The End of Nautilus

The End of NautilusTwitter_NautilusInc

This week marked the conclusion of an investment initiated nearly five years ago.  Nautilus is a local company based in Vancouver, WA that has seen tremendous success, been on the brink of bankruptcy, and now has returned to a measure of prosperity.  My initial investment thesis finally proved correct, but it took a few years longer than I’d anticipated.  All in all it was a profitable position and demonstrated that fundamental analysis and patience is still a viable philosophy. For more information read what the Oregonian had to say following Monday’s conference call here.

Importing Economic Policy From The Land of the Rising Sun

Japanese FlagAfter the initial shock of the Japanese triple tragedy (earthquake, tsunami, & ongoing nuclear) wore off and it’s reality set in, I began to ponder what if any long term economic implications might arise as a result.  Commonwealth (my broker/dealer) recently issued a statement outlining their assessment of the situation which says the whole problem is “surmountable.”  This is consistent with the “that which doesn’t kill you will make you stronger” ethos, however my apprehension isn’t so easily assuaged.

There will likely be supply shortages for products manufactured (or partially manufactured) in Japan and while this will be an inconvenience the bigger concerns are what Japan decides to do with it’s investments in the United States and the consequences of the nuclear situation.   It’s not hard to imagine a scenario where the Japanese government reduces it’s foreign investments as a way of partially funding the massive cost of rebuilding.  Even if they make a graceful (systematic and measured) exit the reduced demand for treasuries would result in increased borrowing costs for the US.  With the amount of debt our country carries this additional interest expense would be immense and with our own economic challenges lingering (and on the horizon) repayment without dollar dilution and inflation is optimistic at best.  The primary argument against this occurring is the amount of exports from Japan to the US and what they would do with the surplus dollars if not buying US treasury bonds.  While this certainly sounds plausible, it may be another case of past experience not necessarily applying to the current (trade) situation.

Over the last decade, exports to the US have fallen by ~$51 billion annually despite a $217 billion increase in overall exports.  “Our” economy now accounts for just 15% of Japan’s exports.  Over that same time period China became a major importer of Japanese goods accounting for 19.4% of total exports, up from a mere 7.7% in 2001.  China has become the lynch pin of global trade and yet the US only accounts for 5.8% of their exports (at least directly, these numbers to not account for items sent from China to other countries that ultimately make their way to the US).

The nuclear situation is by no means finished and may end up being a far bigger challenge than any economic “inconvenience” we’ll likely face…but I’ll save that for another post.  I’m still ruminating on the investment possibilities and economic ramifications of the situation as it is (and continues to develop) but it’s clear that we (in the US) are more subject to the decisions of politicians in Japan and China than we realize.

Bloomberg is the source of the export numbers, view the full detail here.

110228 KBS REIT 1

If you are an owner of KBS REIT 1, you may have or will likely receive a letter from CMG Partners.  The purpose of this letter is to encourage investors to sell shares at a heavily discounted price in exchange for liquidity.  While I concur that the commercial real estate market has had it’s difficulties and KBS has experienced some challenges associated with market conditions it is my recommendation to hold the shares and ignore the offer.

CMG Partners is in a class of funds whom I have not so affectionately termed “Vulture Funds.”  It is a moniker I’ve given as a result of their propensity to prey on investors at inopportune times for excessive profits.  In the case of the current KBS offer they make several statements as a pseudo justification for the ridiculous offer of $1 per share or, an 86% discount to the recently completed December 2010 value.  I’ll respond to their statements here:

KBS REIT is not listed on any exchange…”
Agreed, it is by design a non-traded REIT and is in fact one of the reasons I used it in portfolios.  Investor behavior is a key variable in determining investment returns and many retail investors buy or sell as a reflection of their emotions about the market or a given investment.  This has historically been a poor indicator of future performance and a chief obstacle to achieving the buy low, sell high goal of investing.  Reasons for this dynamic are quite simple: buying low is generally done during a time of turmoil and therefore doesn’t “feel” good.  Conversely, selling high typically comes at the opposite end of the emotional spectrum when doing so may give the appearance of missing out.  Like many things in life, doing the right thing doesn’t always feel good in the moment.

“…our price is not reduced by any commission or fees…”
No reduction was necessary, the $1 per share offer leaves plenty of opportunity to profit after transaction expenses.  Knights in shining armor they are not.

“Even though KBS was supposed to have listed their shares in 2012…”
KBS like many firms did not anticipate the near collapse of the financial markets in 2008 nor the subsequent recession we’ve endured.  To expect any company to dogmatically hold to guidance made prior to such historic events is either foolish, uninformed, or both.  Naturally, an initial public offering (IPO) or other liquidity event, if all had gone as planned, would be welcome.  However, in light of present circumstances attempting to do so now would be ill advised and probably not accomplish what patience and little time may afford us.

“…it was the only non-traded REIT to purport to have an increase in share value from 2009 to 2010…” Two points here: Firstly, they didn’t purport anything, the share value assessment isn’t an arbitrary figure and report would have been a far more accurate term.  Second, the increase is likely a result of the “house cleaning” they did in 2009.  KBS management indicated that any questionable asset or investment would be written down for the initial share value assessment in an effort to provide a conservative valuation and avoid an annual repeat of charge offs.  At the time they also indicated that some of these accounting maneuvers would likely be reversed resulting in subsequent improvements in share value.  Combine this with leases made to companies such as Coca Cola and G & C foods as well as other operational improvements and a share value increase can easily be justified.

Lastly, they made a (hopefully) critical error in their offering price.  By offering only one dollar they created a rational reason for investors not to sell.  In making the risk to return ratio severely asymmetric (an 86% loss if sold) investors are likely to assume (and correctly so) that there isn’t much more to lose, but a whole lot to potentially gain.

Please contact me with any suggestions regarding this matter, otherwise shred the letter from CMG Partners and get ready for spring.

110307 Wells REIT 2

When it rains it pours…or so I thought when my inbox alerted me to the presence of the latest Wells REIT 2 message.  It seems like anytime a sponsor attempts to communicate with investors directly it usually means I have to translate their “communication” into something people not employed in the financial services industry can comprehend.  This time however, I was pleasantly surprised.

The letter you will be receiving is well written, to the point, and should be easily understandable.   And, as if a well written letter wasn’t enough, they also recorded a short video with Chairman Leo Wells himself explaining what they did and why.  The buttons below will take you to a copy of the letter (in case you haven’t received it yet).

Investor Letter
Leo Wells Video

As always, if you have questions please contact me and we can discuss them.