Cresud (CRESY)

[jollyjumper324]

I'm interested in this company only because Pabrai, Fairfax and Leucadia have all recently bought stakes: (Leucadia most substantially, I think.)

 

http://www.gurufocus.com/StockBuy.php?symbol=CRESY

http://idea.sec.gov/Archives/edgar/data/96223/000090951809000142/mm02-1709cresud_13da4.htm

 

I'm going to read the annual report today, but wonder if anyone knows why this looks so good to these smart people?

 

Annual Reports:

http://quicktake.morningstar.com/stocknet/SECDocuments.aspx?symbol=CRESY

 

-JJ

[boingo]

From what I can remember, this is run by a former Quantum Fund manager, and is mainly Argentinian real estate and farmland. 

 

What has hurt it besides the global economic situation is exchange rates in Argentina and the Hillary Clinton of Argentina taxing the farmers on their exports.  I also believe there has been a decent drought in Argentina, but not sure how that affects this company.

 

My opinion is this is one waiting in the wings.  Like FFH below $200 or ORH below $36...just a matter of time.

[rogermunibond]

Bit of background on Elsztain.  IRC Cresud has in the past few months increased its holding of IRSA so that it's reported on Cresud's books.

 

 

From Business Week 1998

ENTREPRENEUR: EDUARDO ELSZTAIN (int'l edition)

 

Eduardo Elsztain, a third-generation Argentine property developer, has a bargain hunter's eye and a long view of the opportunities created by Latin America's new economic model. Those talents have attracted backers willing to invest for the long term despite Argentina's ups and downs.

 

In 1991, seeing that depressed Argentine property values would rise swiftly with the end of hyperinflation, Elsztain got George Soros to back him in buying control of real estate company Inversiones y Representaciones (IRSA). Since then, Elsztain, 38, has assembled $1 billion worth of properties under IRSA management. His projects, including a $400 million plan to build a waterfront financial center, are changing the face of Buenos Aires. And an agricultural real estate company, Cresud, which IRSA and Soros bought in 1994, has become Argentina's No.1 rural landowner and cattle raiser.

 

IRSA, in which Elsztain owns less than 5%, is buffered against the global credit crunch by partners like Soros, who owns 17%. Last December, despite the Asian meltdown, IRSA raised $236 million by issuing new shares, 90% of them bought by existing shareholders.

[kyleholmes]

Leucadia also owns a small percentage of IRSA

[bg]

Elsztain is quite the value investor.  Saw a more detailed interview with him where he explained how during the Argentine financial crises he was able to more than double his land holdings yet only stay even in terms of his net worth.  He buys hard assets like Leucadia when they are being given away. 

[Myth465]

Interesting - http://stocks.investopedia.com/stock-analysis/2010/3-Investments-For-The-Price-Of-One-CRESY-IRS-HT-BRK.B-LUK-GS0514.aspx?partner=YahooSA

 

I am going to dig a bit deeper into this one. My be another Loews.

[valuecfa]

Interesting - http://stocks.investopedia.com/stock-analysis/2010/3-Investments-For-The-Price-Of-One-CRESY-IRS-HT-BRK.B-LUK-GS0514.aspx?partner=YahooSA

 

I am going to dig a bit deeper into this one. My be another Loews.

 

Worth looking into the compensation structure.

 

As LUK says. It is a great set of assets, but too bad it is run by the Argentinians.

[indirect]

As LUK says. It is a great set of assets, but too bad it is run by the Argentinians./quote]

I have not seen C & S make such a statement. They have been selling their stake.

[valuecfa]

It was in somebody's notes i read from a meeting.

 

 

Cumming-We had a successful run in Argentina before. How do you protect yourself from export taxes— pray. This may not be politically correct, but, Argentina is a wonderful country it’s only problem is that it’s full of Argentines.” He want on to comment that the company had a great portfolio of assets, but that the economic coniditions in Argentina were terrible.

 

If my memory is right, mgmt takes 10% of the company's net income. Also, if my memory is right LUK had more ownership in the company that owned CRESUD, than in Cresud. I think it was called IFIS, and if my memory is right once again, it was a cheaper purchase for LUK than CRESY, and it avoided the mgmt. fee.

[txlaw]

Eduardo Elsztain is an incredibly smart real estate investor.  I mentioned him in a post about FUR when I was noting that very smart investors were getting ready to take advantage of a buyers market in U.S. commercial real estate.  If you're looking into CRESY, IRSA, Hersha Hospitality, or Alto Palermo, you need to look into Elsztain as well.  There is a very good interview conducted by Price Waterhouse Coopers that will give you a sense of what he and CRESY are all about. 

 

That Motley Fool article did not mention that IRSA also controls Alto Palermo, a company that owns a bunch of high end Argentinian malls and that has its own credit card program.  Those malls are supposed to be pretty damn awesome (think GGP or Simon properties), according to some Argentinians I've spoken to.  I actually bought some in the midst of the financial crisis because it was trading below tangible book, but I got spooked because of the illiquidity of APSA.  My loss. 

 

Of note is the long term goal of CRESY's ag segment, which is to capitalize on the change in diets that is occurring in emerging markets.  The profitability of these operations are directly affected by export taxes, which are a very controversial issue in Argentina.  Farmers were up in arms about those export taxes.  That's what C&S were directly referring to.  The government is a major risk factor to consider.  The big trade union, which employs like 40% of the population, is very powerful and apparently has a major hand in crafting policy.  In general, the government is very corrupt and has turned over a lot in the past. 

 

The Argentinians are also not very trustworthy credits.

 

I do not own any of these companies at this time, but I will eventually get around to looking into CRESY.  Just like I'll get around to looking into LUK.

