SYTE - Enterprise Diversified

[gfp]

+1, good post.  I think a lot of folks on this board can attest that investment management and real estate investment can be really good businesses.  There are certainly worse strategies than focusing on these strengths.

[Spekulatius]

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.

 

You don‘t state that a business is a disaster before you sell it obviously, but they will probably more frank regarding their assessment, once the business is sold.

 

BG2008 hit the nail on the head, imo.

[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. 

 

BTW, I meant to say the asset management business of SYTE (not just any asset management business) offers something that is truly differentiated from the S&P 500. 

[Junto]

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. 

 

There are real reasons why private equity firms have operating partners. Very insightful post and applicable in many industries.

[gfp]

https://www.valuewalk.com/2018/10/arquitos-3q18-commentary-long-endi/

 

Seems relevant to post the Arquitos letter here.  Contains more detail on Willow Oak and the other positions might be of interest to some.  I, for one, am a large shareholder of MMAC, which is attractively priced today at 25.xx.  Not as familiar with Westaim, but I remember some here following it.

[gfp]

https://www.sec.gov/Archives/edgar/data/1096934/000143774918019519/syte20181105_8k.htm

 

The Company’s determination to terminate the Purchase Agreement resulted from the Company’s management conducting a detailed budget process in the third quarter of this year that revealed that in addition to the 113 properties previously acquired under the Purchase Agreement, Mt Melrose’s management had significantly expanded Mt Melrose’s staffing and operations and had purchased 34 additional other properties during the quarter ended June 30, 2018—with Mt Melrose carrying, in accordance with the requirements of generally accepted accounting principles concerning consolidation, a total of 195 properties on its balance sheet as of September 30, 2018—and that the carrying costs of certain of Mt Melrose’s holdings together with Mt Melrose’s increased general and administrative expenses were not financially prudent, and, if continued, would not be in the best interests of the Company and its shareholders. The Company’s management is in the process of implementing an outsourced property management model at Mt Melrose similar to what it implemented at its EDI Real Estate property operations in Roanoke, Virginia. A third-party property manager has been engaged as of November 1, 2018 to manage certain of the real properties previously acquired by Mt Melrose. In addition, the Company’s management currently is undertaking an assessment of all of the real properties previously acquired by Mt Melrose to determine which holdings should be divested or restructured, depending upon, for example, each property’s current physical condition, any renovation costs projected to be required for each property, the current state of occupancy of each property, the amount and interest rate of debt of each property and each property’s current and projected cash flow. The Company expects to sell a significant number of the Mt Melrose real properties that are not currently generating revenue.

 

In addition, and also in connection with the above, Mt Melrose and Moore have entered into a certain Termination of Employment Agreement also effective November 1, 2018, pursuant to which the parties mutually agreed to terminate the above-noted Moore Employment Agreement as of November 1, 2018. Under the termination agreement, Moore irrevocably waived any and all right and interest that Moore may have had to receive any further payment or other amounts of any kind under the Moore Employment Agreement (including with respect to any annual bonus compensation and any right of first refusal as to the Company’s equity interests in Mt Melrose). Accordingly, Moore’s employment by and with Mt Melrose was terminated, and Moore was removed as an officer of Mt Melrose, effective as of November 1, 2018. Moore’s termination resulted from the Company’s determination, made in connection with the other matters above, to terminate the employment of all Mt Melrose staff and outsource Mt Melrose’s property management and renovation operations to a third-party service provider. Notwithstanding Moore’s termination, Moore and Mt Melrose have agreed that Mt Melrose will pay to Moore on March 31, 2019 a one-time fee equal to 0.25% of the aggregate amount of any indebtedness secured by the real properties owned by Mt Melrose for which Moore provides a personal guaranty, provided that Moore maintains each such personal guaranty throughout the term of the applicable loan.

[NBL0303]

https://www.sec.gov/Archives/edgar/data/1096934/000143774918019519/syte20181105_8k.htm

 

