Mongolian Growth Group

[Parsad]

My bad.  They have negative yields.  What geniuses.

 

No problem :)

 

By the way, where did you see the 95% occupancy statistic? Was it in one of their recent monthly letters? I didn't come across it, but I wasn't looking for it.

 

Cheers!

 

95% occupancy means nothing when the rent doesn't cover expenses.  I can get you 95% occupancy in any city if I price the rent significantly less than operating costs. 

 

They were buying property all through the commodity bubble...bubble burst!  Unless commodity prices rise again in the next few years, I cannot see how their real estate value won't come down.  Stock is reflecting that sentiment.

 

Cheers!

 

There's no question there. It'd be better if they had 20% occupancy with $2m in revenue then at least if expenses stayed in a similar range and revenues went up 4-5x they'd make money. But 95% occupancy means there's not much more room for revenue growth.

 

Just curious Parsad, what do you think the long term play for the management is? They clearly can't run the company like this for too long. They'll run out of cash. So as Anders seemed to imply (Anders, please correct me if I'm mistaken), the end goal seems to be appreciation and not cash flow?

 

I think the end goal is appreciation of the real estate portfolio.  Insurance did not work out at all, so the plan had to change...become only a real estate company.  But they were buying real estate when Mongolia was the only frontier left.  The Gold Rush tide in Mongolia may have just ebbed and that appreciation may be a long ways out. 

 

Harris seems to have a knack for finding the new frontiers, but he has missed the timing on when to exit before.  I have no real idea what will happen here, but we've never owned YAK and have no plans to own it.  Jordan at least seems to have hedged his bets a bit, and has been consistently selling over the last couple of years...got rid of about a third of his holdings in the $3+ range on average...good for Calonego and family!

 

Cheers!

[anders]

Just curious Parsad, what do you think the long term play for the management is? They clearly can't run the company like this for too long. They'll run out of cash. So as Anders seemed to imply (Anders, please correct me if I'm mistaken), the end goal seems to be appreciation and not cash flow?

 

I have studied Mongolia a great deal and have faith in its prosperity. I dont think finding additional cash would provide a problem for them. Today almost all RE comps cannot handle big volumes such as blocks of 100m since they wont be able to deploy it succesfully. CF and value always goes hand in hand so obviously they will try to achieve both.

 

We have found a couple of companies in mongolia that we think can provide good return over the long term period - its part of our frontier forever capital. It goes into our assymetrical positioning sacrifizing 1% every year on frontier capital, this coupled with sacrifizing 1% on macro hegdes every year (ie japan default, short JPY)

So we are building on YAK buying very small volumes, and are taking a bet on Harris that he will be able to structure a company that can ride on the progress of mongolia. And if it takes 10, 20, 30 years, it doesnt matter as long as we believe he does the right things. out of experience, this things tend to take much longer than any anticipates, and then a bit longer still..

 

Rgds

 

 

[Morgan]

Just curious Parsad, what do you think the long term play for the management is? They clearly can't run the company like this for too long. They'll run out of cash. So as Anders seemed to imply (Anders, please correct me if I'm mistaken), the end goal seems to be appreciation and not cash flow?

 

I have studied Mongolia a great deal and have faith in its prosperity. I dont think finding additional cash would provide a problem for them. Today almost all RE comps cannot handle big volumes such as blocks of 100m since they wont be able to deploy it succesfully. CF and value always goes hand in hand so obviously they will try to achieve both.

 

We have found a couple of companies in mongolia that we think can provide good return over the long term period - its part of our frontier forever capital. It goes into our assymetrical positioning sacrifizing 1% every year on frontier capital, this coupled with sacrifizing 1% on macro hegdes every year (ie japan default, short JPY)

So we are building on YAK buying very small volumes, and are taking a bet on Harris that he will be able to structure a company that can ride on the progress of mongolia. And if it takes 10, 20, 30 years, it doesnt matter as long as we believe he does the right things. out of experience, this things tend to take much longer than any anticipates, and then a bit longer still..

 

Rgds

 

Thank you for your reply anders. If you have time, can you answer a few questions?

 

The current market cap for the company is about $40m ($1.12/sh). I'm not sure how big your portfolio is, but at some point you, either alone or with other investors, would consider buying the entire company outright correct? What price would you buy the entire company?

