“Q3 Results Secured”
October 25, 2018
TOO Much Debt…
November 4, 2018


Hi Kuppy – I discovered your site through capitalist exploits and I’ve really enjoyed all of your articles; I’ve read many of them now.

A question about the cap rates issue you’ve brought up the last few posts. It seems like in addition to rates increasing, we’re also in for a bought of inflation as well. Wouldn’t that offset the negative impact of cap rate increases?

Do you expect inflation to remain low while rates continue to rise or am I missing a part of your formula?

I’m actually in Singapore with Chris filming an interview for Capitalist Exploits.

Inflation may increase rental rates. Some asset types like hotels and multi-family re-price faster than others. If cap rates go from 2 to 6, you lose 66% of your investment. Do you think rents can go up fast enough to offset that? I suspect that rents will grow with GDP + inflation? It’s tough to catch up with cap rates exploding.

Will you write a follow-up after a forensic  analysis of the Q3 10Q?

In the late 1990s, I made a fortune following Howard Schilit’s CFRA research which gave early warning notice on public companies that employed aggressive accounting to pump stocks.  Too bad their isn’t a similar service since he sold the business to a PE firm. 

Schilit’s book is the handbook for spotting fraud. I highly recommend it.

I don’t intend to do a follow-up on TSLA unless there’s something truly egregious in the 10-Q. I don’t want this site to become obsessed with the Tesla idiocy–there’s so much more happening in the world. I didn’t comment after “funding secured” as I figured all adults would instantly come to the conclusion that it was fake. Q3 financial manipulation was so insane that I felt compelled to warn people. Hopefully, that will be the last post until the bankruptcy .

Hey Kuppy,

I’m a big fan of your work, and I’m certainly in agreement with you that Tesla’s stock is overvalued in the $300s, but I’m concerned that your analysis is clouded a bit by a dislike of Elon’s antics (based on your past writings).

2017Q4 Depreciation of $470M was 4.7% of Tesla’s $10B in PP&E at the end of the quarter. Q3 depreciation of $503M was 4.5% of Tesla’s $11.2B PP&E at the end of the quarter. Those two numbers are certainly within the same ballpark. Even if they played with it a bit, I don’t see that changing the reality by more than $20-40M.

On the SG&A side, I’m sure you’re aware that Tesla laid off something like 9% of their workforce in Q2. Restructuring charges were close to $130M over Q2 and Q3. They would have also pre-hired to prepare for Model 3 ramp which they’d expected earlier in 2018, so the lack of increase is not surprising to me.

The AR number is a bit more interesting, but the face value explanation is reasonable, so I’m willing to see if it improves in Q4.

I would not hesitate to agree with you that Tesla is overvalued and not investable as a long right now, but its not a bankruptcy risk either.

On depreciation, if it was a straight-line depreciation over a number of years, your % of PP&E logic would make sense. This isn’t the case for TSLA’s tooling as it is on a per vehicle depreciation basis.

Yes, TSLA laid off 9% of their workforce. Assume it’s 4,000 people who made $100,000 a year (both numbers probably are too high). That’s $400 million a year and $100 million a quarter in SG&A savings. At historic 20% of revenue, SG&A should have been about $1.36 billion, it was $730 million. That’s a $630 million swing and substantially larger than the $100 million in maximum headcount savings. Something isn’t right–especially as we know that there was intense chaos for most of the quarter (leading one to think that SG&A was not adequately managed).

There is no AR explanation. The day of the week shouldn’t matter more than a few basis points. There’s 91.25 days in a quarter. Are you saying that all the sales happened on a Sunday in September?

Great Tesla article and the logo you created is priceless!

Thanks, but for the record, I didn’t create that logo. Someone far more creative than me did it.

You mentioned you have sold out most of your positions. You also mentioned, at one time, that Tidewater Inc and Mongolian Mining Company were your 1st and 2nd largest positions – if I read correctly.

My question is this … if you’ve liquidated most of your holdings to “stockpile” cash – did you liquidate or reduce your positions in TDW and MOGLQ or do you just “ride it out” on those issues?

Thanks again for ALL the generosity in sharing your knowledge and expertise with us.

I haven’t sold a share of Tidewater or Mongolian Mining. I sold other stuff that would be impacted by interest rates or was near fair value.

