Episode 389: From Real Estate to Crypto, Value-Investing Opportunities Are Everywhere
On this week's Stansberry Investor Hour, Dan and Corey welcome Andrew Walker to the show. Andrew is a portfolio manager at value-oriented hedge fund Rangeley Capital and author of Yet Another Value Blog. He focuses on microcap, deep-value, and special-situations investments.
Andrew kicks off the show by sharing how he got his start as an investor and what inspired him to focus on value investing. He says that while value investing has gotten more competitive over the years, investors can still do well in this space if they think outside of the box. Andrew also discusses his renewed interest in special purpose acquisition companies ("SPACs") and whether de-SPACs are worth wading through for winners...
I do think de-SPACs are an interesting angle. However, a lot of these were 2021 companies, so you've got to turn through a lot of rocks. You're going to find a couple of princes, but you're probably going to find a lot of frogs as well.
Next, Andrew names a couple of companies he invested in and gives his reasoning for each play. The first is a bitcoin miner that emerged from bankruptcy. As Andrew explains, there are a multitude of problems with bitcoin mining, but this miner has managed to curtail some of those and stand out from the pack with its integration of AI. Andrew also talks about the revival of spinoffs, including one particular real estate investment trust that he likes...
The spin has done great. It's been awesome. But because it's the small, quirky spin – office buildings – you know, the initial shareholders didn't want it. Nobody looks at it now because it's small, it's quirky, it's liquidating. But I think there's a huge margin of safety.
Finally, Andrew discusses another spinoff he has invested in – a company that owns prime real estate in Manhattan. With legendary investor Bill Ackman's hedge fund owning nearly 40% of the company, Andrew believes there's much more upside ahead and that a turnaround is likely. He notes...
Prior management, they've invested a ton. You've got this asset that's very small but it's a clear disaster. Now that it spun off, you've got a new, incentivized management team. They're going to make very obvious, quick changes to stem the bleeding... At this point, there's no debt on the balance sheet, there's a lot of cash, and you've got real estate in Manhattan. I think the downside is quite protected.
Click here or on the image below to watch the video interview with Andrew right now. For the full audio episode, click here.
(Additional past episodes are located here.)
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with Andrew Walker of Rangeley Capital.
Dan Ferris: Andrew is a colleague of Chris DeMuth, a previous guest on the show. And both of them are just loaded with lots of ideas. Get your pen and paper out. You are going to be getting some ticker symbols and a complete explanation of why Andrew likes the investments that he does. So, let's not delay. Let's talk with Andrew Walker. Let's do it right now.
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Dan Ferris: Andrew, welcome to the show. Thanks for being here.
Andrew Walker: Hey, thanks for having me, guys.
Dan Ferris: You bet. Now, you were recommended to us as a guest by Chris DeMuth, who – with whom we had a wonderful conversation, by the way. It was really, really exciting and interesting. Lots of great ideas. And you guys work at Rangeley Capital together, correct?
Andrew Walker: That's right.
Dan Ferris: Right. So, maybe since you're a new guest to our listeners, maybe we should just start with a little bit of background and what you do at Rangeley and sort of how you got there maybe a little bit.
Andrew Walker: Yeah. So, look, Chris came on, so I don't know if you guys want the full background of Rangeley or everything. I guess I can say I started my journey at Rangeley in late 2015. I came aboard as the head of research and a portfolio manager. Before that, I was involved in private credit, which all of a sudden is the hottest thing in the world. Private credit, private equity, consulting. So, that was my background. Joined as the head of research and portfolio manager here. Chris and I have been working together – I guess it's coming up on 10 years now.
Chris has a regulatory and merger arbitrage background and that's a lot of his focus, with my background, a lot of my focus more is on special situations and kind of value investing. But I guess that's the overview, if you want to dive into any piece of it or take the conversation wherever you guys want to go?
Dan Ferris: Well, value is near and dear to our hearts. Are you one of these guys who was 10 years old buying his first stock?
Andrew Walker: Pretty close. That is pretty close actually. Actually, my story – I don't know where we'll go. My story is when I was 14 or 15 my grandparents gave me a – they had bought a savings bond when I was a baby and they gave it to me. And it was worth about a thousand dollars, which is big money now but was definitely big money then to a 13-year-old or 14-year-old. It was really responsible, my dad was a banker. He said, "Hey, you've got it. Now you're going to save and invest it."
And my dad took me to a guy at Ed Jones, a broker, and he was like "You're young. We're going to put this into growth stocks." So, actually this was right after the dot-com bubble burst. But he was like "You need growth stocks. You need aggressive growth." So, he gave it to me. The next month, I got my statement and my thousand dollars had become $950, which that was the price – that was more than N64 games were going for at the time. I was like "What the heck? This is a loss." And he was like "Don't worry. You've got a long-term focus. It's no big deal."
And I looked at the statement and the account had done – actually gone up a little bit but he had charged me a 5.5% fee getting into it. I was like "Fifty dollars? I paid this man $50? Are you kidding me?" I was 13 or 14, so I was working at a summer camp. I was getting paid sub minimum wage at the summer camp. I was like "That's a week, a month –" I don't know, whatever.
So, I read Investing for Dummies and they were like, "Don't pay broker fees." And that's kind of how I started – or "Don't pay mutual-fund load fees." And that's kind of how I started researching. And at 16 I fell in love with Warren Buffett and that. So, very close. But that's the origin story of – if I was a superhero, that would be my origin story. Or maybe supervillain. Who knows?
Dan Ferris: It just captured you and from then on you were passionately pursuing the investing?
Andrew Walker: That's right. I remember in college sitting in the back of classrooms and the lecturer would be droning on and I'd be writing 10-Ks and stuff. So, I've been pretty passionate about it since then.
Dan Ferris: Oh, that's very cool. Oh, I love that. That's Netflix-worthy.
Corey McLaughlin: Yeah, I love it.
Dan Ferris: I mean – you know?
[Laughter]
Andrew Walker: It would be a pretty boring Netflix show, just sitting in the back.
