Bought CLP, And Other Ramblings

I nibbled on CLP today for $19.14, washing out my cash position to “so miniscule, it might as well be nil.”

With this, I have completed entry into the REIT space.  I will not be making any purchases that send me into the Margin Zone.  It is a twisted and bizarre place, where your sanity is slowly stretched taught to the point of breaking.

To be sure, margin is a great power, when executed with discretion.  However, like a character of the Lovecraft Mythos, all those who are exposed to the realm for too long self immolate and are sent into the dreary darkness of insanity.

On to the next thought, why is Bunge Ltd. so cheap!?

If it weren’t enough that the company is a crop grower during a time of epic price increases across its product lines, the company has the added advantage of cyclones in Australia, droughts in China, the U.S. in severe snowstorms, Russia coming off of last year’s raging wild fires, and global food riots shutting down domestic economies the world over.

What do the markets want, an open invitation?

Meanwhile, BG’s cousins are up 10% or more for the year, but the stock is trading at a discount to its book value.

Do you all know something that I don’t?  Please, if so, feel free to fill me in…

I purchased AEC coporation for $15.43 a share today. 

The company has many aspects about it I like, starting with a management that defeased their properties from CMBS agreements before the housing crisis hit, following to their operations expanding by 20% through the end of last year, and roundly finishing with solid cash flow from full occupancy rates and expanding rental operations, and strong revenue before amortization and depreciation.  The company is playing it aggresively, yet has the air of self control about it.  That being said, it’s small, at only half a billion in assets under management, with a large amount of leverage.  This is a position that could easily get smacked around, derailed, or worse.  Be aware of that, if you want to establish a position.

My next favorite REIT company is CLP, mainly because at less than 2x book value, they’re pretty damn cheap.  Also, they’ve been working hard over the last two years to cut out bad partnerships, and have had stunning success, freeing up their own revenue by 7.5%.  It’s amazing what severing dead weight will do for you.  I expect this company, using its new found revenue, coupled with decreased liabilities from stagnant obligations to conglomerate entities, and expanded credit lines, to start making acquisitions similar to (although predictably less aggressively than) AEC.  I will be moving to establish a slightly smaller position in this company in the near future.

I will be looking over the books of some of the companies which were brought up in the comments section of my last post later this week.

Here are some of my notes on four of the companies I looked at, which may help you get a feel for how a dig into company information and the considerations I usually have:

AEC: worth $5.46 dropped $154,000 million on acquisitions.  Repaying mortgage notes and credit facilities in huge sums.  .  Interest expense down over 13%.  Rental revenue up 6.5%.  Construction up over 1400% in last three months reported and up over 1050% in last 9 months reported.  During the reported period, acquired two properties, both in Virginia, and expanded a third operation, also in Virginia.  Entered a 90% owned partnership in September 2010 to construct an apartment community in Tenessee.  In October, acquired a property in Texas.  The company hasn’t had to sell any of their positions since early 2009 and appear to have their liabilities under a firm hand.  Management was quick and defeased 21 of their CMBS contracts going into the housing crisis; still holding most of their assets and barring minor sales, are in a good position to go forward.  Net Operating Income before expenses and charges up over previous reporting period.  Again, largest losses to the company represented by Depreciation and Amortization.  Property occupancy rates at over 95% for existing and acquired properties; over 78% for developing properties.

AIV: worth $12.50 almost doubled cash since the end of 2009.  Rental revenue up 2.7% over three month period from last report and up 2.2% over nine month period reported.  Selling real estate.  Most money being eaten up in tending to financial debt.  Based in Maryland.  Goal to provide above average returns in a non-volatile way.  So far has managed to fuck that goal up pretty thoroughly.  Lots of VIE styled layers here; make it confusing to follow and puts the rights of the corporation to their properties in question.  I’m on about page 10 and this company is just looking like a huge pile of shit.  They’re selling big time during the greatest buying opportunity of the century.  I’m cutting this analysis short.

BRE: Couldn’t find jack shit in the way of filings by this company.

CLP:  worth $14.71.  Revenues up 7.5% over three months same time since last report and 5.4% over nine months same time since last report.  Again, most losses came from depreciation and amortization, all of which skyrocketed over the past two years.  Managed to acquired and develop properties by over $80 million.  Not nearly as much as AEC, especially since CLP is a much larger company.  Nearly doubled cash and still made substantial payments to debt.  Selling some for-sale held properties (no associated mortgage debt, and they were always going to be sold); not selling any operating properties.  Lot of developments in the hotspots of the country, likely won’t be experiencing growth anytime soon.  Exiting joint ventures to save value.  Most developments occurring with unconsolidated partial ownership ventures (see page 21).  Acquired on Class A property on October 22, 2010.  Basically, CLP has been exiting partnership which have proven unfavorable by selling out or taking control of the entire joint operation.  Doing this, they have managed so far to free up additional revenue of about 7.5%, over the last three and nine months.  With that additional revenue, coupled with the purchase made in October and new credit lines they’ve secured, I wouldn’t be surprised of this company started picking up acquisitions.  (Did this company repeat pages of their filing multiple times?  Sure fucking looks like it.)

