Yet Another Value Podcast - David Capital's Adam Patinkin Updates the Vistry Thesis $VTY

Episode Date: April 5, 2025

In this episode of Yet Another Value Podcast, host Andrew Walker welcomes back Adam Patinkin of David Capital for his third appearance—this time for a much-requested update on British homebuilder and regeneration specialist Vistry (RY). Adam originally laid out a bold thesis in early 2024 that Vistry’s transition to a pure-play partnerships business could mirror the NVR success story. But after a string of profit warnings and a collapsing share price, listeners wanted answers. Adam walks through what went wrong, why the company’s current valuation doesn’t match its fundamentals, and why David Capital doubled its position. The discussion probes management credibility, capital allocation, and how UK government policy is now aligning with Vistry’s strategy.______________________________________________________________________[00:00:00] Intro and sponsor message for upcoming AI & finance webinar [00:00:40] Andrew welcomes Adam Patinkin for a follow-up discussion on Vistry [00:01:29] Context and disclaimer before discussing UK-listed stock Vistry [00:02:18] Adam gives a quick overview and update on Vistry's journey in 2024 [00:02:58] Explanation of David Capital doubling their position in Vistry [00:03:59] The original investment thesis in Vistry: value plus catalyst approach [00:04:51] Breakdown of Vistry’s two segments: partnerships vs. housebuilding [00:06:58] Thesis: Transition to a pure-play partnerships business [00:08:34] Discussion on profit warnings and their impact on investor sentiment [00:10:13] Details of Vistry’s missteps and housebuilding write-downs [00:12:29] Analysis of the market's reaction to one-time losses [00:15:29] Third warning due to delayed land sales and management's response [00:16:34] Clarification of misunderstandings around ongoing losses [00:17:57] Adam frames the four-part thesis and which parts still hold [00:19:09] Reaffirmation of medium-term targets for partnerships [00:20:54] Discussion on pace of housebuilding exit and management's actions [00:23:34] Ongoing share buybacks and potential for expansion [00:24:37] Breakdown of customer segments in the partnerships business [00:26:19] UK government's budget and policy impact on affordable housing [00:31:14] Overview of supportive labor government housing initiatives [00:35:05] Cash flow expectations from capital employed reduction [00:36:29] Valuation commentary and mispricing opportunities [00:37:54] Assessment of credibility and investment upside [00:41:51] Discussion on net debt figures and transparency [00:43:40] Capital structure comparisons with other builders [00:46:21] Considerations around lower buybacks vs. future flexibility [00:49:10] Why Vistry still represents compelling value despite concerns [00:52:08] Differentiating Vistry from UK housebuilder peers [00:55:05] Clarification of the NAV not falling due to deferred land sales [00:57:21] Framing margin of safety by cash flows rather than asset base [00:59:54] Summary of company positioning, tailwinds, and outlook Links:Daloopa Webinar: daloopa.com/yavwebinarDavid Capital: https://davidpartners.com/See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

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Register now at dilupa.com slash y-A-V webinar. That's the LUPA, D-A-O-O-O-P-A-V webinar for the April 15th, 1 p.m. Eastern webinar. and get ready to uncover the truth about AI and finance. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have one.

I believe it's for the third time, my friend and one of my favorite people in finance, Adam Patinkin. Adam, how's it going? I'm doing well, ma'am. Thanks for having me back. I appreciate it. A double header this week. You know, long time, I say long time in quotes because listeners don't know this.

We recorded one podcast. earlier this week. I was hoping to have it up right before we recorded this, but they will hear that soon, and then boom, double header coming back on. Look, we've got a lot to talk about today, so I want to hop into it. I'll start with a quick disclaimer, remind everyone, nothing on this podcast investing advice. Please do your own work, consult to financial advisor. Always true, but we're going back across the pond to talk about an English stock. So, you know, foreign stocks for my domestic listeners, maybe carry a little bit of heightened risk. Everyone should keep all that in mind, consult the financial advisor. Adam, company, I'm so happy to have you back on,

because I think the most frequent requests I've gotten over the past year is the Adam Patinkin podcast on Vistri was great. I will, all of my podcasts are my baby, but it was one of my favorite podcasts. I learned so much and had so much fun. People can probably remember that because it was like almost a two hour long podcast. We were jamming so much. So an update on Vistri has been the most requested podcast I've had. Vistri just reported their full year results earlier this week, so we planned the update for it now. I want to dive into everything that's happened to the Bistri over the past year.

But maybe just quick, I'll link to the first podcast in the show notes for people who want the background, but maybe just quick, 30 second, one minute reminder. What is Vistri and kind of what is the overall thesis before we start updating it? Yeah, of course. And, you know, again, I'm happy to go through all of this and share this update. And thanks for having me back on to do this. So I originally came on to the yet another value podcast a little over a year ago. So it was the beginning of January in 2024.

And at the time, Vistri stock was around 900P. Over the course of 2024, the company delivered on a lot of the things that we had outlined. And it was up over 50% at one point. And then it went down by over 50% from there. and it is now trading around 600p. Now, just to get it out of the way, I don't want to bury the lead here. At current levels, we have doubled our shareholding. So we have not sold.

