Fondul Proprietatea S.A. – FP:London

Sometimes, I write about securities I believe could be under-valued. Other times I write about those that are simply unusual or exceptional in some way. Sometimes, it’s a little of each. Fondul Proprietatea S. A. is one of these. “FP” is one of the world’s most unusual publicly-traded securities, worth examining for the history lessons it offers as much its investment potential.

Brutal autocratic regimes seem to be a hallmark of human society. Despite our advancement as a species, we have not yet learned how to prevent their rise to power. Human beings continue to be susceptible to the promises of demagogues, only to wonder “what happened?” when these regimes almost inevitably turn to brutality and mass murder. Fortunately, many of these totalitarian governments are inherently unstable, and many populations eventually successfully depose them. Following a return to some semblance of democracy, some societies have made attempts to compensate the victims of these regimes.

One commonly followed approach is issuing affected citizens securities that are exchangeable for state assets, including state-owned real estate and operating companies, when these assets are sold to the public. Bill Browder famously profited handsomely by buying up these securities in Russia following the collapse of the Soviet Union. Other former members of the Soviet sphere of influence pursued similar programs after the fall of communism. In fact, investors can still purchase Hungarian Compensation Notes on the Budapest Exchange. Did these compensation schemes work? I will leave the particulars to academics, but most of these programs appear to have played out in predictable fashion, with many poorer and less educated recipients selling their claims to more sophisticated, deep-pocketed investors for a pittance in order to meet their urgent material needs.

Romania pursued a slightly different tack after the overthrow of Nicolae Ceaușescu in 1989. The communist dictatorship that ruled the country from 1945 to 1989 had nationalized hundreds of thousands of properties which could not easily be returned to their owners. To compensate the former owners, Romania created the Fondul Proprietatea or “Property Fund” in 2005. The FP was to be a corporate entity that would hold state assets for distribution, including shares in state-owned enterprises. The entity would be managed to maximize its value and distribute its assets to owners over time. In 2010, Franklin Templeton became FP’s portfolio manager after a global search process. Shares of FP became tradable in Romania 2011 and a few years later, depositary receipts were listed in London.

Right from the start, FP shares traded at large discounts to net asset value. This discount eventually attracted the attention of famed fund manager Paul Singer, who pushed FP’s managers to sell off portfolios holdings and buy back deeply-discounted shares. FP has continued to conduct regular share repurchases and tender offers, leading the discount to net asset value to diminish over time. A portion of Franklin Templeton’s compensation actually depends on maintaining a discount to net asset value of 15% or less, so FP’s manager is incentivized to narrow the discount. (Working against this incentive may be the 0.60% annual management fee on fund assets that Franklin Templeton receives, which obviously rewards them for managing a larger fund.)

Today, FP’s discount to net asset value stands at around 18%. The discount was much higher in March of this year, when many other closed-end investment funds also traded at gigantic discounts to NAV. FP’s investing results have been generally good, with net asset value rising 122% from January 25, 2011 to June 30, 2020. Since 2011, FP has returned an average of 16% of its capital to shareholders each year through a combination of tender offers, buybacks, and distributions.

In Fondul Proprietatea we have a rather large investment vehicle trading at a significant discount to net asset value. Historically, this net asset value has grown at a healthy rate, bolstered by the fund’s aggressive capital return efforts. There is every indication this capital return program will continue based on FP’s stated cash distribution policy.

But what about the downsides? Unfortunately, there are a few.

The first is taxation. The US government makes investing in foreign non-operating companies and funds a major headache come tax season. I am absolutely not any kind of tax authority so I will not speculate on exactly what kind of tax and paperwork burden that owning FP could create for American investors. Another major issue is the makeup of the fund itself. Over time, the fund has gradually sold off its publicly-traded liquid holdings and has grown more concentrated in a small number of private assets, mostly infrastructure companies controlled by the Romanian government. These assets include Hidroelectrica, a hydroelectric power giant; ENGIE Romania, a natural gas distribution monopoly; Bucharest Airports, and Constanta Ports. Without a trading market, the valuations of these assets are “squishy,” subject to numerous assumptions. There are some indications that Hidroelectrica may pursue an IPO in the near future. Given that Hidroelectrica was 46% of FP’s total assets at June 30, an IPO would provide much greater clarity on FP’s net asset value as well as improving its liquidity. Fund owners must hope that the Romanian government pursues public offerings or sales of the fund’s other private assets as well. Obviously, anyone with a dim view on these particular assets or on the economic future of Romania may want to steer clear.

Fondul Proprietatea provides a wealth of information to current and potential owners – in English!

General Information




Happy reading.

Alluvial Capital Management, LLC does not hold Fondul Proprietatea S.A. securities for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Takeaways from P10 Holdings’ Quarterly Report – PIOE

A note: Life comes at you fast. Only a few hours after I published this post, P10 announced a major acquisition of a venture capital manager, Truebridge Capital Partners. The deal will provide a major uplift to P10’s earnings and free cash flow. I will prepare some sort of update.

P10 Holdings is Alluvial’s largest position. Clearly, I have a very high level of conviction in P10’s management, strategy, and operations. For the unfamiliar, P10 is alternative asset manager. P10 acquires the existing and future management fee streams of private equity fund managers. These fee streams are highly predictable and long-lived, and will grow as these managers increase assets under management.