I don’t know – the material’s all there, so slap it on a canvas and spread it around.

Whatever you think of the poor title execution, the fact is my portfolio is up one and a half percent today on nothing but MGM Resorts International.

I’ve been rolling in this company since late 2009, like a Colombian has blow.  I’ve watched it double, then cut in half, to double again, to retrace, to now.  The crazy thing about this stock is that it’s been so volatile, practically everyone won, both ways.  I watched some hedge fund guy make a structured derivatives bet against my own positions, which I then scaled out of for massive profits, just so that I could buy back in after the thing tanked.  It’s been a fucked up roller coaster where only the slow seem to lose.

And the whole beginning owes itself to some farfetched idea on how they could cheaply restructure their debt.  For those of you just joining the party, let me recap:

All casinos have a banking segment around which their floor is built, which means in addition to the gaming/resort shindig, they also have deposits and a day by day audit of how profitable their operations are.  This gives them the ability to roll over all money in addition to expenses left over at the end of the day, every day.  So whatever you think their borrowing costs are…they’re actually less.

What’s that, they’re borrowing for 10%?  Nope, sorry jackass, it’s more like eight…

So, MGM and several of the other casinos back in the beginning of ’10 started doing just exactly that.  They restructured their entire liability balance, and in the case of MGM, bought themselves a decade.

I would guarantee you that Las Vegas will experience a recovery between now and the 2020’s.  And as a guy who’s spent a lot of time around statistics, between you and me, that’s doesn’t even make sense.

If Vegas should start to recover this year, I’m set.  I really won’t even have to work for it after that.  Think LVS, but with a different ticker.  The sound and quality casinos have already made their move, so now it’s up to the distressed garbage to determine who’s surviving.  And MGM is a survivor, make no mistake about that.  A retarded survivor, thank to Kerkorian, but a survivor still…

If MGM starts to recover, I could just wander in here spitting vulgarities and obscene references, then maybe cuss a few of you out and split for the afternoon, every day, and I would still blow the lid off.  God willing, this year, which has been slow thus far, will start to shape up.

I’m prepared to make an investment into real estate, at these price levels.  It’s not that I think real estate is about to jump off its death bed and start running a marathon.  Far from it…it will be years before that happens.  In fact, I’ve heard whispers of half a decade needed to process all foreclosures in the works at this time.

This crisis is not the sort of thing you just bounce back from.

However, that doesn’t mean that select aspects of the real estate markets aren’t tantalizing at these levels.  The trick is to find the value lurking in between all the pitfalls.

Which brings us to the landlord…

It’s not that proprietors were spared from the housing collapse.  Rather, they were hit also, with rental vacancies reaching the highest level in 30 years, just as early as the beginning of last year.  As the jobs market contracted alongside housing prices, people were forced to consolidate living arrangements with others, which meant evacuating apartments just as readily as evacuating homes.

However, with housing prices still getting trampled, foreclosures in steady doldrums, and the prospect of a jobs recovery (or, if you just can’t accept that, then at least a salary bottom and wage stability), the US residential real estate market has a silver lining to it.  Homeowners aside, residential administrators are in a position to make acquisitions that may fuel them to outperformance for the next decades.

The reasoning for this is fairly simple; looking at the balance sheets of REITs, the vast majority of losses which these entities are, even now, steadily taking are located in Amortization and Depreciation of their real estate’s theoretical value.

However, this is a huge revelation in the context of companies which specialize in rentals, because amortization and depreciation doesn’t matter.

Amortization and depreciation exist traditionally as a source of replacement value, so that a company can approximate how much money it has theoretically lost at any time on repairs and replacements which will be occurring in the future.  The only time property values getting hit is of an immediate concern is to a corporation which is using debt to fuel its operations.

However, the rest of the time, depreciation is a blessing.

It symbolizes the company being able to replace what it has on hand for less than what they put into it originally.  The company never had any of that money anyways, yet in face of the losses, it still has the assets, which may or may not be making money.

It is the state of operations in these businesses which is the most important question.  And, so far, what I’m seeing is a sector that is at 90-95% capacity and doing just fine.  Better yet, it looks like these sound entities are getting hammered as land value deflation causes losses on the books of corporations that are generating massive cash flow.

And that is a beautiful thing, because many of these corporations are using that cash flow to expand their portfolios.  I’ve already found one company that has expanded its operations by over 20% in the last year and a half alone. 

Why hasn’t that level of acquisition registered with the broader public?  The answer has to do with perceived losses that the company is taking, thanks to real estate prices being in decline.

The housing market funk may continue along for a good while longer.  But mark my words; the housing recovery will start with the rentals.  Looking at the share price of some of them, it may have already started.  They set in the bottom, facilitate citizens increasing savings rates, and are a critical part of the recovery process.