The Company’s determination to terminate the Purchase Agreement resulted from the Company’s management conducting a detailed budget process in the third quarter of this year that revealed that in addition to the 113 properties previously acquired under the Purchase Agreement, Mt Melrose’s management had significantly expanded Mt Melrose’s staffing and operations and had purchased 34 additional other properties during the quarter ended June 30, 2018—with Mt Melrose carrying, in accordance with the requirements of generally accepted accounting principles concerning consolidation, a total of 195 properties on its balance sheet as of September 30, 2018—and that the carrying costs of certain of Mt Melrose’s holdings together with Mt Melrose’s increased general and administrative expenses were not financially prudent, and, if continued, would not be in the best interests of the Company and its shareholders. The Company’s management is in the process of implementing an outsourced property management model at Mt Melrose similar to what it implemented at its EDI Real Estate property operations in Roanoke, Virginia. A third-party property manager has been engaged as of November 1, 2018 to manage certain of the real properties previously acquired by Mt Melrose. In addition, the Company’s management currently is undertaking an assessment of all of the real properties previously acquired by Mt Melrose to determine which holdings should be divested or restructured, depending upon, for example, each property’s current physical condition, any renovation costs projected to be required for each property, the current state of occupancy of each property, the amount and interest rate of debt of each property and each property’s current and projected cash flow. The Company expects to sell a significant number of the Mt Melrose real properties that are not currently generating revenue.

 

In addition, and also in connection with the above, Mt Melrose and Moore have entered into a certain Termination of Employment Agreement also effective November 1, 2018, pursuant to which the parties mutually agreed to terminate the above-noted Moore Employment Agreement as of November 1, 2018. Under the termination agreement, Moore irrevocably waived any and all right and interest that Moore may have had to receive any further payment or other amounts of any kind under the Moore Employment Agreement (including with respect to any annual bonus compensation and any right of first refusal as to the Company’s equity interests in Mt Melrose). Accordingly, Moore’s employment by and with Mt Melrose was terminated, and Moore was removed as an officer of Mt Melrose, effective as of November 1, 2018. Moore’s termination resulted from the Company’s determination, made in connection with the other matters above, to terminate the employment of all Mt Melrose staff and outsource Mt Melrose’s property management and renovation operations to a third-party service provider. Notwithstanding Moore’s termination, Moore and Mt Melrose have agreed that Mt Melrose will pay to Moore on March 31, 2019 a one-time fee equal to 0.25% of the aggregate amount of any indebtedness secured by the real properties owned by Mt Melrose for which Moore provides a personal guaranty, provided that Moore maintains each such personal guaranty throughout the term of the applicable loan.

 

Wow - this seems like a huge deal. Moore was the reason or the catalyst for all of the others getting involved with this right. And wasn't the Mt. Melrose deal just struck in January or so of this year?

 

So is what Enterprise Diversified is now saying is that the properties were not as advertised or expected in the purchase agreement? And additionally that since the purchase agreement for Mt. Melrose was struck - that they added expenses beyond what were warranted? This makes me quite sad, because I enjoyed following what Moore did with Sitestar when he learned of its problems and I guess I'm just really surprised by this turn of events.

[gfp]

Not sure thats the exact story - but we do know there is a new CEO and they are exiting a bunch of businesses.

[Tim Eriksen]

 

Wow - this seems like a huge deal. Moore was the reason or the catalyst for all of the others getting involved with this right. And wasn't the Mt. Melrose deal just struck in January or so of this year?

 

So is what Enterprise Diversified is now saying is that the properties were not as advertised or expected in the purchase agreement? And additionally that since the purchase agreement for Mt. Melrose was struck - that they added expenses beyond what were warranted? This makes me quite sad, because I enjoyed following what Moore did with Sitestar when he learned of its problems and I guess I'm just really surprised by this turn of events.

 

Sad yet in the long run may be good.  Mt Melrose is capital intensive and going to be hit with depreciation charges, meaning low return on capital and low EPS.  Asset management is the opposite once it is to scale.  Moving away from real estate may prove very beneficial over time.

 

Other thoughts:

1. You should not put out an 8-k like this during market hours.

2. It reads to me that there was increased staffing, and hence higher operating costs.  Since this was not prudent it must mean increased loss from operations in the unit.  Poor management at the unit level.  Implied is some miscommunication between unit and corporate parent at best.  We shouldn't assume anything worse than that.  Hopefully that proves correct.

[InelegantInvestor]

From Dec 11, 2017:

"Mt Melrose is at an inflection point. It owns 122 residential properties and has the potential, with Sitestar’s help, of becoming the dominant property owner in Lexington, Kentucky. Jeff’s strategy is to find undervalued properties, repair and upgrade them, rent them out to tenants, and own them indefinitely. This is a similar strategy that attracted us to Sitestar in the first place. 

 

Mt Melrose’s current portfolio is exceptional. Jeff is an excellent, passionate, operator. He uses debt appropriately. And, Lexington is the ideal location to take advantage of rising rents and rising property values.

 

...

 

Sitestar intends to commit the next $10 million of cash that we internally generate to the subsidiary. Some of that will come from debt that we will raise at the corporate level. The initial allocation to the subsidiary will likely be in the range of $3 million. 

