SYTE - Enterprise Diversified

[Read the Footnotes]

That is about the closest I have ever heard to a public company CEO saying "I made a mistake". If you can think of better examples of a CEO publicly taking responsibility, please let me know. I would probably like to keep those managers on a list of people I would like to track and potentially invest with. Better yet, start a new thread of CEO's or investment managers who have publicly taken responsibility for mistakes, so that we can all track them.

 

I heard about this guy who bought a textile manufacturing company a couple of decades ago. Just doesn't shut up about what a bad investment that was.

 

Good point. I am already invested in that one. I am also a fan of his partner, the world's greatest proponent of rubbing your nose in it.

[Spekulatius]

I have been critical of SYTE here (perhaps cynical), but disclosure and honesty wasn’t the issue. The issues with startup from value investors are two fold:

 

1) Running a Company is way more than capital allocation. Being a good value investor does not mean that one is good at running a company. Capital allocation is important , but it isn’t the most Important thing. Operational skills, and industry knowledge are the most important thing and far more important than capital allocation.

 

2) Running a Public Company is expensive. We see this with SYTE and Premier Premier Diversified and even BOMN to some extend. BOMN looks like it has the scale now to pay for this overhead. However, for SYTE and Premier Diversified, the overhead is a killer.

 

We will see about Jeff keeping the SYTE shares. Maybe he has no choice, because the liquidity is too low, but I rarely have seen any executive of a public company keeping shares after leaving. I suspect he want to dispose of his shares to get liquidity for his other endeavors. I think an exchange of some properties for his shares is a likely outcome, but the board needs to be careful with these arms length transaction, especially since the optics most likely won’t look great.

 

Crapshacks may be a strong word, but this isn’t high quality real estate that can be run easily. It’s a bunch of low priced properties in a secondary market that need a lot of TLC to keep make and keep them productive. I don’t think that SYTE has the expertise and management bandwidth to deal with this, so they will get disposed, I think.

 

I agree with “Read the Footnotes” that admitting mistakes is commendable. 90% of the management of public companies will not do this.

[Gregmal]

Its commendable just the same as Sanjeev's honesty is with PDH. But at the same time, these are terrible investments made by people and supported by investors, who should know better. From the company managements perspective(insert SYTE/PDH/BOMN/whatever in there) its freaking awesome. Its like the week long fantasy camp where for 10 days and $10,000 a few middle age dudes get to go participate in spring training with the Yankees. Living out their dream because they have the resources to make it happen. Fine. Worst case you have a great job; get to be "the man" and get funded for a few years, basically being able to do whatever you want.

 

These are basically "I wanna be Buffett too" ventures. And like I said, its cool and all, but I think it says a lot about the shareholders "wanting to believe" rather than thinking with their heads. I mean, I look at people who invest in get rich quick schemes, and "the next time thing" story stocks(like OTC marijuana stocks right now) as a certain type of sucker. These type of stocks aren't scams like those are, but they are basically sucker stocks from more sophisticated folks. Buffett is basically a fairytale, or the exception to the rule. People need to stop touting him as the reason why the impossible is possible from mere mortals. Or using his story as an excuse to make bad investments.

[Read the Footnotes]

I agree with “Read the Footnotes” that admitting mistakes is commendable. 90% of the management of public companies will not do this.

 

Spekulatius, thank you for elevating the conversation by getting in to specifics. I was probably a bit too flippant in my previous comments. Asking what percentage of management would behave this way is a better way of framing the question.

 

Your 10% number might be correct, but I would guess it's 10% that would do so under pressure.

The number of people who would volunteer to do it the way Steve Kiel did, or Warren Buffett does, or Charlie Munger encourages, is a very small percentage. Not unheard of, but very rare.

 

Even if you assume SYTE has excellent management, there would still be a question of how much of a difference can that make. Unfortunately, the poor qualities of a business can easily overwhelm the positive qualities of any management team. Also, integrity would be just one of many issues to consider when evaluating management. Unfortunately, it is possible for management to behave with the best of ethical conduct in mind and yet to make many mistakes.

 

I think lines of inquiry that are not about misconduct are likely to be much more productive if you are trying to do a postmortem of the SYTE over the last couple of years.

