Friday File: Venture Gold from Curzio, plus A Few Buys and a Sell in the Real Money Portfolio

by Travis Johnson, Stock Gumshoe | June 23, 2017 5:30 pm

Confirming a gold teaser solution, plus some Real Money Portfolio updates -- notes on Altius, Bellicum, Dataram, Delphi, Fosun, NI Holdings, PCSB, SAFE and China A Shares

I know quite a few folks got to chatting about Bellicum (BLCM) following Ernie Tremblay’s overly heated pitch for the stock last week, covered in the Friday File a week ago[1]… and, well, things so far are going as they often do: Overhype the ad, overpromise some dramatic results from a presentation that’s really much more mundane but is well-timed to connect with your newsletter promo, and, whaddya know, when the actual news comes out the stock often falls even if the news isn’t necessarily bad.

Here’s what I noted last night[2]:

Just took a look at Bellicum, this is getting quite ridiculous a week after the ad got rolling. Money Map promos are so aggressively pushed that I’m afraid lots of folks who saw those teasers must really believe that there’s huge news coming over the next couple days at that conference.

From what I can tell, Ernie Tremblay (or his ad copywriter) is the only person who thinks there’s a good chance of fantastic big surprise news right away…. my temptation would be to bet against Bellicum next week, since the kind of short term hype buildup like we’ve seen from Tremblay so often leads to disappointment — the folks who bid the stock up 30% over the past week are not likely to be dedicated long-term holders, they’re in many cases people who believed the hype and think BLCM is going to announce a groundbreaking cancer vaccine tomorrow, and a lot of them are likely to sell the news whether it’s good, bad, or, as I expect is most likely, non-news.

Didn’t trade this one personally, but I wouldn’t be surprised to see it back at $11 or $12 in the weeks to come — these heavy pressure over-promising ads often disappear as quickly as they appeared, taking their investors along with them.

So far it’s falling already today, they did release data, as teased, but it wasn’t the crazy great data Tremblay’s hype had led investors to expect — since, after all, they were hoping for a cure for cancer and got just more support for Bellicum’s efficacy in helping transplant patients.

Doesn’t mean they can’t end up being a fine investment, or that the stock is guaranteed to fall… I have no idea on that front — and it’s certainly not impossible that some big pharma company could throw money at them. But we’re reminded of the importance of thinking for yourself, getting as much information as you can, and being skeptical whenever a newsletter trots out the heavy promotional guns and promises huge gains from a near-term event. Deadlines ginned up by newsletter promoters are very often much more about getting you to urgently sign up for a newsletter than they are actual likely catalysts or “game changer” events for a stock.


And speaking of teasers, Frank Curzio finally pushed out a new promo for his Curzio Venture Opportunities that confirms he’s recommending US Gold Corp/Dataram (DRAM) to subscribers of that high-priced letter.

If you recall, that’s the conclusion I came to after Curzio started hinting at his next gold recommendation about a month ago — I wrote that up in the Friday File about three weeks ago[3], and bought a few shares myself at the time, but there was still a bit of uncertainty since Curzio had not confirmed that he would definitely recommend the stock, but now that his pitch letter for Curzio Venture Opportunities has indeed made the rounds we can confirm.

Here’s a bit of his ad, in case you missed our earlier look:

“A Rare Opportunity to Invest in a Brand-New Gold Stock’s “Secret IPO”

“The last time these men got together, they built a company that’s since grown over 3,200%.

“Now, you have the chance to get in on the ground floor of their latest venture….

“This is your chance to invest alongside a handful of mining experts as a new gold company is built from the ground up…

“Based on a prospect that, according to comprehensive geologic analysis, could easily be worth billions of dollars. “

He talks up the people who are involved in the company and their past successes, including one that Curzio himself recommended sometime back in late 2011 or early 2012, and he shows a chart of the huge success of that one with a 324% gain from trough to peak over about a four month period… and that perfectly confirms that, yes, that past stock recommendation was Gold Standard Ventures (GSV), as suspected.

