It’s been about three weeks since I’ve written. I’ve read and dissected a billion quarterly reports and now the cycle is mostly done. This time of year is always stressful on time – companies release their annual reports at the end of March and then another quarterly report either at the end of April or the first week or two in May, so there is a lot of reading that has to be done in a relatively short period of time. The most painful part is when I sometimes have to listen to conference calls when transcripts are not available.
Since then I have been on a liquidation spree. My favourite cash parking utility in the public markets (long-time readers here will have a deep suspicion as to what it may be) lately started to trade at a gigantic premium to intrinsic value that I just had to start liquidating – basically investors are pre-paying 7 months’ worth of future dividends on this fixed income instrument (i.e. it is trading at a lofty premium to par value) and I highly suspect it will be a ripe target to get called out by its issuing company (they are paying dividends a good deal higher than their cost of capital if they were to float a bond offering to replace it). So despite the fact that the yield on this was awfully attractive, it had to go for risk concerns.
Another position that was liquidated was a good chunk of my Gran Colombia Gold (TSX: GCM) debentures. I was fortunate enough to cash a good chunk of it out at a premium to par value and convert the rest into stock. I still haven’t decided what I will do with the stock. Financially, the company has made a remarkable turnaround since I invested in the debt early 2016 and basic math suggests that the common shares are undervalued – especially now that the company’s solvency is no longer in doubt because they’ve equitized a good chunk of their debt – US$150 million into what will be US$98 million in August (when TSX: GCM.DB.U auto-converts into stock). The company at that point will have around US$20 million cash in the bank which is no longer encumbered by the cash sweeps mandated by the previous debt holders. The new debt is auto-liquidating, so each year they will pay down about a sixth of the debt principal.
So on paper, in light of the relatively high EBITDAs it is generating, Gran Colombia looks cheap compared to its peer group. One possible explanation is the common stock has been a victim of convertible debt arbitrage and there simply hasn’t been sufficient demand for common shares – this theory will be tested in the upcoming months. The other risk of downside includes being effectively a single mine operation in Colombia, and also the feasibility of future capital expenditures to expand mine growth (I still have a 624 page NI 43-101 to plough through! I’ve prioritized other company quarterly reports before this technical mine report!). GCM is not exactly an unknown company either – other intelligent people have written about this company over the internet and there are various risks to consider which could explain the relatively low share price (especially resentment that equity holders got nearly wiped out in the late 2015 recapitalization).
Besides for this and a few other routine bond maturities (this was just small yield picking on short duration investment grade securities which weren’t worth the research I dumped into them), I’ve raised a lot of cash for future investment. The problem is I have no idea what to invest it in.
I have the highest weighting of cash in the portfolio than I have had in a long, long time. I ended 2015 at +42% cash and percentage cash today is even higher.
I have some marginal investment ideas on queue, but in a rising rate environment the risk one takes is a bit higher. It is nothing like early 2016 when things were being thrown out the window with double digit yields (I do miss those days). However, there are some glimmers of despair and panic out there – I’ve been looking quite closely at pipelines, which are currently the media focus of doom and gloom and all things wrong with society. Pipelines today is what tobacco was in the 90’s.
The CEO owns about $500,000 worth of the “world class cash parking utility”. So I don’t know if a refinancing is likely while he owns that stake. It puts him in somewhat of a conflict of interest that may best be resolved by doing nothing. They also have the option of converting to common at 95% of the common share price. That could be the end game in mind once the company feels that it’s stock is getting pricey. It gives them an easy way to issue some stock when they want to. Though that may be a long way off. The stock has recently moved from $7 to $10, but I think it’s worth north of $15. The company itself is buying back shares. I own both the common and the preferred.
$15? A man can dream…
For DRM, $15 is just the bottom end of my valuation range. I didn’t want to shock anyone.
@Aharon: Love your comment…
@Rod: I was pretty wrong with how Whistler-Blackcomb turned out on the public markets (if you can remember those days), and operationally DRM has a recreational property that’s making very good money. The rest of it should actually give out money in future years as long as their respective housing markets don’t collapse. The rest of it can be replicated in one’s portfolio… I can see what variables you’d use to get the $15 mark but above that I’d be curious what the assumptions were.