 

In the long term (15 and 30 year time frames), how much do you think the property will appreciate? Very roughly. Will it become a $500m portfolio or $5bln portfolio? Something on the higher end? I'm not sure, so I'm just throwing numbers out.

 

Until then, how will the company continue to pay its bills? By selling buildings? Cutting expenses drastically? Raising more money from investors?

 

Thank you for your input.

[anders]

The company is focusing on the commercial property and development which naturally comes with higher leverage with growing economy. Their focus is on creating assets before CF which they evidently believe will provide better return on equity over time. Their occupancy rate is approximately 99%, hence getting occupancy creates contracts and, if you can show consistent timelined CF on a building, will evidently raise the price on that building. Sure 4-5% yeild on assets that doesnt cover costs seems bad at first, but if you can grow the asset base, then they will at some point have a structure that allow them to grow without putting further pressure on the cost side.

 

The company leverage ratio is at 1,08 meaning about 93% solvent which in our opinion is low for a RE company and, will enable more leverage in pace with securing occupancy rates. This to continue finance future growth and expenses until the assets cover the cost, then they slow down growth and start liquidating some assets.

 

I think it is difficult to put a price tag on the company as the assets plays on expectation on future growth on Mongolia, future policy rates, future inflation and FDI. The ecomony has come down due to reduced coal price and some political aspects but activity is still live and well with annual gdp growth at 7%.

 

But sure, with price trading at 85 cents on $1 tangible equity it is more interesting and we are picking up the pace in purchasing. But with a notion that it provides a part of our 1% frontier capital that we are mentally prepared to lose.

 

I dont know how much the company will be worth in future, I talked to a guy that came to mongolia with £100 000 in 1993-94 and IPO d it in Hongkong last year at $500m and, he told me they only scratched the surface.

 

Its risky business so best way to do this is to read everything from the company started and make a decision if one want to have it in the portfolio longterm.

 

Rgds,

[premfan]

The company is focusing on the commercial property and development which naturally comes with higher leverage with growing economy. Their focus is on creating assets before CF which they evidently believe will provide better return on equity over time. Their occupancy rate is approximately 99%, hence getting occupancy creates contracts and, if you can show consistent timelined CF on a building, will evidently raise the price on that building. Sure 4-5% yeild on assets that doesnt cover costs seems bad at first, but if you can grow the asset base, then they will at some point have a structure that allow them to grow without putting further pressure on the cost side.

 

The company leverage ratio is at 1,08 meaning about 93% solvent which in our opinion is low for a RE company and, will enable more leverage in pace with securing occupancy rates. This to continue finance future growth and expenses until the assets cover the cost, then they slow down growth and start liquidating some assets.

 

I think it is difficult to put a price tag on the company as the assets plays on expectation on future growth on Mongolia, future policy rates, future inflation and FDI. The ecomony has come down due to reduced coal price and some political aspects but activity is still live and well with annual gdp growth at 7%.

 

But sure, with price trading at 85 cents on $1 tangible equity it is more interesting and we are picking up the pace in purchasing. But with a notion that it provides a part of our 1% frontier capital that we are mentally prepared to lose.

 

I dont know how much the company will be worth in future, I talked to a guy that came to mongolia with £100 000 in 1993-94 and IPO d it in Hongkong last year at $500m and, he told me they only scratched the surface.

 

Its risky business so best way to do this is to read everything from the company started and make a decision if one want to have it in the portfolio longterm.

 

Rgds,

 

Good post.  I still find it rather bizarre that a vehicle created to buy real estate for straight cash is not producing consistent profitability in year 3.  Lets all put our real world businessman hats on. All of us that have a IQ of 50 can focus on a particular region of the US and buy 45 million in real estate and at least make 7 percent. Hire a management company in the region and check on property weekly.  Then use cash and repeat.

 

Random thought.  Seeding capital to operators with a track record in a particular niche business and you owning the real estate would be a great model for a company.  Real estate is just a platform to do business. The content is the business. Owning the platform and content creates downside protection for your platform.  I think any one that has a holding company ( hint sanjeev) can create downside protection for there platform and create upside via owning a portion of a operating business.  If operating business successful rinse and repeat. Maybe down the line creating a franchise business.

 

[Guest chai]

I recently read the latest Asian Development Bank outlook. 

http://www.adb.org/sites/default/files/publication/59685/ado2014update_1.pdf

 

ADB's view no Mongolia is pretty bleak: GDP growth decelerates, high current account deficit and persistently high inflation that is higer than the GDP growth. The latest inflation is currently expected to be 13.5% in 2014 vs GDP growth of 6.0%. So basically, Mongolia is expected to have negative growth rate of -7.5% in real terms.

