yeah but depreciation is a noncash item so using your numbers, free cash flow will be 12.5m per quarter... original question was around the impact to cash flow of this refi, and I think the answer is that the refi is cash flow positive to the tune of $16m/yr (ballpark).
rofflecopters, where do you see that "mandatory amortization" will be $40m/yr after this notes offering is complete? Typically these notes would be interest-only until maturity. If that's the case, then this offering will actually free up quite a bit of cash flow (currently $18m interest + $40m amort = $58mm/yr, becomes $42mm interest - $16mm newly available cash flow per yr).
Well, for one thing, the option of issuing notes is not necessarily dead... they could give it another try next year. (Frankly, after what was said on the cc I was surprised they tried to pull it off in 2013 at all).
Very OT and very very late, but I just now got around to looking at how Lodgenet turned out (short answer: an absolute disaster). My question for any LNET followers who might still hang around this board: do any of you honestly think Colony Capital cut a good deal in their $80m recapitalization a year ago? The only ones who got wiped out were commmon and preferred shareholders, and they were pretty near bust at that point anyway. Debtholders are still scheduled to be paid 100 cents on the dollar, plus interest, no haircut. So for their $60m equity injection, Colony inherited every penny of the negative $185 million book value that existed pre-bankruptcy. And their new $20m revolver is now, at best, pari passu with the old debt. So without investing so much as an extra dollar, the old-money debtholders keep their first claim on the spoils from a successful turnaround while the new money is last in line. Unless Colony already owned all of the old term loan, how could they possibly see that as a smart deal?
And regardless of the financial engineering, it's also unclear to me how they turn LNET around. Sure, they can kill the next-generation set top box or whatever other strategic initiatives LNET was working on before they went bust. But LNET was hemmoraging money all over the place; just killing capex wouldn't stop the bloodletting. Or maybe Colony is a true believer: maybe they think that by spiffing up their offerings, LNET can become a moneymaker once again, despite the huge macro trends working against them? Again, I don't get it. Your thoughts are appreciated.
he would be in favor of creating value inside the company at IRRs 15%... at this point, who wouldn't be??
I think the short answer is, a lot of current shareholders appear to be in favor of "creating value" by issuing a dividend and thereby boosting the stock price instead of reinvesting at mid-teens IRRs. Finance 101 says that dividends don't create value, but this yield-driven market has not been particularly bothered by that theory.
I'm on the fence on the divs-vs-investment question. But if and when it comes time to make that call, I hope Ian doesn't try to split the difference and do both. IMO, If the strategy is growth, there should be no dividend; if the strategy is income, they should devote basically all free cash flow to dividends and not try to squeeze in a ship purchase or two. (FWIW, if the strategy is income, I'd also be in favor of a distribution-maximizing variable dividend that grows or shrinks based on FCFE, instead of trying to finesse a "stable" dividend rate). Trying to please everyone will more likely result in pleasing no one.
If you liked GSL's 2012, you're gonna love GSL's 2013. With half the swaps rolling off, earnings will likely be 20% higher in 2013 on that change alone.
Leave it to Mr. Courson to identify a predatory firm with a business model under existential threat as his "value pick" for the year. I hear gun manufacturers and payday lenders are a good buy for 2013, too...
I would just point out that this proposed arbitrage strategy generates a lower return than just buying the pfd outright. Buying 1 share of D at 21.75 yields 9.2%, and has essentially the same risk and volatility profile as your long D/short I trade which only yields 8.4%. So to the original question, there may be an arb play involved in the current short interest but I'm pretty sure it's not the one laid out above.
From the May issue of Value Investor Insight
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Diamond Hill holds about 6% of SFI common equity.
Q: What upside do you see in commercial mortgage REIT iStar Financial [SFI]?
[Chris Bingaman, Diamond Hill]: This is a broad-based commercial real estate lender and investor that was hit by a nearly perfect storm in 2008. Quite simply, it found itself as the crisis hit with liabilities that were almost entirely whole-sale-funded and assets that were entirely in real estate. We believe management has done an excellent job of preserving value at all levels of the capital structure, but that was a toxic combination and the past few years have been extremely difficult.
The analysis here rests almost entirely on what you believe the company’s net assets are worth. On a GAAP basis, total assets are $7.6 billion, against which there are $6.6 billion in liabilities, including bank lines, public debt and some preferred equity. That leaves common equity of about $1 billion, which with 84 million shares outstanding translates to nearly $12 per share in tangible book value. That’s twice the current stock price [of around $5.70].
We actually think the $12 is low. Part of that is due to the fact that iStar’s core $3.1 billion gross loan portfolio appears to be conservatively marked. The company currently carries loss reserves of $570 million against that portfolio. To put that in perspective, gross non-performing loans in the portfolio are currently at $1.1 billion. If the loss content after netting out any recoveries on those NPLs comes in at 30-35% – which would be high – that would still leave $185-240 million in reserves against the performing $2 billion balance of loans. So to wipe out the remaining reserve would require 10% loss content on those performing loans. We think that’s highly unlikely to happen in a portfolio with a weighted-average loan-to-value ratio of 76%.