Dan Ferris: I know.
Andrew Walker: Maybe a little –
Dan Ferris: Yeah, just a quick two seconds. So, I love – I'm a value guy myself and have been for too long to even think about exactly how long it's been. Value has – I always start here in the past couple years, talking with value investors, I always have to start here. Value has been tough for the past decade, hasn't it?
Andrew Walker: Well, I think it depends. The markets are a really competitive place. And I do think a lot of people say value has been tough. And what they mean is 30 years ago, if you had gone and you had bought a stock trading for 10 times earnings, you probably would have done pretty well. The market wasn't – there weren't these computer screens and everything. You did well just buying baskets of deep value stocks.
Now, if you evolved, I think there were a lot of people who – one of the things that broke me was I remember in, I think, 2015 Facebook bought Instagram for a billion dollars and there were so many people who came out and said, "This is such a bubble." I think it had 13 employees, zero revenue. "A billion dollars? What a waste." And that was the first time I was sort of like, "What are you guys talking about? All my friends are on it. This is – it's prerevenue but it's got tens of millions of users. It's taking over the world. You're using the wrong metrics."
So, I guess what I'm saying is yes, a lot of the deep value stuff has not worked. But people who were early and who saw the Amazon, Apple – Apple, you could buy at 8 times earnings as recently as seven years ago. And if you saw the potential of the App Store and the lock-in, that was a killer growth stock trading at a value multiple. I just think a lot of people who decry the death of value investing – and yes, it has been heard. I'm not saying it's been easy. The Mag Seven has been lightning everywhere and the world's on fire. But I think people who decry the death of value investing, what they're actually saying is the market's got a lot more competitive. Fifteen years ago we could go buy net-nets. A hundred years ago when Ben Graham was writing you could go buy companies for less than the cash on their balance sheet. That's all gone. That's been picked over by quantitative screeners, computers that do that better. You have to evolve.
And I do think people who – now, maybe you got lucky with big tech and everything, but people who evolved and were willing to look at newer things and think about value outside of pure quantitative metrics I think have done pretty well.
Dan Ferris: Yeah, I had to do a bit of evolving myself. But – and I found, though, as in the case of Warren Buffett, not that I'm a Warren Buffett by any means. I'm not suggesting that. But as in the case of Buffett, it was a pretty natural thing, isn't it, for a lot of value guys to start out with net-nets and all kinds of cigar butt type things and then eventually get tired of the churn of it, the sheer churn of it, and maybe even run out of ideas at the top of a bubble or something and switch over to this focus on great – what Buffett calls great businesses. He wants a great business that he never has to sell.
And I find – and I've done that too, and I find a lot of people and a lot of folks that work with me at Stansberry and a lot of folks who are in the sort of value investing camp have sort of gone – tended to go that way as well. Have you – it sounds like you may have made a similar evolution, from what you've described.
Andrew Walker: Well, I don't know. I still am really attracted to companies with harder assets, balance sheets. Banks below book value after Silicon Valley went bust was a big play for me. And I wish I had stuck with it because all of a sudden –
Dan Ferris: I know –
Andrew Walker: – the banks that I bought below book and sold around book earlier this year all of a sudden all of them are trading for, like, 1.8 times. I'm like, "Damn, that's pretty nice."
I do hear you on net-nets. I think there's two things: (a) a lot of investors graduate out of that because, again, 100 years ago Ben Graham is writing these things. There – the world's – America's largest grocery store is trading below net-net value. That just doesn't happen anymore unless you're in extreme, extreme distress in the overall summary.
So, size graduates a lot of people out them. And then, I do think, again, it comes back to – a net-net is a very simple balance sheet calculation. You and I could go find net-net in 30 seconds if somebody pointed us in the right direction. We pull up the 10-K or 10-Q, we do some math, and we say, "Yes, this is a net-net." That's been generally picked over by computers that do it faster, better than you, put on a huge basket of them, run factor multiples behind it. The net-nets that I am generally aware of today – and I used to – I write a blog, YetAnotherValueBlog.com, and at the start it was always focused on smaller companies. You can see net-nets because they're so picked over, most of them now are a lot – some of them are, hey, there's questions of if it's a real business or now. I remember five or six years ago a lot of the net-nets that you would screen would be Chinese reverse mergers where it was pretty clear that they – it said it had $100 million of cash on the balance sheet and it was pretty clear that that wasn't the case.
But I just think the net-net pool is a lot smaller. It's gotten picked over by quantitatives. So, I think investors have had to gravitate towards other things
Dan Ferris: What do you think of SPACs trading below $10? Is that something that you can get interested in?
Andrew Walker: Yeah. Yeah. It's funny you mention that. So, in 2021 before SPACs really took off – Chris and I have always been interested in SPACs and then they took off and we had some of our biggest winners. And it's funny you mention SPACs because after 2021 we were both kind of like, "Look, this market is dead. Every deal – you have to have some deals that get money over – none of the deals can even get money over the finish line. I'm not sure why anyone would do it." Recently, I've been kind of interested in SPACs again. On the heels – (a) so many of them have gone – the remaining ones have for the most part real sponsors that have had history of getting them over the finish line. I love the up-down on SPACs where you buy it, as you said, at or below trusts. If they give you a deal that really works, then the SPAC can go crazy, and if they don't, you kind of get Treasury-like returns. That's incredible up-down to me.
And then, the other reason I kind of started getting interested again – getting into them recently is what really made SPACs go crazy in '21, '22 was they were taking speculative growth stocks public, and everyone was announcing and they were going crazy. We haven't seen that happen with SPACs yet but we are seeing a lot of speculative growth stocks go really crazy as you and I are talking here on November 21. And I could just see a way – I don't think– all of these SPACs are trading at or below trusts, and if you're a smart SPAC manager, go – I could see a wave of SPACs doing crypto plays, AI plays, and power plays in some way, shape, or form. And if the market takes, I could see SPACs going crazy again.
