Tag Archives: URB-A.TO

Urbana Corp: one year later

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Urbana has been one of the first stocks I wrote about on this blog, and it’s also one of the few investments I have realized a loss on. But after selling my position at the end of last year the fund has gained more than 100%, and a reader asked me a question worth a blog post: “Are you still happy with your decision making process? Should you have had more patience? Should you have re-bought when the company started repurchasing shares again?”

Urbana trading history

Background

I have a lot of new readers since discussing Urbana for the first time, so to summarize the story: Urbana is basically a closed-end fund with the majority of holdings in a few publicly listed financial companies (mostly exchanges, but more recently also banks). When I first bought Urbana it was trading at a ~45% discount to NAV, and buying back ~10% of the outstanding shares/year. Because closed-end funds incur overhead and management costs they should trade at a discount, but when you can buy back your own shares at a substantial discount you also make a lot of easy money. Because of the buy backs I estimated that a fair discount should be between 15% and 20%. Despite this estimate I sold almost a year later while the fund was still trading at a 45% discount.

What happened since?

Urbana is now trading at a 33% discount and NAV/share is up 70%: combine these two factors and you are looking at a >100% return that I missed. I didn’t have a strong opinion on the value of the assets that Urbana owned a year ago, or what they own today. The big increase in NAV/share is in my opinion mostly a random result, and a big contributor to the good result was their position in NYX that was acquired at a premium this year by ICE.

Shrinking of the discount

I don’t feel bad that I didn’t anticipate the good performance of the fund, but at the same time it does show that my initial thesis was roughly correct. Investor sentiment does change, and when you buy something at a big discount there is a decent probability that you can sell it at a smaller discount at some point in the future. It’s not a surprise that this occurs at the same time as the outperformance versus the market (even when it is just a random good year). Closed-end funds just seem very inefficiently priced: when the underlying assets are hot investors are willing to pay a premium, and when they are out of fashion the fund starts trading at a discount. This doesn’t make a lot of sense since changes in value are already reflected in the market prices of the underlying assets: there shouldn’t be a huge variability in the discount itself.

So why did I sell?

I haven’t really changed my thinking about closed-end fund discounts between two years ago, and today. The reason I sold Urbana was a combination of factors that made me believe that a bigger discount than I originally calculated was warranted.

  • Management was investing money in questionable assets: the amount of money invested in this wasn’t big, but when I saw that the fund manager was putting money in leveraged gold ETF’s I thought my assumption of neutral alpha might be too optimistic. I still think this is true: portfolio turnover jumped from 5% in 2011 to 22% in 2012, and the trading expense ratio jumped from 0.08% to 0.63%.
  • Management started investing in a private company that had Urbana’s CEO as a major shareholder. I still think that’s super sketchy.
  • The company was buying back 10%/year of the non-voting class A shares. With the share count of this class getting lower the percentage of outstanding shares that is bought back each year is shrinking. Instead of 10%/year it’s now closer to 8%/year.
  • They use a little bit of leverage, and the interest they pay on their margin loan is relative high. As a small private investor I can borrow on margin a couple hundred basis points cheaper than them.

So when they stopped buying back shares at the end of 2012 that was the proverbial drop that made the cup run over. Every single negative in the list above isn’t huge, but they all add up, and do make Urbana less attractive. I also think that the fact that Urbana resumed the share buybacks doesn’t mean that I was really wrong.

The big question is: what would they have done if NAV/share would have continued to deteriorate? Management had stated that they didn’t want to reduce the size of the fund too much, and the fact that almost no shares were bought back at the end of 2012 when they were trading at all-time lows seems to support that possibility. I think the timing of the repurchases are a further indicator that management isn’t value neutral. They are now buying back shares at full speed while the underlying is up and the discount is smaller.

Conclusion

The above might all sound very negative, but you have to realize that most of those negatives are just minor compared to how big a 45% discount was. But those negatives were enough of a reason to think that I could find a more attractive idea, and I don’t regret my decision to sell just before the big run-up. If I would have had the choice to put either 100% of my money in the S&P 500, or 95% in the S&P 500 and 5% in Urbana I would have gone for the latter, but with many more options available I thought I could find something better.

