Posts By: Geoff Gannon

Silvercrest Asset Management (SAMG): A 4% Dividend Yield For an Asset Manager Focused on Super Wealthy Families and Institutions

Silvercrest Asset Management (SAMG) is an investment manager. It looks cheap if you expect it – as has been the case in the past – to do a good job of keeping its clients and keeping those clients keeping about as much money with them as before. However, most publicly traded asset managers are cheap stocks, because they have experienced – and investors probably expect them to continue to experience – redemptions. In some ways, Silvercrest looks a bit closer to Truxton (TRUX) – another stock I wrote-up – than it does to some of the asset managers that just run mutual funds for the general investing public. Silvercrest’s client base is a mix of ultra-wealthy – their top 50 clients average $290 million in assets each at Silvercrest – families (2/3rds of the business) and institutions (1/3^rd of the business). These clients are put into a mix of homegrown investment options and outsourced investments. For all clients, the average is closer to about $30 million. However, as you’d expect – most of the assets under management are with their top 50 clients (who, again, each average close to $300 million in assets with Silvercrest).

Silvercrest charges mostly asset-based fees. These average a bit less than 0.6% of assets under management. Unlike Truxton, Silvercrest is not a private bank. It offers other services. But, these are a small part of the business, aren’t growing very fast, and aren’t something I’m going to discuss much here. So, Silvercrest might sit midway between the kind of publicly traded asset managers you’re more familiar with (say GAMCO) and a private bank / trust business like Truxton. I don’t think it’s entirely comparable to one or the other.

There’s a write-up over at Value Investors Club on this stock. It’ll be a little different from what I discuss here. So, I recommend reading that. But, there’s not going to be a ton of information in there that I don’t also cover. This is because both my write-up of Silvercrest and that Value Investors Club write-up look like they’re nearly 100% based on reading the company’s 10-K. The company does earnings calls. You should read the transcripts. It might give you a little bit better feel for the sales process and things like that. The company also puts out an annual report (on its website) that includes a shareholder letter not found in the 10-K (the rest of the annual report is just the 10-K).

As of the last 10-Q (September 30^th, 2020) the company had $24 billion in asset under management. However, that is for the consolidated entity Silvercrest L.P. which is 35% owned by employees of the company and only 65% owned by public shareholders in the entity I’m writing about here.

So, as a stockholder, you really only have an interest in $16 billion of that AUM.

Silvercrest has a diagram to explain this. But, it’s worth going over here. The publicly traded company owns about 2/3rds of the …

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Investors Title Company (ITIC): A Strong, Consistently Profitable Regional Title Insurer Trading at a Premium to Book Value

This stock was brought to me by Andrew. He wanted to know more about the title insurance industry. ITIC is a publicly traded (it trades on NASDAQ) regional title insurer. There are four large, national title insurers that account for 80-90% of all title insurance market share in the U.S. However, in some states – the leading title insurer is a homegrown operation. These companies are known as “regional” title insurers. ITIC was started by the Fine family in the 1970s (it became operational midway through 1976). By the 1980s, it became the largest title insurer in North Carolina. It has since expanded into other states – mainly Texas, Georgia, and South Carolina. Premiums in North Carolina, Texas, Georgia, and South Carolina account for 75-80% of the company’s premiums. ITIC writes mainly (but not totally) directly in North Carolina and through “issuing agents” (lawyers, bankers, basically anyone originating a real estate purchase or transfer or refinance) in other states. Generally, there is no commission associated with title insurance premiums written directly and slightly under a 70% commission rate for insurance written indirectly.

ITIC is a “primary” insurer. It does own a reinsurance subsidiary. And it both assumes and cedes some insurance each year. However, this has never been a material part of its business. As far as I can tell – and I only read the most recent 10-K from 2019 and the oldest 10-K from the mid-1990s – reinsurance has been less than 1% of revenues. My guess is that the reinsurance business is not for regulatory reasons. It probably has to do with the company’s choice to not retain individual risks in excess of a certain amount. For example – and this is just a hypothetical illustration, it may be close to the truth but is not something the company says explicitly – if someone wants $900,000 of title insurance, the company may take the first $500,000 and retain that risk in the usual insurance subsidiary and then pass the other $400,000 on to the reinsurance subsidiary. As of the 1990s, we know that this was not a requirement that state regulators in North Carolina put on the company. It was a choice the company was making.