We have not maintained a neutral stance. We have doubled our shareholding. That is not a, you know, I'm not telling anybody to do the same thing. Please do your own work. This is, you know, merely me sharing what we have done. And I feel like I owe it to your listeners to talk through what happened and what our views are today and to explain why we've doubled our shares and why we feel that this is as compelling a setup as it's ever been. So I think that that broadly is

my intro, and I didn't want to bury what my take is or what my evaluation of it is. Obviously, in every situation like this, you run the risk of, you know, sunk cost fallacies or being too far in it and being biased. I think we do our very best at David Capital to be as objective and fact-based and evidence-based as we can. And I think that this is the determination that the facts support. So that's where we are. Should I jump into the thesis a little bit? I think it would probably be helpful to review the thesis.

So maybe to just jump to the investment thesis, and I know you can go through the full thing in our prior interview, David Capital, our approach to investing, we call value plus a catalyst, value plus a catalyst. And what that means is we are looking for, for securities that are meaningfully undervalued, relative to our assessment of intrinsic value, and they have a clear catalyst event path

that we can point to, and we can say, this is how an undervalued security is going to become fairly valued over time. And so it's not just that we've got a margin of safety because we're buying a stock this cheap. It's also that we have the ability to achieve attractive returns based on the time value of money, because we've got that clear catalyst driven event path.

In this case, it was a very, very clear thesis. Vistri had two businesses. One is their partnerships business and one is a house building business. The partnerships business is a crown jewel business. It is a great business. High returns on capital. Over 40% Roki, which is returns on capital employed is what they call it in the UK, growing three X GDP, low cyclicality, asset light, fast asset turns, high barriers to entry. So a significant competitive mode, the dominant number one player probably 50x or more bigger than the number two, all of the characteristics that you'd look for in a great business, that is what Vistri's partnerships business is. The house building business is kind of

the inverse of that. It's a mediocre business. Returns on capital approximately half or a little less than partnerships, so around 20%, growing in line with GDP, highly cyclical, asset heavy, low barriers to entry. Those are all the characteristics of a house building business. And so our thesis was very simple. Become a peer play partnerships business. Exit your house building use the excess capital generated from exiting it to buy back shares that are meaningfully undervalued because the company is being valued as if the whole thing is a house building business. And you essentially can create what we call NVR on steroids. So for your listeners, NVR is one of the three best performing stocks in America over the last 30 years. It's done 30% a

year. And they've done it by following this model, being a pure play asset light house building company that uses all excess capital to retire shares, to buyback shares along the way. And our thesis was really that this is even better than NVR because this tree's partnership business has higher returns on capital than NVR, is growing faster than NVR, and is starting at a lower valuation than NVR. And you put those three things together, and I think that you've got a recipe for really attractive returns. It's why we're involved here. So, you know, ultimately, That's what our thesis is. It's three things.

It's partnerships is a crown jewel business. It's that Vistri is going to become a pure play partnership's business, and that industry will use its excess capital to buy back shares along the way. Perfect. So that's a great overview. And again, people, we tore apart this business model in the first podcast. So people can go listen to that if they really want to dive into different pieces. Let's go to the update.

You know, I think things, as you said, are tracking along. If I remember correctly over the summer, they start the share repurchase. Like the share return, capital return was a big piece. of these is over the summer. They start that. The stock's ticking along, getting closer and closer to kind of where you're thinking fair value is or, you know, maybe it's a lot higher because it's MBR and steroids. It's a compounder over years. And then if I remember currently, it's in October, they have a profit warning. And then in November they have another, it just keeps coming. So over the past, let's call it six months. There have been a lot of profit warnings, a lot of

disappointments. And that's leading up to the conference call that they just did two days ago where they say, hey, share buybacks are going to be lower, are just lots of stuff. I just want to say over the past six months, what's kind of happened that all these, they called them headwinds. They faced unbelievable headwinds since they released their medium term plan 18 months ago is what they called it. What are these headwinds they're running into? And why do you think the, do you and probably the company think these are headwinds

and not signs that the thesis is off track or something else is going on here? Yeah, absolutely. So to maybe think about this from the perspective of the thesis. Fundamentally, what does value plus the catalyst mean? It fundamentally means that we are looking for change. We are looking for a business that is changing from one thing to another, from a lower quality business to a higher quality business, from a less profitable business to a more profitable business.

We are looking for change. This is not looking for a business to keep doing what it's done for 10 years or 30 years. This is looking for a business that is going to improve itself, and that improvement is what's going to drive returns. But sometimes when there's change, there can be hiccups along the way. And so whenever we look for investments, we're very disciplined in looking for companies with clean balance sheets, with great management teams, and with positive free cash flow. Our view is, if you're going to invest behind change, that there almost inevitably will be

hiccups along the way. And so you need those three things as buffers to allow you to get through to deliver ultimately the reward that that change will bring. And so fortunately, Vistri has all of those three things. things. They have a great management team. They have a clean balance sheet and lots of free cash flow. But to kind of go through what the heck. And so I think that they're going to be able to navigate this. I mean, that's kind of the punchline. They're navigating it. They're resolving the issues. In fact, essentially all the issues are now almost fully resolved at this point.