We also think the $1.7 billion net lease portfolio – properties owned by iStar and leased long term mostly to single, high-quality tenants – is undervalued on the balance sheet. Here we’re going through the portfolio in detail and applying current-market cap rates to reported net operating income levels to derive estimates of market value.
The most difficult assets to value are the $2 billion in combined real estate held for investment and “other real estate owned,” which are properties acquired through foreclosure or in partial satisfaction of non-performing loans. The values will best surface when those properties are sold, but we’re comfortable basically assuming the carrying values currently on the balance sheet. If management proves to be as conservative with these as we think it is elsewhere, all the better.
All told, we believe the true net asset value today is closer to $15 per share.
Q: How would you characterize the macro view on commercial real estate that’s informing your analysis?
CB: It’s fair to say we’re basically assuming things muddle through and don’t get worse from here. If commercial real estate values were to materially decline, our estimate of today’s net asset value is almost certainly too high.
Q: The short interest in the stock is more than 20% of the float. Do you imagine the bears have a less sanguine macro view?
CB: The bear case is likely a deterioration in commercial real estate values. They also might assume the processing and disposition of the other real estate owned takes longer and yields lower sale prices than expected.
Value investors inevitably will come across situations with lots of shorts. As long as we’re comfortable with our own independent assessment of value, it doesn’t dissuade us.
Amazing to think SFI might be able to tap the unsecured debt market again, even if only thru private placement. Will also be interesting to see how these are priced.
You're not the only one who is a fan of Bill Gross. There are so many fans, in fact, that those fans routinely bid his Pimco closed-end funds up to a substantial premium over NAV, which is rare in the CEF space and exposes you to substantial risk of underperformance/loss, for example, if the market were to decide it's no longer quite so hungry for yield and the price corrects back down to NAV.
PTY is currently trading at a 21% premium to NAV. That means the underlying fund only has 83 cents in assets for every $1 worth of shares at the market price. (And there's no "hidden value" here; the NAV is recalculated daily, so that's really the best they could get if they were to liquidate the portfolio).
It hasn't always been like that: before 2011, PTY even traded at a discount to NAV. Here's a chart of the premium/discount over the last few years. It's one chart that as a buyer, you don't want to see trending up:
Just to be clear, John Bogle of Bogle Investment Mgmt is the son of John Bogle, the Vanguard founder who decries active management. Ironic, yes, but also deeply cynical.
Are you discounting the terminal/sale values at 25% as well? Because that doesn't make much sense. Surely ship valuations aren't all that volatile.
it's becoming clear that the story on GSL is that it's a play on the credit of CMA CGM and therefore of France and the whole of Europe. That's not a good story at the moment.
Yes, and at the moment they seem to be weighing volatility concerns over ROE. (Plus concerns about upcoming drydock expenses yada yada). I guess that's fine for the 12-month "short term". But at some point, the margin of safety has to be enough and they've gotta shift their focus back to shareholder returns. Otherwise this stock is fairly priced at two bucks, because without significant leverage this is a really crappy business.
I don't necessarily disagree with you that they might be targeting the next tier of LTV before paying dividends. But the marginal interest savings would be small: 50bps on $415mm of debt, more or less, translates to 2.3mm of avoided interest pre-tax, or 5 cents a share per year. Even at L+300, the debt on the balance sheet is cheap money and really, GSL should be looking for ways to slow down payments, not speed them up.
And, btw, repayments are being made with equity capital, for which the cost of capital is much higher than the debt it's replacing. So I understand the instinct to be conservative here but hopefully management still has their eyes on the prize of generating an adequate shareholder return. Given that this is no longer a distress situation, voluntarily using free cash to pay off low-rate debt as you suggest is not a great way to do that.
> The bond market is currently saying that inflation isn't an issue... but you can't print the way we are printing without inflation eventually becoming an issue.
Japan has demonstrated that under certain circumstances, you can print enormous amounts of money without generating inflation, see chart here:
The US is now in the same predicament as Japan, and there will probably not be any material amount of inflation here for the next decade. It's certainly worth contemplating how inflation might impact GSL, but it's not worth worrying about.
1) you done?
2) Did you sell any at $1.99? If so, me & Ag got 'em ;-)
3) LNET's on the margin list, should we watch for action there too?
4) Obviously you're a sophisticated hedge fund manager etc etc, but IB's margin was, and is, clearly dangerous, and dangerous in unpredictable ways. So sorry for the bad news, but not terribly surprising that once again IB forces investors into uneconomic portfolio management choices.