 

Mongolia's gross international reserve is only US$1.3 billion, barely enough for 3-months of merchandise imports.

 

Further, probably in reflection of all these, the currency MNT is now at approximately 1800-1900 MNT per USD (in 2011 - 2012 it was around 1200 MNT per USD; OR about 50% depreciation since MGG first invested in the country).

 

I don't recall seeing the MNT depreciation/ volatility mentioned in MGG shareholders letter, but logically speaking - in USD (or CND terms), the asset value in USD (or CND) since 2011 would barely break-even even with asset escalation of low-mid teens per year.

 

I also tried to understand what's the rental yield in Local Currency term. I found this website which is in English and has some real estate listings.

http://mad-real-estate.com/advanced

 

It seems for a 100 sqm 2 - 3 bedders in UB, the rental would be around 5.4m MNT per month and that the sale price is around 4.4m MNT per sqm. so gross rental yield in MNT is 5.4*12 / (4.4m MNT per sq meter * 100) = 15%.

 

In USD- terms, assuming a currency depreciation of roughly 3% (which may be a generous assumption but I dont think MNT could depreciate by more than 15% infinitely - maybe over near term), the rental yield would approximate 12%.

 

This of course is a rough gauge, but I dont think any sensible person would demand anything less than that in a country like Mongolia. With this I am really struggling how MGG could carry its assets without any write-down - Unless a large part of their porfolio mix (says >80% is in raw land-bank which is non-yielding?

[anders]

Thx chai,

 

I always enjoy reading from those that are well informed and do their homework, I very much appreciate your thoughts and agree on almost every point you bring up.

 

I will try to illustrate my thinking in this matter.

 

Our stance on Mongolia among other nations such as China, is that over time, these countries will be winners of 21th century in terms of prosperity and growth. Its a very long term view.

 

So how can we best surf on the asian wave and also gain knowledge and build experience? We have taken small steps in taking exposure in those countries that we feel have a great future ahead. 

 

So we have allocated a small portion of the portfolio and in Mongolia in particular we are purchasing things that we believe will go hand in hand with that prosperity. The funny thing about mongolia is that its 1 company that dominates every sector, so we are buying into the only listed beverage company, the only listed cashmere company, the only listed financial brokerage company, the only listed cement company and so on. MGG also is an interesting way to get exposure in real estate in mongolia.

 

A funny story when I was there a couple of years ago if you dont mind; I asked a guy where I could find the books, and got the following answer "there are´nt any books".. eh? no books I said, "no books".."you need to go to the company and knock on the door and ask to have a look in their internal books". So the way it is structured is that Mongolias financial infrastructure is still in building process and there are not any real standards and CF valuations as the ones we have in the west, as a corollary, they mark the company value to the net assets and if you want your dividend you are asked to come and pick it up at the reception. It has progressed since then but you get the point... This is longterm process and as we try to protect our ignorance of knowledge in these countries, we diversify.

 

So it is really more of a way trying to get a healthy assymetrical exposure at an acceptable risk. The currecy risk you can take away, we have chosen not to since we are not smart enough to see where it is heading, so either you hedge or you dont, or else you are just speculating. Last time I checked, the daily turnover on MSE was about $200 000, so the kicker is when/if mongolia structure start to stabilize, FDI will enter the system and drive up asset prices. 

 

But this makes sense in our world, I would never put 10% in mongolia hoping for a quick return, we treat this more as china in the beginning of 90s and adding as it gets cheaper.

 

Further on, we do this because we have luxory of long term view and I love traveling around the world, but it is scary sometimes. Another story is that I and a business partner went to Kenya starting a farm project up north, its a another story but it is really scary when you are sitting sipping your coffee at Westgate and two weeks later, the al-Shabaab terrorist group goes there and kill 67 people, or just yesterday, they killed 36 non-Muslim quarry workers in northern Kenya, cutting their heads off while my business partner is a couple of hours drive from there. The reason Im telling this is that I finally understand why you can generate a yearly 100% on equity on these kind of frontier structures, there is always a very good reason why people dont touch highly lucrative transactions.