But let's talk about what they work. So the company is transitioning to being a partnership's business. And the management team used the 80-20 rule. They said, we're going to spend all of our energy on the 80% that matters, which is the partnerships business and the house building business, which is in Windown, literally just delivering sites until they're done or selling the sites that haven't been built yet. You sell the land or you sell the partial sites. They're in liquidation, effectively, of that house building business. And they took their eye off the ball. And the house building business is where the hiccups happened. So there was a profit warning. As you mentioned, there were three profit warnings. They were.

all in Q4. Two of them were on the same subject and really the same profit warning. I think the third one was a little bit different. But what happened? So they took their eye off the ball. And in one division, the company has six divisions in their South division, which was the only division run by a house building executive and had a significant house building presence in that division. They had a subset of that division, which was all legacy house building. And And it came to the management team's attention during their annual budgeting that there were some issues in that house building business, in the legacy house building business. In the UK, you are required. Anytime you think that profits are going to come in either 10% high or low from where a consensus is, you have to announce it immediately.

You can't wait. In the U.S., you can wait. You can announce it at your next earnings results. In the UK, they require you to come to the market with that immediately. And so the company discovers this on a Friday and they report it on a Tuesday. They race through the weekend and they do their best estimate. And what they estimate is that there's going to be a 115 million pound right down in their house building business. Now, this is a company at the time worth $4.5 billion.

This isn't the end of the world. It's a one-time, one-off impact in a legacy business of $115 million. But the market reacts as if it's an ongoing profit loss that's never. coming back and the market capitalizes it. And so essentially the market cap drops by two billion, even though it's a one-time 115 million pound write down. Now, the company then goes through its full review. They hire a phone, you know, a fire breathing auditor to come in and do a line-by-line evaluation of every single business in the entire company, not just house building, but the entire company. And what the audit firm comes up with is that partnerships is totally

fine. There are no problems in partnerships. It is great. And all of the targets and earnings power and everything else the company has put out is totally fine. But they were incentivized to pull every possible expense out and report it as a one-off because the last thing an auditor wants to do is to leave some expenses unfound. And so they pull all of these expenses out. And once they're done with this a month later, the company comes out and reports, hey, it's not 115 million. It's going be 165 million. So they increase it by 50 million to reflect these additional costs that the auditor identified. Was it really additional costs or were those kind of one-time things or, you know, the normal course, you know, something's coming a little bit better, something's coming a little bit

worse. I don't know. I think you probably could make an argument that the 115 was the right number, but they came out with the 165 and that's fine. That was it. 165 million write down in the house building business. Since then, the company has said that there are no additional write downs there. There were none in January. They were none this week in March. That has been fully contained. The company has fully replaced the management team that oversaw this, and they've accelerated the exit of the house building business because of this. What is kind of even more important in a way or just as important is not all of that as a cash cost. In fact, the cash cost is less than 100 million out of the 165. And so if you were to say, kind of on a blank sheet of

paper, what is the economic loss to shareholders here? It's less than 100 million on a business that should be worth many billions. And so when you look at the share price dropping by, you know, between two and three billion at this point, I would characterize that as a pretty you know, incongruent reaction relative to what the actual economic loss was here. At the end of December, there was a third profit warning. The third profit warning, I'm not even sure if you can even characterize it fully as a profit warning. It was essentially that the company had a number of land sales agreed to. And at the end of the year, some of their buyers noticed that Vistri had had these two profit warnings, and they tried to chip them.

They tried to come in and say, hey, we're going to retrade the price on this deal. And Vistri said, no, we're going to walk. We're not going to do the deal. We'll push those sales into next year and not do them now. And that's exactly what I would want them to do, right? That's exactly what a good management team does. They say, you know what, I'd rather report a profit warning now than to do something worse for the business, especially if I can just re-agree to these deals 60 days from now at better prices.

And so, lo and behold, what has happened, a lot of these buyers have already come back and agreed to the deals on the original terms. So it was absolutely the right thing to do, but that was a very different thing than those, than the write-downs, which was really just one write-down. It was just they had to report it very quickly and then to report it more conclusively. As a result of this, the share price dropped from 1,400P down to 600P. And so, you know, as we kind of think about the investment thesis now, you know, I think that those are the things to consider, right? Where the share price is, whether our thesis is still intact, and, you know, how we think about the management team, its credibility and the business's ability to underline these

and to really have them in the past. So, well, what, that was a great overview. I've just got a lot of questions. And again, I think, I can't remember I told you before we started recording or right at the start, but I had so many people who were shareholders and they said, they've done work here, but they're like, look, Adam is the axe. I really want to get, I really want Adam's take on it. So let me ask, my, the thesis to me was, as I had one share overlay out, the thesis to me was four points.

One, partnership is a great business. Two, starting in 2024, we're going to generate a lot of cash. from the partnership business. Three, starting 2012, because we're shifting more to the partnership business and winding down kind of the high capital, low, more commodity-style home-building business, we're going to generate even more cash because we're going to release it from that legacy building. And then four, we're going to take all that cash, and we're going to buy a ton of shares. And I do hear you on the profit warnings. I think this comes to a lot of the role, but I guess when I hear that, I say, okay, number one might still be true. Probably true. I think

the partnership business is a good business. But at this point, number two is in question, number three is in question, and number four is in question. So I look and say, hey, like three of the four points here are kind of off track. And maybe those are one-time headwinds. But, you know, on the call, they're talking about this year, they're really not going to buy. They're going to buyback a little, but it's not the same amount of buybacks that I think everybody was hoping for. The cash flow is looking wonky. I had a lot of people inbounding me and saying, hey, can you help us understand how they talk about getting to their net debt number for the year. And like, those aren't the questions you really want when you've got this great capital-like

business. Like it just doesn't, right? So I guess I threw a ton out at you. I'd love to talk about all those. And I guess the overarching question that is there. And you mentioned at the end is like management credibility. You've had, you know, sometimes there's one cockroach in the kitchen, but they had three profit warnings, including one they dropped on Christmas Eve. I think people are just like really hesitant around this business right now. Yeah. Look, that's obviously, fair like a company needs to reestablish credibility when you've got the profit warnings. But again, it was really one profit warning here, which was around the write down. So they missed. That's totally on the management team. They missed that in the legacy house building business that is in liquidation.