P10 Holdings is a micro-cap unlisted stock with minimal trading volume, a short operating history, and a low float. The company is not SEC-reporting. Investors should be cautious when trading in P10 Holdings and all similar stocks. I make NO recommendation to buy, sell, or hold shares of P10 Holdings.

In April, P10 acquired its second private equity manager, Five Points Capital. The second quarter report was P10’s first to include details on the transaction. Notes to the financial statements reveal much about P10’s near-term plans. Here are a few of my impressions from the report.

  • The acquisition goes a long way toward building scale. With the purchase of Five Points, P10’s run rate annual revenue goes from $49 million to $63 million. For P10 to be taken seriously as an asset manager and to achieve a valuation comparable to other public alternative asset managers, the company needs to continue adding revenue by acquiring multiple additional managers and management fee streams.
  • Fund-raising continues despite the difficult macroeconomic backdrop. P10’s subsidiary RCP Advisors saw its RCP Fund XIV reach its final close in April, having raised $393.5 million. RCP Fund XV is off to a good start, raising $145.1 million for its first close in July. P10’s managers will introduce additional funds in coming quarters.
  • The addition of Five Points improves both GAAP income and cash earnings per share, but it will take a little time for the true economics to show. The second quarter was burdened by legal and professional expenses related to the acquisition. Compensation expenses were also quite high in relation to revenue, again related to the acquisition. Once a few quarters go by and the integration process is complete, I expect both professional fees and compensation to return to historical baselines.
  • The company is already planning for its next acquisition. A P10 subsidiary issued $61.3 million in convertible preferreds to fund the Five Points acquisition. In note 13 to the statements, the company reveals that one of the purchasers of these preferreds has the right to purchase another $15 million worth to fund another acquisition. All of the preferreds are puttable three years after issuance, but this put date is extended an additional two years if a qualifying acquisition is completed.
  • Most exciting of all, P10 is planning to become an SEC-reporting, listed company. P10 has the right to convert all outstanding subsidiary preferred stock into common shares in a new public entity. Per the footnotes, “It is probable that the Company will go public prior to the triggering of the redemption feature on the preferred shares.” An up-listing in connection with a share offering would certainly be done in a manner that would preserve P10’s substantial tax assets.

All told, P10 enjoyed a successful quarter. Once acquisition-related costs are in the rearview mirror, I estimate the company’s free cash flow per share will be 30 cents. (26 cents assuming assuming all preferred stock is converted.) The company is clearly capable of financing another acquisition using cash from operations and additional external capital. I wholeheartedly support the company’s plan to reregister with the SEC and to achieve an exchange listing, which should result in much greater investor attention.

I continue to believe P10 shares are worth well over their current trading price given the company’s cash flow profile and management’s proven ability to identify and execute productive acquisitions.

Alluvial Capital Management, LLC holds shares of P10 Holdings for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

A Thank You and our Quarterly Letter

A huge thank you to everyone who e-mailed or left a comment following my last blog post. More than 100 of you kindly took the time to provide your thoughts and insights. I am still catching up, so sorry if I have not responded just yet. Opinions varied, but the broad consensus is readers don’t want to see OTC Adventures content go behind a paywall or otherwise become less accessible. I am happy to oblige! At least for the foreseeable future, I am going to continue writing here but allow Seeking Alpha to publish my content when they see fit. I think this approach will best accomplish my twin goals of reaching a larger audience while maintaining control over my output and website.

I thought readers would enjoy Alluvial’s second quarter 2020 letter to partners. In it, I review our top holdings and provide some additional commentary. Please don’t hesitate to get in touch to discuss any stocks mentioned. (This is not a recommendation to buy or sell any of these stocks. Please conduct your own extensive due diligence before buying or selling any security.)

Alluvial Capital Management Q2 2020 Letter to Partners

The Future of OTC Adventures

OTC Adventures is eight and a half years old. In internet time, this site is practically an ancient relic. For roughly half of my post-college adult life, I have been sitting down every few weeks (OK, sometimes months) to hammer out a post on some little-known company. And it’s been wonderful! I owe so much to this blog and its readers. Through it I have come to know dozens of like-minded investors who have generously shared their own considerable wisdom and expertise. OTC Adventures is directly responsible for the existence of my life’s work, Alluvial Capital Management, LLC.

I’m proud of my output here. Most of my work holds up well. There are a few posts I look back on and cringe, having been way off with my projections and assumptions. But that’s life. I have yet to meet an infallible investor. I like to think there is some merit in making mistakes in a public setting and owning up to it. I have never deleted a post, even those that in hindsight fall short of my standards for quality and insight.

I have changed considerably since 2012, and so has OTC Adventures. When I started this blog, I wrote with the individual investor in mind. People who were happy to find opportunities to plunk down $5,000, $1,000, even $500. Because that’s who I was. My personal investment account didn’t reach five figures until I was nearly 30. I don’t come from money. I grew up in an isolated Pennsylvania timber town of 4,000 people, pre-internet. Nobody I knew had a stock portfolio or paid much attention to the faraway, ephemeral stock market.