And Curzio talks up the geologist who worked both at Gold Standard and for this new company, calling him “King Midas” ….

“The Man They Call “King Midas”

“You see, this man told me he teamed up with one of – if not the – most experienced… most accomplished… most celebrated geologist in the world today.

“As you might imagine, he’s not a promoter.

“He’d much rather be drilling holes than making phone calls….

“He’s actually been described that way in print.

“King Midas is what his peers call him.

“And it’s no wonder…

“For over thirty years, he’s been exploring for gold in Northern Nevada – the epicenter of gold production in America.

“Of the approximately 300 million ounces discovered there, King Midas has personally had a hand in locating more than 50 million of them.”

I don’t know where Dave Mathewson was specifically referred to as “King Midas” in print, but I wouldn’t be surprised if that moniker was applied to him at some point — mining folks, after all, love hyperbole almost as much as newsletter salesmen. Mathewson is the VP of exploration for US Gold, and was the geologist behind the discoveries at Gold Standard Ventures as well as several other large mines in the area for Newmont in decades past. I think we can all stipulate that he’s as good at finding large gold deposits in Nevada as anyone else — though that, of course, does not mean he finds something every time he looks.

More from Curzio:

“Right now, you have the chance to invest in what King Midas calls ‘Project R on steroids.’

“I’ve codenamed it DISTRICT X.

“And here’s why, if you get in now, DISTRICT X could make you a fortune…”

So yes, that “Project R” is the Railroad Project that Gold Standard is developing, and the pitch is really that this is the next similar project from Mathewson — they spent years putting together the claims that made up the Railroad Project, dealing with all the different land and claim owners in the area and finally doing their exploration and discovery. Gold Standard has made a half dozen or so discoveries on their properties, and have kept buying up more land, and now they’re more aggressively drilling to further expand their resources… I have no idea how long it will be before they think about actually building a mine, or partnering with a big player who needs reserves, but it has taken them six or seven years of exploration (including some lull years when gold was crashing) to get to this point.

And, for final confirmation (as if that weren’t enough), we get this:

“… he management team was trying hard to keep this under wraps as much as possible.

“For one, instead of a traditional IPO – which would bring major industry scrutiny and a whole lot of press – the company decided to do what I term a ‘Secret IPO.’

“They didn’t go to an underwriter.

“Instead, they merged with a company already listed on a major exchange.

“In fact, as of today, this brand-new gold stock doesn’t even have its own ticker symbol.

“If you were to search Yahoo! Finance for the company’s name, you’d never find it.

“It’s trading under the symbol of an IT company that has essentially turned into a shell corporation.”

So yes, quite clearly still talking up Dataram, which is the shell into which US Gold merged — the company mostly refers to itself as US Gold Corp. now, though as far as I can tell they have not officially changed their name, and the ticker symbol remains DRAM.

So… is there any new news about US Gold or their Keystone project? Not really — they have released a bit more information about their “scout” drilling, and plans for their 2017 drilling that is going to start actually trying to find and define whatever the gold resource is in the area, and they’ve staked additional claims but they’re still probably a ways from an actual “discovery” announcement or anything dramatic like that. They’re awaiting analysis of their “scout” drilling and permits to do some real exploratory drilling, so we’re still talking about a very, very early stage project. This is what Mathewson said in the most recent press release about their 2017 plans and the staking of their additional claims this year[4]:

“My approach to exploration has always been a process-driven, model-based methodology. This is the same approach we used at Gold Standard Ventures to make the initial discoveries on the Railroad project. Keystone represents a tremendous opportunity, as the gold deposit system indicators, permissive rock formations, geological structural setting, and Nevada location present an ideal setting for a potential discovery and mining exploitation. With these additional claims, I am confident our existing land package now effectively controls every part of the visible system and prospective extensions.”

Will it be a winner? I don’t know with any level of certainty — they talk about “visual systems” and geologic trends, and I see the obvious possibilities given the neighborhood they’re inhabiting, but I have no geologic expertise or insight into the odds of success. Everything really depends on what they find, and, to a lesser extent, on what the price of gold is when they find it.