But it was split up into because of how the audit review went. And again, the the deferral of some of the land sales, that's not profit lost, right? That's profit deferred. That's not really a profit warning. That's the profit deferral. And so when I look at this, I think it's really one profit warning and the company has got its arms around it. I think that when you think about the investment thesis, I would articulate it slightly differently. And this gets down to first principles, right? Always think about things in first principles. What fundamentally is our thesis here, right? And I think it goes to the three things I said at the beginning of the podcast, which is number one, is partnerships broken? And I think the answer is clearly no. I think the partnership

business is every bit as good, if not better, than what we had anticipated it would be. And we know it because the company has now, they put it under review. And then two days ago, they formally came out and said, we are reinstituting all of our medium term profit targets, 800 million of operating profit, 40% returns on capital, 5 to 8% annual revenue growth, and 12% operating margins in the partnership's business. They did this after doing an exhaustive line-by-line review, not just internally, but using third-party auditors to make sure that this is real

and every single line item is fully vouched for and supported. I feel a lot better about that than 12 months ago. You're telling me that it's not just the management team saying it, but they've had an exhaustive analysis done of it at every effort, coming from every direction, like the partnerships earnings power is real. It's been reaffirmed. They are going to do it. And I think that should give more confidence in the thesis, not less.

The second one is, are they going pure play partnerships? On the earnings call, Greg Fitzgerald, the CEO, came out and said that they have moved more in the last three months towards a pure play partnership business than they had in the prior 12 months combined. And to me, that's music to my ears. That's exactly what I want to hear. This is, I think that they're recognizing just they got to get out of house building. That's where the issues are.

Partnerships is beautiful. And they're accelerating their exit from house building. They have replaced, you know, essentially the entire leadership team at Vistri is now 100% partnerships people. There's no one left from house building. And house building is aggressively being wound down. The last bit is. Can I just pause you there? Because that the three months, more than we did three months in the past three months than we did in the prior 12, it was one of the lines that

really jumped out to me because I was like, look, this is what you want, right? Like, if you think partnerships, Scoundrel, you want them running to it. But I guess it also, maybe this is, because I'm a little skeptical at this point, too, I was kind of like, you know the hot dog meme where the guy is in the hot talk soup and he's like, we're all trying to find the guy who did this? I kind of looked at it and I was like, well, you guys were in charge of the company the prior 12 months. So I love that you've got a fire lit under you the past three months.

But like, why did it take the price? profit warning and everything. Do you think, like, do you think they were, I don't know, I was just, it's not like they took over and then they said, oh, those prior guys weren't moving fast enough. Like, they were in charge the whole time. So do you think it was just the profit warning like dawned on them, hey, how risky the home building business was? Or do you think there was something else going on with that? Yeah, I mean, I think that the main answer that I would have is that they were so focused on the partnerships business and growing the partnerships business and putting the institutional, you know, foundation behind it,

getting the system set up, getting all the processes right across what's going to be a very large business over time and is the number one house builder in the UK right now, that they weren't focused on house building. They said, you know what? These are house building guys. We're going to let them run and then these businesses will run off and then they'll disappear. They weren't as hands on. And this is the fault of the management team. They weren't as hands on with the house building business. Oh man has that changed. This is very much in the center of the sites of the management team to make sure that there are no more problems in house building and that this business gets gone, that it gets exited.

And so, yeah, I think that you're progressing where this business is going to be a pure play partnerships business faster than what we had been baking in when we first did our podcast interview. This is coming a lot sooner. And I think that's a good thing. As soon as this is a pure play partnerships business, again, partnerships has had zero issues here. As soon as this is a pure play partnership business, that is the biggest risk off the table for the investment thesis for Vistri, and this thing can fly. And I think it's really

good that they're accelerating towards being a pure play partnership's business. The last point I just wanted to mention, the buyback of the shares. So they actually accelerated their share buyback a little bit this week. It wasn't a whole lot, but if you look at it, they bought back, I think that they said they bought back 38 million pounds over the last six months, and they're going to buy back 92 million pounds by the beginning of 2026. So essentially over the next call it nine months, they're going to be buying back 92 million pounds. And so yeah, I don't know, that's something like a 50% increase in the share in the in the pace of the share buyback. Let's see if they actually do it or not, but that's what that's what they said.

