SYTE - Enterprise Diversified

[slkiel]

Good catch. We will update it ASAP. Definitely can't say that!

[InelegantInvestor]

Q2 results are out.

https://www.sec.gov/Archives/edgar/data/1096934/000156459018021273/syte-10q_20180630.htm

[Spekulatius]

Interesting, They are really ramping up real estate. looks like they acquire properties at a 6% cap rate, based on cost and revenue metrics. Home service business seem to suck, based on capital invested and operating losses. Asset management didn’t have a great quarter like Q1, but volatility is expected here.

[Sportgamma]

Not really on topic, but I think this is the first time that I come across a filing where a business segment is recording negative revenue. It seems kind of silly that asset managers have to accrue performance fees on the income statement like that.

 

If an investor would pull out of a fund at a loss, it's not like the asset manager would have to pay the investor the negative performance fee. Here's a question: If an investor pulls out at a loss, does the asset manager record revenues as the negative performance fees are wiped out of the accrual fees?

[John Hjorth]

Sportgamma,

 

It's most likely a consequense of a [x + y] fee agreement with the limited partners involved. While using accrual accounting, this may be a logical consequense in a given quarter [it is for 2018Q2 isolated, not for 2018H1 here], related to x, from an accounting perspective.

 

Interesting question. You're very observant.

[Tim Eriksen]

The negative revenues is due to the large investment in the Alluvial fund declining during the quarter.  Instead of being reported as other income it is reported under Asset Management segment along with management fees.  While a negative quarter may happen in the future due to inventive accruals, Alluvial had not surpassed the 6% hurdle for this year.

[Sportgamma]

The negative revenues is due to the large investment in the Alluvial fund declining during the quarter.  Instead of being reported as other income it is reported under Asset Management segment along with management fees.  While a negative quarter may happen in the future due to inventive accruals, Alluvial had not surpassed the 6% hurdle for this year.

 

Hi Tim,

 

Interesting. Thank you for the clarification. You would think that even though there is a fee sharing agreement in place, losses and gains from the seed investment itself would be accounted for as comprehensive income. I assume that they will pay capital gains taxes on any realized profits from the seed investment, right? Just thinking aloud here.

[Tim Eriksen]

The negative revenues is due to the large investment in the Alluvial fund declining during the quarter.  Instead of being reported as other income it is reported under Asset Management segment along with management fees.  While a negative quarter may happen in the future due to inventive accruals, Alluvial had not surpassed the 6% hurdle for this year.

 

Hi Tim,

 

Interesting. Thank you for the clarification. You would think that even though there is a fee sharing agreement in place, losses and gains from the seed investment itself would be accounted for as comprehensive income. I assume that they will pay capital gains taxes on any realized profits from the seed investment, right? Just thinking aloud here.

 

It used to be that way but not now due to the new tax rules.  Pretty sure US companies do not get a lower rate on capital gains than income.   

[gfp]

Tim is right.  Same change that affected Berkshire's reporting starting in January.  Not sure it had anything to do with the tax bill per se, but was a change announced to GAAP before the tax bill passed.  I think it was telegraphed as early as 2016.

 

And yes, corporations pay the corporate income tax rate on capital gains.  There are different rates on dividend income depending on what percentage of the investee they own, what type of corporation the owner is (insurance company, etc), and other complications.

[DTEJD1997]

Hey all:

 

Anybody else see this?

 

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/232c9e53-f4b9-4ba3-acbd-c435ac7ec739/100518_Shareholder_Letter_Chairman_CEO.pdf

 

The letter is kind of vague, but it seems that ENDI is going solely towards asset management:

 

"Our assets are ideas and the managers with whom we are affiliated.

The business does not have to rely on significant capital expenditures, inventory,

or debt to succeed.  As part of our focus on asset management, we will be restructuring

all of ENDI toward that goal.  This will take some time.  Stay tuned for additional details."

 

I am going to guess that HVAC will be gone, interweb access & domain names gone, but what happens to the real estate?

 

Seems kind of odd, a complete change of direction...

[Spekulatius]

Hey all:

 

Anybody else see this?