 

Jeff will not earn a salary. He will receive an annual bonus based on book value growth with a high-water mark.

 

As an investor, I have a strong preference for a stable or decreasing share count. We have done the opposite over the last year and a half. Believe actions, not words. We will work to prove those words over time. On this issue, I prefer Sitestar to be less of a Teledyne (issuing shares at opportune times and then buying them back when attractive) and more of a Berkshire (only using shares for acquisitions in unique cases). We think this transaction will prove to be more akin to Burlington Northern than Dexter Shoes. I am certain we will not regret issuing shares."

 

 

While we are certainly excited about this transaction, you should be patient. We urge our subsidiaries to think long-term. Often that negatively affects short-term results."

 

-Steven Kiel

 

"I bring this up to say that, coming from a person who values his autonomy as much as the air he breathes, if you are a person who is looking to sell your business or partner with a public entity while still remaining at its helm, then you should consider partnering with Sitestar."

-Jeff Moore

 

Less than a year later, the arrangement ends with some insinuations, but no clear statement. The insinuations seem to imply that Mr. Moore did what Mr. Kiel had expected him to do, but the company no longer had an interest in its funding commitment or in granting autonomy. Is Mr. Moore still on the Board? 

[Tim Eriksen]

I think the insinuation is that debt was not used appropriately.  Growing too fast and not getting properties on the rental market quickly and efficiently means high carrying costs.  In that sense I read the 8-K as implying that the operating philosophy changed after the purchase - buying too many properties on debt = increased carrying costs plus increased operating cost structure.  We will find out more in the quarterly financials.  Many organizations struggle with growth. 

 

As a shareholder this sucks in the short term, but these issues are fixable.  How much it will cost to fix is the issue. 

[Guest roark33]

So, let me get this straight.  The company has made two private investments in operating companies, HVAC and real estate, and both have turned sour in short order.  And this guy is running an investment advisory business, where most of his returns are driven by his ownership in SYTE?  Yeah, this will not work out well.....

 

 

[fishwithwings]

So, let me get this straight.  The company has made two private investments in operating companies, HVAC and real estate, and both have turned sour in short order.  And this guy is running an investment advisory business, where most of his returns are driven by his ownership in SYTE?  Yeah, this will not work out well.....

 

Well to be fair, I think they bought bad businesses but his portfolio @ Ark is very different as he is invested in higher quality companies (e.g. MMAC).

[matts]

So, let me get this straight.  The company has made two private investments in operating companies, HVAC and real estate, and both have turned sour in short order.  And this guy is running an investment advisory business, where most of his returns are driven by his ownership in SYTE?  Yeah, this will not work out well.....

 

Well to be fair, I think they bought bad businesses but his portfolio @ Ark is very different as he is invested in higher quality companies (e.g. MMAC).

 

What do you mean by businesses? I thought Mt. Melrose was just a shell with a bunch of properties in it, which SYTE had appraised at the time of acquisition. And my impression was that there wasn't much to HVAC when SYTE "bought" that as well. Most of the apparent damage here seems to have taken place as these things were being scaled under current management, not before.

 

How does the CEO not know how many people Jeff is hiring until months later? or how many houses he is buying and how quickly they are getting into the rental market? Either Jeff was supposed to report up and didn't (which will make Jeff look very bad), or Steve wasn't engaged as he should have been, which will make him look bad.

 

[oddballstocks]

This is such a weird situation. So Jeff cashed out and they’re stuck with the buildings? Is that good or bad? Is the portfolio decent? It seemed like Jeff knew what he was doing pre-purchase. Did he suddenly go rogue or something?

 

Why the sudden reversal on RE?

 

I guess I have more questions than the 8-k has answers. The optics doesn’t look great.

[Foreign Tuffett]

Let me see if I've got this right:

 

SYTE agreed to acquire Mt Melrose and all of its owned properties late last year. At the time Mt Melrose owned 122 properties. The owner operator of My Melrose was also SYTE's Chairman.

 

Fast forward 11 months to the present. Now Mt Melrose carries 195 properties on its balance sheet. 113 of these properties are actually owned by SYTE. Contra the original plan, SYTE won't be acquiring the remaining properties. Instead, SYTE will either sell the properties it already owns, or contract with a 3rd party leasing manager.

 

Hmmmm......

 

If Moore and his team aren't going to be managing the 113 owned properties, then all of the properties should likely be sold off -- something I recognize will take some time.