But I don't think, look, I don't think that that's where our focus should, like they're buying back shares every single day, and I hope that they continue to do it more aggressively, but I think that they will buy back more aggressively, and I think that there can be potentially some special, you know, some extra share buybacks that come in. And the reason is, in a way, it answers the question, why hasn't the share price recovered? And why has David Capital doubled our position size? When you look at Vistri's business right now, the partnerships model, I think if you remember from our first conversation, it has a diversified customer base. They really are selling to three

different end customers. One is PRS buyers, which are large institutions that are buying units to use as rented stocks. So they're going to go out and rent them to people. The second buyer are open market sales to homeowners who are going to live in the properties. And then the third one is affordable housing that they're selling to housing associations, which are not-for-profits that buy and manage affordable housing, or to government entities, especially to local authorities, which are essentially regional governments in the UK that also maintain affordable housing stock. PRS sales are very strong right now. They're up nicely year on year. Open market sales are very strong right now. And Vistri came out and said that PRS is doing very well and that they are experiencing

a bump in open market sales in line with where the rest of the sector is. And so really, you know, the stock fell a little bit this past week. And I think the most important reason it fell was because the Vistri reported its sales rates were not quite, did not have quite the same pickup that other house builders have been reporting. And I think that people have been asking, why has that been the case, and all of it has come from affordable. And the reason why affordable sales have been a little bit lighter is because the UK government operates through five-year plans where they allocate a certain budget to affordable housing. And under the most recent five-year plan that the British government came out with, it was essentially just over 12.5 billion pounds

that the government allocated to affordable housing over five years. It was just over that. So it was actually about 2.6 billion pounds per year. We're coming to the end of the five-year plan. And so by this point, almost all of the funds have been allocated. And there's kind of an air pocket that we're hitting right now that started in Q4 and into Q1 a little bit, where the new labor government has come out and said very strongly. They're going to allocate a ton of money to affordable.

housing, but there wasn't certainty around when that money would come through and what exactly it would look like. Now, the labor government has topped it up, not once but twice. So they took the $2.6 billion this year. They added $500 million to it. I mean, even though the UK government, their budget is in not perfect health right now, they added $500 million to take it from 2.6 to 3.6 to 3.1. Then they topped it up again from 3.1 to 3.4. So these are really positive signals. And then ahead of them announcing a new five-year plan, which, I mean, look, it could be 3.4 a year. I don't know, but it's trending towards being a really large number.

And then the day before Vistri reported, the UK government came out and said, hey, we're going to do an extra $2 billion of funding, and we're going to get it out the door now. And even in the last 72 hours, I'm hearing from our channel checks that the government is basically telling everyone, we want this money out the door in April. We want two billion more funding, which by the way, can be levered three to one, two billion out the door. That is massive. And so I think that what you're going to see is, you know, it's not Vistri's numbers. Vistri did not bake in. And when they reported, it was too close. They'd already set all their budgets. They'd set what the press release was going to look like, everything else. There is

nothing in Vistri's numbers for this year for that incremental $2 billion of affordable. housing spend. We know PRS sales are running really well. We know open market sales are running really well. The only thing that's been lagging is affordable. And our view is at David Capital, you're going to see a massive catch up here. I think the market has missed this. The market has totally gotten it wrong. Vistri is positioned to do beats and raises through the rest of this year off the back of this significant affordable housing spend bolus that just came through from the labor government. And, you know, maybe just one one last point on the labor government, as long as as long as that's the subject here. The labor government has been so much better than even I

had anticipated for what Vistri's doing. They have made it a central part of the government's program to make sure that the housing sector and construction and infrastructure, all of that, but building is what they are focused on to juice GDP. And when you look at even the GDP forecast that the labor government has come out with, they are projecting the primary driver of accelerating GDP growth over the next five years to get to a balanced budget and everything else in the UK is all about more construction, more building. This is central to the next five years of UK government policy. So what is labor government done? They instituted mandatory housing targets, where they are essentially forcing local authorities across the whole country

to meet minimum house building targets so that the government can reach one and a half million new homes over the next five years. That would be essentially 300,000 homes a year. This past year, the UK built something like 215,000. And because you can't just turn it up to 300,000 immediately, that means that by the last couple years by years four and five to make up for year one and two, they'll probably be having to do 350,000 homes a year. So you're talking about an increase in build of as much as 50% over the course of the labor government. Even if they don't hit those targets, it's still a massive increase.

They've changed planning approvals from a default no answer on Brownfield ground to a default yes answer on Brownfield ground. So automatically, brownfield, you know, regeneration, which is what Vistri does, now has a default yes answer from planning authorities. They've gotten rid of environmental mandates. There's a famous story in the UK about a highway that they're building there. And there was a newt that was endangered. And they ended up spending 100 million pounds building a tunnel around where the newt was. And so I got a lot of press. And the labor government is saying, look, we're not going to spend 100 million pounds on a 50-foot tunnel to go around newts anymore. Labor has launched a new town's policy where they're building a whole new towns where none

existed before. They've streamlined the planning process, hired a bunch of additional planning employees to accelerate the permission process. They've allocated 600 million pounds for skilled labor training. They're reducing the requirements on banks when it comes to the LTB on mortgages. If you try to get a mortgage right now in the UK, it's really hard to get a mortgage at anything more attractive than like a 25% down payment, literally a 75% LTV. That's totally unnecessary. You can do loans at 85% or 90% and be well protected. It looks like that's where the policy is heading for labor. And then on top of all of that, labor has now been openly talking about bringing back a program called Help to Buy, which was a major driver of demand,

especially for first-time buyers, no guarantees that that happens. But man, would that be a shock to demand of, like a positive shock to demand if they do it? And so when you look at all of these things, I'm looking at a situation here where Vistri is now trading at the lowest share price or a much lower share price with much more certainty around the profitability of the partnership's business, much closer to becoming a pure play partnerships business. And in the meantime, the company has bought back millions and millions of shares. To me, obviously, the negative is now you've got to prove it. You've gotten back-to-back announcements where there's been no further profit warnings, right? Back-to-back,

they've been good. And so you're in the process now of rebuilding that credibility. But the reality is that this stock is now trading at a lower price with more certainty that our thesis is going to be right. Hey, I love to hear all about the, it's cliche, but I love to hear that the labor government is taking basically a Yembe approach to a building. You know, I wish Manhattan, I said, I'm thinking about, you live in Chicago, which doesn't have it much better, but I'm thinking about leaving Manhattan. One of the reasons like, hey, the rent is how much at this point?