Today my situation is different. Through Alluvial, I manage nearly $40 million in client capital. So my investment focus has shifted to securities and situations where I can invest at least $100,000. Buying $5,000 of some promising liquidation story simply doesn’t move the needle, no matter the potential return. So I spend a lot less time looking for that sort of opportunity, and that results in fewer OTC Adventures blog posts of that ilk. To be clear, I still focus on little-known, thinly-traded issues. That’s where I know how to find value. They’re just a little larger on average than they used to be. But blogging about those ideas while I am attempting to trade them could disadvantage my clients.

This is undoubtedly disappointing to some long time OTC Adventures readers. But just as my focus has changed, markets have changed, too. There simply are not as many micro-cap/unlisted deep value opportunities as there were eight years ago. The long bull market took care of many of these situations. A sizable proportion of “dark companies” were bought out or cashed out minority shareholders. The ranks of OTC-traded community banks continue to dwindle. The value ideas I find today rarely make for a brisk, 500-800 word blog post. I don’t have any interest in publishing comprehensive research reports here. I also don’t want to attempt to compress complicated ideas down to a few paragraphs by glossing over important details. I try to pay readers the same respect you have given me, and that includes making efforts not to bore you or insult your intelligence.

That brings me to the topic that has occupied my mind for several months: what do I do with OTC Adventures? How do I best position this blog to achieve my goals? The plain truth is OTC Adventures is a commercial blog. No, there are no ads here. Never will be. But my primary goal in writing here is to make people aware of my portfolio management services through Alluvial. My success on this front has been mixed. Yes, I do occasionally hear from somebody who likes an idea I have profiled and is interested in hiring me to find more of them. But more often, writing here feels a bit like shouting into the void.

OTC Adventures has never been terribly popular. Some of the reason for this is simply the subject matter. There is not a big appetite out there for blog posts about community banks in Wichita or Latvian chocolatiers. And some of the reason is, well, me. I could have kept to a more consistent posting schedule or made my writing snappier, clearer, more relevant. Finally, some of the reason is just the way that internet investment writing has developed. It’s tougher than ever for an independent website to compete for attention against portals and aggregators with marketing staff and content curators.

The low traffic in itself doesn’t bother me. I am grateful for the engagement I receive and the lively conversations that sometimes ensue. But I have to evaluate the return on my own effort that this blog provides. Every blog post represents hours and hours of time spent in research, writing, and editing. If the resulting post is viewed by only a few hundred blog visitors with only a handful of potential clients among them, I am not making the most of my limited time.

As I see it, there are four ways forward. I could:

  • Maintain the status quo. This is the easy approach, but obviously it does not address the issues I just made a wordy blog post discussing. A non-starter.
  • Cease writing on OTC Adventures and use the time I spend here for other projects. C’mon, not gonna happen. I enjoy this too much, even if the current format is sub-optimal. I need some kind of outlet to talk about the weird stuff I find in the markets, and nobody in my household is nearly as interested in this as I am!
  • Take OTC Adventures “private” and make it a paid service or a benefit for Alluvial clients and partners only. Interesting, but I am probably flattering myself to think there would be a market for my writing. And I cannot commit to writing with enough frequency to make it worthwhile for potential subscribers. As for offering content only to Alluvial clients and partners, this approach would fail to increase my reach and readership beyond those who already appreciate my investment style. There is no need to preach to the converted.
  • Move all or most of my future output to a larger platform, such as Seeking Alpha. Various investing sites have approached me over the years, asking to host my content. I have always declined, worried about giving up total ownership of and control over my intellectual property. I am becoming convinced this was short-sighted on my part. After all, what good is my intellectual property doing me if it reaches only a small audience? If the primary purpose of my writing about investments is making more potential clients aware of my services, shouldn’t I want as many readers as possible?

The last approach is the one I will likely take. I’m still thinking it over, but the ability to reach a large, untapped audience is attractive. If I do move platforms, future blog posts might amount to “Check out what I wrote on (______)!” OTC Adventures would undoubtedly lose subscribers from readers simply choosing to follow me solely on that platform, but the trade-off seems positive. (And if it isn’t, I can always revert to posting everything here.)

Before I make a definitive move, I want to invite readers to comment. I have benefitted substantially over the years from reader input. This blog is nothing without you, and I want to make accessing my content as easy as possible for the broadest possible audience. If you have any advice, please leave a comment or drop me a line. Thanks as always for reading. I’ll do my best to provide interesting, informative ideas and stock profiles until at least 2029.

Wheeler REIT – An Activism Story: WHLR, WHLRD, WHLRP

I wanted to bring some attention to an activist situation that has flown under the radar. There is something for everyone here: personal drama, a badly-underperforming company to make us all feel better about ourselves, and a potential investment angle.

Joseph Stilwell is an accomplished activist investor who has run dozens of successful activist campaigns, mostly targeting mis-managed or under-managed community banks. Stilwell is refreshingly direct, unafraid to call out laziness and greed wherever he sees it. There are many anecdotes concerning Stilwell, but my favorite comes from his proxy battle with Harvard Illinois Bancorp in which Stilwell took a picture of the bank’s chairman apparently sleeping during a shareholder meeting. Stilwell employed the picture to great effect, publishing it in an SEC filing and garnering national attention. At this point, any bank that catches Stilwell’s disapproving eye had better shape up quickly or risk embarrassment.