I think TDW is worth in excess of $100 if offshore comes back. MMC could be worth in excess of $1.00 and possibly a lot more if a railroad is ever built. Both give huge upside without too much downside. Both are really hitting it out of the park operationally over the past few months. The computers aren’t watching, but they will when the results are released.

Kuppy, love the site and your approach.  Much of what you do really resonates.

Question…haven’t seen much follow-up (or specific thesis) on the exploration of malls you were doing.  Any actionable views come from that?  And specifically, have you done any work around Seritage?

We visited a bunch of malls, talked with a few dozen people and put it in the “too hard” pile. You can buy a dead mall for a few dollars a foot and try to re-purpose it, but all the the restrictive cross-covenants and easements make it very difficult to effectively re-purpose it. The other issue is that while you may be able to figure it all out, it will take a few years of VERY hard work and all you have to show for it is 1 asset. Maybe you can do 3 at once if they’re relatively close together (we couldn’t even find 2 within 100 miles of each other) but then what have you created? You have cash flow, but who is the logical end-buyer for an assortment of random schlocky businesses in a former mall? Your exit cap rate would be mid-teens at best. In the end, there are easier ways to make money.

On Seritage, I looked at it quite a bit right before the Sears BK as it seems logical to own it at the time the big bad news hits. The more I looked, the more I felt like it was a short and not a long. There will be a cash flow gap, development returns are pretty mediocre, there are a lot of sub-par assets that are going to be sitting there costing money while you go after the better ones, if it all works out, fair value is $30-100 and it will take 5-8 more years to realize most of that value. Discount that at any reasonable rate and the shares are overvalued. Finally, the real risk is that the bondholders go after it for fraudulent conveyance. I’m not smart enough to know how good their case is, but I suspect the shares get nuked when that happens and you can re-assess at a much lower price than today. At best, SRG wins, but it takes years to sort out in court. More likely, they settle for something that takes more out of the fair value. Finally, in BK, they can break the master lease agreement, stopping SRG from cherry-picking the best assets for re-development. I don’t short, but this screams risk and no upside.

Interesting on OZK.  I had never heard of these guys up until the last six months.  Heard from two different commercial mortgage brokers weve done business with that “ozarks is doing every hotel loan in the country” and from another guy “ozarks is the most aggressive lender on the street.”

I have gotten a few emails like this from readers. It makes me think that OZK is a much bigger powder keg than I had originally thought. It seems they’re acting reckless in multiple cities, not just NYC and Miami as I had heard previously.

Doesn’t Teekay Offshore fall into the same highly interest-rate sensitive bucket?

Yes it does!! It almost didn’t make the cut when I did my pruning. In the end, I made a decision that I want to be long stuff that sees competition decrease as rates go up. Who is going to build a new FPSO with a multi-decade lifespan if it costs 2% more per year to fund it? Therefore, existing FPSOs have a competitive advantage bidding on new contracts. Look at TOO’s Varg, it just won a contract that likely leads to a $30-40 million swing in CFVO (it is losing $5-10m a year now in cold stack). That’s $200-300 million over the 7 year contract. Discount that at some rate and you’re talking about 25-50% of the total market cap in added NPV. The stock should have been up huge on the news. Instead it is down 10% since then. I have added more lately. It is too cheap and too hard to replicate. Rising interest rates will bite TOO, but with their capital program now mostly complete, I suspect they’ll begin to pay down debt and de-lever (which is VERY accretive when you borrow at 8% or more). They also get a kicker to cash flow based on oil prices–which are up a good deal lately


What nat gas companies did you buy?

I sold my basket of names for a small gain a few days after I posted that I was long. I decided I’d rather sit with more cash and see what shakes out in the market. I think nat gas prices squeeze this winter if it is cold. They’re already up a lot and it’s not even the heart of the drawdown season. Inventories are low. If gas gets to $4, a lot of these beat down names with big short interests will squeeze. I feel funny talking about what I owned as it was a trading basket of junk names and I didn’t have particular conviction in any individual name.

How did you know to get out of the market? What made you know it would collapse? Did you short the market too?

I didn’t know anything. I sensed that I had overstayed my welcome on the long side and wanted to lighten up. I did not short anything and I didn’t mean to make a trading call. It just feels dangerous in the market. Crashes happen when interest rates and oil go up, while liquidity goes down. There’s a lag, but there’s usually a crash afterwards.