I love it. But neither here nor there. Let me ask. Okay. So you've got all these great tailwinds, right? Everything seems like it's lined up. The headwinds in the management's way of saying are like they were real, but they've been dealt with. A lot of it was self-stub. A lot of it was in the legacy business. By the way, I don't think that they were macro. I think it was a management error in the house building business. I don't think that this was aside from the reduction in affordable spend because of this little air pocket that we've gone through, but now is essentially over. Yeah, I think that this was a self-inflicted mistake that has been corrected now. Air pocket is over. They do say the day before the earnings, they get the labor, the labor acceleration. It's in the press release, but maybe it's not filling the numbers. They say, hey, we're going to have. It was not in the numbers at all. They did not change any of their numbers.

Momentum into F.J. into FY26. So let me just ask, the medium term targets they have, right? 40% return on capital, all this type of stuff. as part of the earnings, they pull, they say, hey, we're still committed to those medium term targets, but we're no longer giving you a timeline for it, right? It's just some indefinite number in the future when we're going to hit those medium term targets. And I understand managers may be thinking, hey, they never gave a timeline at the beginning. There was never a timeline on this. No, there was never a timeline. They always said that there was medium term targets,

but they never gave a specific timeline on when they would be hit. Okay. When I hear medium term, I'm thinking over the next three to five years. Yeah, so maybe I was misinterpreting it, and I'll try and pull up the results real quick. But when I heard the medium term targets, which I think they first gave in 2023, my first thought was this is a 2007, maybe 2028 target. And I think they said, I'll try and find it. But I thought they had basically said, hey, the timeline is extended is what they're saying. I just hear like, hey, it was short term had wins.

we've got all this like accelerating momentum coming in. And I was kind of surprised that I felt like they were lengthening the timelines and hitting the meeting from targets. Now look, again, I don't know exactly what the year is that they're going to hit it. But let's say they did. Let's say they extended it by year. I think that there's good reason for it. And it's the South Division, right?

They've had to go in and essentially pause growth in the South Division for a year as they got their arms around the issues and fixed those issues. And so to the extent that there is any delay, I think it's not emanating from the other five divisions. It's emanating just from the South Division, and they're getting the thing in order so that they can re-accelerate their growth there. The quote was, all we've done is simply remove the timescale,

so I don't know if they were just saying this is a three to five years. Yeah, okay, cool. They never had one at the beginning, and, you know, that's fine, but they're going to get there. So, I mean, when you look at the numbers right now, and maybe to, you know, this helps to talk about the numbers, The company just did $360 million of EBIT this past year. So in 2024, they did $360 million of EBIT.

They are guiding for a notable step-up in operating profit in 2025. So I don't know what that number ends up looking like, but it could easily be $400 million plus, right? And I think that it's going to accelerate as the year goes on. The company was very clear that there's a lot of these legacy projects, including legacy house building projects that are rolling off in the first half of the year and being replaced by much higher margin projects in the second half of the year that then should continue going forwards.

And so I think that in the second half of the year, you're going to reset the profitability base of this company at the same time that you're seeing, again, this bolus of spending coming through from affordable housing. And by the way, that affordable housing spend, it could step up even more from there as the company or as the labor government puts in place, its new five-year affordable housing spend targets. So I think that there's a really clear path here to be doing north of 400 million of operating profit and clearly on the way to five, 600 million of operating profit within the next couple of years alongside a freshly pure play partnerships business. And when you look at that

and eventually to the 800 million of medium term targets, when you look historically at multiples of partnerships businesses and house building businesses. House building companies over time have traded at about one and a half times book value. Partnerships businesses have transacted in anywhere from five to seven times book value. Right now, Vistri is trading a 0.8 times book value. When you look at an earnings multiple, historically, partnerships businesses have transacted at 12 to 13 times EBIT. Right now, let's say that Vistri is going to do 400 million plus of, of operating profit this year, you're talking about a business that's trading it five times

EBITs on this year's numbers and two and a half times EBITs on the medium term target versus transactions at 12 to 13 times EBIT. It's just not the right number. It's just not the right valuation here. So that's the kind of upside, I think, and the other buying back shares every day, right? So that's the kind of upside potential, I think, that you're seeing here. And again, the issues are behind the company now. There's been no more write downs for months. They've got their arms around the house building, and now the business is accelerating. As it becomes a pure play partnership business, the margins we're going to inflect in H2

anyways, and then this affordable housing spend on top of it. I don't know. I just, I think that people have missed the crux of it. They've missed that this business is accelerating. And I think that, yeah, it's kind of one of the things. these things where you're allowing too much of, of, you know, this kind of one-off, you know, issue that the company had in its legacy winding down business to overshadow what I think is a wonderful kind of crown jewel asset they have that's going to be the entire business here

pretty soon. Let me ask two questions on the debt balance. And, you know, I don't think, I think this speaks to people being a little bit gun-shy with this company, right? right now because they guided, if I remember correctly, hey, our FY25, this year's, our debt balance is going to end lower than FY23, if I remember correctly. And I had some people, I had a lot of people, and I think you and I are both members of Vic. There was a lot of debate on the Vic boards. I had a lot of people reach in. And one person humorously said, the math isn't mapping. Like a lot of people are struggling with the guidance on the debt balance.