 

If you are a professional investor you are not doing your job if you are not constantly looking for self-dealing managements, frauds, overly promotional managements, or other management risks. Most of the time investors make mistakes by not being concerned enough about these risks. In the case of SYTE, I believe there are many simple explanations that make more sense than self-dealing or anything unethical. If you are having trouble coming up with alternative narratives, I would suggest that you probably have not considered enough alternative explanations, or have not thought through what choices management had at their disposal at each juncture. Hopefully I didn't sound like a dismissive jerk earlier, but this really would be a great exercise for an investor who wants to get better at understanding some of the challenges of understanding a company from the outside. If building those skills is not something you can do, go fish elsewhere. There are other ways to do well in markets where management is not that important.

[Read the Footnotes]

These are basically "I wanna be Buffett too" ventures. And like I said, its cool and all, but I think it says a lot about the shareholders "wanting to believe" rather than thinking with their heads. I mean, I look at people who invest in get rich quick schemes, and "the next time thing" story stocks(like OTC marijuana stocks right now) as a certain type of sucker. These type of stocks aren't scams like those are, but they are basically sucker stocks from more sophisticated folks. Buffett is basically a fairytale, or the exception to the rule. People need to stop touting him as the reason why the impossible is possible from mere mortals. Or using his story as an excuse to make bad investments.

 

I like the cautionary tale you are telling, but I wouldn't have chosen those tickers to support the narrative. Plus, I can think of other cases I am more skeptical of, but I won't name them.

 

On the other hand even if you had chosen BH (which has had a lot more time to play out than some of these examples), there would be someone out there who would want to disagree.

[Gregmal]

These are basically "I wanna be Buffett too" ventures. And like I said, its cool and all, but I think it says a lot about the shareholders "wanting to believe" rather than thinking with their heads. I mean, I look at people who invest in get rich quick schemes, and "the next time thing" story stocks(like OTC marijuana stocks right now) as a certain type of sucker. These type of stocks aren't scams like those are, but they are basically sucker stocks from more sophisticated folks. Buffett is basically a fairytale, or the exception to the rule. People need to stop touting him as the reason why the impossible is possible from mere mortals. Or using his story as an excuse to make bad investments.

 

I like the cautionary tale you are telling, but I wouldn't have chosen those tickers to support the narrative. Plus, I can think of other cases I am more skeptical of, but I won't name them.

 

On the other hand even if you had chosen BH (which has had a lot more time to play out than some of these examples), there would be someone out there who would want to disagree.

 

I don't know how that one slipped my mind. Although there, I feel its crossed a line and he doesn't even try to hide the ridiculous antics. Whereas here and with PDH, the managers seem honest, but nonetheless still seem to want to run up steep mountains that are covered in ice...and there seems to be plenty of shareholders who say "here take my money" good luck!

[Spekulatius]

These are basically "I wanna be Buffett too" ventures. And like I said, its cool and all, but I think it says a lot about the shareholders "wanting to believe" rather than thinking with their heads. I mean, I look at people who invest in get rich quick schemes, and "the next time thing" story stocks(like OTC marijuana stocks right now) as a certain type of sucker. These type of stocks aren't scams like those are, but they are basically sucker stocks from more sophisticated folks. Buffett is basically a fairytale, or the exception to the rule. People need to stop touting him as the reason why the impossible is possible from mere mortals. Or using his story as an excuse to make bad investments.

 

As far as your point on if good management making a difference, it’s probably true in most case, but in this case, the management chose the business it want to operate in. So in that sense, they bear more responsibility than a managment that inherits a bad business.

I like the cautionary tale you are telling, but I wouldn't have chosen those tickers to support the narrative. Plus, I can think of other cases I am more skeptical of, but I won't name them.

 

On the other hand even if you had chosen BH (which has had a lot more time to play out than some of these examples), there would be someone out there who would want to disagree.

 

Any successful investor/manager will have imitators. That’s just human nature and not bad by itself. The insurance/hedge fund hybrids come to mind like GLRE and TPRE. The idea sounds great, but it looks like the implementation is way harder than people think. Despite that, there are still people out there who claim, that Buffet was only successful because he had “free leverage” with his insurance company. of course it’s true, except that others can’t get free leverage/float that easily and the investment side doesn’t seem to work out either.

[cameronfen]

I think the lesson in SYTE is that it's harder to run a business than investors think it is.  It's not just financial engineering and pouncing on an industry roll up oportunity.  That's the easy part.  Actually running a business like the HVAC business is difficult. 