ITIC’s financial position is strong. You can see it has an A.M. Best rating of “A” (there are only two notches above this: A+ and A++). In a podcast I did recently with Andrew, I mentioned that investors may want to look for an “A minus” or better rating from A.M. Best to know if there is anything about the company’s financial position that might be a concern in terms of the strength of an insurance subsidiary. Keep in mind that an A.M. Best rating is really an indication of insurance subsidiary strength as an insurer (safety for policyholders, ability to reinsure others, etc.) and not a credit rating. It’s certainly not a rating of the safety of the common stock or its dividend.

Having said that, I wasn’t surprised when …

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Marcus (MCS): Per Share Value of the Hotel Assets

I’m revisiting Marcus (MCS) with an attempt to appraise the hotel side of the business. Andrew sent me some articles discussing property tax appraisal of Milwaukee hotels (including those owned by Marcus). I looked at some other property tax records. I looked at Penn State’s hotel value index. Andrew spoke with the CFO of Marcus. And I consulted a few other sources.

My best guess is that the pre-COVID fair value of Marcus’s hotel assets was around the $235 million to $400 million range. On a fully diluted basis (41 million shares) assuming that the convertible is fully converted – this is inaccurate, because it ignores the “capped call” Marcus entered into – that works out to between $6 and $10 a share from the hotel segment. Remember, Marcus has like $5 a share in debt. It has cash, tax refunds due, other assets it isn’t using etc. that might be worth around $2 a share. But, then this is a hotel and movie theater company. So, it’ll burn through some cash in the quarters ahead. Maybe it’s best to ignore the cash, tax refunds, excess land etc. and assume that Marcus will just need to use that stuff to fund cash burn through 2021. That leaves $6 to $10 in hotel value per share vs. debt of $5 a share. So, hotel value net of debt is $1 to $5 a share. Marcus stock is at $11 a share right now. So, the stock is pricing the theater chain at like $6 to $10 a share. In a normal year – like 2022, maybe (certainly not next year) – I wouldn’t be surprised if Marcus could do $1 a share in free cash flow from its theaters alone. So, that’d mean the stock is now priced at like 6-10x free cash flow from the theaters.

What’s MCS stock really worth? Probably more like twice that amount (14-20x free cash flow) if it was priced like a normal business.

How solid is this $6 to $10 a share (after the conversion adds to Marcus’s shares outstanding) in hotel segment valuation?

Not very. Hotels are pretty difficult to value in the sense that they bounce around a lot like stocks do. Cap rates are important. If yields on other assets are very low, hotels will rise in price. If debt is widely available, hotels will rise in price. And then these are cyclical assets. If you look at the year-by-year figures for hotel values on a per room basis – each year is priced a lot like the market is just extrapolating the present into the distant future. Hotels may have fallen like 30% or something in value during COVID. But, this isn’t really relevant on an asset like this. And I’m going to ignore 2020 values for hotels even though they are our most recent valuations. I’m not going to value hotels in 2020 for the same reason I wouldn’t value a stock portfolio using early 2009 prices. They clearly …

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Marcus (MCS): A Movie Theater and Hotel Stock Trading for Less than the Sum of Its Parts

Marcus (MCS) is not an overlooked stock. Despite having a market cap of around $300 million – the level usually defined as the cut-off between a “micro cap” and a “small cap” stock – well over $10 million worth of this company’s stock trades on some days. The stock is liquid. And most of that liquidity is probably highly speculative activity. This is typical for the industry. You can see similar amounts of high share turnover, high beta, etc. at other publicly traded movie theater companies like Reading (RDI) and Cinemark (CNK).

A major reason for that is COVID. I’m going to ignore COVID throughout this write-up. If you’re a long-term investor looking to buy a stock and hold it for the long-term, COVID may influence your appraisal of a company a bit in terms of cash burn over the next year or so. But, aside from that, it matters very little in predicting where a hotel or movie theater stock will trade within 3-5 years. Also, due to the value of the real estate Marcus owns, I don’t foresee meaningful bankruptcy risk here compared to other hotel and movie theater stocks. Most companies in the movie theater and hotel businesses own virtually none of their locations – Marcus owns the majority of the properties they operate in both segments. In fact, Marcus is remarkably overcapitalized compared to its peers in these industries.

