SYTE - Enterprise Diversified

[valueyoda]

The premium placed on the entire holding company was in my opinion unsustainable, and the decline so far has only put a dent into this premium valuation. Even being generous when it comes to the asset management business, I still think that the stock should trade at a discount to book (and the question now becomes how overstated book value is).

[stahleyp]

This might be a really stupid question, but let's say they bring in a manager that kills it and assets go up to several billion. What would stop the manager from setting up shop on their own?

 

Nothing.

 

Also, from my own experience, I agree with whoever pointed out that in this space you better be hands-on. They will NOT get the same results with an external manager. All these guys do is find tenants (usually not very well vetted) and collect rent. They mindlessly instruct tradespeople to fix issues when a tenant calls. They don't care about costs, efficiency or logic.

 

I think Stahleyp is talking about the Asset Management Business.

 

Yeah, that's correct. I should've made that more clear.

[gg]

I wasn't clear on the 8-k .... is Jeff no longer on the board of ENDI? My reading was that he was no longer an officer of Mt Melrose, but wasn't clear on his position with ENDI.

[NoCalledStrikes]

I wasn't clear on the 8-k .... is Jeff no longer on the board of ENDI? My reading was that he was no longer an officer of Mt Melrose, but wasn't clear on his position with ENDI.

 

On Friday, October 5, 2018, the Board of Directors of the Company, acting unanimously, appointed Director, Steven L. Kiel as Chairman of the Board of the Board of Directors of the Company.  As Chairman of the Board, Mr. Kiel replaces Jeffrey I. Moore, whose service on the Board of Directors continues in the capacity as a regular Director.

 

 

[Tim Eriksen]

The premium placed on the entire holding company was in my opinion unsustainable, and the decline so far has only put a dent into this premium valuation. Even being generous when it comes to the asset management business, I still think that the stock should trade at a discount to book (and the question now becomes how overstated book value is).

 

It is easy to throw comments out there.  Can you support it with some facts?  Book value of the asset management business is the investment in Alluvial.  The revenue interests in Bonhoeffer have no book value and certainly has some worth.  The Alluvial revenue interest is tied to the investment but I would argue has value in excess of the investment.  Huckleberry is carried at cost.  Likely worth more.  The internet operations are clearly worth multiples of its 400k book.  They earned over 725k pre-tax in ttm.  Virginia real estate has already been written down.  So there is no reason to value it at less than book.  HVAC may be worth a bit less than book.  That leaves Mt. Melrose.  While some properties that have not been repaired may be worth a bit less than the purchase, those that have been repaired and have stable renters are likely worth more. 

 

Please explain why you disagree     

[Guest roark33]

Well, I think the easiest argument against book value is that Kiel is basically 0 out of 2 in investments in operations, so, no offense to Dave Waters, but you have to assume there might be a pattern there, i.e. Alluvial might not turn out.  If so, then that is a huge write down to book value.  And same thing with the other investment, forget the name off hand. 

[Foreign Tuffett]

The premium placed on the entire holding company was in my opinion unsustainable, and the decline so far has only put a dent into this premium valuation. Even being generous when it comes to the asset management business, I still think that the stock should trade at a discount to book (and the question now becomes how overstated book value is).

 

It is easy to throw comments out there.  Can you support it with some facts?  Book value of the asset management business is the investment in Alluvial.  The revenue interests in Bonhoeffer have no book value and certainly has some worth.  The Alluvial revenue interest is tied to the investment but I would argue has value in excess of the investment.  Huckleberry is carried at cost.  Likely worth more.  The internet operations are clearly worth multiples of its 400k book.  They earned over 725k pre-tax in ttm.  Virginia real estate has already been written down.  So there is no reason to value it at less than book.  HVAC may be worth a bit less than book.  That leaves Mt. Melrose.  While some properties that have not been repaired may be worth a bit less than the purchase, those that have been repaired and have stable renters are likely worth more. 

 

Please explain why you disagree   

 

NPV corporate expenses needs to be factored in.

 

From the most recent 10-Q: "Corporate expenses for the six months ended June 30, 2018 totaled $510,304."

[Spekulatius]

The premium placed on the entire holding company was in my opinion unsustainable, and the decline so far has only put a dent into this premium valuation. Even being generous when it comes to the asset management business, I still think that the stock should trade at a discount to book (and the question now becomes how overstated book value is).