And again, I don't want to get like hung up on accounting or something because I think there's a really nice story. if you, there's a really nice story, accelerated momentum, things to believe. But I think the fact that people are getting hung up on this debt guidance in the Mac there speaks to a little bit of it. So I'd love to just ask you, like kind of how do you make sense of their debt guidance? And then I have a follow-up question on the debt. Yeah, I mean, look, this is a low debt company, right? It just doesn't have very much debt. You know, we're talking about a business that had under $200 million, about $180 million of net debt as of year end and did, you know, more than twice that in operating profit, not even EBITs. I'm just talking about EBITs, did twice that this past year. You know, look,

you can look at the debt balance another way, which is to say what is the average net debt over the course of the year measured on a daily or a monthly basis. And that would be higher because the company gets a big cash inflow at the end of the year. And so, you know, even if you were to say that the average daily debt, you know, net debt, you know, debt balance is a half a billion pounds. You're still talking about a business. If they do over 400 million of operating profit this year, it's trading not much above one times net debt to EBIT. That is not a high debt balance. That's a very manageable, moderate debt balance. I think that where people struggle is just that house building companies run net cash. And the reason why is

because they're so asset-heavy. If you run into issues where all of a sudden the market stops and you need capital, you can't get it because all of your capital is tied up in the land and in the projects, in the house-building projects, because your asset turns are so low, right? You might only have an asset turn of under one times a year. Whereas a partnership's business, you might have three times acid turns. And it's just a very different set of financial conditions for this business, for a partnership's business, because you've much readier access to capital. You don't have it where you go into a downhurt turn and then you're just stuck and you need that cash balance to rely on because the partnership business is consistently producing capital. And because you have such high

asset turns, you have ready access to capital always. And so you can run at a modest net debt position. One times net debt or close enough to zero times net debt on a year-end balance, those are, you know, I think of it as a red flag if it goes above three times net debt to EBITDA. We're nowhere close to that here. I really like that they're also breaking out the average daily debt balance because I got a lot of questions from people not just the year-end debt balance, but you know, as you said, especially on the home building side, like it fluctuates up and down and all this sort of stuff. You get cash at the end. I like that they're just saying, hey, we're just going to give you the average debt balance so you know we're not

playing games and being like, oh, man, during the month, we're running from, you know, the second of the month to the 30th of the month. We have four billion of debt. And then on the last day, we managed to pay it all down. And then we borrowed that. Like, I just, I think that's transparency is good. Yeah. Transparency is good. So yeah, but it's just, it's not a, it's not a levered business. It's just, it's a very, very modest amount of debt and something easily manageable. It's just sometimes house building analysts struggle with it because they're so used to businesses that always are running with net cash. And look, I know what that is. In 2008 during the financial crisis, the hedge fund that I was at, we were short all of these companies, right? We were short

the mortgage lenders. I mean, we were watching as house builders were going bankrupt and collapsing into each other's arms. Like, I know what that looks like. And back then, the traditional house building businesses were levered. And so now they run with net cash, and I think that's a much smarter thing to do, but it's just not the case for a partnership's business. It's a different model with different characteristics, and it requires a different financial profile. One more thing on the debt. And this might be very British of them, right? Because I've seen this at a few of the British companies I follow. Like IWG is one that comes to mind, where they say, hey, our franchise business is taking off. We're about to experience a real acceleration in cash.

flows because franchise is asset light, like we're going to see this real acceleration in cash flows. We can't wait to buy back stock. But by the way, we, we like must bring our net leverage down to one X before we can like really lever this up and start buying back shares. And I say this because, you know, they say, hey, we had some headwinds. Yes, a lot of them self-inflicted, but the acceleration is here. The labor government budget, the affordable housing, it's all here. We're going to see accelerating momentum in the back half of the year and especially into to 2026. And then they say, hey, we're going to end the year with a debt balance lower than we had at an FY23. And I'm trying to pull up my notes. And they say, hey, in 2024, if I'm just

looking at the cash flow, we bought back 170 million of stock in 2024. And this year, you know, I think they said 92 million through the end of the year on top of the 38 million they've already done to date. So if I do the math there, it's 130 million. So what I'm hearing is accelerating momentum, them. Things are getting better, but at the same time, we're going to be paying down debt and reducing our share repurchase while our stock price is lower. I'm like, oh, I don't know if that's very British of them or if there's something else going on, but like it's hard for me to match. I understand like companies are not stocks and they need to run with the margin of safety and everything, but I'd rather than be leaning into it. Do you see what I'm saying? I'd just love to

get your thoughts on that. Yeah, remember this company, like all companies, has a lot of different audiences that they're appealing to. And one of the audiences that they're appealing to is their customers, which are primarily local governments, not-for-profits, government authorities, right? And so you don't want to spook them. And it's really easy to say, hey, we're going to have less net debt a year from now than we have today. And that's the kind of thing that gives those partners a lot of comfort. And so I don't blame them for that. Now, what that gives them, though, is a lot of wiggle room because if the business accelerates the way I think it's going to accelerate as all of this affordable housing spend comes through. And after last year, you bet that Vistri did not

guide aggressively for this year. They have set expectations as low as they can so that they can make sure that they are absolutely not issuing any profit warnings going forward. This is a beat and Ray's story from here on out, they are absolutely not having another hiccup here. I mean, they're making sure of that. I think then it opens up the door where you can expand the buybacks, right? If the cash flows are coming in better and all they've guided to is that net debt is going to be less than the prior year, every little bit of incremental profit can go to incremental buybacks. And in fact, on the call, the company said that.