[rogermunibond]

Here's the interview mentioned by txlaw.

 

http://www.pwc.com/gx/en/ceo-survey/2010-assets/transcripts/ceosurvey10-Elsztain.pdf

 

There are Motley Fool notes from the LUK annual meeting that mention C&S saying that they sold out of IFIS because the CEO liked debt too much.

 

http://boards.fool.com/Message.asp?mid=28501889&sort=postdate

[Myth465]

Thanks for the link and background info. From looking at the 13Fs this like Goldman and Citi are popping up in everyones holdings. I will have a look over the next few weeks. C and Goldman are in the too hard pile given my time constraints.

[scorpioncapital]

:) You guys are all so funny. Obviously you didn't attend the AGM this year. Joe said they have gotten out of Cresud because they don't have faith in Eduardo's use of leverage.

 

 

 

[txlaw]

Thanks for posting the LUK annual meeting notes. 

 

Yeah, Elzstain definitely does like "leverage."  Makes Biglari seem like an amateur!  That's one reason why I haven't even tried to figure out CRESY.  Elzstain owns a controlling but nonmajority interest in an asset management business, which owns 100% of another shell company, which I think is IFIS.  For some reason, wealthy people in Argentina like to form shell companies in Uruguay or Paraguay (or maybe Nicaragua), I think maybe to avoid taxes.  IFIS owns a controlling but nonmajority stake in CRESY I think.  CRESY owns a controlling stake in IRSA.  IRSA owns a controlling stake in APSA.  There are a bunch of joint ventures that all these subsidiaries are involved in too, I think.  And to top it off, there's convertible debt and warrants in these subsidiaries that Elzstain owns.

 

So, basically, Elzstain controls a ton of real estate in Argentina while only having really put up a small amount of capital for that privilege. 

 

I'm assuming that's what C&S were talking about when they meant leverage.  Or were they actually talking about debt?

[scorpioncapital]

Not sure what but they said the assets were great, but imprudently financed.

[jjsto]

Thanks for the LUK comments at the shareholder meeting.  The level of financing at the IRSA/CRESY level is not that bad (at the CRESY level in particular.)  I think what LUK was referring to is that their investment was made at the level of IFIS (Elsztain's "shell" company that has the controlling interest in CRESY.)  It seemed to me, based on the SEC filings, that IFIS pledged its shares in CRESY as collateral for a loan.  At the height of the crisis there was a margin call and Leucadia was forced to loan money to IFIS to cover the margin call until another investor could be found to "buy" them out.  That must have infuriated C & S since that was right when they needed the little cash they had left to support ACF and JEF.  Unless, I am missing something?

 

Also, the assets in APSA/IRSA are good.  (I have been to most of them.)  What I have a hard time understanding is: 1) the future prospects of Banco Hipotacrio, 2) What is going on with Tarshop, 3) What is going on at Brasil Agro?

 

As far as management is concerned I dont like the compensation agreement, the fact that they continue to try and invest in US real estate (in spite of their less than stellar history), and the offer they supposedly made to buy out the controlling stake in TEO.  But, I still own the stock cause it seems cheap on a sum of the parts basis...

[scorpioncapital]

Munger says it's all about mental models. So maybe the mental model is, 'Should one invest with a manager that personally got so leveraged so as to get a margin call'. The corrollary being, what other actions will they do in the future, if not yet, to the assets under their control?

[txlaw]

Thanks for providing those details, jjsto.  That would make sense about their being pissed off at Elzstain for pledging his IFIS stock for a loan.  I don't understand why he would do that.  Definitely seems imprudent.

 

I actually think it's a good idea for Elzstain to be readying a platform to purchase U.S. CRE.  Seth Klarman's recent comments about looking into undervalued, non top-tier CRE seems to drive home the point that there will be opportunity in that market in the near future.

 

Do you have any thoughts on the political/regulatory risk for CRESY's operations?  It sounds like you might be familiar with the country risks.

 

 

[jjsto]

Just realized there was a question here.  Sorry for the delay.  As for the country/political risk, I really dont know what to think.  I have spent a good deal of time in Argentina, and I have no idea how predict the political environment.  On the one hand most of the big elements that have caused past crisis are not present here.  There is almost no debt backing real estate, there is no currency peg, and the hot money that could flee the country left a long time ago.  There is the issue of inflation/government spending, but that seems mild compared to how it was in the past.  The main political problem related to Cresud is the tax on farming, and I have no idea how that will play out in the future.  On the other hand, even if the Kirchners were to lose in the next election, the farming taxes were repealed, the foreign debt issue was resolved, and inflation was brought back under control, there would still be the possibility that the argentinians would snatch defeat from the jaws of victory and somehow manage to shoot themselves in the foot.  In my opinion investors here just have to live with a certain amount of uncertainty.  Not very helpful, just my 2 cents...

[Guest HarryLong]

Chile is the Switzerland of Latin America. I don't understand why everyone isn't crazy about Child and PVD, which is a oligopoly and has a great record of dividend growth. Unlike most dividend-paying companies, it doesn't need capital expenditures to expand tangible assets (they run pension funds), so the dividends do not impact future growth in any way.

 

 

[peripatetic]

Not sure what but they said the assets were great, but imprudently financed.

 

It took awhile, but this eventually aged well. The assets are still great, but the liabilities are frightening. Leucadia recently started buying in again, though. I held my nose and bought a few as motivation to have a closer look. Anyone else still looking at this?

[rogermunibond]

Is Elzstain still the CEO?

[gfp]

Off topic - blast from the past Harry Long!

https://seekingalpha.com/author/harry-long#regular_articles

 

Busy with algorithms for the last decade

[peripatetic]

Is Elzstain still the CEO?

Yes.