 

It is easy to throw comments out there.  Can you support it with some facts?  Book value of the asset management business is the investment in Alluvial.  The revenue interests in Bonhoeffer have no book value and certainly has some worth.  The Alluvial revenue interest is tied to the investment but I would argue has value in excess of the investment.  Huckleberry is carried at cost.  Likely worth more.  The internet operations are clearly worth multiples of its 400k book.  They earned over 725k pre-tax in ttm.  Virginia real estate has already been written down.  So there is no reason to value it at less than book.  HVAC may be worth a bit less than book.  That leaves Mt. Melrose.  While some properties that have not been repaired may be worth a bit less than the purchase, those that have been repaired and have stable renters are likely worth more. 

 

Please explain why you disagree   

 

NPV corporate expenses needs to be factored in.

 

From the most recent 10-Q: "Corporate expenses for the six months ended June 30, 2018 totaled $510,304."

 

With 2 of the 3 business lines being workout situations,  and the high afformentioned corporate cost burden, I don’t think book value represents a good value here, so it looks like SYTE is still overvalued from my POV.  Doesn’t matter to me, because as it stands, it’s uninvestible for my anyways.

 

[gg]

I wasn't clear on the 8-k .... is Jeff no longer on the board of ENDI? My reading was that he was no longer an officer of Mt Melrose, but wasn't clear on his position with ENDI.

 

On Friday, October 5, 2018, the Board of Directors of the Company, acting unanimously, appointed Director, Steven L. Kiel as Chairman of the Board of the Board of Directors of the Company.  As Chairman of the Board, Mr. Kiel replaces Jeffrey I. Moore, whose service on the Board of Directors continues in the capacity as a regular Director.

 

This is from early October. Says Jeff moved from Chairman to Director. Nothing in the November release says whether he's a director still or not.

[matts]

I think the implication is that if nothing was disclosed then there is no change from Oct 5. If Moore was removed or resigned as director I'm almost certain it would need to be filed with the SEC along with the other announcement.

 

[Tim Eriksen]

Corporate expenses are not a part of book value.  So my point still stands.

 

If you want to discuss intrinsic value and factor in corporate expenses, fine but it washes with internet operations. 

 

Please explain how there would be huge write down in Alluvial.  Of course the fund could go down due to performance but the revenue royalty is carried at zero.

 

Kiel is not 0 for 2.  Alluvial has worked fine.  Mt Melrose is not a failure that is a huge assumption. 

 

You all are not being rational.  To say that because HVAC didn't work and Mt Melrose had a hiccup that therefore Alluvial may now be suspect is illogical.   

[Tim Eriksen]

I think the implication is that if nothing was disclosed then there is no change from Oct 5. If Moore was removed or resigned as director I'm almost certain it would need to be filed with the SEC along with the other announcement.

 

A board cannot remove a director.  And yes director changes have to be filed within a few days.

[DTEJD1997]

Corporate expenses are not a part of book value.  So my point still stands.

 

If you want to discuss intrinsic value and factor in corporate expenses, fine but it washes with internet operations. 

 

Please explain how there would be huge write down in Alluvial.  Of course the fund could go down due to performance but the revenue royalty is carried at zero.

 

Kiel is not 0 for 2.  Alluvial has worked fine.  Mt Melrose is not a failure that is a huge assumption. 

 

You all are not being rational.  To say that because HVAC didn't work and Mt Melrose had a hiccup that therefore Alluvial may now be suspect is illogical. 

 

The properties that Mt. Melrose has requires close supervision and "hands on" management.  This is going to be farmed out to an outside management company.  Odds are that an outside management company is NOT going to do anywhere near as good a job as what was being set up.

Over time, properties will deteriorate, there will be tenant issues, and other problems will crop up.

 

Thus, I would suspect that the properties are going to be in a much position in a year or two than they are now.  Management will get tired/frustrated at things not working out and decide that they want out.  Wanting out, they sell, and will sell at a discount.  Thus, the write off.

 

I would also not call what has happened a "hiccup".  What was told to shareholders in prior communications has been completely reversed. 

 

How are shareholders to think that anything OTHER than the wheels are falling off?

 

[valueyoda]

What is the AUM of the Alluvial Fund and Bonhoeffer  fund? At least, then we can make some assumptions what those revenue streams could be worth.