In hindsight I would have wished I would have been a bit more patience, but I don’t think I made a bad decision. I was just a bit unlucky to miss some positive variance. With value stocks you often buy something cheap, and you just bet that at some indeterminate point in time something will happen that will realize that value. In the case of Urbana that catalyst came early with a great result, but there were many more possible outcomes that were less favorable. Would they have continued buybacks if NAV/share remained low? What would have happened if the underlying assets didn’t outperform this year? What would have happened if the market itself didn’t have a great 2013? The shrinkage of the discount could just as easily have taken 5 or 10 years, and the value of the underlying assets could have gone down as well as up.

Looking at the good results from 2013 is in my opinion simply a form of results oriented thinking. Urbana was a slightly above average investment, but not a great pick. If I made a mistake it was investing in it in the first place.

Disclosure

No positions in any stock mentioned

Exited Urbana Corp

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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.

Disclosure

No position in URB-A.TO anymore

Portfolio review 1H2012

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With the first half of 2012 behind us it seemed a good idea to me to quickly review my portfolio. Not because a time frame this short is really useful in evaluating how good or bad certain picks have been, but a portfolio is not a static entity. Some positions could become more attractive over time because of new developments, insights or changes in price, while other positions become less attractive.

The performance of the various positions is summarized in the table below. As is visible I have a few positions with a small loss and some positions with a pretty good return with SALM being the icing on the cake. I wish I could attribute this to buying undervalued companies with good downside protection, but this is not yet even getting close to getting a sufficient sample size. Besides: the company with the highest return was (and still is) also the riskiest company based on the amount of leverage.

Ticker Purchase Date AVG Price Rating Dividend price Return
ORGN.PK May 10, 2012 1.45 8.5->7.5 0.38 1.45 26.2%
CNRD.PK Mar 29, 2012 16.50 9.0->8.5 – 14.92 -9.6%
SODI.OB Mar 26, 2012 3.09 8.0 – 2.96 -4.2%
DSWL Mar 6, 2012 2.11 8.5->8.0 0.02 2.84 35.6%
SALM Feb 21, 2012 2.65 8.0->8.5 0.07 5.64 115.5%
IAM.TO Jan 24, 2012 0.59 8.5 – 0.59 0.0%
ARGO.L Jan 3, 2012 14.69 8.5 1.3 12.84 -3.7%
URB-A.TO Nov 28, 2011 0.99 8.0->7.5 – 1.02 3.0%
0684.HK Nov 16, 2011 2.21 8.5 0.025 2.09 -4.3%
ASFI Nov 7, 2011 8.33 9.0 0.06 9.51 14.9%

I have also included how I would change the rating of the attractiveness of the various positions based on today’s stock price and information. I have summarized my reasons for the changes below. In most cases more details can be found in the comments on the original write-up or in a followup posting.

  • ORGN.PK: Have to say that this stock really showed the value of this blog for me. Got great feedback from multiple readers and realized that it’s currently trading closer to fair value than I initially thought. The positive return thanks to the fat dividend is purely luck and only showed I didn’t fully understand the risks (and luckily in this case the rewards!) of the interest rate swaps (now terminated).
  • CNRD.PK: Small re-rating based on some errors in my original write-up, mainly because there was less excess cash on the balance sheet than I thought.
  • DSWL: I’m more convinced than ever than I’m right that it isn’t a fraud thanks to the increase in regular dividend plus a special dividend this month. But since the stock price is also up a decent amount I think it’s less attractive today.
  • SALM: It’s up a lot, but still trading at a near 20% FCF yield. The refinancing possibility next year (missed this in my first write-up) and massive insider buying after I bought it are the reasons to upgrade my rating. But it was a close call: the increase in share price is obviously not positive for the risk/reward ratio.
  • URB-A.TO: The discount has been getting smaller since I initiated my position, and the recent transaction was also a small negative development.

So far there isn’t anything in my portfolio that I think I should sell right now. Cash is in my opinion one of the least attractive assets with an almost guaranteed negative real yield. But if a better opportunity comes along I do have two positions on the hot seat.

Disclosure

Long everything mentioned in this post.