I think it’s an above-average speculation, given Mathewson’s track record of discovery in the area, but there is ample room for a falling share price, particularly if they have to issue new shares to fund exploration but they haven’t had an exciting drill hole with a big gold intercept yet, and there’s also a real possibility that the stock could languish for years if the exploration is slow or uneventful or the gold price falters.

If the company begins to get more promotional, sending out lots of press releases and contacting other newsletter pundits, that will be a sign that they’re thinking about raising money and want to get the price up so they can raise cash on better terms. That next equity raise or a bad couple of drill results are probably the biggest risks, given that permitting isn’t likely to be an issue in this part of Nevada, but with drilling funded through this year they can wait and do their next equity raise after they have some news if they want to… we’ll see. Curzio actually notes in his ad pitch that he thinks it’s “likely” that he’ll be able to provide a private placement opportunity in this “secret” stock, so that’s perhaps an indication that he has at least talked to the management team about raising money.

I bought a few more shares of DRAM today, so now this is roughly a 0.5% position in my equity portfolio. That’s about as high as I’d want to go for something that’s completely exploratory like this, but it’s a fun story and could be a nice winner if they are as successful with US Gold as they were with their previous Gold Standard Ventures — right now, at about $3, the market cap is roughly $40 million… pretty much were Gold Standard was when Curzio recommended them five or six years ago. When Gold Standard made their initial discovery it shot up to a $200 million valuation, then fell to $50-60 million for a couple years when gold was in the doldrums and they were in the long slog of defining resources, and after last year’s jump in the gold price the market cap is now above $400 million (and peaked around $600 million). That’s obviously not something we can count on for US Gold Corp., but it’s a reasonable daydream to have if they have a successful drilling program this year and next. We’ll see.


Speaking of natural resources, Altius Minerals (ALS.TO, ATUSF) released earnings this week. Altius is one of the natural resources stocks with which I’ve been most stubborn, holding through a long period of periodic disappointments as they’ve been hit by the coal regulatory changes in Alberta (which caused a bit writedown on their most valuable coal royalty), the drop in iron ore a couple years ago that put the development of the Kami mine on hold, and the royalty dispute with Vale at Voisey’s Bay.

Through all of that, they’ve kept churning along with the cash generation from their royalty portfolio — it’s just that the cash flow hasn’t approached what I would have expected a few years ago when they were just making their first huge royalty acquisition (that was the Sherritt deal, which brought the Alberta coal royalties along with royalties on some of Canada’s biggest potash mines).

The Altius chart shows the dangers of issuing new shares to make acquisitions — Altius has grown pretty nicely since I first bought shares in early 2009, but most of that growth was in those first couple years. As of now, the stock has roughly doubled since I first bought shares… but the market capitalization has almost tripled, because they’ve issued new shares to make acquisitions and those acquisitions have failed to be accretive to the existing shareholders. (My position is currently in the red, as you can see in my Real Money Portfolio[5], since I added at significantly higher prices after that first purchase.)

That’s not to say they were bad acquisitions at the time — I thought they were impressive, they generated much more dramatic cash flow, and they turned Altius into a strong and significant royalty owner… but investors aren’t valuing that cash flow and those royalties as richly as they used to value Altius’ large cash hoard in 2010 and 2011. The last two acquisitions, of Callinan (and it’s royalties on the 777 copper/gold mine) and of the Chapada copper royalty (from Yamana) have both created substantially higher cash flows over the past year or so, so Altius, as it did last quarter[6], is again noting that they’ve achieved record royalty cash flows… but, of course, they paid a pretty steep price to get those immediately cash-flowing royalties.

The basic press release is here[7], on the conference call they noted that potash has stabilized and improved a bit, that thermal coal (for electricity generation in Alberta) has stabilized a little relative to last year, and that base metals have generated essentially all the growth — mostly because of copper and zinc prices and the Chapada and 777 mines.