[Tim Eriksen]

Corporate expenses are not a part of book value.  So my point still stands.

 

If you want to discuss intrinsic value and factor in corporate expenses, fine but it washes with internet operations. 

 

Please explain how there would be huge write down in Alluvial.  Of course the fund could go down due to performance but the revenue royalty is carried at zero.

 

Kiel is not 0 for 2.  Alluvial has worked fine.  Mt Melrose is not a failure that is a huge assumption. 

 

You all are not being rational.  To say that because HVAC didn't work and Mt Melrose had a hiccup that therefore Alluvial may now be suspect is illogical. 

 

The properties that Mt. Melrose has requires close supervision and "hands on" management.  This is going to be farmed out to an outside management company.  Odds are that an outside management company is NOT going to do anywhere near as good a job as what was being set up.

Over time, properties will deteriorate, there will be tenant issues, and other problems will crop up.

 

Thus, I would suspect that the properties are going to be in a much position in a year or two than they are now.  Management will get tired/frustrated at things not working out and decide that they want out.  Wanting out, they sell, and will sell at a discount.  Thus, the write off.

 

I would also not call what has happened a "hiccup".  What was told to shareholders in prior communications has been completely reversed. 

 

How are shareholders to think that anything OTHER than the wheels are falling off?

 

That is a lot of assumptions.  I don't understand why Mt Melrose properties require increased hands on management versus other properties.  These aren't low income properties or high maintenance, or likely high turnover.  Unless they have a different way of complying with the 40 Act they won't sell.  They need a leveraged entity.

 

The trade off of farming out versus in house is current cost versus long term risk .  With a management company costs are known and overhead is spread over your properties and others.  In house means multiple people, an office, increased audit costs, etc.  Farming out is probably 15k less cost per month.  It is the difference of being profitable or not if revenue is only 100k a month.    At 300 properties the cost structure probably flips the other way.  The decision makes sense to me.

 

To armchair quarterback it is to assume that management is now irrational.

 

 

[Tim Eriksen]

What is the AUM of the Alluvial Fund and Bonhoeffer  fund? At least, then we can make some assumptions what those revenue streams could be worth.

 

So you drew a conclusion before knowing the facts???  =)

 

Alluvial 22.4 million 

Bonhoeffer 13.8 million

[DTEJD1997]

Corporate expenses are not a part of book value.  So my point still stands.

 

If you want to discuss intrinsic value and factor in corporate expenses, fine but it washes with internet operations. 

 

Please explain how there would be huge write down in Alluvial.  Of course the fund could go down due to performance but the revenue royalty is carried at zero.

 

Kiel is not 0 for 2.  Alluvial has worked fine.  Mt Melrose is not a failure that is a huge assumption. 

 

You all are not being rational.  To say that because HVAC didn't work and Mt Melrose had a hiccup that therefore Alluvial may now be suspect is illogical. 

 

The properties that Mt. Melrose has requires close supervision and "hands on" management.  This is going to be farmed out to an outside management company.  Odds are that an outside management company is NOT going to do anywhere near as good a job as what was being set up.

Over time, properties will deteriorate, there will be tenant issues, and other problems will crop up.

 

Thus, I would suspect that the properties are going to be in a much position in a year or two than they are now.  Management will get tired/frustrated at things not working out and decide that they want out.  Wanting out, they sell, and will sell at a discount.  Thus, the write off.

 

I would also not call what has happened a "hiccup".  What was told to shareholders in prior communications has been completely reversed. 

 

How are shareholders to think that anything OTHER than the wheels are falling off?

 

That is a lot of assumptions.  I don't understand why Mt Melrose properties require increased hands on management versus other properties.  These aren't low income properties or high maintenance, or likely high turnover.  Unless they have a different way of complying with the 40 Act they won't sell.  They need a leveraged entity.

 

The trade off of farming out versus in house is current cost versus long term risk .  With a management company costs are known and overhead is spread over your properties and others.  In house means multiple people, an office, increased audit costs, etc.  Farming out is probably 15k less cost per month.  It is the difference of being profitable or not if revenue is only 100k a month.    At 300 properties the cost structure probably flips the other way.  The decision makes sense to me.

 

To armchair quarterback it is to assume that management is now irrational.