 

Best,

 

[OracleofCarolina]

The company decided to drastically reduce overhead. A snippet from today's press release

 

To save substantial costs and in parallel with this re-alignment, unfortunately we will need to discontinue the employment of the current CEO, Paul Byrne, who will now remain as an advisor to the Company.  He will be replaced as Chief Executive Officer by Harris Kupperman, the founding CEO and largest shareholder of MGG. Mr. Kupperman has agreed to resume his former executive role for zero cash compensation during 2015.

 

“Given the deteriorating economic situation in Mongolia, the time has come to dramatically reduce costs while still positioning the Company for future growth,” said Harris Kupperman, Chairman and CEO of MGG. “Starting with the changes announced today along with the steps that will be taken over the next few months, I aim to reduce the Company’s cost structure, so that MGG is in a position to thrive regardless of the economic situation in Mongolia.”

[Parsad]

They also pretty much replaced the entire board of directors!  That's just plain crazy.  Cheers!

[orion]

Mongolia Growth Group Ltd. Successfully Executes Cost-Savings Plan; Eliminates Over CDN $1,000,000 of Recurring Costs

http://mongoliagrowthgroup.com/mongolia-growth-group-ltd-successfully-executes-cost-savings-plan-eliminates-over-cdn-1000000-of-recurring-costs/

 

Right direction, but likely still burning cash. We will see.

[stahleyp]

I know this is quite old but has anyone followed this? Is Kupperman still around? Supposedly he managed a fund. Anyone know how's that done?

[rkbabang]

I know this is quite old but has anyone followed this? Is Kupperman still around? Supposedly he managed a fund. Anyone know how's that done?

 

I don't follow Mongolian Growth Group anymore, but Kupperman is still actively blogging: https://adventuresincapitalism.com/

 

 

[stahleyp]

I know this is quite old but has anyone followed this? Is Kupperman still around? Supposedly he managed a fund. Anyone know how's that done?

 

I don't follow Mongolian Growth Group anymore, but Kupperman is still actively blogging: https://adventuresincapitalism.com/

 

Thanks, rk. Yeah, I knew about the blog but he doesn't seem to be nearly as popular as he was several years ago. I guess his performance wasn't all that great.

[Spekulatius]

Is anyone still following this? 

 

I did a quick back of the envelope calculation for the $/SQFT for the company.  Assuming no value for the insurance company (let's just go along for now)

 

There are 277k sqft of real estate including redevelopment square footage 

 

With 34.1 mm shares outstanding and at 4.04 Cad per share, the total market cap is $137mm Canadian dollars.  This implies a valuation of $494 per square foot.  Put this in perspective.

 

Manhattan residential is about $1,000 for the generic stuff in NYC

 

Replacement cost and transactions for non-manhattan retail is typically $150-$300/square foot.  I've seen comps in the $60-$100 for distressed stuff as well.  Manhattan retail can sell for in excess of $10,000/square foot.  Keep in mind, Mongolia Growth uses square meter, to covert multiple by 10x to get to a square foot number. 

 

From a rental revenue perspective, the 9 month rental figure is 1.174mm.  Annualized, this would imply a 87x rental multiple, when the US trades at 10-12x rental multiples.  Obviously, there are square footage that aren't generating income. 

 

I've seen emerging market real estate go parabolic, i.e. China.  But, the $/SQFT is 1/2 of manhattan real estate, I don't know how much more upside there could be.  If they were using leverage, then there could be significant upside.  This is clearly not the case.  I doubt leverage makes sense since the interest rate in Mongolia is higher than 10% and the yield on RE is about the same. 

 

 

 

Ist this all one needed to know before moving on?

[opihiman2]

Does anyone have returns over the past several years on Praetorian Capital?  I'm starting to see Kupperman pop up on a lot of finance channels like Real Vision. 

[John Hjorth]

What is it with people here on CoBF discussing this investment as of now [Here, I disregard posts from 2014]?

 

It's so simple. It's all about cash flows from the asset(s), judged by leverage used.

 

Do you you see any?

 

If you're holding real estate without any real cash flow, you're stuck [& subject to downside]. It's that plain simple.

[minte2k]

Worth a revisit. Heavy insider purchasing, and repurchases continually renewed. Portfolio value alone exceeds the market cap at this juncture... so even if you value the real estate at 0, this looks like a screaming bargain...

[Gregmal]

They loved it at X and now hate it at .15X....how many times have we seen this story before? I love Kuppy but how many times do we need to see these "follow the manager" things not work out?