Most recently, Stilwell turned his attention away from small banks and toward Wheeler Real Estate Investment Trust, Inc., an atrociously under-performing retail-focused REIT. In a series of letters and presentations, Stilwell highlighted management’s incompetence and self-dealing, as well as the board’s absent oversight and minimal financial commitment. Perhaps most damningly, Stilwell pointed out the incredible losses suffered by Wheeler’s shareholders, down 96% since the IPO not even a decade earlier. Stilwell even placed a billboard near Wheeler headquarters with an image of the Grinch and a Wheeler stock chart. (The billboard mysteriously disappeared and was replaced.) Wheeler responded with no shortage of vitriol, accusing Stilwell of all manner of illegality and ill intent.

Despite Wheeler’s obvious issues, the Stilwell group was not successful in its first attempt at reconstituting the board. But Stilwell ultimately prevailed in December 2019, succeeding in electing three of its nominees to the board of directors. With the subsequent resignations of a legacy board member and the company’s CFO, the Stilwell Group effectively took control.

Stilwell’s plan for Wheeler was straightforward and sensible. The company would cut administrative costs and sell several of its properties, including its crown jewel shopping center. The company would use the proceeds to reduce debt and improve its balance sheet. Ultimately, the company would achieve a sustainable capital structure and would resume paying dividends on its common and preferred shares. Following the payoff of near-term debt maturities, Wheeler’s highest balance sheet priority would be addressing its Series D preferred shares. These shares were issued in 2016 during a dire period for the company and the terms reflect the circumstances. The company’s Series D preferreds carried a hefty 8.75% coupon at issuance. What’s more, the shares would be puttable by holders in September 2023, requiring the company to redeem shares at par value plus any accrued, unpaid dividends, in cash or in stock. Shares remaining outstanding past September 2023 would see their coupon increase by 200 basis points annually to a maximum of 14%. Obviously, the Series D preferreds represented a toxic liability for Wheeler. Depending on the company’s cash position, ability to access new capital, and common share price come September 2023, holders of Series D preferreds could wind up owning effectively all of Wheeler!

Stilwell’s plan to right the ship at Wheeler may have been intelligent and achievable, but it was certainly never a guarantee. Despite a number of obvious improvements the company could make to its operations and capital structure, Wheeler remained the over-leveraged owner of a challenging set of assets. The ongoing issues that many retailers face were no secret. Wheeler’s shopping centers were largely anchored by grocery stores, which helped. But the company’s ability to raise rents was limited at best, and occupancy trends were poor at many locations.

Enter COVID-19. The economic effects of the pandemic have further challenged Wheeler’s results with many tenants unable to pay contractual rents. Wheeler has been successful thus far in negotiating with its own creditors about loan extensions and forbearance, but the company will ultimately need to succeed in collecting the amounts it is owed in order to address its own liabilities. Furthermore, Wheeler will have to succeed in selling multiple properties in a difficult market for commercial real estate.

All of that said, if Wheeler succeeds in collecting the rents is it owed and if the company’s lenders remain cooperative and if the company manages to shrink to sustainability by selling off some key properties, the upside could be impressive. (This trio of ifs absolutely depends on factors outside the company’s control, so act accordingly.)

Wheeler Series D preferreds currently trade in the $12-13 range, or just over 40% of liquidation preference plus dividends in arrears. We are 38 months from the put date. Series B preferreds trade around $7, or 28% of liquidation preference. While both preferreds rank equally in the capital structure, the valuation difference is due to the Series D put feature and coupon step-up, plus the fact that Wheeler will engage in aggressive repurchases of Series D preferreds if it is able.

Wheeler common stock is priced like a call option, valued at less than 5% of the company’s enterprise value. Obviously, holders of the common stock could profit immensely if the Stilwell Group is able to turn the company around, but there is a high chance of a total wipeout for common share holders if the turnaround doesn’t materialize. At normal occupancy, operating efficiency, and cap rates for Wheeler’s properties, substantial equity value appears to exist for the preferreds and quite possibly, the common equity. Whether this value proves realizable will depend on the direction of the economy and on Stilwell’s ability to sell assets and satisfy liabilities. Historically, underestimating Stillwell has been a bad bet. Stilwell has done shareholders a lot of good over the years. I am rooting for him. Then again, these are unprecedented times.

For anyone interested in digging in, Wheeler provides a reasonable level of disclosure down to the property level including details on lease rates and terms, tenant composition, and its debt structure. Happy hunting!

Alluvial Capital Management, LLC does not hold Wheeler Real Estate Investment Trust, Inc. securities for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

LICT Corporation – LICT

At $17,000 or so per share, LICT Corporation is already one of the market’s highest-priced stocks. I believe shares should and will trade far higher. In LICT, I find the rare combination of a strong and growing business, pristine balance sheet, and well-incentivized, capable management.

