In the past year I’ve roles which brought with it new learning, but also significant restrictions on investing in public markets. This doesn’t mean I’ve stopped, but it does mean it slowed downs significantly due to time and regulatory restrictions. Some interest picks remain.
Howard Hughes Corp (HHC) caught my attention back in November/ early December. While price hasn’t moved much, I still like it as a long term pick. First, the business has complete control over it’s development process, at-least in all major projects. They are able to add residential (high density or low), commercial, office, etc as they please. They buy properties in booming markets, often on the out-skirts, large swats of undeveloped land. While they do need to run utilities, the local municipalities often give them MUD Bonds. As these properties develop, they land values naturally raise. This has been a wonderful long-term project for them. Vegas and Texas projects especially. As such, we see IRRs for all projects at 15%+, often above 30%. While they have fumbled to some extent the Seaport project in NYC, it seems in the long run- NYC land generally is a safe bet. Though on a sum of the parts model, you get to well above $110 per share, even excluding Seaport. This is assuming much longer property price growth, lower project margins, and a large 15% discount rate for residential projects for the MPCs. The condos I put at 11% discounts (mostly in Hawaii), of which are almost entirely pre-sold prior to breaking ground with hard 20% deposits (90%+ pre-sales). I do need to thank Bill Chen aka “Leg Day Guy” (twitter) for putting me onto this company and for impressing me with his Kirkland sponsored squats.
Next, Canadian housing. Oh Boy. At the time of writing, we observe 25% of mortgages in Canada with amortizations of 35 years. For reference, this time last year that figure was ~1%. Its above 30% when considering 30 year amortizations. Consider that the average Canadian first-time home-buyer is 36 years old. You are on track to finish paying it off at 71. Ignoring alternative cost of capital (i.e. investing into public markets), at current rates, recently buyers will need their property to more than double if they are at 5.5% with 25 year amortization just to breakeven on their mortgage. That doesn’t count repairs, potential renovations, insurance, property tax. I’m not a home owner, though I hear those can be pricey. If you are getting fixed 5 year rate with a $1mm CAD mortgage (assuming 20% down payment), your monthly payment will be ~$6k per month. This mortgage amortizations figures we published prior to the recent rate hike. It would not be surprising to see more and Canadians may soon be shocked to find property prices don’t go up annually forever. If prices do drop in any meaningful way, it will be interesting to watch.
Finally (I think), I’ve spent the last eight months shopping for private business to fully acquire. It has been a very interesting space. Generally we have focused on businesses priced from $3mm – $10mm, looking for $1.5mm of SDE and where we could install an operator on our behalf to run daily ops. Almost the entire search has taken place in the USA, opportunities are much less attractive here in Canada. We have focused on industries such as; electrical engineering, orphan wells, industrial clean-up, golf cart sales, pest-control, etc. We are specifically avoiding anything “exciting” such as anything technology related. Neither myself nor my partner are comfortable with that area, plus valuations tend to be ridiculous. It is interesting to see e-comm businesses listed at 15-20x EBITDA (on $500k EBITDA). But someone must be paying if they are listed in those ranges.
Next the realization that I was spoiled with financial statements in public markets. You expect something different, but its amazing how different they are. Without disclosing any private info, take a trip to BizBuySell (or similar) and fill out a few NDAs. But that reduced financial disclosures comes with more opportunities. The universe is significantly broader than public markets, the financing options are much broader (owner’s earn outs/ notes). Its more interesting and I’ll be sure to detail any business which we close upon and how the close goes (retroactively of course).
(Update coming October 20th)
Red Canoe Capital 