Urbana update

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Urbana Corporation issued a press release yesterday announcing that they have bought a 15.6% stake in Caldwell Financial Ltd. Urbana is managed by Thomas S. Caldwell who also owns 45.14 percent of Caldwell Financial. So this transaction looks in my opinion pretty bad: it could be a nice way for insiders to cash out of Caldwell Financial at the expense of the Urbana shareholders. I don’t know if this is indeed what happened. The press release is short on details and while insiders own a total of 69.3% of Caldwell Financial they could have bought the 15.6% stake from a third party.

While my initial thought was that as an Urbana shareholder I was getting screwed pretty bad the potential loss of value seems minimal. In the weekly NAV update the company already disclosed earlier this week that they own 700,000 shares of Caldwell Financial with a cost price of just 1.5M (just a bit more than 1.3% of NAV) and based on Urbana’s latest Annual Information Form this position is indeed the 15.6% stake. It discloses that TSC owns 45% or 2.2M shares of Caldwell Financial. Based on this the 700,000 shares would translate to a 14.4% position: close enough to the announced 15.6% number.

So while I still think the transaction is very questionable there is no big loss of value, and I’m not yet selling my position. But Urbana is certainly moving up in the list of things I could sell if I find another good idea.

Disclosure

Long URB-A.TO

Urbana Corporation update

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Urbana Corporation, in essence a closed-end fund focused on stock exchanges, released it’s annual report for the year 2011 previous month. Initially I didn’t intend to write an update because the report didn’t really contain any news. The company is publishing an overview of it’s NAV and portfolio holdings every week, so there are no surprises with regards to the portfolio performance or the number of shares bought back. Urbana is steadily buying back shares, reducing the share count from a peak of 87.5M in the beginning of 2010 to 72.5M now. Since the company is trading at a significant discount to NAV those share buybacks add to the value per share for remaining share holders in a meaningful way (the discount was around 45% when I initiated my position in November, and is currently still around 40%).

The reason for this post is that my original write-up didn’t include an estimate what a fair discount for Urbana is. It’s easy to understand that the current discount is too high: the company is buying back 10% of shares per year, and with a 40% discount that would result in a growth of NAV/share of 4.44%:

(InitialNAV - CostOfBuyBack) / NewShares = NewNAV
(1 - 0.06) / 0.90 = 1.0444

At the same time the company has ~3% in overhead costs per year, so thanks to the buybacks Urbana should currently have a portfolio that is capable of outperforming the market with 1.44%/year. And a fund that’s capable of outperformance should trade at a premium! But this of course can’t be true for Urbana since the outperformance can only be realized while trading at a discount and it certainly should trade at some discount because of the high fees. What we want is to find an equilibrium where the fees of the Urbana corporate structure are exactly cancelled by the share buybacks.

Before we can do that we need to take a look at another variable: the expected return of the portfolio. If you would for example expect that the equities in the Urbana portfolio have a return of 6%/year in the long run it would imply that a discount of 50% would be fair if the company would not be buying back shares. With a 6% return and a 3% expense ratio you would basically have a situation where 50% of the earnings are siphoned off. With a higher return assumption a fair discount would be smaller since you would need a smaller part of the asset base to cover the fixed 3% costs.

Major assumptions:

  • The expected return of the URB portfolio is equal to ‘the market’ minus 3%
  • A fair discount for URB is when it returns ‘the market’ after fees
  • The company continues the share buybacks indefinitely
  • The company does nothing else to close the gap to NAV (liquidate, self tender)

With some crude Excel work to include the effect of share buybacks I get a fair discount of 14% when we assume that the expected future market return is 10%, and a fair discount of 20% when the market return is 4%. So I think it’s safe to say that a discount around 17% would be appropriate for Urbana Corporation.

And while I’m waiting for the gap between the current ~40% discount to close to less than 20% I’m owning an asset that should outperform the market with ~1.4%/year. So unlike a lot of other asset based plays I don’t really care how fast value is realized. Either the discount remains big and I can make money because the company can grow intrinsic value at above average rates by buying back shares, or the discount simply gets smaller. I would prefer the last option, but it’s not a situation where you will end up with terrible returns if it’s going to take ages before this happens.

Disclosure

Author is long URB-A.TO, and short a little bit CBOE and NYX as a partial hedge