 

The assumption that SYTE management is irrational may be perfectly fine. 

 

Mr. Moore, who built Mt. Melrose, did it by being "hands on".  He had help from a "crew" of people that he vetted & hired.  I would have to assume it was known by SYTE's management how Mr. Moore did things.  Further, I would have to assume, that they had a good idea of how Mr. Moore was to proceed in the near future in having a team to work on the properties.

 

Mr. Moore, who built Mt. Melrose, decided on how to do it.  If it were better/cheaper to simply farm out management/supervision to an outside management company, would he have not already done that.  Would he not have done from VERY EARLY stages of Mt. Melrose? 

 

Finally, Mr. Moore was DIRECTLY involved with those properties, working on some of them himself.  I would trust his judgement on how to proceed/work those properties over the management of SYTE.

 

In the end, does not matter what I think...only thing that matters is how much $$$ SYTE can make and what the stock price is. 

 

We will see.

[valueyoda]

Thanks. Yes, I did my assumptions before knowing all the facts. Easy to do so when  you have no position haha. I still fail to see how with the revenue sharing agreements based on those AUMs and normalized returns really adds substantial value, unless AUM really grow substantially or if they would continue to perform well. Hedge fund partnership interests are notoriously undervalued by the market due to the erratic nature of the performance fee cash flows.

[Tim Eriksen]

 

Mr. Moore, who built Mt. Melrose, did it by being "hands on".  He had help from a "crew" of people that he vetted & hired.  I would have to assume it was known by SYTE's management how Mr. Moore did things.  Further, I would have to assume, that they had a good idea of how Mr. Moore was to proceed in the near future in having a team to work on the properties.

 

 

It is my understanding that there was a misunderstanding in how Mt Melrose was to proceed in the near future and the size of the team.  That is the whole point.  It was nothing improper.  I don't know how many years it took Jeff to build up the company.  I will guess four, which means acquiring on average 30 homes per year.  That accelerated to more than 30 per quarter.  The 8-k notes additional operational (personnel) expense.  So it seems management expected slower growth from internally generated cash flows which would provide the equity part of the purchase price of additional properties.  It seems that is not what happened.  Thus the changes. 

 

The reality is SYTE could not support a fast growing "start up" losing money without raising capital  either through equity, changing terms of Alluvial agreement, selling HVAC quickly,or internet operations.  They decided to stop the growth all together instead of restructuring.  That is not explained.  Did Jeff want to grow fast?  Did he not want to let go of people he just hired?  Who would.  We just don't know. 

 

So we are left with two choices: we either believe management (and Jeff's comment on this board) that it was unfortunate, painful, yet friendly, necessary refocusing from SYTE's point of view, etc. or we don't.  I have always found Jeff and Steve to be straight forward and honest.

[gfp]

Who gets to keep the ambulances, that's the important question...

 

(I guess some folks didn't get the reference -

)

 

 

Here are some of the properties, by the way.  Should be able to search Lexington assessor's website for Mt Melrose LLC to find other representative deals:

$40k all in, rented for $600/month - wonder if this one transferred to SYTE?

 

This one is mixed use, $725k all cash

[writser]

If the comments of insiders are correct then they only have to fire the person responsible for writing and releasing an 8K during market hours that caused massive panic among investors and made the stock drop ~40% while nothing significant happened from a valuation perspective.

[Broeb22]

I'm just not 100% buying this.

 

How can Kiel chalk this up to "we wanted cash flow" and "Jeff wanted capital appreciation". That's like saying you got divorced because you didn't know the other person didn't want to have kids. These are foundational conversations a partnership has, and either the conversation never happened, or one side changed their priorities after they said their vows.

 

Why take the drastic step of removing Moore from his employment agreement if they simply wanted him to stop buying properties and focus on generating cash from existing units. Seems like there were a whole bunch of intermediate outcomes here that could have taken place that would have left Moore in place, but they had "irrenconcilable  differences" that necessitated a change.

 

I wonder also if these properties were not well-financed. I went to the annual meeting this year, and met the guy who provides financing to Jeff. He was getting paid double-digit rates to lend Jeff money. (I thought to myself, I'd like to be that guy doing the lending.) If these properties were not generating as much cash as Jeff hoped, maybe they were in a negative carry situation, where the property was yielding less than the cost of capital. Seems potentially possible given the move in rates this year. I wonder how much the cost of capital over time.