[gfp]

Annual letter from new CEO out (link opens a pdf):

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/af00ac08-367b-451b-a751-a6edb301497a/040119_Shareholder_Letter_CEO.pdf

 

10K -

https://www.sec.gov/Archives/edgar/data/1096934/000143774919006241/0001437749-19-006241-index.htm

[Jurgis]

Annual letter from new CEO out (link opens a pdf):

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/af00ac08-367b-451b-a751-a6edb301497a/040119_Shareholder_Letter_CEO.pdf

 

10K -

https://www.sec.gov/Archives/edgar/data/1096934/000143774919006241/0001437749-19-006241-index.htm

 

Mailchimp does not open for me again (this happens most of the time, I don't know if it's an issue on their side or ???). Any other location for the letter? Or can someone post it here as attachment.

 

Thanks

[Guest Schwab711]

Annual letter from new CEO out (link opens a pdf):

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/af00ac08-367b-451b-a751-a6edb301497a/040119_Shareholder_Letter_CEO.pdf

 

10K -

https://www.sec.gov/Archives/edgar/data/1096934/000143774919006241/0001437749-19-006241-index.htm

 

Mailchimp does not open for me again (this happens most of the time, I don't know if it's an issue on their side or ???). Any other location for the letter? Or can someone post it here as attachment.

 

Thanks

 

https://www.otcmarkets.com/filing/conv_pdf?id=13335472&guid=Sgd3Uq34plO-fth

2019.04.01_SYTE_annual_letter.pdf

[stahleyp]

I found this line kinda humorous:

 

"Our core competencies of value-oriented asset management and fund operation couldn’t be more different from installing and maintaining air conditioning units."

 

 

[Steven B]

SYTE letter AKA The Circle-of-Competence drinking game.

 

I say that in jest y'all. Much respect. Hope 2019 heads in the right direction for those guys.

[Jurgis]

I found this line kinda humorous:

 

"Our core competencies of value-oriented asset management and fund operation couldn’t be more different from installing and maintaining air conditioning units."

 

::)

[LowIQinvestor]

so this trades at about 1.4 x book value?

 

Anyone have a view on the current valuation in light of recent results?

[Foreign Tuffett]

Can someone make a flow chart of all the related-party transactions and relationships? That would be helpful to anyone trying to understand this company.

[Poor Charlie]

Annual letter from new CEO out (link opens a pdf):

https://gallery.mailchimp.com/2511717cdf1bae9a0638c942a/files/af00ac08-367b-451b-a751-a6edb301497a/040119_Shareholder_Letter_CEO.pdf

 

10K -

https://www.sec.gov/Archives/edgar/data/1096934/000143774919006241/0001437749-19-006241-index.htm

 

Mailchimp does not open for me again (this happens most of the time, I don't know if it's an issue on their side or ???). Any other location for the letter? Or can someone post it here as attachment.

 

Thanks

 

https://www.otcmarkets.com/filing/conv_pdf?id=13335472&guid=Sgd3Uq34plO-fth

 

My intention isn’t to beat up on these guys.  But you have to wonder: Where do they go from here?

 

They say asset management is the focus going forward, but how is that possible when they’ve managed their own assets so poorly (most of their deals were also with related parties, which only makes things worse)?  Who is going to want to be associated with them as an external fund manager?  How can they raise money for their internal funds with a straight face?

 

I hope it works out for them, but I think it will be an uphill battle.

[DTEJD1997]

hey all:

 

When putting together a conglomerate such as this, YOU HAVE TO BE CORRECT IN THE BEGINNING!

 

Everybody makes mistakes, even WEB.  HOWEVER, WEB didn't make too many, especially at the beginning.

 

Another interesting thing that nobody has said anything about is that for YEARS they've been talking about the internet division is being managed for cash flow...that it is being slowly wound down and managed to harvest cash.  Sounds like a good plan...NOW they've brought in a consultant to help with it's growth opportunities!

 

How about if you need a consultant to help you grow/invest capital, then you don't need to be doing it?  Of course, hiring and PAYING a consultant has always proved to be a good move, with high returns on capital, AND NOTHING EVER GOES WRONG with that!

 

If I've got $$$$$$$ burning a hole in my wallet, I want to put it with people who know what they are doing, have a good track record, and have a good idea for the future.

 

Heck, I can hire consultants just as well as they can.

 

Color me skeptical.