 

 

[DTEJD1997]

Hey all:

 

If SYTE is going to be liquidating the property portfolio of 100+ properties...that is going to be a large amount of properties in the lower cost housing segment for that market.

 

If they liquidate over the course of a year, I imagine they will have to discount them OR offer seller financing, OR a combination of both.

 

Who would buy a lot of those properties?  Somebody who is familiar with the market.

 

If SYTE is outsourcing management of the properties, that is going to take away a lot of their income.  The management company will get a lot of it.

 

SYTE is probably going to liquidate the internet company.  Maybe they get 1x or 2x EBIDTA for it?  There are no earnings for the HVAC, so either sell it at a large loss or shut it down.

 

I am going to predict that there is going to be a big writedown(s) in the near future for SYTE.

 

I am further going to predict that the share price is going to be going SUBSTANTIALLY lower in the upcoming year. 

 

One could even argue that the whole thing just had it's wheels come off.

[Spekulatius]

Let me see if I've got this right:

 

SYTE agreed to acquire Mt Melrose and all of its owned properties late last year. At the time Mt Melrose owned 122 properties. The owner operator of My Melrose was also SYTE's Chairman.

 

Fast forward 11 months to the present. Now Mt Melrose carries 195 properties on its balance sheet. 113 of these properties are actually owned by SYTE. Contra the original plan, SYTE won't be acquiring the remaining properties. Instead, SYTE will either sell the properties it already owns, or contract with a 3rd party leasing manager.

 

Hmmmm......

 

If Moore and his team aren't going to be managing the 113 owned properties, then all of the properties should likely be sold off -- something I recognize will take some time.

 

The new Sytestar looks like the old Sytestar. Reminds me of a book I read a long time ago in school - the title was “Animal Farm”.

[InelegantInvestor]

Let me see if I've got this right:

 

SYTE agreed to acquire Mt Melrose and all of its owned properties late last year. At the time Mt Melrose owned 122 properties. The owner operator of My Melrose was also SYTE's Chairman.

 

Fast forward 11 months to the present. Now Mt Melrose carries 195 properties on its balance sheet. 113 of these properties are actually owned by SYTE. Contra the original plan, SYTE won't be acquiring the remaining properties. Instead, SYTE will either sell the properties it already owns, or contract with a 3rd party leasing manager.

 

Hmmmm......

 

If Moore and his team aren't going to be managing the 113 owned properties, then all of the properties should likely be sold off -- something I recognize will take some time.

 

The new Sytestar looks like the old Sytestar. Reminds me of a book I read a long time ago in school - the title was “Animal Farm”.

Indeed. This all began with "All shareholders are equal, but some are more equal than others"

[Tim Eriksen]

I may be wrong but I think you are all over reacting.  It is not about selling all the properties.  Some certainly will be.  I doubt there is a meaningful write down. 

 

Outsourcing management is how it should be done and is much better.    Let's assume all 113 properties are rented for $800 month average = $90,400 per month.  You can use 90% occupancy at $900 if you like.  Assume a property manager takes 6-8% to manage or $5,400 to $7,200 per month.  That is a whole lot cheaper than building a property management team.  That is cheaper than one decent accountant or maintenance person.  With 113 properties are you better off with in house maintenance and contracting out services as needed.  If it were a single apartment complex maybe an in house person makes sense but if you have properties spread around a city contracting out services as needed seems cheaper. 

 

My read is that Mt Melrose was just buying too quickly and over hiring.  There is no evidence that the problem is that the properties are bad or that they over paid.  With a holding company approach you are sometimes going to have issues like this.  In their case it has happened twice, since HVAC had some similar problems.  Asset management and Internet are doing well.  VA real estate is being liquidated. 

 

[matts]

I may be wrong but I think you are all over reacting.  It is not about selling all the properties.  Some certainly will be.  I doubt there is a meaningful write down. 

 

Outsourcing management is how it should be done and is much better.    Let's assume all 113 properties are rented for $800 month average = $90,400 per month.  You can use 90% occupancy at $900 if you like.  Assume a property manager takes 6-8% to manage or $5,400 to $7,200 per month.  That is a whole lot cheaper than building a property management team.  That is cheaper than one decent accountant or maintenance person.  With 113 properties are you better off with in house maintenance and contracting out services as needed.  If it were a single apartment complex maybe an in house person makes sense but if you have properties spread around a city contracting out services as needed seems cheaper. 