 

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/232c9e53-f4b9-4ba3-acbd-c435ac7ec739/100518_Shareholder_Letter_Chairman_CEO.pdf

 

The letter is kind of vague, but it seems that ENDI is going solely towards asset management:

 

"Our assets are ideas and the managers with whom we are affiliated.

The business does not have to rely on significant capital expenditures, inventory,

or debt to succeed.  As part of our focus on asset management, we will be restructuring

all of ENDI toward that goal.  This will take some time.  Stay tuned for additional details."

 

I am going to guess that HVAC will be gone, interweb access & domain names gone, but what happens to the real estate?

 

Seems kind of odd, a complete change of direction...

 

My guess is that real estate will fall under the asset management and SYTE will become a mini version of BAM. I think HVAC and the Internet  operations will be disposed off. I predict that there are significant write offs with HVAC. The internet ops have been shrinking, but they generated nice profits covering a lot of the overhead. it will be interesting how the financials look, after the restructuring is done. I felt that the HVAC in particular looked like a bad investment and didn’t seem to be working as envisioned.

[Guest roark33]

It's sort of funny how the only real "investment" that SYTE management made was the HVAC and that was a horrible one.  But, now the investors who made that investment will be moving on to remake themselves as asset managers.  It really shows how much of a sham asset managers are.  Complete fee-driven business without performance being accurately accounted for.  This case has that written all over it. 

[Tim Eriksen]

It's sort of funny how the only real "investment" that SYTE management made was the HVAC and that was a horrible one.  But, now the investors who made that investment will be moving on to remake themselves as asset managers.  It really shows how much of a sham asset managers are.  Complete fee-driven business without performance being accurately accounted for.  This case has that written all over it.

 

Your comment doesn't make sense.  Yes HVAC has not performed well.  Why is the existing asset management business not an investment?  Why is Mt. Melrose not an investment?  Both are many times larger.  They are not moving to something new.  Maybe you are not familiar with what they have been doing the past year and a half.  Why are asset managers a sham??  They sell a service to clients just like other service businesses do.  Maybe you don't need it but that doesn't mean others don't.

[Gregmal]

It's sort of funny how the only real "investment" that SYTE management made was the HVAC and that was a horrible one.  But, now the investors who made that investment will be moving on to remake themselves as asset managers.  It really shows how much of a sham asset managers are.  Complete fee-driven business without performance being accurately accounted for.  This case has that written all over it.

 

Your comment doesn't make sense.  Yes HVAC has not performed well.  Why is the existing asset management business not an investment?  Why is Mt. Melrose not an investment?  Both are many times larger.  They are not moving to something new.  Maybe you are not familiar with what they have been doing the past year and a half.  Why are asset managers a sham??  They sell a service to clients just like other service businesses do.  Maybe you don't need it but that doesn't mean others don't.

 

Yea I've never understood this line of logic. In a world were casinos/betting are legit businesses, anonymous source based journalism is considered a legitimate business, and pay day loans are accepted as businesses, how is asset management a sham?

[Foreign Tuffett]

It's sort of funny how the only real "investment" that SYTE management made was the HVAC and that was a horrible one.  But, now the investors who made that investment will be moving on to remake themselves as asset managers.  It really shows how much of a sham asset managers are.  Complete fee-driven business without performance being accurately accounted for.  This case has that written all over it.

 

Your comment doesn't make sense.  Yes HVAC has not performed well.  Why is the existing asset management business not an investment?  Why is Mt. Melrose not an investment?  Both are many times larger.  They are not moving to something new.  Maybe you are not familiar with what they have been doing the past year and a half.  Why are asset managers a sham??  They sell a service to clients just like other service businesses do.  Maybe you don't need it but that doesn't mean others don't.

 

Yea I've never understood this line of logic. In a world were casinos/betting are legit businesses, anonymous source based journalism is considered a legitimate business, and pay day loans are accepted as businesses, how is asset management a sham?

 

Asset management isn't a sham, but single manager funds ARE very different than normal businesses in that they are extraordinarily dependent on the services of a single person. If that person quits/retires/dies the business is gone -- or at least greatly diminished. Also, think about how much leverage the manager has over any entities that own parts of the GP.

 

IIRC the Fortress Investment Group/Graticule Asia Macro/Adam Levinson situation is a good example of how this dynamic can play out.