They continue to be excited about the project generation business, by which they stake or identify new projects and then sell them or partner them and hold on to some sort of royalty on the project — and they made more exploration-stage project generation deals this past year than they ever have before, though those don’t get as much attention because of the fact that Altius is larger now, and is valued more based on its cash flows than on future projects. They summed up the year in their project generation business here[8] if you’re interested.

And on the financial side, the combination of cash, equity holdings (they often get shares of junior miners as part of farm-out/project generation deals) and preferred shares (from Fairfax, which invested in Altius recently to provide growth financing), means that they now have a positive non-operating balance sheet (they have about C$80 million in debt still outstanding, and about $90 million in cash and equity investments), so the debt is becoming less and less of an issue as they pay it down and grow the cash flow.

The expected revenue has ramped up pretty dramatically, mostly, again, because of Chapada and 777, and Altius now says that they expect C$55 million in royalty revenue this year — with roughly a quarter of that coming from the least appealing part of the portfolio, the thermal coal royalties, and about 50% coming from base metals (like copper and zinc), which is their biggest focus right now. The bottom line has been negative of late for Altius, mostly because of the big (but non-cash) $72 million impairment charge for the Genesee coal royalty, but cash flow generation has been solid — their Adjusted EBITDA for the last fiscal year was $34.7 million, and my expectation is that for the current year, with revenue growing by about 20%, that number will also grow by a similar amount. If we assume that they have an Adjusted EBITDA of about $40 million (all these numbers are in Canadian $), then how does the valuation stack up?

Well, there aren’t any great comparables — all of the other meaningful royalty companies are focused on precious metals… but Altius is sort of in the middle of the pack when it comes to those royalty companies. Franco-Nevada (FNV), the blue chip of the sector, trades at an Enterprise Value/EBITDA valuation of about 28, Royal Gold (RGLD) is at about 18, Sandstorm Gold (SAND) is at about 9. Altius, going on a trailing basis and giving them credit for their balance sheet that’s effectively free of net debt, would be at an EV/Adjusted EBITDA of about 13.

I hesitate to put a lot more faith in Altius given their several problems over the past years, but their long-term track record of creating value from their project generation portfolio throughout the commodity price cycle, combined with the solid exposure to base metal royalties on long-lived projects, gives me enough faith to add a small chunk to my Altius exposure here — it has become a smaller position for me over the years because I haven’t added to that holding as my portfolio has grown (and because Altius shares are well off their highs), so I’ll reiterate my long-term confidence with a small buy that boosts my position by a little less than 10% and brings my average cost down just a hair to a still-unpleasant $9.50 or so.

When it comes to some of the big picture issues, by the way, Altius did share a few updates:

On the possibility of compensation for the Alberta writeoffs from the government, they indicated that they’ve been having trouble getting the politicians to make good on their promise to help those who have stranded capital in the province as a result of the regulatory change… and they have essentially no traction with higher level politicians in Alberta, so they are still pushing for compensation but there has been no real progress. Not holding my breath on that one.

And when it comes to Voisey’s Bay and the dispute over the royalty, they are in litigation and expect not to receive any royalty from that mine this year… the case is apparently in discovery and their first tentative court date isn’t until September 2018, so we won’t know anything for quite a while. Altius is the junior partner on that royalty, they own 10% of the royalty and the litigation is being handled by the 90% owner, Royal Gold, so my assumption would be that they’d reach some kind of settlement or compensation eventually but it might fail, and either way it will take at least a couple years more to get clarity. Neither relief from Alberta nor a restart of the Voisey’s Bay royalty are included in Altius’ guidance for this year.


What else has been going on that catches my eye (or hits my portfolio) this week?

The MSCI China decision did finally come down, and it hit roughly as expected — MSCI agreed to begin including Chinese A Shares (domestically traded Chinese stocks, in Shenzhen and Shanghai) in its influential and widely-followed Emerging Markets Index. That opens the door for substantially more cash to flow to the Chinese domestic stock market, as China continues to try to open up its markets (without, they hope, inspiring a lot more capital flight as wealthy Chinese continue to be somewhat desperate to get their money out of the country, whether by bitcoin or real estate purchases or stock trading).

