SYTE - Enterprise Diversified

[Ballinvarosig Investors]

I am going to guess that there is eventually a HUGE write down on these properties.

I doubt they will be able to get a property manager that cheap.  Maybe? Let us say that I am wrong assume that they do for that low a price. 

What of the quality and diligence of monitoring/watching/fixing/improving the properties?  A 3rd party management company is not going to be that good, certainly not for that price.

When you are dealing with lower end residential property, third party management is a bad idea. Any of the successful people I know who are involved in this area are all very hands-on and run their business directly, usually using a few trusted tradespeople. Yields on these properties are generally good, but the business requires more direct management (things get broken more often, tenants will try to stiff you, etc.). Third party management will simply not do as good a job as a motivated owner operator. They won't chase down tenants for arrears, they will not spend time on bodge repairs, etc.

Personally, I think it's a mistake for the company to part ways with Moore in this fashion. If they don't want to be in the business and want to back out, by all means start liquidating. But I would be surprised if it works any better with a third party manager.

[writser]

Also, I appreciate the comments about the timing of the filing. We typically try to file the Qs on Friday afternoons, for example. In retrospect we should have been more sensitive about the timing of this filing. Clearly we did not believe that it would be market moving.

The chairman is leaving the company effective immediately, a subsidiary is buying real estate without the company knowing and is deemed 'not financially prudent' and now the real estate portfolio will be restructured. There are still many unanswered questions re: internal controls, restructuring costs, estimated losses on the real estate portfolio, etc. etc. If Biglari would do something like this the board would go utterly crazy. I find it hard to believe that you sincerely think you can release such a press release during market hours because you think it won't move the market.

You know more than we do about the break-up so I guess it's possible you look at this press release with rosier glasses but still: blank out all the names, show the press release to any random investor and he/she will tell you in 5 seconds that this looks like major bad news. "I didn't think it would impact the market" vs. a 30% price drop on huge volume implies a ridiculous disconnect between what you think and what the market thinks. So either the market is crazy, you are way too optimistic or the press release was badly phrased. And in my experience it's never just the market being crazy ..

[Spekulatius]

Also, I appreciate the comments about the timing of the filing. We typically try to file the Qs on Friday afternoons, for example. In retrospect we should have been more sensitive about the timing of this filing. Clearly we did not believe that it would be market moving.

The chairman is leaving the company effective immediately, a subsidiary is buying real estate without the company knowing and is deemed 'not financially prudent' and now the real estate portfolio will be restructured. There are still many unanswered questions re: internal controls, restructuring costs, estimated losses on the real estate portfolio, etc. etc. If Biglari would do something like this the board would go utterly crazy. I find it hard to believe that you sincerely think you can release such a press release during market hours because you think it won't move the market.

You know more than we do about the break-up so I guess it's possible you look at this press release with rosier glasses but still: blank out all the names, show the press release to any random investor and he/she will tell you in 5 seconds that this looks like bad news and I think you should have considered that.

Yes, I don’t get it either how Jeff can buy another 83 properties (195-113) without the board knowing. there are not many charitable explanations for this. Managing a portfolio of 113 single home properties in Kentucky isn’t exactly like eating a piece of cake either and I think a disposition at a considerable loss is quite likely, now that interest rates move up. Jeff bought these so quickly in a geographically confined area, he almost must have cornered the market.

[valueyoda]

 The current price still looks extremely expensive too me, given the likely writedowns on the real estate portfolio, the discount that should be placed on corporate governance issues and the ongoing volatile nature of cash flows from the asset management division. How do some of the bulls value this company now given these headwinds? I can't put more than a $5 valuation on the company if I am generous.

[DTEJD1997]

Also, I appreciate the comments about the timing of the filing. We typically try to file the Qs on Friday afternoons, for example. In retrospect we should have been more sensitive about the timing of this filing. Clearly we did not believe that it would be market moving.

The chairman is leaving the company effective immediately, a subsidiary is buying real estate without the company knowing and is deemed 'not financially prudent' and now the real estate portfolio will be restructured. There are still many unanswered questions re: internal controls, restructuring costs, estimated losses on the real estate portfolio, etc. etc. If Biglari would do something like this the board would go utterly crazy. I find it hard to believe that you sincerely think you can release such a press release during market hours because you think it won't move the market.

You know more than we do about the break-up so I guess it's possible you look at this press release with rosier glasses but still: blank out all the names, show the press release to any random investor and he/she will tell you in 5 seconds that this looks like major bad news. "I didn't think it would impact the market" vs. a 30% price drop on huge volume implies a ridiculous disconnect between what you think and what the market thinks. So either the market is crazy, you are way too optimistic or the press release was badly phrased. And in my experience it's never just the market being crazy ..