 

My read is that Mt Melrose was just buying too quickly and over hiring.  There is no evidence that the problem is that the properties are bad or that they over paid.  With a holding company approach you are sometimes going to have issues like this.  In their case it has happened twice, since HVAC had some similar problems.  Asset management and Internet are doing well.  VA real estate is being liquidated.

 

If this is just a case of going too fast, why would Steve terminate the man who up until a month ago was chairman of his board? Sure, change course and hire an external manager, but wouldn't you let Jeff keep his job and have Jeff issue a statement with the announcement saying "Hey, we figured out a more efficient way of running Melrose" ?? Or the other logical option is that you let him resign. To me, Jeff's silence is telling here. As is the general lack of communication other than the filing at 2:30pm. They couldn't wait 90 minutes and also issue a press release to explain better and let the market digest outside market hours? The fact that we are trying to figure out what the filing is trying to say indicates that the company dropped the ball on communicating with shareholders on top of everything else. I'm surprised it's only down 30%.

 

 

[slkiel]

Please find below a thread that I tweeted out earlier about the situation.

 

The bottom line is that we decided to restructure the subsidiary to better support our asset management operations. The goal is to generate predictable cash flow from the real estate. Jeff’s goals were different as he was more focused on capital appreciation. There is no animosity between Jeff and the company, simply different goals.

 

Things have not worked out exactly as planned for HVAC and Mt Melrose, but those challenges have pushed us to focus on our strengths and on the operations that we control at the corporate level. That is a big long-term plus. Doing things in a decentralized manner, as we attempted with HVAC and Mt Melrose, in a small company is very, very difficult. The public company aspect is much different than a private company.

 

The stock price will do what it does, and, as we all know, it is not always rational (especially for a small company). Our operations, though, are no different than yesterday. As we said in the 8-K, we are cutting expenses and simplifying the business. There isn’t much more to it than that.

 

[slkiel]

Also, I appreciate the comments about the timing of the filing. We typically try to file the Qs on Friday afternoons, for example. In retrospect we should have been more sensitive about the timing of this filing. Clearly we did not believe that it would be market moving.

[Gregmal]

I'm not accusing this company of doing this, but generally speaking, IMO these type of deals are generally the equivalent of stock promotions for sophisticated investors. These communities(COBF) inadvertently cultivate a sense of "in the know" from members and "access" that generally speaking, impairs ones ability to look at a high risk, low quality businesses as such. I'm curious to know how many investors are involved in this and Premier Diversified simply because of this site? Again, I am not accusing the managers here of anything....But being here, amongst sophisticated investors, likely gives a bit of a boost somewhere. You see folks here rigorously rip through other investments, and I can't help but think there is less diligence with companies like these because people want to believe.

 

And in relation to this, why not just start an in house property manager? The ROI in that business is typically high. Asset light and very scale-able, much like money management. You wouldn't need an accountant, anyone who runs money should be able to do basic accounting or find a handyman. The problem with these "management" schemes is there's double and triple and quadruple layers of people getting paid to essentially do the same thing. If the CEO is managing the company, he should be able to do some accounting without drawing a fee or outsourcing it for one. I own investment properties and I do all my own management stuff. I guess if it was someone else's money I'd hire it off and bill them the cost though...

[fishwithwings]

So, let me get this straight.  The company has made two private investments in operating companies, HVAC and real estate, and both have turned sour in short order.  And this guy is running an investment advisory business, where most of his returns are driven by his ownership in SYTE?  Yeah, this will not work out well.....

 

Well to be fair, I think they bought bad businesses but his portfolio @ Ark is very different as he is invested in higher quality companies (e.g. MMAC).

 

What do you mean by businesses? I thought Mt. Melrose was just a shell with a bunch of properties in it, which SYTE had appraised at the time of acquisition. And my impression was that there wasn't much to HVAC when SYTE "bought" that as well. Most of the apparent damage here seems to have taken place as these things were being scaled under current management, not before.

 

How does the CEO not know how many people Jeff is hiring until months later? or how many houses he is buying and how quickly they are getting into the rental market? Either Jeff was supposed to report up and didn't (which will make Jeff look very bad), or Steve wasn't engaged as he should have been, which will make him look bad.

 

HVAC is known to be a horrible business with low margins.  As for real estate it is very capital intensive and if I recall correctly, Buffett once said if there was an easy way to manage a lot of single family homes, he would do it. The businesses should not have been entered into the first place.

 

However, the poorly timed press release and firing (not resignation) of Jeff from the BOD and company leaves a lot of questions. Also, I don’t understand why the new direction focuses on cash flow and not capital gains from the properties. These are SINGLE FAMILY homes which usiually provide very low cap rate.