I wrote about this a while back[9], when Steve Sjuggerud was pushing a variety of Chinese investments because of the pending MSCI decision, and it seemed then that the change was likely to be meaningful… but much more gradual than the promos implied. As still seems to be the case, there will be time to roll out the changes, it’s a very limited exposure to start, and China still has some regulatory reform and market openness to work on before the A Shares can be really fairly represented in the emerging markets indices. Assuming, of course, that China remains an emerging market (it’s kind of hard to consider it “emerging” when it’s the second largest stock market in the world).

The impact on the ETFs has likewise been real but muted — I have some options in the ASHR ETF that I bought because of the chance that China shares could shoot higher on excitement once this news finally hit, and the near-term options (for July) are now showing a profit, but I haven’t sold them yet — I’ll let it ride a bit and see if we get a nice pop of a percent or two over the next couple weeks to give me a stronger profit… my 2019 ASHR ETF options are much more speculative, of course, and depend on China having another bull run — they might not, but there is a possibility of a strong Chinese bull market, and the options are cheap enough (as ETF options typically are) to make it a reasonable risk/reward bet. We’ll see.

Ligand new approval. Limited impact? Expected

What else? Well, the two IPOs I’ve bought this year, PCSB Financial (PCSB) and NI Holdings (NODK) have both dropped pretty sharply from their highs over the past week or two.

I took partial profits on NODK two weeks ago because it had run up to such a rich valuation so quickly, but I wasn’t foreseeing the specific drop that the shares had this week. From what I can tell, this drop is weather related — much of North Dakota is in a severe drought[10], and there are likely to be a lot of crop insurance claims.

That’s one of the larger business lines for NI Holdings, so it wouldn’t be surprising to see them lose money this year, depending on what their reinsurance coverage looks like. I haven’t seen any commentary from the company about exactly what the impact of a drought will be on this scale, but I’d assume that they’ll have a worse-than-expected year unless North Dakota gets some significant rain over the next week or two. If so, I imagine the stock will come down sharply, and I have no particular fundamental reason for preferring NODK over other insurers (it was just a cheap mutual conversion at the time of the IPO), so I’ve taken a bit more of my cash off the table with this one and have now taken profits on half of my remaining position.

PCSB’s drop is not as clearly tied to any particular news, at least not that I’m aware of. PCSB Financial is another mutual conversion, though a more familiar flavor — it’s a mutual savings bank that converted to stock ownership over the Winter and went public a couple months ago, and they have an enviable franchise in the wealthy NYC suburbs and a reasonable valuation and operating performance. I bought shares because I expect the company to be either acquired or merge with another bank after the three year post-conversion moratorium, and because they’re reasonably valued and mutual conversions, on average, do well. And I added to my position after that because company insiders, who should know the prospects better than anyone, not only bought their maximum allowed number of shares during the conversion (at the sweetheart conversion price of $10) but also added to their holdings at market prices post-conversion. That’s a big vote of confidence from several executives… perhaps that’s what caused the shares to jump up from $16.50 to near $18 in the first few weeks of June, I don’t know, but they dropped sharply back to the mid-$16s this week, and I don’t know why. Banks in general are not delighted about the flattening yield curve, I suppose (they like a steep curve — pay low rates on savings accounts or interbank funding and earn higher yields on long-term loans they make), but most banks didn’t fall sharply this week like PCSB did.

So… reasons? I dunno. What goes up must come down? Maybe some newsletter or analyst or pundit talked the shares down a bit, I don’t know, it’s still fairly illiquid and small so it wouldn’t take all that much. At or near $16.50 I think it’s a pretty compelling buy if you can keep your expectations in check and hold for a few years, but I don’t wish to add to this position now — if I were to bet on small banks right now I’d want to spread it out among a few names, but if you feel like you missed this one it might be coming back to reasonable buying territory now.