The kind of corporation I’m looking for is one that has its debt under control, with good spacing between maturity dates.  I want a company that has strong revenues before depreciation and amortization, and that isn’t being strongly affected by the loss of appraisal value.  I want a company which hasn’t had to sell any property in the last year and a half.

And, I want them to be using this opportunity to make investments in a big way.

I’ve already got a list going, and have completed an in depth evaluation on four companies.  When I’ve had my good, long look, I’ll post on what I’ve found and what I’m buying.

Ladies and Gentlemen:

After tirelessly working since this afternoon, I present to you the culmination of my earliest efforts – the Talir Index (First Approximation).

I have decided that this metric should be built from a starting investment of $100K. This choice was made for one sole consideration; bonds.

I don’t know right now whether or not I will ever give out advice on bonds on these forums. I do, however, know that if I do give out advice on bonds, then it will be on specific bonds.

So, since bonds are generally sold with a $10,000 face value, if makes very little sense for me to say, “hey, you should buy bond issue #…” since for any amount less than $100K you’re either:

a) Inadequately funded to actually make the purchase OR
b) Buying the bond would eat up somewhere between 20-100% of your portfolio, which is fucking cashew-nut crazy, even by my standards.

So, $100K is the number of the initial counting. An investment of less than this amount would likely have to mirror all equity trades while making exemptions for any trades, like bonds, which require that significant minimum contribution. Likely, such an account would also compensate by making additional allocations, either into existing positions or else different ones.

As such, any account with less than $100K may find itself subject to wildly different performance, with enough time.

As to the specific questions of this print out I’ve provided:

1. This is not the final product; I found myself missing information on specific account balances for every day. Hence, I needed to approximate those specifics, which leads to wild volatility when I leverage/deleverage. As you can see, the last year particularly has quite a spread, which is thanks to my utilizing margin. The only way to get an exact series of numbers is for me to go through and with a set of predetermined rules, reconstruct my account balance based on transactions. It will be very, very time consuming, and I don’t expect it to be done any time soon…

2. This index is before including information on shorting. Again, that’s a product of account balances. I need to construct them before shorting makes sense. With shorting (specifically hedging) my account performance will most likely take a hit, as the biggest short positions I’ve taken have closed out with Realized Losses.

3. This performance is before including my precious metal position of the same time period. Therefore, I can guarantee that the Final Talir Index will show a considerably better performance. For the moment, in conjunction with the fact that I haven’t owned any bonds and haven’t included shorting, this index is effectively a Long-Only Equity Index of my performance.

4. I’ve slapped a 6th Order Polynomial on the scatter plot (because it looked good), which actually gives a fairly good idea of how one would do if they were to only follow my long equity ideas, without ever hedging or engaging in open shorting, during the last two years. My equity picks have seemed to generate an average 41.45% annual return over the last two years (which makes sense, given the broad market rebound during that time period).

That being said, I will admit my displeasure in this earliest attempt. When I realized how much information I was missing, I became rather disappointed. I will be working to make up for this disgrace of specifics, and replace the “approximation” bullshit with something more concrete.

This graph does not accurately depict what I’ve done over the last two years, during my time writing on this website. It completely ignores one of my greatest gainers, while also overstating my equity performance. I need to add the commodity and short side information in. But, that will require more time.

For now, rest assured that all future performance will be concrete thanks to better data, as will all future presentations thanks to the work I’m going to be undergoing in solidifying the past.

My business was conducted slowly, over the course of a three hour meeting, which began at high noon. After catching the open and seeing my positions getting shelled, I just assumed it as well.

However, upon my return, I’m glad to find this market has turned about face. And what’s more, I ran ahead, thanks to gains in TLP, AWK, and BG. It’s good to see my new work doing – well – work. I am absolutely jovial when in the right and I hope to stay that way.

A note on TLP: Transmontaigne Partners is now my largest position by value, with MGM coming in at a close second. My consolidation of NRP brings it in the running for third, at just barely larger allocations than AWK and BG.

But back to TLP. Although a remnant of my old positions, I am encouraged to keep it. The reasoning is simple, as TLP is a transportation company which situates itself throughout the United States. And, they specialize in shipping bulk commodities, especially volatile cargo, like what we find with petroleum products. So, it follows that increases in the price of commodities will give room for businesses like TLP to demand higher shipping rates.

Combine that with this: the U.S. is presently experiencing some of the worst weather on record. This means price increases accross the country in addition to what has transpired already. It also means local business, which would have otherwise supplied for that demand, is probably operating below capacity. Those price increases will therefore be tantalizing to distant businesses, who can make a killing compared to their own local markets.

And how will they get their products to said destinations?

Answer: TLP’s transportation lines.

So for the meantime, TLP stays on the books, as is. However, even though I want to keep it around, once it goes above $40, I’ll be scaling it back, similar as I did to NRP today.