 

Either way, there are a ton of questions and not very many satisfactory answers.

[LC]

Oh man what a sh1tshow we've got here.

 

I periodically pop into this thread to quickly catch-up, since I remember when SYTE was being written up when Frank? ran it and then these guys came in and took control.

 

Jeff is ragnarisapirate, right? I think that was his name when he wrote about RE acquisitons.

 

Anyways, my memory is obviously a bit sloppy and I don't know all the details of what is going on here, but:

 

My take is (1) they couldn't manage an HVAC business (2) they couldn't manage a RE portfolio

 

These people do not seem like "get their hands dirty" kinds of people. Both (1) and (2) require experience. You can't just walk in with a checkbook and do it. I guess they found that out the hard way.

 

So now we're left with (3) an asset management business. What's the business model here, they seed managers for a take in the future?

 

What value do these people bring to the asset management business. I'm not talking about Keith because I've met him and he's a stand up guy who has a circle of competence and can work. I'm taking about the guys seeding him. What the hell do they bring other than cash? Can they help with marketing and introductions to funds of funds? It doesn't seem like it. So are they just tossing cash at some managers, walking away, and hoping 1 of 10 strikes it rich?

 

Isn't that similar to the playbook for the HVAC and RE businesses? Throw money at it?

 

What value do these people add? And if you have to respond with the words "scale" or "platform", then you are fvcked!

[gfp]

Yes, Jeff is ragnarisapirate.

 

I think Jeff does in fact know how to manage a Real Estate investment enterprise.  By all appearances he was quite successful at building a sizable operation.  It looked like he was also quite aggressive in growing the business, which may have been what spooked the new management at SYTE.  Or it may have been that someone discovered what the accounting would look like for a public company.  Or it may be that the new guy just didn't like the business.  However successful, it may not have appeared super profitable through the accounting.  When you're a private real estate investor, primarily presenting your accounting to the IRS and lenders, its fine - you know the economic reality and are happy to minimize taxes along the way.

 

 

Oh man what a sh1tshow we've got here.

 

I periodically pop into this thread to quickly catch-up, since I remember when SYTE was being written up when Frank? ran it and then these guys came in and took control.

 

Jeff is ragnarisapirate, right? I think that was his name when he wrote about RE acquisitons.

 

Anyways, my memory is obviously a bit sloppy and I don't know all the details of what is going on here, but:

 

My take is (1) they couldn't manage an HVAC business (2) they couldn't manage a RE portfolio

 

These people do not seem like "get their hands dirty" kinds of people. Both (1) and (2) require experience. You can't just walk in with a checkbook and do it. I guess they found that out the hard way.

 

So now we're left with (3) an asset management business. What's the business model here, they seed managers for a take in the future?

 

What value do these people bring to the asset management business. I'm not talking about Keith because I've met him and he's a stand up guy who has a circle of competence and can work. I'm taking about the guys seeding him. What the hell do they bring other than cash? Can they help with marketing and introductions to funds of funds? It doesn't seem like it. So are they just tossing cash at some managers, walking away, and hoping 1 of 10 strikes it rich?

 

Isn't that similar to the playbook for the HVAC and RE businesses? Throw money at it?

 

What value do these people add? And if you have to respond with the words "scale" or "platform", then you are fvcked!

[slkiel]

Please find a joint statement that Jeff and I released through ENDI:

 

https://backend.otcmarkets.com/otcapi/company/dns/news/document/33645/content

 

As a fellow investor in small and micro-cap companies, I sympathize with the idea that things are not always as they seem and it can be healthy to be skeptical of management's statements. Heck, I have built the success of my fund on that idea! However, that also does not mean that management should never be taken at face value. Both Jeff and I have a long history of being direct and plain-spoken. We have no reason to be any different here.

 

The fact is that we thought we had to make a change based on the reasons in the link above. Clearly we both thought things would be different, but the reality is what it is after a thorough internal review and strategic planning process within the company. We have a great collection of properties, but the strategy that we enthusiastically announced when we made the acquisition didn't work. We could admit that now and change it with little economic impact, or we could continue down the path with larger ramifications.

 

I hope this information is helpful and more clear than the 8-K earlier this week. I apologize for the delay in getting this information out to you.