And, despite not being overlooked, Marcus may actually be cheap. The company is made up of two businesses. One business is the fourth largest movie theater chain in the U.S. The other business is a collection of hotels. I’m most interested in the movie theater business. So, I’ll start by trying to get the value of the hotel division out of the way.

Marcus manages around 20 hotels. However, it only has ownership stakes in less than half of those. It owns 10% of one hotel. It owns 60% of another hotel. And then it owns 100% of a hotel where the property is held under a long-term lease (instead of outright ownership). To simplify, I’m going to ignore all the hotels Marcus only manages, the hotels where there is a different majority owner, the hotels where there is a different minority owner, and the hotel where the property is held under a long-term lease. In reality, some of these hotels have value. But, we’ll ignore all that.

This simplifies the hotel division’s assets down to 6 fully owned hotels. Those 6 hotels are: the Hilton Milwaukee Center (729 rooms), Grand Geneva Resort & Spa (355 hotels), Pfister (307), Lincoln Marriott Cornhusker (297), Hilton Madison Monona Terrace (240 rooms), and Saint Kate (219 rooms).

This adds up to a total of 2,147 rooms. Generally, these owned hotels are somewhat upscale and somewhat urban (though they are in relatively less densely populated Midwestern states like Wisconsin). I don’t know enough about hotels to be able to appraise these hotels accurately. When I say they are upscale – they …

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Hingham (HIFS): Good Yield Curve Now – But, Always Be Thinking About the Risk of the Bad Yield Curve Years to Come

I’m writing again about Hingham (HIFS), because someone asked me this question:

 

I was wondering how long it would take Geoff to talk about Hingham savings, seems to tick all his boxes – very low cost of funding on the operations side and a capital conscious manager with Buffett fetish. What more could you want ?

 

It does have a very low operating cost. But, it doesn’t have a very low interest cost. It does now that rates have been cut to nothing. But, it probably got down to about a 2% net interest margin just before the end of the housing bubble about 13-14 years ago. It had a very rough 2006-2007.

 

So, the bank is set up very differently than most banks I would be interested in that I’d consider very safe. Hingham is running some serious risks by being 100% real estate focused. This is because you end up with almost no “self-funding” of your lending, because your borrowers are going to be small to mid-sized (and maybe a couple big sized) relationships where they just want a lot of money all the time to invest in more and more real estate. They aren’t going to deposit a lot of money with you. Compare this to something like the C&I side of Frost where it is going to be about 100% funded by an equal amount of deposits and borrowing coming from your customers on the commercial and industrial side. So, something like Hingham is going to need to use CDs and FHLB borrowing to operate. It is going to be very, very sensitive to cost of liabilities on the very short-term. What it is basically doing is borrowing short wholesale and then lending long against real estate. That’s very good right now. It’s just gotten to be a lot better business, because the cost of its liabilities has dropped to close to 0% with Fed Fund Rate cuts in the last year. But, that is going to be a temporary situation.

 

So, what more would I want to know?

 

Does the bank understand how it is running a unique business model that has unique risks in terms of liquidity. Like, do they understand that they can have almost no credit losses and the lowest operating expenses in the banking industry and STILL face some risks? If they said to me: “Oh. We don’t really worry about that liquidity stuff. There’s always been funds available to borrow. Etc.” Then, I might worry.

 

I kind of follow the Buffett approach that Alice Schroeder has talked about where I START with asking “what’s the catastrophic risk here?” and then go from there. So, if I think there’s a meaningful risk of catastrophe – then, I might pass on an idea right away that looks like it might have good risk/return odds in most environments, but could go broke in unusual circumstances.

 

What are the unusual circumstances that are a risk here?

 …

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Hingham Institution for Savings (HIFS): A Cheap, Fast Growing Boston-Based Mortgage Bank with a P/E of 9 and a Growth Rate of 10%

This is the one “higher quality, more expensive” bank I mentioned in the podcast Andrew and I did where we talked about like eight or so different U.S. banks. Hingham’s price-to-book (1.7x) is very high compared to most U.S. banks. It is, however, quite cheap when compared to U.S. stocks generally. This is typical for bank stocks in the U.S. They all look very cheap when compared to non-bank stocks. There are many different ways to calculate price multiples: P/B, P/E, dividend yield, etc. The easiest way to calculate a high quality, stable, growing bank’s cheapness or pricey-ness is simply to take the most recent quarterly EPS and multiple it by 4. You then divide the stock price into EPS that is 4 times the most recent quarterly result. The reason for this is that bank’s aren’t very seasonal. But, sometimes events – like COVID – and normal growth (HIFS is a fast grower) can cause the full past twelve month earnings figure to be out of date So, how cheap is HIFS?