I talk about LICT a lot, but mostly on Twitter and in my quarterly letters. For anyone who is not familiar, LICT is a collection of rural telecom companies. Mario Gabelli and a few of his associates control the company, which has rewarded shareholders richly since going public in 1985. At present, LICT owns a collection of 11 telecom providers in several states. I’ll be borrowing liberally from the company’s annual meeting slides as I describe the company.

Rural telecom has never been what most would consider an “exciting” industry. Many rural telcos were established in the 20th century by neighbors collaborating to build systems in places so remote or thinly-populated that Ma Bell had no interest. Eventually, states and the federal government recognized the strategic and economic importance of ensuring rural Americans had access to modern communications and began subsidizing these rural telecoms. The major service of rural telcos was, for most of their existence, the landline. Naturally, the rise of cellular communication and broadband internet has decreased the need for landlines. Telcos that foresaw the decline of the landline and invested heavily in non-regulated cell service and fiber-optic networks remain healthy, viable businesses. Telcos that were unwilling or unable to make these investments are struggling.

Fortunately, LICT is in the first camp. LICT invested heavily in its network over the last several years with the explicit goal of building its non-regulated revenues and reducing its reliance on traditional telecom services. It is likely that non-regulated revenues will exceed 50% of total revenues in 2020.

LICT’s efforts to roll out high-speed broadband have helped offset the long-term run-off of landline revenues. In fact, LICT’s EBITDA grew at a 9% annual rate from 2013 to 2019. Free cash flow, as the company defines it (EBITDA – capex) grew at a 12% rate over the same time period. Now, it must be recognized that the company got a major boost from federal and state subsidies along the way. The Alternative Connect America Cost Model provides a major increase in subsidy revenue for rate-of-return carriers in return for meeting certain broadband access and speed thresholds in their service area. LICT’s annual A-CAM subsidy revenue now totals $31.9 million. LICT will receive this annual subsidy until the end of 2028. After that, the subsidy picture is uncertain. Personally, I fully expect another subsidy program to be enacted based on the continued need for infrastructure investment in rural America.

LICT has a notably strong balance sheet to pair with its healthy operations. The nature of telecom revenue streams lend themselves to a healthy amounts of leverage, particularly in an era of rock-bottom interest rates. Most telecoms feel comfortable with leverage of 2-5x EBITDA depending on their operating model and business trends. LICT once employed meaningful leverage, but has paid down debt to the point where it holds substantial net balance sheet cash. To bolster its flexibility, LICT recently closed on a $50 million line of credit from CoBank. The company drew down on this line of credit completely in March.

LICT’s free cash flow profile is enviable. On 2020 revenue of around $115 million, LICT will produce free cash flow exceeding $20 million. This is despite being in an elevated phase of the capital expenditure cycle. With practically zero debt to service and network additions fully covered, LICT is free to direct significant cash flow to returning capital or to acquisitions. I have wanted the company to make a significant debt-financed acquisition of another rural telecom for some time now, but it seems the company is more interested in aggressive share repurchases. And that’s fine! By continuing to buy back hundreds of shares each year, the company is actually creating an extremely interesting dynamic.

Following years of share repurchases, only about 10,000 LICT shares remain in the hands of non-insiders. Assuming the company dedicates its 2020 free cash flow to buybacks (without spending down any of its $80 million warchest) the company will be able to repurchase more than 1,200 shares. At this pace, it won’t be long until the company simply runs out of shares to repurchase. To me, the inevitable result of this dynamic is a much, much higher share price not terribly far in the future.

A strongly profitable business with growth opportunities, net balance sheet cash and an active capital return effort coupled with a more than reasonable valuation tends to be a good setup for patient investors. When I update this post in 2030 or so, I expect LICT will have treated investors very well.

Alluvial Capital Management, LLC holds shares of LICT Corporation for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Another look at New England Realty Associates LP – NEN

I don’t often go back and look at my old blog posts. When reading my posts from several years ago, I wince a bit as I see how far I’ve come as an investor since. That’s not to say I am not proud of these writings. There are a lot of them 8 years in, though that output has slowed as I have taken on the role of a business owner and a pretty typical American family man. In particular, I am proud of a few pieces of analysis that I believe really captured some kind of value that was being missed by the market.

One of these is New England Realty Associates LP, ticker NEN. In a 2015 blog post, I laid out how the market was missing the value contained in New England Realty Associates LP’s somewhat complicated structure. For several reasons, “NERA” units screened poorly, and the substantial value of its equity-accounted real estate investments were not reflected in the financial statements. (Digging into the accounting for consolidated investments with minority interests and equity-accounted investments is one of my favorite mental puzzles. What can I say, we value dorks are a special type.) Despite significant growth in net asset value, NERA units actually trade lower than they did at the time of my post.

I’m going to keep this post on the short side, because I doubt anyone really wants to read a property-level analysis of NERA’s holdings. So here are the basics:

NERA owns 25 apartment complexes containing 2,892 units, all in the Boston metro area. NERA also owns 19 condo units, plus a smattering of commercial properties. Finally, NERA holds 40-50% interests in a further 7 apartment complexes containing 688 units, plus a parking lot.

In 2019, NERA’s wholly-owned assets produced $60.5 million in rental and sundry income (laundry rooms, etc.) Cash property operating expenses, including management fees, were $28.5 million leaving net operating income of $32 million. This compares favorably to $23.5 million in 2015.