Fosun (656.HK, FOSUF) has been in the news, in a bad way, but it’s not really anything specific to the company — it’s just regulatory risk rearing its head again, and in China regulatory risk means scrutiny of overseas deals and debt levels. All of the big, acquisitive overseas investors in China, many of whom, like Fosun, use their insurance companies to fund expansion, are getting beaten down of late because of regulators’ deeper look at the Chinese banks who lend to these very levered companies. There’s a Wall Street Journal article on that here[11], and, well, that’s essentially why my Fosun position is small: I like their overseas expansion, led by investments in the financial sector, and I like that they’re investing in Chinese consumer and healthcare companies, but the risk is very high because they carry a huge amount of debt and are sharply watched by the government.

I’m not doing anything with my Fosun position here, down a bit on the news of more regulatory scrutiny, but I may not hold Fosun forever — I’ll check back in with them when these latest headlines fade and see what their fundamentals are looking like.


I’ve been thinking some about Delphi Automotive (DLPH) since I wrote about it for a Jeff Brown teaser a few days back, and I decided to put on a small position here in the mid-$80s. I’m trying to be more cautious than usual, just because we seem to be in a weak time of year for stocks and I’m hopeful that we’ll see a summer pullback, so I haven’t loaded up on this one and I don’t really think there’s any rush — butI like the valuation at about 12X forecasted earnings, and I like the possibility that the stock could get a higher valuation as they spin off the drivetrain business later this year (probably).


And, finally, we’ve got a new IPO this week that will go on the watchlist, Safety Income and Growth REIT.

Safety Income and Growth REIT (SAFE) — this is an interesting idea, a REIT that was formed specifically to hold ground net leases (really, just owning land instead of owning buildings). In theory, that should make this REIT more stable than most, and should keep operating costs very manageable… but the IPO pricing seems pretty optimistic to me.

Ground net leases are essentially what they sound like — you own the land, and you lease it to someone, usually for a very long time (at least 15-20 years, often 99 years)… that someone develops a property and operates it and covers all the costs of building and operating the property, with no participation from the land owner, and continues to pay that ground lease for use of the land.

Sometimes, as in some of the leases owned by SAFE, there will be various kinds of escalators built into the ground lease — it could be that they get some participation in the net income of the business over a certain point, or that the lease payments increase annually, either by a set amount or by some multiple of an inflation rate, etc.

Each lease is different, but the key point is that the owner of the land continues to own the land, and after the ground net lease (GNL) term is over the building and land revert to the landowner (that being us, if we were to own SAFE shares). And there’s extra “security” built in, because the ground lease tenant (the actual operator of the property or some other developer — often there are many parties involved along the way) will have built the building and paid for all of that, but will surrender the building in addition to the access to the land if they default on their ground lease.

What there isn’t is a huge profit, at least at this point. SAFE completed the offering yesterday at $20, but opened for trading at the low end of the IPO range of $19-21 and is now trading around $19. The anticipated dividend is 60 cents per share, and that represents the maximum they’re allowed to pay this year because of their debt covenants (they’re allowed to pay out an effective 3% yield based on the IPO price)… in addition to being the maximum that they could reasonably handle based on their cash flow. This is the relevant paragraph from the S-11 they filed last week[12]:

“Our new revolving credit facility will restrict our ability to pay distributions to our stockholders. For the remainder of 2017, we will be permitted to make distributions based on an annualized distribution rate of 3.0% of the initial public offering price per share of our common stock. Beginning in 2018, we will be
permitted to make annual distributions up to an amount equal to 110% of our adjusted funds from operations, as calculated in accordance with the new revolving
credit facility. In addition, we may make distributions to the extent necessary to maintain our qualification as a REIT. “

They further estimate that their estimated cash available for distribution for the next twelve months will pretty much equal the $11 million they’ll need to make that annualized 60 cent dividend payment, so there’s not much wiggle room — and with their current operating metrics, it doesn’t look like the dividend would be within that 110% limit when it comes to adjusted funds from operations (AFFO) unless their newly acquired Ground Net Leases that are coming in along with the IPO are going to generate substantial AFFO (they might). AFFO last year was about $7 million.