Either way, they’re not the type of business to drop 80% in a day which gave me confidence in the “world class cash parking utility” as you put it but CEO conflict of interest or not, it really is difficult to justify this over-premium to par that it is currently trading at…
There are a number of significant assets whose values exceed those on the balance sheet:
The 10,000 acre urban land holding in Alberta and Sask is carried at cost of $50K per acre. My own analysis suggests it’s real value is about twice that. This is a roughly 30-year development pipeline, so the discount rate you use is meaningful.
The Arapahoe Basin ski hill in Colorado is valued using equity accounting and is on the balance sheet at something like 3X earnings.
The asset management business is not on the balance sheet at all except for about $40M relating to the contract to manage Dream Alternatives (DRA.UN). There is a lot of hidden value here. They earn fees to manage the public real estate trusts, but also development and management fees on third party money in their own urban development activities.
With these three assets revalued you can get an NAV over $15. There is also a significant amount of urban land in Toronto with a low cost basis. They have plans to develop more condos on these lands in the next few years. The additional value here adds several more dollars to NAV. You have to hope that downtown land value in Toronto doesn’t collapse for this extra amount to be realized.
My estimate of NAV is $15 to $20 per share. Given that the company has a 20 plus year history of increasing value at far above average rates, you might apply a premium to this NAV range to account for growth. I think that is reasonable. So my estimate of intrinsic value is $15 to $25.
You may call me a dreamer, and I may be the only one, but I’m sticking with it!
The “Dream” continues with another dividend today and no retraction notice! I always remember my heart beating when I see the notification of a news release and open it up and… don’t see it.
Somebody from TD Securities has a LOT of money that they are throwing into it. Pretty much all of the buying at this level is from them.
The market is usually right….if trade volume supports it…..kind of hard to call it on the Dream….slight increase in volume.
@Rod: With regards to the DRM Prefs, do you expect the company will not redeem the shares for quite some time? Unless something has changed, they can still do so for $7.16 cash. With rising rates, one would assume they would have redeemed them by now if they were so inclined.
http://www.dream.ca/wp-content/uploads/2017/03/Dream-AIF-2017-FINAL.pdf
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Chris: I don’t think the prefs will be redeemed for a long time. Obviously, I could be wrong. Things that suggest they won’t redeem: They have indicated that they have a lot of good uses for capital right now. I think redeeming the pref is low on the list of options. They wouldn’t replace it with debt, because they are careful of their debt levels and more debt would constrain other investments in their development business. They could replace it with a new pref, but they have never done that. In fact, the existing pref is a legacy from the spinoff from Dundee in 2013. The size of the pref is small. They may not care that much about paying higher divs than necessary. The CEO owns half a million dollars worth. DRM pays no dividend, so the pref could be seen as the way to offer one. The company may be happy for shareholders to have that option. They haven’t redeemed yet even though they could have for a long time. That suggests they don’t care that much. I think the most likely outcome is that the pref will be redeemed for cash with no new pref issued or converted into shares in a few years when either the stock seems high to them or the investment opportunities are poor. I would watch the debt level of the company. They would likely pay that down first. Of course, they could redeem it tomorrow despite all this. I’m betting they won’t redeem for a long long time.
@Rod: Thanks for the input. I’ve had my eye on the prefs for a while, but didn’t have the capital available when it was trading lower. He’s obviously a light trader, but I’ll take everything I can get under $7.30. With regards to Dream, I sold into the recent D.UN tender offer, and still hold DRA.UN.
Sacha,
Have you finished reading that NI 43-101?
Yes, I have. Work that involves this amount of time, however, I won’t be sharing my thoughts about.
With all the cash they are generating, a bit surprised they go with an equity offering of $25 million. They can generate that money in a couple of months!
Their offering is a disaster for a few reasons.
One is why bother? They’ve got cash on hand, they’re generating cash, gold (at least before today) is above $1,300. The only apparent reason is a money grab. I also do not like this dealing with Sandspring.
But since their stock is halted this moment it might be a moot point. I was going to write about it later.
I did sell about 75% of my equity holdings in GCM, the majority of it in the upper 3’s and lower to mid 4’s. Should have gotten rid of it all in the day after the idiotic Venezuela news release.
Sanity prevailed at GCM and they did a convertible offering instead, for less size ($20M) than their previous proposed equity offering.
Still, not a fan of this fundraising.