And I really like that risk-reward where, hey, the market is completely shelled out, how one of the things that broke SPACs in 2021 is all of a sudden there were 500 SPACs out there. We've never seen that many SPACs before. We're down to a normal 30 or 40 SPACs. There's still some lingering from there. But you've got a normal bunch of SPACs and I think the market is clearly saying, "We want more crypto, AI companies." And if your – the gold to your company isn't crypto and AI are going to become public but a silver to your company might say, "Hey, we've got to strike while the moment's hot." And I think a SPAC makes a really attractive play for that.
So, I think you are – I don't know if you knew you were leading the witness or not, but yeah, I think SPACs are really, really interesting right now. And look, if anybody's got a SPAC they like or something that – I try to look at all of these but I'd love to swap thoughts. They can shoot me a note and I'll look at any pre-deal STAC trading –
Dan Ferris: The other question then becomes what about busted de-SPAC, a de-SPAC being a SPAC that's done the deal, they've bought the business, and now, as you know, so many of them from 2021 are down 50%, 60%, 80%, 90%. I mean, they've been just decimated. Is that worth sort of rifling through those names, in your opinion?
Andrew Walker: I think the answer is yet. The taint of SPACs is long. If you are a company that went public through a SPAC most investor are not looking at you. And I think you've seen a lot of companies that they trade so – they trade off so hard that they're just clearly below fundamental value. And you've seen a lot of these tainted de-SPACs get acquired for huge premiums.
So, one I looked at over the summer and I'm kicking myself because I kind of almost got there and missed a few limit orders was Sharepair, which they – their stock was trading – and this is closed so I don't have to disclose anything but all listeners know penny stocks and everything carry heightened risk and do your own work and all that. This was trading at $0.60 to $0.80 per share. Management was out here screaming. "Hey, our intrinsic value of some of the parts went higher. We're running a process." And they ended up getting taken out for $1.40. So, it was basically a almost hundred percent premium to the closing price. And it had traded around that closing – that $0.60, $0.80 for five, six months while they were running the strategic process and screaming, "Our fundamental value is higher."
That's one example. But we've seen plenty of examples. A lot of these private equity-backed de-SPACs, the private equity firm still owns 60%, the stock goes from $10 to $2, and they look at it and say, "Hey, let's take it – re-private at $4 and we'll make a lot of money."
So, I do think de-SPACs are an interesting angle. However, a lot of these were 2021 companies, so you've got to turn through a lot of rocks and you're going to find a couple of princes but you're probably going to find a lot of frogs as well because a lot of those businesses did not have much of a plan.
Dan Ferris: Absolutely. It's one gram per ton. It's a mining operation, right? One gram of gold per ton –
Andrew Walker: I like that.
Dan Ferris: – of earth. So, let's – Chris actually, he liked – he threw some names and ideas and stuff at us. And we do like to do both things. We like to give our readers a fish but we also like to teach them a little bit about how to fish. And Chris gave us his version of that. Let's start with how you fish. Do you have a particular –?
Andrew Walker: Well, let's – what did – what fish did Chris toss your way?
Dan Ferris: Let's see. They were banks, I think.
Corey McLaughlin: There were some banks. Banks at the time. Some of the regional banks, I think.
Andrew Walker: Okay.
Corey McLaughlin: This was maybe six months ago, I think.
Andrew Walker: Okay.
Dan Ferris: And they were –
Corey McLaughlin: It's – yeah, I'm curious, when you bring up AI, crypto, energy, those are obviously – a lot of people are talking about those areas right now. And so, maybe there's an example in there where there's something that is good and also reasons for caution in those areas.
Andrew Walker: Look, I wish I was YOLO-long, AI, crypto, and energy, and baseload energy from the start of the year. Unfortunately I really was not – I had a few small plays but I really was not. I guess Dan was saying, "How do you fish?" I tend to fish in quirkier ponds. Spinoffs. Post-bankruptcies. Hairy merger-arb. Hairy take-privates. Those are all right up my alley. I guess the two – I did have two earlier this year which, one, I'm still involved but nowhere close to the same size unfortunately, and one I'm no longer involved. I can walk you through, but again, I – my interest in them is lower. So, along those lines, but I think they'll be nicer to your listeners.
So, the first would be Core Scientific. The ticker there is CORZ. And I'll disclose I am still long, but again, in a much smaller size than I used to be. And this was a – it was – for years it's been the largest Bitcoin miner in the world. They went bankrupt during the 2022 crypto winter. Their balance sheet – they got kind of hammered on a bunch of different angles. They went bankrupt and they emerged from bankruptcy in January of this year.
And my thought at the time was twofold: (a) if you looked at – I thought they had the best assets of all the bitcoin miners, which wasn't saying a ton. I don't have a lot of – I think a lot of the bitcoin miners have very poor assets but I thought they had the best assets. They were by far the cheapest. So, you had the best assets and the best – the best assets and the lowest multiple. And the reason for that was they were emerging from bankruptcy. So, they emerged, had a lot debt holders, they got some equity and they were distressed debt holders. They wanted to pound the stock as soon as they got out. You've got people who had ridden this through bankruptcy for two years. You had creditors who were getting stock. So, I thought you had this really nice angle where you had the best assets and the cheapest multiple. So, I bought it then.
And the other thought I had in January – in February when I was putting this on was they at the time had a small AI play. And the thing with AI is AI is an absolute energy hog. AI does not want 10 megawatts of data or five. They want these huge 100-megawatt-plus plants. And there just aren't a lot of those out there. Now, bitcoin mining is very energy-intensive. So, bitcoin mining drew a lot of looks. A lot of these players have stumbled into "Hey, our sites required premium access to data. It required fiber internet so that we could be connected to the internet while we're mining." This site that we built for bitcoin mining, a lot of them have turned out – or they think they will turn into perfect AI plays.
And Core Scientific, again, because – this is the nice thing about buying the player with the best assets – a lot of bitcoin miners have said, "We would like to do AI." Core Scientific, to my knowledge, is the only one who has really signed full-fledged AI deals, and in May they announced a deal with CoreWeave where they were going to sell 100 megawatts of data and it morphed into about 500 megawatts for a huge premium. And if you look at kind of what a bitcoin miner trades at to what an AI data center trades at, it was an enormous uplift.