NERA reported equity income of $1.7 million from its 40-50% owned investments. However, this figure materially underestimates the net operating income these properties produce. Here is a look at the underlying net operating income of these properties, and the percentage of this NOI (and the associated debt) attributable to NERA.

NERA’s equity-accounted properties produced net operating income attributable to NERA of $5.6 million in 2019 and $71.1 million in mortgage debt.

Summing up, NERA earned net operating income of $37.6 million in 2019. The balance sheet shows $299.8 million in debt. Adding the portion of NERA’s investment property debt attributable to the partnership brings the total to $370.9 million. There is no excess cash to speak of.

Today, NERA’s enterprise value is $458.7 million. On $37.6 million in trailing net operating income, this implies a cap rate of 8.2%. I challenge anyone to find a collection of investment-grade properties in the Boston area that can be purchased at a yield anywhere close. Just as a valuation exercise, here is what NERA’s equity value looks like under a variety of cap rate assumptions.

Clearly, I think there is plenty of upside to the current unit trading price in the low $40s. This is a good quality portfolio, and it is reasonably financed. Using a 5% cap rate valuation, loan-to-value is only 49%.

Now, there is a very obvious and legitimate caveat to all of this: COVID-19. The effects of the virus and the ongoing economic shutdown will absolutely have an effect on NERA’s tenants and their ability to pay their rent in a timely fashion. Occupancy may fall and cash collection may slow. But for anyone who believes the economy will eventually recover and that the Boston metro will continue to experience tight housing conditions, I think it’s very difficult to lose with New England Realty Associates LP at current prices. NERA pays a modest dividend and buys back a small number of units annually. The stock is unlikely to double in the short-term. On the other hand, I have a hard time seeing how an investment like this could be permanently impaired under all but the worst economic circumstances.

One last consideration. NERA is majority-owned and controlled by the estate of Harold Brown, the company’s founder. Mr. Brown passed away in February, 2019. By all accounts Mr. Brown was an extraordinary man. It seems the most likely scenario is business as usual for NERA, but the potential sale of the company could provide a catalyst.

Alluvial Capital Management, LLC does not hold units of New England Realty Associates LP for clients. David Waters does own units of New England Realty Associates LP personally. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Detroit Legal News Co.

This post concerns an extremely illiquid and difficult-to-trade security. As always, I make no recommendation as to whether or not you should buy this security. If you do, please do so carefully.

Detroit Legal News is one of the old guard of OTC-traded “dark companies.” In DLN’s case, the “dark” part of the phrase is not particularly apt. The company provides quarterly reports with limited financials and full audited annual statements with footnotes, publishing them through Still, the company withdrew its SEC registration decades ago and has traded over-the-counter with limited volume ever since. The company was featured in the classic Walker’s manuals. Here is a picture of Detroit Legal’s entry in the 2002-2003 edition.

Excuse my fingers, please.

Detroit Legal News operates in possibly the most unattractive industry there is: newspapers. Fortunately for the company, its newspapers are niche publications created for the legal community of Michigan. The papers cover court proceedings and legal developments. Critically, the papers also publish legally required notices. These notices must be published in a paper such as those Detroit Legal News publishes. The rates the company can charge for these notices are dictated by the state government, but the fact that these notices must be published provides a recurring revenue stream for Detroit Legal News as its other revenue streams have come under heavy pressure. The company is well-aware that any any time, the legislature could change these publishing requirements, and has invested in software and online resources in case these legal notices go fully electronic.

Detroit Legal News owns 55% of its newspaper subsidiary, with another 35% held by Bridgetower Media. The member operating agreement of the newspaper subsidiary (Detroit Legal News Publishing, LLC) includes an intriguing “shootout” provision under which during the 60 days prior to each November 30, any member of the LLC can declare a value for the whole of Detroit Legal News Publishing, LLC. Then, the other LLC members have the option either to buy that member’s interest at the declared valuation, or sell their own interests to the declaring member at the same valuation. So far, no LLC member has exercised this right.

Detroit Legal News is consistently profitable, though profits have declined in tandem with printing revenues. Recently, the company sold off a parking lot it owned several decades for a tidy profit. I don’t expect many more surprises of that magnitude, but I do expect that Detroit Legal’s core operations will continue producing modest profits for many years to come. In 2019, the company earned $540,000, though this figure includes an impairment charge of $191,000 for a software project that has been slow to achieve momentum. Ignoring this impairment and adjusting for minority interest, the company would have earned about $700,000, or $18.50 per share. Revenue for the year was $14.95 million, down substantially from 2018 and down 30% from 2014 levels. Revenue will probably continue to decline at a high single digits rate annually, though a difficult economy is actually beneficial to Detroit Legal as the volume of foreclosure notices and the like rises.

At a share price of $320 and with revenues highly likely to continue rolling off, a price-to-earnings ratio of ~17x is certainly not compelling. However, Detroit Legal’s balance sheet is stuffed with cash and other valuable assets. Adjusted for the dividend paid in January, Detroit Legal News has cash per share of $242. Net current assets per share is ~$281 (ignoring operating lease effects and assuming all non-cash current assets and current liabilities reside at Detroit Legal News Publishing, LLC.) The company’s strong balance sheet offers quite a bit of downside protection. Historically, the company has always maintained a strong cash position while paying out essentially all earnings as dividends.