[Gregmal]

It's sort of funny how the only real "investment" that SYTE management made was the HVAC and that was a horrible one.  But, now the investors who made that investment will be moving on to remake themselves as asset managers.  It really shows how much of a sham asset managers are.  Complete fee-driven business without performance being accurately accounted for.  This case has that written all over it.

 

Your comment doesn't make sense.  Yes HVAC has not performed well.  Why is the existing asset management business not an investment?  Why is Mt. Melrose not an investment?  Both are many times larger.  They are not moving to something new.  Maybe you are not familiar with what they have been doing the past year and a half.  Why are asset managers a sham??  They sell a service to clients just like other service businesses do.  Maybe you don't need it but that doesn't mean others don't.

 

Yea I've never understood this line of logic. In a world were casinos/betting are legit businesses, anonymous source based journalism is considered a legitimate business, and pay day loans are accepted as businesses, how is asset management a sham?

 

Asset management isn't a sham, but single manager funds ARE very different than normal businesses in that they are extraordinarily dependent on the services of a single person. If that person quits/retires/dies the business is gone -- or at least greatly diminished. Also, think about how much leverage the manager has over any entities that own parts of the GP.

 

IIRC the Fortress Investment Group/Graticule Asia Macro/Adam Levinson situation is a good example of how this dynamic can play out.

 

I don't disagree, but don't people realize that this is the product they are investing in when they chose to do so? I mean I get the complaints here, but at the same time I think it's also pretty naive if folks were buying THIS, because they wanted to be in the HVAC biz and didn't realize this was massively reliant on an asset manager...

 

That said, I've heard from quite a few respected people that asset/money managers make great CEO's(in a sarcastic, biding their time to bilk value type of sense), especially with small companies because they know the lingo, know which levers to bump to produce aesthetically promising but still ultimately hollow results and generally speaking play the long game. Not saying that's the case here but it's something I tend to watch out for with smaller companies run by finance guys.

[gfp]

So y'all are saying that by going from an HVAC roll up strategy to a group of one-man money management businesses SYTE is making the same mistake twice because it's an identical key-man business.  Seems possible but I feel the money mangers will be a lot more loyal.  Time will tell

[Spekulatius]

To me, it always looked like SYTE had many (perhaps too many) lines of business, and now they are trimming those that don’t work out or don’t have a future long term, I don’t know if this doesn’t make sense, what does? Should Berkshire have stuck with the textile business?

[Sportgamma]

Although a permanent loss of capital is never a good thing, at least I would credit them for jumping out of the HVAC hole early. I think it's actually a much harder thing to do than to keep on digging.

[writser]

Bit odd that HVAC wasn't mentioned at all in the letter. Stay tuned for additional details, I guess.

[InelegantInvestor]

Bit odd that HVAC wasn't mentioned at all in the letter. Stay tuned for additional details, I guess.

Not odd at all.

https://en.wikipedia.org/wiki/Misdirection_(magic)

[Spekulatius]

Bit odd that HVAC wasn't mentioned at all in the letter. Stay tuned for additional details, I guess.

 

It’s not odd. If it doesn’t get mentioned, it means it get sold off.  It’s implied ,the way I read this letter. I have been in the corporate world long enough to read the tea leaves, and this seem as clear as they come.

[writser]

It’s not odd. If it doesn’t get mentioned, it means it get sold off.  It’s implied ,the way I read this letter. I have been in the corporate world long enough to read the tea leaves, and this seem as clear as they come.

 

What I was trying to convey: that they possibly want to get rid of the HVAC business isn't odd at all. But if HVAC is a disaster then I believe our great value investing hero WEB would say just that in his shareholder letter. I'd expect the same from these guys. But maybe there are some (legal) issues with that that I am not aware of - explaining the 'stay tuned for more details' in the shareholder letter.