I was thinking about this later in the night.  Senior management didn't think it would affect the stock price?  wut, Wut, WUT?

Rightly or wrongly, some shareholders are going to be concerned/upset about this.  That alone will lead to a lot of "forced" selling as investors re-evaluate the investment thesis.

If senior management was blindsided by the market's reaction, what else are they missing?

[Tim Eriksen]

Either I am going to look foolish or others are.  Some of the comments do not make sense to me.
a disposition at a considerable loss is likely now that interest rates are moving up -
1. they are not selling all the properties, only ones that are not rehabbed (I suspect they may even rethink this).
2. higher interest rates are good for rents.  So that is a positive on properties they hold.  They are going to hold nearly all the properties to stay in compliance with the 40 Act.  They have to.  Investments must be less than 40% which means they must have more than $26 million of assets.

Jeff is smart... expect a HUGE loss on disposition.
1. I agree Jeff is smart.  That implies Jeff made good purchases, appropriately rehabbed, secured good renters.  Jeff sold for stock not cash.  Meaning he was essentially a buyer in the transaction as well.  So which is it?  Is Jeff smart or dumb?  The only way to have a huge loss is if Jeff was dumb or SYTE irrationally sells off the properties, which they will not and can not do.   

Here is another point.  If Jeff bought 80 properties.  That would cost roughly $5 million.  If he is keeping the properties, then all SYTE is hit with is the interest charge during the period.  Let's assume 6% or $300k per year, or $75k for the quarter.  That creates a loss but not a huge one.  If you add in staffing in the quarter - let's assume five people at 5k per month would be another 75k for the quarter.  I do not expect a large charge this quarter or next.

 Yet investors have taken $10 million off the market cap.  Nearly the whole value of all the Lexington properties.  Three times the net purchase price (equity issued to Jeff). 

I buy the story that it was a difference over execution - grow with cash generated internally from the business with acquisition debt available from the parent (mgmt thought) versus grow rapidly with interim losses being acceptable (Jeff thought).  We will see.     

[valueyoda]

Hey Tim. I agree with most of your points. But what is the bull case at this price?

[bizaro86]

The bull case is that one of the hedge funds they're incubating blows up to $10B AUM, and they get a fee override.

This is terrible news though. Single family residential is an owner-operator business, it isn't something that scales well. But before the story was we have a great owner operator who is chairman and has a big stake. Now we have a hedge fund type who has a big portfolio of low end single family houses in Kentucky getting professionally managed for income. Hard to see how that could go very well, imo.

I really don't like 'not selling because of the 40 act' as a reason to own something. If it's not a good business to own I'd rather sell and buy something that is.

[matts]

I buy the story that it was a difference over execution - grow with cash generated internally from the business with acquisition debt available from the parent (mgmt thought) versus grow rapidly with interim losses being acceptable (Jeff thought).  We will see.   

Tim, that story is certainly possible, but to me, it would seem a lot more likely if the story ended with:

1) Moore resigns
2) Moore issues a statement saying "difference of opinion on strategy folks, I'm off to do it the way I want"

how do you explain what actually happened?

1) they terminate their up-until-a-month-ago chairman effective immediately
2) file a public document stating Moore's actions "were not financially prudent".
3) Don't bother with a press release, just dump an 8-k during market hours


Don't you think if this was just a difference of opinion Jeff would fight like heck not to have his reputation impacted this way in a public document that lives forever?! and wouldn't Steve also want to avoid the optics of a termination and such harsh language in the filing?

We've all read hundreds of these kinds of corporate announcement and it seems to me, that whenever possible, companies allow everyone to save face. "he went to spend time with family", "I'm leaving, but I believe in the company and in fact I will keep a substantial position in the stock." This is in fact what Steve has attempted via his tweets late last night after the market reaction. But what prevented a mutual press release in the first place? To me, the simple "difference of strategy" narrative just does not fit with the events surrounding the announcement.

[matts]

The bull case is that one of the hedge funds they're incubating blows up to $10B AUM, and they get a fee override.

This is terrible news though. Single family residential is an owner-operator business, it isn't something that scales well. But before the story was we have a great owner operator who is chairman and has a big stake. Now we have a hedge fund type who has a big portfolio of low end single family houses in Kentucky getting professionally managed for income. Hard to see how that could go very well, imo.

I really don't like 'not selling because of the 40 act' as a reason to own something. If it's not a good business to own I'd rather sell and buy something that is.

Sure, except each of their current managers have stated multiple times in public that their strategies only work with small amounts of capital. I really wouldn't want to be in that 10 billion dollar OTC Adventures fund...