So, I was there for – the reason I'm not there, unfortunately, anymore is I was there for a cheap bitcoin mining play trading at what I thought was below the replacement cost of assets and it's – you can look at the stocks char – it's like a 4X to 5X.
Dan Ferris: Nice.
Andrew Walker: It's morphed into this – this is pure AI backbone. But that's the type of quirky situation that I'm generally interested in. And that would probably morph nicely into the next one but I'll just pause there if you guys want to talk at all about Core Scientific. I can talk endlessly about the bitcoin miners if you're interested, but however you want to go.
Dan Ferris: Bitcoin – you said you don't like – you said most of them have poor assets but this one was okay. What assets are – why don't you like them? What's poor about them?
Andrew Walker: Yeah. So, when I think of a Bitcoin miner the overall structure of bitcoin mining – this is my personal opinion – I don't think you could design a worse structure. So, bitcoin mining is basically you buy power, you run it through GPUs to verify the blockchain, and you get paid out on bitcoin. However, you don't know your cost of power up front. Now, you can lock it in, but you don't know your cost of power up front. You don't know the price of bitcoin going forward, so you're making these huge – and you are buying the GPUs up front. So, you're making these huge investments.
Now, that's not unheard of. If you think of an oil or gas company, they don't know for sure what price they're going to sell oil and gas at in the future. However, they are a reasonable range. And they probably are doing projections. The issue with bitcoin mining is oil miners, if you and I go drill the Gulf of Mexico, it's going to cost us a billion dollars to set up the deep sea drilling there but we know our price is going to be about $15 per barrel. The issue with bitcoin mining – oh, and that compares to if we go to a shale play it'll be $50.
The issue with Bitcoin mining is there's no competitive advantage. Everyone runs the exact same. Now, you might have lower access to power but that value is going to accrue to the power plant who's selling you cheap power. So, everyone is doing the exact same thing to create the exact same commodity. What does that mean? When you're planning to buy and you're saying, "Hey, I'm going to start mining six months out," everyone buys based on what they think the price of bitcoin is going to be six months out. That's the only edge you can have. So, you have this terrible, terrible situation where everyone buys and the marginal cost is getting set by the person who is most bullish on bitcoin. You're never going – every Bitcoin miner is going to invest and say, "Oh, I think bitcoin is going to $100,000. I can create bitcoin for $80,000 at my price, so I should buy this." It's a levered play on bitcoin where you're having massive, massive oversupply.
There's a lot of other issues with it but that was – that's my major issue. Complete commodity, the marginal price, marginal volume marketing set by people who are wildly, wildly bullish in bitcoin. There are other issues with it, like also bitcoin mining, what's it really good for? I mean, there are all sorts of issues with money laundering with bitcoin, but bitcoin mining is the best way to launder out of totalitarianism regimes. Because if you think about it, you take power, which you're paying for in local dollars, you buy hardware, and you get bitcoin, which you can transfer anywhere.
So, going back to my point, pure commodity, your marginal prices get – your marginal miner is getting bilked by one of two persons, a person who thinks that bitcoin is going to $200,000 so they want to invest in miners because this will get them a levered weight to get upsides of net bitcoin, or a person who doesn't care how much it costs them to mine. They're using bitcoin to get money out of a totalitarian regime. It's just a terrible, terrible setup. There are no competitive advantages. It's the worst designed business I can imagine.
Now, that's not to say – that's overall. That's not to say these things don't have peaks and valleys and everything. I'm not making a commentary on the stocks or anything. I'm just saying overall this is an industry designed to destroy value.
Dan Ferris: Okay. So, what's better about Core –
Corey McLaughlin: So, what did Core Scientific have going for it? Why were its assets good?
Andrew Walker: So, a lot of their peers – again, it takes huge facilities. A lot of their peers did one of two things. In order to quickly get up in mining bitcoin, they collocated in other data centers – so, they don't own their plants. They don't actually own the facilities. And that is terrible because you've got a facility that says, "Hey, we've got 100 megawatts. We leased it to this Bitcoin miner because 100 megawatts is a ton of power and nobody needed it. All of a sudden we've got demand for AI. We just kick the bitcoin and pay – have the AI person come in." That's one thing that a lot of the data miners have.
Or they built in really poor locations. A lot of – because bitcoin mining, you can turn it off and on, so you say, "Oh, bitcoin is $100,000 today? I'll run all my GPUs. Oh, bitcoin is $20,000 today? I'm not going to run any." So, a lot of them did deals with utilities where they curtail everything. That does not work for AI plays. AI needs constant access to data for a bunch of reasons. One small one, if you think of Nvidia chips, each Nvidia chip is tens and tens of thousands of dollars. In a data center you might put $2 billion of chips in there. If you could curtail for six hours and your chips have a two-year useful life, you're literally talking millions of dollars of missed cost because of this curtailment.
So, what Core Scientific had that these guys did not have is they owned their own facility, they owned their own access to power, and they didn't have any curtailment deal. So, they could go to these AI places and say, "Look –" a lot of Core Scientific's guys actually had background in data centers and everything and said, "Look, this is not your scammy Bitcoin miner who did something to get up and running. They don't have real reliable access to power. We own these facilities. These are data center-grade utilities You come in here, obviously we'll take the Bitcoin miners out, but you're going to have a real AI facility." And that's kind of been proven out.
And again, got lucky there. Look, I thought I was buying the best assets at the lowest multiple and it turned out that I was buying not only the best assets but AI data center-worthy assets.
Dan Ferris: I see. That's interesting. So, I forget – we were going to do something right after this but I forget what it was. I want to say what else you got? I mean, that's really – to me, crypto, like a value guy, figuring out the best crypto assets and the AI connection is really cool. But you – what other – what's the quirkiest thing – I mean, is there something right now that you think is just the quirkiest thing that nobody is paying attention to that you think is wonderful?