[Spekulatius]

What a disaster. Real estate ( Mt Melrose ) lost ~$2M of which $0.96M were impairment losses and more than $1M operating losses. $2.5M in debt for interest rates from 10-13% -how did this happen? I can’t even fathom the train of thought that went into financing real estate this way.

 

The cleanup of HVAC (mostly impairments) and Real Estate (which looks like it is burning substantial amounts of cash) is going to be very expensive. Book value is $5.9/ share and in my opinion, the current price of $8.2 is pretty generous considering the current results. Hopefully in a year from now, when HVAC is gone (I think it will be sold for very little) and the real estate is sold (I believe all the Mt Melrose properties will be eventually sold, not just the parceled out assets), this will be stabilized,  looking much cleaner and the losses will be greatly reduced.

[bizaro86]

A pretty standard way RE investors earn very high rates of return is to buy distressed properties low using significant leverage. Buying crappy stuff at high LTV costs high rates.

 

However, if you can fix the crap into good stuff, then you can conventionally refinance, often to more than what you paid for the property all-in. That makes high interest rate loans at least superficially attractive, because you can do more very high IRR deals.

 

I've done the buy low, rehab, refinance high, which has resulted in very high IRRs. I'm too big a wimp to do more than I can conventionally finance at the outset, but I understand the reasoning behind being more aggressive.

 

That said, I really doubt that business model could work at a public company. The only way I can see single family residential RE working in a public company is as a low return TIPS alternative. I don't think these guys have the cost of capital for that.

 

[ratiman]

"Lexington has some interesting characteristics"? I had to LOL at that. I mean, what kind of return are you expecting from real estate in Lexington that would justify paying a corporate board, CEO, CFO, auditors, exchange fees, etc etc? Micro cap companies are for high risk, high return investments. Biotech, gold mines, roll ups. Not for rentals in Lexington. That the CEO doesn't understand that suggests to me that the whole thing should be sold and cash returned ASAP or else insiders will continue to drain even more money.

[Broeb22]

Having been at last year's annual meeting, the argument for Lexington's attractiveness is that due to the popularity of horse racing, there is something called a Greenbelt that wraps around the entire city center. The land is protected by the government to prevent redevelopment. As a result, the thesis was that this Greenbelt created limited supply and allowed investors some protection from overbuilding or suburbanization. The argument also was that Lexington is home to University of Kentucky among other large employers and that would provide insulation for the area from future economic headwinds.

 

The thesis seems OK, more like the execution didn't happen. But I never thought of Lexington as a big growth market either. Based on the article below, the impression is almost that they don't have enough land to grow.

 

https://www.kentucky.com/news/local/counties/fayette-county/article183299136.html

[Spekulatius]

Cash burn is a concern imo. SYTE has about $460k in cash left and  cash burn appears to be ~300k/ quarter.

There are plenty of liquid assets within the investment business, but I assume these are locked. SYTE needs to dispose of these real estate properties with high interest rates quickly, or cash could become an issue. I doubt there is much demand for another stock offering.

 

Let’s face it, this is a dumpster fire and unless it’s put out quickly, there won’t be much left. I am amazed the stock trades at $8+ still.

[Sportgamma]

They could go dark, right? Deregister as an SEC reporting entity and instead report to shareholders on an annual basis. Shares could still trade OTC.

 

If the plan works out and they reach a scale where it makes sense, they could "reappear".

 

That would lower the cost of operating and in cases such as Winland, shareholders have been no worse off with the company going dark.

 

 

[ratiman]

Having been at last year's annual meeting, the argument for Lexington's attractiveness is that due to the popularity of horse racing, there is something called a Greenbelt that wraps around the entire city center. The land is protected by the government to prevent redevelopment. As a result, the thesis was that this Greenbelt created limited supply and allowed investors some protection from overbuilding or suburbanization. The argument also was that Lexington is home to University of Kentucky among other large employers and that would provide insulation for the area from future economic headwinds.

 

The thesis seems OK, more like the execution didn't happen. But I never thought of Lexington as a big growth market either. Based on the article below, the impression is almost that they don't have enough land to grow.

 

https://www.kentucky.com/news/local/counties/fayette-county/article183299136.html

 

By that argument, every city on a coastline has "limited supply" because it can't grow into the ocean. And what medium sized city doesn't have a hospital or university? It's hilarious that management is STILL trying to sell investors on the glorious investment potential of crapshacks in Lexington, Kentucky. I'm sorry for ranting about this, I just find the whole thing so ridiculous.