Portfolio updates: positions reinforced

Hi there, here is some new reporting of positions reinforced.

1. Melcor Development

Melcor is a Canadian family owned “book value per share growth” company and quarterly dividend payer at 0.3 times book.

End of description.

Source: Koyfin

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Ok, I will be nice and describe it more.

This is an integrated real estate company. A bit like St Joe or Howard Hugues in the USA.

They own land, develop the land into lots, build infrastructure and also commercial properties. Then sell the land to developers. It must be cyclical? Well yes it is but the land development business was always profitable, even in 2008.

How is that possible? It is operating in Alberta. Land of the Free Canadians. Cheaper real estate than the rest of the country, population growth, and natural resources.

Also, it has a second business: Keeping that commercial real estate and renting it out. It even spun out some commercial, office and industrial assets in 2013 under “Melcor REIT”. Alas, the office crisis caused post covid by remote work, as well as the increase in Canadian interest rates hurt the REIT earnings.

So what did Melcor Development do? Buy back the part of the REIT that it did not own. The combined entity will be less leveraged than the REIT was, and with more flexibility.

1-Melcor is buying the REIT shares that it does not own. This is for $5.50 per unit, for a total of $71.30 million.

This should bring 5 or 6 extra million of FFO (unclear because the last REIT earnings have extra professional fees for the advice on the strategic priorities). Not great but this is a deep downturn in Office and high mortgage rates.

Now something interesting is happening. They sell a REIT building for 48 million.

Lovely. But again I live in Spain.

“Melcor REIT owned a portfolio of interests in 34 properties representing approximately 2.8 million square feet of gross leasable area located across Alberta and in Regina, Saskatchewan.”

These 48 million $ represent a small part of the GLA of the rest.

Then they buy the REIT, with extra debt. They plan to sell more REIT buildings, after they bought the REIT. It looks like they are doing a multiple arbitrage where they buy the whole thing cheaper and sell the pieces for a higher multiples.

Book value per share and adjusted earnings or FFO are getting a boost. We don’t have estimates for 2025, and it is still unclear what the earnings will be, with all the moving parts.

One thing is certain: relative to 2024 profits, Melcor Development trades at 4 times FFO. 2024 profits were pushed by a great year in property lots sales, so maybe it is a cyclical high in that business. But definitely not in the office lending business, and in the interest rate cycle. A lower interest rate will benefit the company greatly.

What I also like about it, is that it is set to benefit from oil and gas royalties effect on Alberta’s economy, if oil prices go up.

Bonus: new VC position: Illumina

illumina is the world leader in genome sequencing and consumables. The share price dropped 50% in the past six months, so I bought. The forward P/E is now 19. A VC or venture capital position is small position in a company I buy and forget, just like you would with a VC portfolio. I have analysed fast growth investors, and found that the mistake they most do is selling. I have seen successful ones, even ignorant investors, who just bought tech companies and did nothing, and never read a financial release. And they killed it. And I was humbled by them, they also killed me!

This is the approach here, because I am ignorant about genomics. I covered Genomics previously, explaining my ignorance based approach.

I have no idea if it will continue to work well for Illumina, and who is going to be the world leader in 15 years. Nobody does. (It’s the same about Nvidia and Alphabet - if you read an article about this, you have been fooled. Maybe the writer is honest but he is fooling himself too). Investing is about odds. If history of capitalism is a hint, there is a good chance that Illumina is part of this revolution. If not, it’s a loss.

Another approach is to invest in value, or in serial acquirers that have a clearer growth runway. Short term catalysts is also a good way to invest. Today, we will see more value investing:

Added positions with detailed updates:

-Emerging financial company at 3 4 times PE, 20% growth and 7% yield. Unfortunately for my readers, the price is up 25% since I have started writing my article, on no news.

- European beverage company at 2.4 times EV/EBITDA and 5 times my adjusted for working capital FCF.

-Growing Japanese internet company at 3.8 times operating income (no net cash).

With things like these, I have no need to find new companies for the moment. I bang and bang and bang on the cheapest companies, then sometimes one of them goes up 30-50% or more and stops being that cheap, so I bang and bang on the remaining cheapest companies. I rotate the additions to avoid value traps, and to observe earnings releases.

I will have a problem when most of them will have rerated, and I will have to think about taxes and rotation.