Andrew Walker: Well, I think we've got to – for years – I think the – I mention this all the time on the blog, YetAnotherValueBlog.com. I think the best event-driven book – the best book on investing ever written is You Can Be a Stock Market Genius by Joel Greenblatt. Joel Greenblatt. And if I had to boil that book down to one thing it would be "Incentives matter." But if you asked me for a sentence, it would be "Pay attention to spinoffs."
And I think management teams in the late 2010s knew that investors wanted spins and would pay up for spins. And in the late 2010s I think we had the worst set of spinoffs I've ever seen. And you saw a lot of them go bankrupt. A lot of them really underperformed. I think over the past two-ish years we have seen a real revival in spinoffs. We've seen some that have done incredibly well. One that everybody likes to point to is GE Vernova, which shame on me, I didn't do enough work. I wasn't long on the stock and it's been 2.5X, 1.5X over the past year.
But we've seen a lot of spins on the smaller and quirkier side that I think have been some of the best and most interesting spins we've ever seen. And if you're okay, I'll just dive into some examples. And I should note that I am long on both –
Dan Ferris: Love it. Yeah.
Andrew Walker: – of these. The best spinoff situation probably I've ever seen set up was Net Lease Operating Properties – NLOP. And again, I am long on the stock. It got spun off from WPC about a year ago now. Are you guys aware of this? Or can I walk through this story?
Dan Ferris: Sure. No, go ahead.
Corey McLaughlin: Yeah, please.
Andrew Walker: Yeah. So, a lot of these giant real estate companies, they owned – in the early 2010s office buildings were a great property to own. Well, post-COVID nobody wants to own office buildings. So, you have these huge, triple-net-lease companies that are getting asked – if they own a billion dollars of assets, $10 million are these office properties, and 85% of the questions they're getting asked are "How are your office buildings doing?" and that sort of stuff. So, you've seen a lot of these big companies spin off their office properties just so that – it's get them out and this is a "two minus one equals three" situation.
So last year, WPC said, "Hey, we've got this garbage barge of office buildings. We're going to spin it out." And the reason this spin was so interesting is they spun – and if memory serves, for every hundred dollars worth of shares of WPC you owned you would get about six dollars of Net Lease Operating Property shares. So, they spun it off. Every WPC shareholder was there for WPC, this core, very stable business. Nobody wanted office properties. They spin off a very small amount, instantly kicked from every index, everything. It's a taxable spin, so you wake up and you say, "Oh, I'm going to have to pay taxes on this thing next year. It's not what I want. It's not paying a dividend. It's not stable. It's this office thing."
So, book value of the thing – and I think where it was indicated in When Issued Trading was about $45 per share – it spins off and the next day it hits $12 per share. And unfortunately, I didn't buy it right then but I kind of got involved earlier this year in the high teens, low 20s, and again, book value is $45 per share. They're very consistent. They're saying they're going to liquidate this whole thing.
And I think what's really interesting from a value message perspective is they give you details on every property that they own, every office building that they own. Who the tenant is, what the terms of the lease are, how long the lease is. And when you go and you just do the math on their leases, the cash flow from these leases, it's very, very difficult to come up with a per-share price that – yes, if you assume office buildings are all complete zeroes at the end, yes, you – but if you assume they're re-leasing and they're going to get – half the buildings won't re-lease and half the buildings will re-lease for 50% of what they're doing – and you can get a lot more information if you go and start Googling and looking at all these specific properties. But if you do that math, it's very hard to think that this stock is not worth in a very draconian case $25 to $26 per share if you start giving them any credit for re-leasing everything.
It's very easy to get a stock price in the $40-plus share on an NPV range. The stock is still trading kind of at $30, so you've got this – the spin has done great. It's been awesome. But because it's this small quirky spin, office buildings, the initial shareholders didn't want it. Nobody looks at it now because it's small, it's quirky, it's liquidating. But I think there's a huge margin of safety in that. So, that's one I really like and I think that it's – if you think – you had dividend-focused stability investors who get this small tactical spinoff of something no one wants. I think it was one of the best setups for a spin I've ever seen.
I've got one more I'll run by you but I'll actually pause there and talk about Net Lease Operating Properties.
Dan Ferris: It's interesting, you're really excited about it at $30-ish, $31 as I speak, and yet you're saying – when you said the draconian $25 share scenario, you don't expect that, in other words?
Andrew Walker: No, no, I'm saying they've got so much cash flow signed with these tenants over the – that will come in over the next five to seven years, if you're really just giving them credit for that cash flow, that contractual cash flow, because office buildings, these are class B office towers. Some of them are two stories, some of them are four stories. But they are contractually leased on a triple net lease. If you just give them credit for that cash flow, at this point it would be very difficult to get lower than a mid-20s number. So, if you're starting to give them any credit for these buildings having any type of terminal value – and I'm being a little fast and loose with it, but if you start giving them any credit for these buildings having any terminal value, it's very easy to get a value higher than today's price.
And again, I'm also NPVing all of these cash flows. So, these are office buildings. They will get – they get checks in the mail from their tenants. Over the past year, basically all of their cash flows from selling properties and getting from their tenants has gone – they took out a lot of mortgages when they were doing the spinoff. Those mortgages are almost fully paid down now, so all of the cash flow is starting to really –
[Crosstalk]
Dan Ferris: And for our listeners' sake, when you speak of terminal value –
Corey McLaughlin: You know what I find interesting here? Net Lease – sorry.
Dan Ferris: That's okay. I just want to cover this one thing before you ask your question, Corey. For our listeners' sake, when you talk about terminal value, is that like if you sell it right now kind of value?
Andrew Walker: No, I'm saying – so, you've got to – one of their buildings is leased to Google. And I think Google actually just extended their lease for another – it now has six years left. So, you've got six years of contractual payments from Google. That's about as good as you can get. This is triple net lease, so all the cash flow that you get, yeah, you have to pay to cover your lights and your accounts and everything but you don't have to keep the building up or anything.