On the positive side, there is roughly $100 million in cash available for acquiring more Gross Net Lease assets, and that’s not included in the projection for the coming year — so if they put that capital to use (perhaps levered, using some more of their debt capacity), they could certainly increase the AFFO for the coming year.

I like the idea of Ground Net Lease ownership and I think it’s great that there’s a REIT focused on this niche now — but it’s not a new sector, it’s been quite popular for a long time with huge institutional investors who have coveted these kinds of relatively predictable and stable assets… and it is a part of the real estate world that is significantly less lucrative than owning actual buildings, because of the lower risk and assumed lower operating cost of the net lease ownership.

Cap rate is the shorthand term that real estate investors use to value properties — it essentially represents the current net owner cash income for a building as a percentage of the purchase price, so if you buy a $1 million building that generates $100,000 of operating profits (rent minus operating expenses, generally ignoring depreciation and financing costs), then your cap rate is 10%.

Cap rates have been falling for a long time, largely because of the huge amount of money chasing commercial real estate and the low cost of financing with minuscule interest rates, but the average for metropolitan areas is a little over 6% right now, as calculated by SAFE in their S-11. Ground net leases, in contrast, have a lower cap rate to reflect their comparative safety and stability, so the average GNL cap rate in those same metro areas is roughly 4%.

So that’s the risk, really, that these leases might only generate 4% income in the near future (this is all cash operating income, not including depreciation or stock-based compensation or, importantly, the cost of financing), and it’s hard to grow a 3% dividend if you generate a 4% return on your capital and also have interest payments and management expenses to cover (SAFE is externally managed by iStar, which created the company essentially as a spinoff IPO). Part of the solution is leverage, since these assets should allow for relatively low borrowing costs, but then you still deal with the fact that properties that generate 4% current cash returns have to be financed with either equity or debt, and debt is unlikely to be less expensive than the implied 3% cost of new equity (thanks to the dividend).

The key to making all of this work is probably scale — but it might be that the management fee works against them on that front, since it makes it a little harder to get more efficient as they grow the portfolio. The management fee is being postponed by a year, so it’s in the projections but won’t actually be paid, so that’s a decent boost for the immediate prospects… and the management fee is not necessarily an evil thing, since SAFE has no employees and the management fee essentially acts as their personnel budget, but it is a real cost going forward and if there’s no cap on the fee then they don’t get as much benefit from scale as they otherwise might (your accounting department doesn’t need to grow twice as big just because you own twice as many properties, for example, nor does the CEO suddenly need two cars instead of one as the portfolio grows… you get the idea). The structure of the fee does not seem onerous, the management fee to iStar (STAR) will be 1% of equity for the first $2.5 billion, then 0.75% for everything above that, and it is paid in SAFE shares instead of in cash, but that’s the major operating expense aside from interest and non-cash charges (depreciation and amortization) so it’s worth watching closely.

Which leads me to think that to be attractive enough for me to buy shares they either need to grow the portfolio more quickly to get up to a sustainable level that can generate some gradual dividend growth, or they need to have a lower share price. I like the model, but not at $19 a share right now — I’d rather see some more of the risk removed with something closer to a $15 share price (that would be a 4% yield), or some good additional GNL assets added to the portfolio… perhaps in combination with a secondary offering that might help bring the share price down further. I’ll add this one to the watchlist and set a note to look for their next acquisitions or another 15%+ drop in the share price.

So there you have it… a little buying (Delphi, Altius, Dataram), a little selling (NI Holdings), and not much conviction as we head into the Summer… I’ll let you know what changes, and you can check my Real Money Portfolio[5] to see how it all shakes out. Thanks for reading, and enjoy your weekend!

  1. Friday File a week ago:
  2. noted last night:
  3. the Friday File about three weeks ago:
  4. most recent press release about their 2017 plans and the staking of their additional claims this year:
  5. Real Money Portfolio:
  6. last quarter:
  7. basic press release is here:
  8. here:
  9. wrote about this a while back:
  10. much of North Dakota is in a severe drought:
  11. Wall Street Journal article on that here:
  12. the S-11 they filed last week:

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