In my view, shares of Detroit Legal News Company are worth somewhere around $400 per share. Not a stock to own for its incredible return potential, but a lower-risk holding that is backed by an extraordinary balance sheet and a counter-cyclical business model. Or maybe the idea of owning one of the market’s oddities has some appeal. Regardless, Detroit Legal News is quite alone in its niche and fun to watch as it quietly profits year after year.

Alluvial Capital Management, LLC holds shares of Detroit Legal News Co. for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Alpine Banks of Colorado- ALPIB

Guess who’s back again with another super illiquid, ridiculously high-priced bank stock? Oh, did you think I had run out of them? Naw. Never gonna happen.

Alpine Banks of Colorado is the holding company for Alpine Bank, a $3.9 billion institution founded in 1973. The bank has 40 branches sprawling across the Centennial State from Durango in the southwest to the Denver metro area. Alpine is now the ninth largest bank in Colorado by market share and occupies the number one position in many of its localities. Alpine’s employees are large shareholders of its Class A voting stock. The company recently took steps to allow its non-voting Class B stock to trade over-the-counter.

I’ve had a lot of success in accumulating shares of banks that are newly tradable. Typically, trading volume is very low for some time and the valuation is extremely attractive. (Early sellers are often highly motivated, sometimes having waited years to achieve liquidity.) Eventually, the bank’s results begin to show up in databases and newsfeeds and another cohort of investors begins to buy in. Once the early supply of shares is exhausted, it’s off to the races.

Favorable new listing and liquidity setup aside, I think Alpine Banks is a particularly attractive firm. The bank’s geography is stellar. Colorado is in the midst of a decades-long population boom which makes attracting deposits and making loans all the easier.

Alpine also enjoys an extremely low-cost deposit base thanks to its focus on business and commercial customers. In the quarter ended December 31, 2019, Alpine’s cost of funding was only 11 basis points.

On the lending side, Alpine has a large commercial real estate operation in addition to its more traditional lending activities. The bank is also looking to expand into the commercial & industrial market. Alpine’s asset quality has exceeded its peers since 2015. As of September 30, 2019, Alpine’s balance sheet was in stellar condition with non-performing assets to total assets of only 0.16%.

Alpine also has a wealth management division with rapidly increasing assets under management. The bank’s has improved its operating efficiency in recent years and the efficiency ratio has reached the low 60s, an impressive figure for a bank with a far-flung branch network.

The bank’s strong net interest margin and good efficiency have allowed Alpine to operate very profitably. For the year just ended, the bank produced a return on assets of 1.54% and a return on equity of 18.2%.

Alpine is strongly capitalized, with a Tier 1 capital ratio of 13.1% and a common equity ratio of 10.8%. Given Alpine’s focus on slightly riskier loans, it makes sense for the bank to run a fairly conservative capital structure. Alpine’s loan book has performed quite well, but it makes sense to prepare for any storms ahead.

At the last trading price of $4,950 (not a typo) Alpine trades for 8.9x earnings and a price/tangible book value ratio of 1.65. Alpine’s good geography, stellar deposit base, strong loan book, efficient operations and strong growth outlook make it a bank worth examining.

For those wanting to investigate, Alpine is very communicative and publishes shareholder letters and quarterly presentations. Have fun!

Alluvial Capital Management, LLC holds shares of Alpine Banks of Colorado for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Société Fermière du Casino Municipal de Cannes – Euronext Paris: FCMC

The Société Fermière du Casino Municipal de Cannes (or henceforth, SFdCM) is quite possibly the world’s cheapest luxury company. The group owns three world-class hotels, two on the French Riviera at Cannes and the other in St. Bart’s. SFdCM also operates two Cannes casinos and several restaurants.

It is difficult to overstate the quality and reputation of these properties, particularly the Hôtel Majestic.

Hôtel Barrière Le Majestic

Built in 1926, the Majestic is a five-star Art Deco masterpiece. The hotel is popular with film festival attendees. The hotel offers a private beach, several restaurants and nearly every imaginable amenity. Presently, the Majestic has 257 rooms and 92 suites.

The view from the Mediterranean.

Hôtel Barrière Le Gray d’Albion

Le Gray d’Albion is a four-star property located next door to the Majestic. This 200 room property employs more modern design, but nearly the same luxuries.

Hôtel Barrière Le Carl Gustaf Saint-Barth

Finally, SFdCM owns a hotel in a favorite Caribbean destination for well-heeled travelers, St. Barts. Le Carl Gustaf is a boutique with 23 rooms and suites. The hotel was built in 1991 and acquired by SFdCM a few years back. After a top-to-bottom renovation and a hurricane-related delay, the hotel is now open for business. The property’s chef formerly ran an establishment with 3 Michelin stars. Fancy! The company put out a glossy press kit in preparation for Le Carl Gustaf’s grand re-opening.