I'm saying at the end of those six years the building has a terminal value. This is not a knockdown. If you assume every building was a knockdown there would be zero terminal value and then you'd have to say, "Oh, for some reason the land has no value as well." But if you start giving them any credit for some of these buildings having terminal value, then you can get a stock price well above the current price on – for liquidation.
Dan Ferris: So, value at the end of the cash flow.
Andrew Walker: And again, some of the buildings – yes, yes. So, I'm saying the cash flow – so, the contractual ones, and that gets you a decent bit to today's share price and then some terminal value for some of the buildings that you –
[Crosstalk]
Dan Ferris: Okay. I'm sorry, Corey, your question?
Corey McLaughlin: Yeah, I was just going to say in an example of how funny the markets work a lot of times, New Lease Office Properties, it's up – its shares are about up a hundred percent almost this year, and the company it spun out from, WPC, are up about 4%, which it seems – they thought this was the bad part of the business, the part that investors weren't – that wasn't working, and you just wonder what's going on with their own business at the same time?
Andrew Walker: Well, I like the way you frame it. But again, they – it spins out at the end of last year and there's just this huge forced selling. And WPC, as you and I are talking, is a $12 billion market cap company. NLOP, as you and I are talking, is a $450 million market cap company. So, again, this was a small, small piece. None of the shareholders wanted it. It was all management was getting asked about. They spun it off. And I did something that showed – the CEO of WPC, he obviously now owns shares in NLOP because it got spun off to him. The dividends he gets from WPC in one quarter covered more than all the salary, all the stock, everything he owns at NLOP. So, all this time, just getting this off his plate was so critical to them. So, that's what I loved about that setup.
Dan Ferris: Forced selling is an interesting – and actually, forced selling is interesting and even just spinoffs, like you'd think that the way that net-nets and other things were kind of arbed out of being really amazing hunting grounds, that you would be able to say the same thing about spinoffs. But not really.
Andrew Walker: Well, it's difficult because you say forced selling: Somebody has to be on the other side of that. And in NLOP's case, if you and I had been sitting here a year ago and we were like "We are so bullish on NLOP. We want access to it," how do you get access to it? Well, we'd have to – if we wanted to do – let's just hypothetically say we wanted to do a million dollar position in NLOP. We'd have to go buy $30 million of WPC stock in front of that to get a million dollars. We can't do that.
So, you get it and then every shareholder who gets it force sells it. We don't even know – you wouldn't even know ahead of time if NLOP was going to be interesting or not. So, you have almost a hundred percent of shareholders who want out. WPC is in a lot of REIT indices. I believe they're' in the S&P 500. I could be mistaken of that. They're in one of the big S&P indices. NLOP is absolutely not, so you've got a lot of forced sellers in the indexes. That's the thing about forced selling: It's hard to say, "Can this get arbed away?" because it's forced. And it's very difficult for – a lot of event people have gone out of business over the past 10 years, and even if there were still a lot of event people it's very difficult to absorb a hundred percent of the float getting sold in three years or something.
Dan Ferris: I remember when we talked to Chris – for our listeners, Chris DeMuth, who works at Rangeley with our guest Andrew – he mentioned that criteria of almost a hundred percent of the shareholders wanting out. And I found that interesting. I mean, it's a classic – I think Greenblatt even discussed it – it's a classic way to sort of look at a spinoff when they don't want it for whatever reason, not in the index, etc., etc.. But I've found that almost a hundred percent of the shareholders, it was just – it seemed another level of – it made the hurdle a little higher for spinoffs to insist on that.
Andrew Walker: Well, forced selling, again, it's something we love. S&P kicks something out of an index, that's generally a nice time to look at companies. Yeah, I guess we can talk forced selling, or there's one other spin I wanted to run by you guys as well if you want to do that.
Dan Ferris: Yeah, let's have a fish.
Corey McLaughlin: Yep.
Andrew Walker: Yeah. So, the other spinoff that I love – and again, I'm quite long on this stock, for full disclosure – is Seaport. The ticker is SEG. And Seaport was spun out of Howard Hughes, which I have a much smaller position in. But Seaport is Seaport Construction in New York City. This was going to be – for listeners who are familiar, Howard Hughes is a collection of real estate assets. Bill Ackman, probably one of his greatest investments was buying General Growth Properties, GGP. And basically, I believe he actually pushed them for bankruptcy, but in the global financial crisis for a dollar per share, and within a couple of years it was a 20-bagger. General Growth Properties, they have malls but they also have all this real estate across the U.S. They spun out Howard Hughes. And when they spun out, they owned a lot of master plan communities, MPCs. The big one is the Woodland out in Houston. But they also owned the Seaport District. And this is basically – they own a block in Manhattan, in the FiDi. It's a five-, 10-minute walk from Wall Street. They own a block in Manhattan.
And in 2012, 2013, they were saying, "This is our trophy property. We're going to spend a billion dollars on this." And think about spending a billion dollars and owning your own block in Manhattan. Who does that? So, "We're spending a billion dollars and this is going to be fantastic. We think in the endgame every – we're going to have so many great brands that want to have storefronts and everything. And we think in the endgame we sell it to some rich sovereign wealth fund who wants to own a block in Manhattan for the rest of time and they'll pay a 1% cap rate," which, remember, interest rates were almost zero. But they were like "They'll pay a 1% cap rate and we're going to make a fortune on that." It did not go well.
Similar to WPC and NLOP, Seaport was an absolute disaster. It was an increasingly small percentage of Howard Hughes' value. And it was pretty much all anyone was asking them about. Not all, but if you would go listen to earnings calls, 50% of the time would be spent on Seaport and 50% of the time would be spent on Howard Hughes' business. And that's a big mismatch because Seaport was probably worth five to 10% of Howard Hughes' overall value.
So, last year they said, "We're going to spin off Seaport." Seaport has been – I think everyone there was willing to admit it had been a complete disaster. We can talk about the reason why. But they said, "We're going to spin off Seaport. And we're going to spin it off with a rights offering. And the rights offering is going to be backstopped by Bill Ackman." And if you remember Joel Greenblatt's book, You Can Be a Stock Market Genius – I actually pulled this quote out in a writeup I did on the blog – he says, "You should look at every spinoff. But if I could give you one piece of advice, it would be this: Stop everything you're doing and look at spinoffs with rights offerings."