[BG2008]

I see a pattern with "fund managers" who wind up buying businesses like WEB.  WEB at one point bought a gas station in Omaha and he quickly found out that it is a tough business and he and his family wind up working on the weekends and pumping gas and cleaning windows.  I think a lot of us, asset managers, don't know or forget how hard it is to run actual businesses.  We read annual reports and argue about what is a good business move and what is a bad business move and how we would do things differently.  We're kind of like the talking heads doing Monday morning quarterbacking.  In reality, if you ever played an actual sport or ran a business, you will know that the real world is very different and much harder.  Your opponents don't just lay down and let you run all over them.  Your employees don't do exactly what you tell them to do.  On paper, running a Chinese food take place is a great business because you don't need to manage working capital.  It is a capital light business.  Yes, it cost $100-150k to open up a place, but if you run it well, you can net $100k in a year.  Your customers pay you at the point of sale, but you pay your vendors after 1-2 months.  It's fairly recession proof.  Everyone has to eat, right?  $6 lunch specials is the cheapest you will get.  As a fund manager, we would mistaken many of these view points as being advantages and someone may say "hey, let's roll them up"  I'm sure that the mom and pop people don't know how to run it as well as a professional fund manager.  What the fund manager forget is that the owner's got his wife and three kids working pretty much full time to make that $100k a year.  It is not representative of the true business.  I have an uncle who does very well as a HVAC guy.  But he works like 12-14 hours a day and he's very good at what he does.  You can't take him out and replace him with a 20 year old who clocks in and clocks out. 

 

Peter Lynch mentioned that some financial entities tried to roll up the lobster fishing industry mentioning scale etc.  The truth is lobster fisherman is a irrational breed of people who smoke Marlboros, are grumpy, but work like hell, and loves being on the water.  Yes, it's a shitty living and they don't make anything.  But they go to work everyday being on the water.  They may even dislike their job/business, but they show up everyday to do it.  It's being a part of a shitty American dream.  You try to roll up the lobster fishing industry, you will go broke.  If an industry is fragmented, there is likely a good reason why it is.  As a manager, you really need to understand why and examine what you're bringing to the table that will alter the economics. 

 

Rant over.  I think guys like Keith Smith are salt of the earth and great assets for SYTE.  I also think that the asset management business offers something that is truly differentiated from the S&P 500.   

[Jurgis]

I see a pattern with "fund managers" who wind up buying businesses like WEB.  WEB at one point bought a gas station in Omaha and he quickly found out that it is a tough business and he and his family wind up working on the weekends and pumping gas and cleaning windows.  I think a lot of us, asset managers, don't know or forget how hard it is to run actual businesses.  We read annual reports and argue about what is a good business move and what is a bad business move and how we would do things differently.  We're kind of like the talking heads doing Monday morning quarterbacking.  In reality, if you ever played an actual sport or ran a business, you will know that the real world is very different and much harder.  Your opponents don't just lay down and let you run all over them.  Your employees don't do exactly what you tell them to do.  On paper, running a Chinese food take place is a great business because you don't need to manage working capital.  It is a capital light business.  Yes, it cost $100-150k to open up a place, but if you run it well, you can net $100k in a year.  Your customers pay you at the point of sale, but you pay your vendors after 1-2 months.  It's fairly recession proof.  Everyone has to eat, right?  $6 lunch specials is the cheapest you will get.  As a fund manager, we would mistaken many of these view points as being advantages and someone may say "hey, let's roll them up"  I'm sure that the mom and pop people don't know how to run it as well as a professional fund manager.  What the fund manager forget is that the owner's got his wife and three kids working pretty much full time to make that $100k a year.  It is not representative of the true business.  I have an uncle who does very well as a HVAC guy.  But he works like 12-14 hours a day and he's very good at what he does.  You can't take him out and replace him with a 20 year old who clocks in and clocks out. 

 

Peter Lynch mentioned that some financial entities tried to roll up the lobster fishing industry mentioning scale etc.  The truth is lobster fisherman is a irrational breed of people who smoke Marlboros, are grumpy, but work like hell, and loves being on the water.  Yes, it's a shitty living and they don't make anything.  But they go to work everyday being on the water.  They may even dislike their job/business, but they show up everyday to do it.  It's being a part of a shitty American dream.  You try to roll up the lobster fishing industry, you will go broke.  If an industry is fragmented, there is likely a good reason why it is.  As a manager, you really need to understand why and examine what you're bringing to the table that will alter the economics. 

 

Good post.