“Core” earnings per share in the most recent quarter – I’ll discuss what “core” means at Hingham later, but for now trust me this is the right number to use – was $5.68. Multiply this by 4. We get $22.72 a share. That’s our 12-month look ahead “core” earnings. The stock now trades at $206 a share. So, $206 divided by $22.72 equals 9. Hingham is trading at a “forward” P/E of 9. The “PEG” ratio (price-to-earnings / growth) here may be around 1 or lower. Hingham compounded book value per share by 15% a year over the last 5 years. Growth rates in the 10-15% range have been common since this bank’s management changed about 30 years ago. A lot of balance sheet items – like total assets, loans, and deposits – all grew about 10%+ over the last 12 months. So, a growth rate of about 10% and a P/E of about 9 seems likely here. One thing to point out is the high return on equity. Core return on equity is running at about 18% here. If ROE is about 15-18% while growth in loans and deposits and so on is in the 10-12% range, then the bank will eventually need to pay out one-third of its earnings as dividends and buybacks. Historically, it has not done this. It has found ways to grow much faster than the area (Boston) in which it operates and much faster than the balance sheets of its existing clients. Usually, that kind of thing can’t be kept up forever. Once that kind of growth can’t be kept up, the bank either becomes overcapitalized or it pays out a lot more in dividends and in buybacks. This brings up the other way we can look at a bank like Hingham. We can think in terms of dividend yield and growth. So, let’s say the dividend yield is 1%. The question then becomes how much do we think that dividend …

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Luby’s (LUB): Luby’s is Liquidating – What’s the CAGR Math Behind Possible Payouts and Timing?

This is a simple situation. But, you’ll want some background info before reading my take on it.

Information you might find useful about this one can be found at:

Clark Street Value

Hidden Value

Seeking Alpha

And my comments in this podcast (starts at 31 minutes)

The stock is Luby’s (LUB). It is liquidating. The company estimates it could make liquidating distributions of between $3 to $4 a share. It doesn’t set a timetable for the distributions. However, elsewhere in the proxy statement a period of 1-2 years is the estimate given for when they will get an order for the Delaware court that would provide them the sort of safe harbor they want to make distributions. As soon as they got that order, they might make the first of the distributions. I suspect they will make no distributions before getting the order. So, the company is saying it expects to pay out $3 to $4 per share no sooner than 1-2 years from now. The stock is at $2.58 a share.

Let’s just do the math with those numbers: $2.58 price today, $3 distribution, or $4 distribution, 1 year, or 2 years from now. I don’t necessarily believe some of these numbers. But, let’s put that aside for now, because these are the actual sort of company estimates we see in the proxy statement instead of guesses made by me or others.

Buying at $2.58 and getting paid $3 in 2 years is an 8% annual return.

Buying at $2.58 and getting paid $3 in 1 year is a 16% annual return.

Buying at $2.58 and getting paid $4 in 2 years is a 25% annual return.

Buying at $2.58 and getting paid $4 in 1 year is a 55% annual return.

So, if you really expect to be distributed $3 to $4 per share within 1-2 years, you should buy the stock. The expected return range is 8-55%. If we take the middle of both price and timeline – that is, $3.50 in 18 months – that’s a 23% annual return. Which is really good. And if you assume the downside here really is something like earning 8% a year for the next 2 years – there’s no reason to assume you can do better than that in any index, any safe form of bond, etc. Stock pickers might be able to do better than 8% a year over the next 2 years. Your opportunity cost could be a lot higher than 8%. But, the certainty might be higher here.

Also, I have not presented the real upside here. The $3 to $4 estimate presented by the company in its proxy statement is not the actual estimate of the liquidation distributions provided by the company’s financial advisors. Like most companies considering “strategic alternatives”, Luby’s formed a special committee which then hired a financial advisor. The financial advisor – Duff & Phelps – came up with an estimated range for the liquidating distributions that would be paid to shareholders.…

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