illusion of growth, spice it up into a popular position, then unload the company for a fast gain on multiples expansion.

The only way it gets better for the hedge fund guys is if they can pay out as much of that leverage to themselves, either in special dividends, or – better – by bullying management into buying their private assets at a premium (you don’t have to share with anyone else that way).

At the end of the road, you have a lackluster and profitable company transformed into a glitzy and unprofitable one. That isn’t growing a business; it’s liquidating one.

It’s all fun and glam right now, with interest rates so low. However, as debt needs to get turned over next decade, we’ll get to see who was actually working for their company versus who was trying to rob it.

It All Comes Down To Trust And Timing

Do you trust your management, or don’t you? Secondary offerings and debt issuance can both go bad if the mood is right. What is the money being used for and what are the risks?

Is the company pulling a lot of strange moves on their filings? Are the cash flows pages telling the story of a company that isn’t actually taking in more cash, despite a great “growth” story? Are classes of shares being thrown around like a bowl of alphabet soup?

And what are prospects of the business looking like? Is demand for products growing? Does the company have more business than they can possibly service? At the end of the day, this is likely to be the biggest factor in the success or failure of any business. Debt versus secondary offering will probably play a backseat, if management is working as a proper fiduciary in a hot business cycle.

Update: I purchased more shares of HCLP for $62.47

I’m A Seller Into This Rally

The market is running and I have made much profit. My gains this year stand respectably north of 15% with the summer closing behind us.

HCLP is back to announcing omnipotent re-pricing and supply extensions. Natural gas continues to see robust expansion to the glory of BAS and ETP. CCJ defies the uranium market. AEC and MAA are riding a multifamily wave that almost no housing analysts foresaw. And the coal market is stealthily shoring up BUT and NRP, with fundamentals that will catch the mainstream opinion off guard. Even the silver market has held onto some pittance of gains this year.

To be sure, the past 18 months have been a glorious time to be alive.

But that will all end soon enough.

It is not just any specific prophesy of doom I’m latching onto here. For the most part, we’ve seen the ability of markets to price out specific events. But I have gone back through every stock market crash since the establishment of the Federal Reserve, and what I have seen (albeit with what little data is available) is a left skewed distribution of such frequency that makes me think the chances of our current state of affairs casually drifting past the 7 year mark without recidivism are…poor.

So I will raise cash going into Fall (as I have several times in the past). And knowing that if I am wrong, there will be plenty of time to make yet more money.

Speak Of The Devil And He Shall Amend HCLP’s Supply Agreements

Cain Hammond Thaler, 10:41 pm last night:

Even here I am a long term holder of HCLP; I think we see it go on a hundred dollar roll at least by the end of next year. A lot depends on if supply agreement announcements keep coming.

Thomson Reuters, this morning:

Houston, Texas – August 11, 2014 – Hi-Crush Partners LP (HCLP), or Hi-Crush, today announced the entry into an amendment to its supply agreement with Weatherford. The amendment increases the annual committed volumes under the supply agreement on certain grades of frac sand. In the supply arrangement, Weatherford agreed to pay a specified price for a specified minimum volume of frac sand each month.

“We are pleased that Weatherford has chosen, once again, to expand our relationship by entering into this amendment,” said James M. Whipkey, Co-Chief Executive Officer of Hi-Crush. “Weatherford`s increased commitment for volumes further underscores the demand for Hi-Crush sand as we bring on new production capacity this year.”

Suffice to say, it’s going to be a coke filled second half of the year for HCLP. My straw is ready and I smell $80 on the horizon.

HCLP is going higher.

Trade: Sold Shares Of CCJ Bought On 8/1, Retaining Core

On August 1, anticipating a looming bounce off of oversold levels, I bought some extra shares of CCJ for $19.30. I sold those for a small loss today for $19.10.

Just adding back cash – the market feels terrible and the extra cream to my position was supposed to be all about easy money.

This Market Is A Real Bummer

One of my newest positions, ETP, co-reported earnings (alongside ETE, a familial body) that rose 50% year over year, soundly crushing estimates. The partnership is putting out almost 7% in distributions annually and distributable cash flow lifted 11%.

The partnership is modestly priced and more than a fair buy here. The only conceivable issue in the report I saw was that they’re paying out a little more in distributions than they take it, at the moment (and not for long if this kind of growth keeps up). And a little over a month ago ETP announced plans to build a new pipeline from the figurative gold mines in the Bakken region in North Dakota to their existing distribution network in Illinois…and the new capacity is allegedly already filled.

So following what can only be described as a stunning performance, the market is roundly bidding up units of ETP, correct?

WRONG

ETP has given back all the morning ramp following the exciting earnings beat, and ETP is now struggling to hold just half a percent gain on the day.

That’s just the kind of market we have right now. You can hear the oxygen rushing out of the trading floor. I have a couple similar positions that have all left analyst estimates in the dust (mostly after having already been revised higher), and yet they just can’t catch a bid.

Previous Posts by Mr. Cain Thaler