Now, he was referring to spinoffs that are done through rights offerings. This is a spinoff with a rights offering, so there's a slight difference. But this is the first spinoff I can remember with a rights offering backstop ever, I want to say, at least since I've been investing, at least past 15 years. People can correct me if I'm wrong, but I can't remember any. So, they spin off this. Howard Hughes shareholders at this point, they've been fed this – all of them hate Seaport. The financials are an absolute disaster. They've got this – the Tin Building, which they sunk $200 million into. They said it's going to be – forget Ebilee – Harrods in London. They said it's going to make that look like a clown show. They sunk $200 billion into it. The Tin Building has been a complete disaster. It burned – from memory – $50 million last year. A food court burned $50 million. A complete disaster.
Seaport has been dealt with – it comes out of Howard Hughes – it's got $180 million market cap and they do a rights offering. But as you and I are talking, it's got a $350 million market cap. They just did the rights offering, so they've got $150 million-plus of cash on the balance sheet. And they've got this district in Manhattan that they spent a billion dollars raising. Ackman owns – he did the backstop. He owns about 40% of the company. And I think they've got the right management team placed to stabilize, turn this thing around.
And then, if I started saying, "Hey, how much is a district – how much is owning real estate in Manhattan worth, a whole district?" you're getting offered it in the stock market right now for about – a net of the cash, about $200 million. I can get a whole heck of a lot more. So, it's not quite as clean as NLOP in terms of those guaranteed cash flows, but I think when you look at the cost on the ground, you look at the alignment, you look at the forced selling, I think it's just a fantastic, fantastic setup. And I really like it.
Dan Ferris: I'm detecting a real estate theme here, Andrew.
Andrew Walker: Well, it's funny you say that.
Corey McLaughlin: Real assets.
Andrew Walker: I have thought about that. I think it's because post-COVID there are a lot of these companies that the real estate – real estate split so hard with work from home and everything post-COVID that most publicly traded real estate companies tend to be kind of "steady Eddie" companies, and all of a sudden a lot of these real estate companies had pieces that weren't quite as steady, that didn't fit their shareholder base, that didn't fit what was in their core skill set. And a lot of them spun off, and they spun off – I love these quirky [inaudible]. I love this forced selling. And they spun off in forced selling, quirky [inaudible] ways.
So, I had thought about that. Hey, why are you so interested – why are your two largest positions real estate spinoffs? And I think the answer is I'm kind of looking where the fish are and that's where the most interesting quirky stuff is right now.
Dan Ferris: It reminds me – I forget exactly. It was within the last 20 years or so. I used to follow the Third Avenue funds when Marty Whitman was in charge there, and he wound up with half his portfolio in real estate stocks at one point because he just found all this stuff. And then, it all kind of ran up in the bubble or whatever. But it was like Tejon Ranch and St. Joe even and New Hall Land and Farming. And I stole a bunch of these from him and recommended them in the newsletter. Of course they did great.
But you – you're actually pointing in a direction here that is – it's classic of value investors. You don't know what you're going to be concentrated in next. You just know the kind of situations you're attracted to, and if it's a bunch of real estate, it's a bunch of real estate. If it's a bunch of crypto – whatever it is. It's sort of like Buffett is always saying, "We have no master plan." You have no master plan – you just know what's attractive to you.
And that's interesting to me because a lot of people sort of do have a master plan. They always want to buy tech and they always want to buy something that's growing like crazy. And they – so, they're not looking at oil or real estate or crypto or whatever it is. It's interesting. The eclectic, inherently eclectic nature of a true value seeker has always been very interesting to me because you're saying that nothing is off limits. There's a line, if I'm not mistaken, in – I'll probably have to paraphrase it – in security analysis where he basically says "Anything can be attractive at the right price." I forget the exact line. That's a pure power phrase. And that's you, isn't it, Andrew? No?
Andrew Walker: Think about GFC. Lehman bought it. After they went bankrupt, a lot of people made money buying – no, Luckin Coffee over in China, which, hey, fraudulent financial statements, but if you came in post the blowup, a lot of people did manage to find value there. I've had a lot of people pitch silver bonds and PREFs and equities, saying, "Hey, yeah, it went to zero, but if you look at the whole co structure, these are interesting bets."
So, look, the right price for anything, anything can be interesting. And I think these quirkier areas of the market, I think they're interesting. And I think they're – look, I'm sure all of us are kicking ourselves we weren't buying Facebook in late 2022 at under $100 a share, but there are a lot of people who can do that. But the people who can look at these quirkier situations with real analysis, hopefully there is a pot of gold at the end of that rainbow, as I like to say. Hopefully, that's the area where you put a lot of work in and your work can be rewarded.
Dan Ferris: Right. There's another set –
Corey McLaughlin: Right. And Chris talked about this with us a little bit, your timeline for these quirky situations. Generally, what are you looking at? Explain to our listeners just what –
Andrew Walker: You never know. I mean, the nice thing about NLOP, one of the things that's so attractive there is they – they're going to liquidate that thing. So, when you were buying it, if you were fortunate to be buying it for $12, you could do the math, you could see the cash flow schedule from all of their things, and you could say, "Hey, at the end of three years they're probably going to sell this whole thing down." There's management contract structure in there that suggests they're incentivized to wrap this up within three years. So, that was a really nice one because you kind of say, "Hey, I've got a pretty tight time frame on it."
Seaport? I don't know. Again, there's a billion dollars of cost in the ground. I'm not saying that this thing is performing well. There's a reason it was spun off. But I do think one of the interesting things is – and again, it was 5% of the assets at Howard Hughes. It was all people were talking about. And I think you have something where if you've been pitching something as a trophy asset for years and then it becomes a disaster, and a lot of the people who were associated are gone, but everyone else around it, it's kind of like "Hey, that flaming bag of garbage over there, the people who were in charge of it are gone. I kind of don't want to put it on my plate. It's not critical to the company. It's a small piece of their asset value. If I take it on, it's a big headache for me. I'm mid- to upper management – if it goes well, I get a pat on the back. If it doesn't go well, I'm probably going to get fired even though I'm inheriting this awful problem."