The Casino Barrière Croisette and the Casino Barrière Les Princes

These casinos offer 340 slot machines and 38 gaming tables, plus dining and entertainment. The properties are just half a mile apart and within easy walking distance of the Majestic and Le Gray d’Albion. SFdCM operates the casinos under long-term concessions from Cannes.


In 2018, SFdCM brought in revenue of €145.9 million and earned operating profit of €25.9 million. After taxes and minority interests, profit was €21.1. As I type, the company has a market capitalization of €296.1 million. The company has essentially zero debt and net cash of €35.8 million for an enterprise value of €260.3 million. That works out to a very undemanding multiple of 10.1x operating income and a P/E of 12.3, net of excess cash.

And yet, I believe these financial ratios do a poor job of capturing the value of SFdCM’s unique assets. I think a lot of value investors get caught up in the dollars (or euros) and cents and fail to recognize the enormous public relations benefits and cachet that owning a trophy asset like an historic, high-end hotel brings. For the most part, nobody buys these trophy assets hoping for a financial bonanza. Yes, they hope to at least recoup their investment over time, but the most significant benefits to ownership do not show up on the profit-and-loss report. The signaling involved is far more important than the financial details. China’s Anbang Insurance did not buy the Waldorf-Astoria for a whopping $1.4 million per key because it was the best deal around, they did it to assert their claim to membership in the world’s largest and most prestigious financial companies. A consortium of Japanese corporations were playing the same angle when they bought the Pebble Beach Company in 1990. (Interestingly, these transactions marked a peak for the acquirers with each falling upon difficulties not long after.) LVMH’s 2018 buyout of Belmond also springs to mind. In this case, the world’s premiere luxury brand burnished its existing suite of products and services by adding Belmond’s extraordinary hotels and travel offerings.

I think a superior means of valuing SFdCM is by looking at each asset. The Hôtel Majestic is the crown jewel. The Majestic by itself could fetch €1 million per key. Jaw-dropping? Maybe, but we are talking about an architectural icon in one of the world’s most sought-after locations. That would value the hotel at €349 million. Le Gray d’Albion is smaller and less prestigious, but it benefits strongly from its proximity and association with the Majestic, not to mention its access to the Majestic’s private beach. Valuing Le Gray d’Albion at €600,000 per key for a total €120 million is not out of the question. That yields a value of €469 million for the Cannes properties.

It’s more difficult to place a value on Le Carl Gustaf. The hotel opened only recently and doesn’t have an operating history or a decades-long reputation for excellence. On the other hand, it does enjoy an incredible location and no expense was spared in its renovation or staffing. Being conservative we can value the hotel at the cost of its renovation, €19 million. That yields a value of €488 million for SFdCM’s trio of hotels.

The company’s casinos are difficult to value apart from the associated Cannes hotels. Neither casino produces a consistent profit, but they do have significant strategic value as a conduit funneling guests to the Majestic and Le Gray d’Albion. Gambling appears to be in long-term decline in the region as more gamblers opt for internet competitors. For these reasons, I don’t think the casinos have much independent value and I won’t provide them with such in my estimates.

Including net cash, I estimate SFdCM’s value to be at least €523 million, or €2,990 per share. Just as a reality check, that works out to €853,000 per key. Again, high! But SFdCM’s assets are singularly attractive. And it’s not as if this valuation is indefensible on an earnings basis, either. 23x trailing earnings is a very fair value for the company’s trailing income stream, especially because Le Carl Gustaf will begin contributing to results in 2020. Let’s hope for fine weather in the Caribbean!

So, Why Is It Cheap?

If the company’s assets are really so irreplaceable and prestigious, then why do shares trade at a 43% discount to my estimate of fair value? The answer, like many of the companies profiled on this blog, is illiquidity and obscurity. Despite its €296.1 million market capitalization, the value of free-floating shares is less than €20 million. The Desseigne-Barrière family owns 60% of shares, Fimalac Développement holds another 10%, and a Qatari investor, Casinvest, holds 23%. The remaining shares trade sporadically on the Euronext. I doubt the vast majority of investors even realize the company is public. SFdCM is very much a family-controlled enterprise. Major shareholder affiliate Groupe Lucien Barrière essentially acts as external manager for SFdCM, handling operations and advertising the Majestic, Le Carl Gustaf, and Le Gray d’Albion alongside the many other fine Barrière hotels in France and elsewhere. As always, investors must maintain skepticism when it comes to family-controlled companies. Many do not respect the rights of minority investors or deal fairly with the company. In SFdCM’s case, these risks are reduced by the presence of extremely deep-pocketed Fimalac Développement and Casinvest.

I don’t think investors in SFdCM should expect its ownership structure to change dramatically in the short term. I do think it’s highly likely that the majority owners eventually make an offer to minority holders to take the company private. Why deal with the hassle of a public listing when there is minimal trading activity and a depressed valuation? The Desseigne-Barrières, Fimalac, and Casinvest certainly don’t care about the price at which a few dozen shares changed hands, nor does the company need access to public equity markets in order to raise capital. If an offer does materialize, shareholders should not expect to receive full value for their shares. But at a discount of this magnitude, I think shareholders will do rather well regardless of whether or not an offer materializes.

Alluvial Capital Management, LLC holds shares of Société Fermière du Casino Municipal de Cannes for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at