Urbana Corp has been one of the first write-up’s on my blog. I initiated my position almost a year ago, and the thesis was simple: it’s a crappy closed-end fund, but it’s trading at a big discount and it has a buyback program in place that should easily generate more value than what’s disappearing due to management costs, trading costs and other expenses.
While Urbana announced a new share repurchase program at the end of Augustus it seems to me that it has stopped buying back shares after just a few weeks. Today the company has exactly 70,000,000 shares outstanding (10,000,000 common shares and 60,000,000 non-voting shares). The share count has remained at this level for the past few weeks, and while the repurchase program was paused in the past it’s a suspiciously round number. Combine this with the statement below from the CEO (made last year):
We do plan to build this company and our goal is significantly above its current size. I would not like to run our size down too much.
And it seems to me that the company has reached the number of shares they are willing to repurchase. Given the fact that a big part of my thesis was based on the value created by the buybacks it seemed like a good idea to reconsider my position in the company. Unfortunately the discount to NAV is back at the level of when I bought my position (~45%), and in the mean time NAV/share has been going down even though the company did reduce the share count from 75.5M to 70.0M. The result: a loss of approximately 9.1 percent.
No position in URB-A.TO anymore
Is there any insight worth mentioning that you took away from this investment? When reading all your Urbana posts from start to end I feel like you give a little bit too much credit to management doing ‘the right thing’. This was mentioned by a few readers of your blog. You made a very nice mathematical analysis but half a year later one of your major assumptions breaks down. How would you have estimated the chance of that happening in advance? And now?
Good question! Guess I should have included the answer to that in my post.
I would say that my main assumption was not that management would do the right thing, but that management would do what would be in their best interest, but that this would include continuing the share repurchase program for the foreseeable future. While it is unclear if I’m in fact correct with the assumption that the repurchase program has effectively been suspended, I think it’s fair to say that I underestimated the probability that the program would be suspended within a year.
I’m still curious to see how this is going to play out in the long run: fact is that there were forces in the past that caused the company to start buying back shares when the discount was significantly smaller than today, and those forces are most likely still there.
And would you make a similar investment again in hindsight?
Yes, but I would focus more on ways that you can get screwed as a shareholder at the expense of insiders. The earlier than expected termination of the repurchase program was just – to use a nice Dutchism – “the last drop that makes the bucket spill”. Urbana was already moving up on the list of things to sell because of BS like the investment in Caldwell Financial and the trading of levered ETF’s (Only logical explanation for this is imo that Caldwell is getting some kind of kickback from the dealer). I also should have accounted for the leverage that the company uses. All small items, but they do add up.
I do think the 45% discount combined with the share repurchase program is enough to compensate for that, but the potential alpha of the idea was lower than my first estimate. Given the fact that it was already from the start not one of my best idea’s I would only buy a similar investment when I’m really running out of idea’s. Or it would have to be a better idea than the original investment because expenses are lower, discount is higher, or something else.
And will you rebuy if the fund manager had a valid reason for stopping buybacks for a few months? Personal issues, something regulatory, insufficient liquidity or whatever.
See the post above :).
The tip-off for me (if I recall correctly) was that the financial incentive for Caldwell was to just keep collecting his fees. Bringing up the share price would not have benefited him quite as much over a period of time.
Also, real value destruction under his management, historically.
Unfortunately that is almost always the case for closed-end fund managers. Caldwell does at least have a decent amount of his own money in the fund.
A bit more patience was required. Right after you sold Caldwell started buying back shares. They’re on track for 8.5m shares this year .. On top of that you were a bit unlucky with the NYX deal going through .. On top of that the discount to NAV decreased from 45% to 35%.
I would be very interested in a re-evaluation 1 year later. Are we still happy with the decision making process, both for buying in the first place and selling after two months of no buybacks? As a hindsight specialist (annoying as they are) I can inform you that there had been dry spells of weeks without buybacks before (also at round levels).
Did you reconsider opening a position in march / april when Urbana bought back over a million shares @ 45% discount? Or was the was the temporary stop of buybacks just a catalyst for selling and was the real reason that you were uncomfortable with the behavior of Thomas Caldwell?