So, I do think Seaport is something where – it was in a really weird space but now it's spun off and you've gotten a very incentivized management team that's taking over. And I think there are a lot of changes they can make where they can say, "Hey, why are we burning $50 million per year on a food court. That's insane. We're bringing that cost down or else we're going to blow up the building." And I mean that hyperbolically. But they're going to bring that cost down or else they'll turn it into a McDonald's and they'll run it at break even. But you can't burn $50 million.
Well, when you're in a big company and nobody wants to take on this flaming pile of garbage, that can happen. You have this scenario where prior management, they've invested a ton. You've got this asset that's very small but it's a clear disaster. Now that it's spun off you've got a new incentivized management team. They're going to make very obvious, quick changes to fix – to stem the bleeding and then you can benefit from the – from a Manhattan district that has a billion dollars of cost into it. This is a very unique district with a lot of history and I think the upside is enormous. And the downside – and again, there's – at this point there's no debt on the balance sheet. There's a lot of cash. And you've got real estate in Manhattan. I think the downside is quite protected and the upside is very high.
Dan Ferris: What do you think the prospect for taking on debt is at this point?
Andrew Walker: At Seaport? I mean, eventually, if you thought about a fully leased up district where things are going great here, a hundred percent lease, they've got storefronts popping, guaranteed – anytime a tenant goes out people are just bursting the doors down to resign. I think they would lease this up and sell it to a REIT. This – a lot of the initial thoughts that they had, if it played out well, would work. But I don't think management is looking to YOLO this up until – there is a lot of – maybe – there's some easy lifting and then there's some heavy lifting to get this in a place where you're looking at that.
Dan Ferris: Okay. And it seems like – I mean, just grabbing a quick chart on Yahoo, it seems like it kind of hasn't really moved much.
[Crosstalk]
Andrew Walker: No. So, it spun off – it was – again, to the Greenblatt thing, it was very interesting where it spun off and they – every share that you owned, they were doing a rights offering. For every share you owned you had the right to buy – it was roughly 1.2 shares of stock at $25 per share. So, it was this very unique spin where it spun, it hit your account, and then they said the next day, "Hey, this stock is worth $26 or $27. Do you want to write a $30 check for every $25 worth of stock you have to get more stock?" So, it was this very unique setup. Look, the spin happened just a couple months ago. The rights offering just finished. The management team hasn't really communicated with anyone yet. They said they're – in their third quarter earnings release, which just came out a week or two ago, they said, "Hey, we're not hosting a call. The first time we're really going to communicate with people is when we report Q4."
So, yeah, this stock – If you did the rights offering and you bought this all at $25 you're probably pretty happy with where the stock is. But I think that pales in terms of the long-term potential, the costs and everything there.
Dan Ferris: All right. That sounds interesting to me. It sounds interesting because it's – it hasn't doubled already or anything. It's still priced for an incredible return.
So, Andrew, we actually are near the end of our time and it's time for me to ask my final question, which is the same question for every guest, no matter what the topic, even if it's a non-financial topic. Identical question. Chris answered it. All the guests answer it. But the question is simple. If you could just please leave our listener with a single thought today, what would you like that thought to be?
Andrew Walker: All right. So, based on our conversation, I would just say "incentives matter" would be – if you were leaving and you say, "Hey, does Andrew look at the world? How does Andrew invest?" it's "incentives matter." So, I like the incentives of having insiders aligned with us. And I like the incentives of "Hey, every person who is selling this stock to me are not doing fundamental work, they're not doing anything, I'm providing a service to them by buying this stock. They don't care what the economics of selling it are."
So, those were the two things – that's more what you would take away from "Hey, what does Andrew think about as an investor?" or something. But those would be the two things.
Dan Ferris: Great. Great answer. Thank you very much. And thanks for being here, Andrew. I really – this was very exciting for me, to sit and listen to you describe all these ideas and give us a couple of tickers and some thoughts about those. Thanks very much and I hope we'll have you back again soon.
Andrew Walker: Hey, thank you guys so much for having me. I'm always here. Again, disclaimer, I mentioned every time – any stock I was long, I disclaimed it at the end. And yeah, appreciate guys for having me.
Dan Ferris: You bet.
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Well, that was very interesting. Chris and Andrew, both from Rangeley, man, you just start them up and set them loose and they're just so energetic and filled with ideas. And among our guests, I find that they are the ones most passionate about talking about individual stocks. They've just got – they just want to share it with you. It's great. I loved it. I loved every minute of that.
Corey McLaughlin: Yeah. Yeah, I loved that too from them – they just have special situations. And they have so many ideas. And yeah, like what you're saying, conviction in them too, which is nice to hear and refreshing to hear because they're actually doing the work on these hard assets in many cases, the numbers that nobody else is paying attention to. You hear so many things in the mainstream about – it's just a lot of opinions, basically, is what you hear a lot of the times from people talking about investment ideas. But theirs is not an – well, it's an opinion but it's a very grounded take and very set parameters of how it could work out and how it could not and why they're – why they are so convicted in it. So, yeah. It's – I love listening to them.
Dan Ferris: Yep. And I loved the section where he was talking about the crypto miners' business model, and I thought, "Wow, that's a great sort of a –" it's like a – it's a razor. It's like is this just sort of good for flipping on and off to do crypto or is it, like he said, AI-worthy assets. And I thought, "Wow, okay, that's good to keep in mind if you ever want to look at one of these things." Really great stuff. I love it. I love people who are filled with ideas, just overflowing with ideas like that.
So, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really, truly did. We do provide a transcript for every episode. Just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "Transcript" and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please. And also do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want us to interview? Drop us a note at feedback@investorhour.com or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.
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