They said, look, we'll assess where things are as the year progresses. And if our cash flows are coming in where we expect them to be, we can evaluate more share buybacks. It's on the table. Two last questions. You framed it one way that I've toyed around with this investment, this company in this way several times. Hey, at today's prices, you're paying below tangible book value for the company. So you can literally liquidate the whole company and get more than your money back. Now, obviously, you would not want to do that.

This is too good of a business. Don't liquidate it. But it just shows you how kind of crazy the multiple is right now. No, that's it. So I guess, you know, some part of me says, hey, you buy this street and heads, Adams, right, partnerships a great business, the cash flow starts rolling in, all the working capital they're talking about drawing down, getting down a home building. It adds, you win massively.

And then tails, cool, it's trading below book value. Maybe we're wrong on the partnerships, but it's trading below book value. Like, you have this firm asset protection, which is generally, I generally like when I have like asset protection plus capital like compound or upside. I realize I am preaching, dude, I am speaking your book. But I guess, is that the right way to think about the risk reward here? again, I know that's a softball question, but I love it if you said, hey, no, if you told me no, like there's something about the tangible book value that's in question or something.

I think that's probably what the market's saying because of the write down. I don't know. That's the way I've been toying with it. But today, you know, I don't know. I'll stop there. I'm rambling. But it's just the big debate I've had internally with myself. Yeah, look, it's an appropriate framing, but it's not the framing that I would necessarily

use just because in my experience as an investor. And look, everybody, I think I preach this a little bit, but you have to figure out as an investor the way, the approach that works for you. And there's some approach that works for everyone. And for some folks, it's growth investing. And for some folks, it's quality investing. For some folks, it's, you know, dumpster diving. There's lots of different ways to get to heaven in investing. And because you do it one way and I do it a different way, it doesn't mean that both of us can't get to heaven.

We can. That's kind of the beauty of how it works. And so for me, value plus the catalyst makes a lot of sense. In my career, in my investment, yeah, track record, I have found that margins of safety are better if they're cash flow based than asset based. And so, like, yes, it is, to a certain degree, a margin of safety if you can liquidate the whole company and get more than your dollar base. back from doing so. But is Vistri going to liquidate? No, Vistri's not going to liquidate anytime soon.

And so really, how the stock is going to move is going to be based on cash flows. And if you keep your eye on the ball there, if you really focus on cash flows more than anything else, I think that that's how you can find stocks that are going to perform well. And so in a way, my thesis here, it's not about that. I mean, look, again, that's not an unreasonable framing to say that you're buying it below book, but what I think gets me more excited is the idea that free cash flow and cash flow overall is going up. It's going up as the business transitions to me in Curplay Partnerships, and it's going up because you've got the tailwinds of affordable housing spend. So I wouldn't spend too much focused on the asset value. I'd focus more on the cash. That's my approach.

No, A, I love how you frame that. And B, I love how you frame that over here. I love how you framed it because you are right. When you said you have more success with cash flow-based margins of safety than asset-based, I have found more success and more conviction and stuff being able to develop asset-based margin of safety with cash flow kickers, which I think why this under book value appeals to me in that framing. But I just love how you said that because you are right. And like one of the big things with investing is finding investments that fit your style because you're going to research the better. And you're going to have a better ability to build conviction and think through and everything. So I just really like how you framed that. Last question,

and then I'll turn it over to you to hit anything that we missed and wrap it up. You know, all investing is opportunity costs, right? Technically, we should be comparing an investment in history to, you know, buying a restaurant in Istanbul versus, you know, name everything else on the planet. But a lot of times it is interesting where you say, hey, let's just compare it to the direct peers. And I had several people mentioned, hey, there are other homebuilders and homebuilding companies in listed in London that focus on the UK that are trading below book value. There are companies, you know, post the craziness that has been March,

there are home builders in the U.S. that trade pretty cheaply. You know, I think Lenar is getting close to 1.1 times book, and I think that's pretty capital light post spinning off Millrose. I haven't done tons of work there, but there are several other homebuilders that are trading at or below tangible book in the U.S. I think I know what your answer is going to be, but I'd love to just briefly touch on. this is no longer just like vistry trade cheaply a lot of them is trading cheaply so like why is vistry the horse

why is vistry the better kind of opportunity cost versus these kind of direct pure play comparisons yeah i mean look i have for sure i mean you know this but i i think that um inflation is well anchored it's under control and i think interest rates are likely to go down over time And I think that that kind of tailwind, I know that's a separate discussion, but, you know, as you look at real-time data, whether it's shelter data or car data, or even, yeah, which are the two primary components that go into CPI, there's a catchdown that's happening. And it's very hard for me to do any math that shows that inflation is going to get out of control because you've got this weight on the numbers from shelter kind of mean reverting back to where. it's been more recently, which is essentially not much growth at all in shelter costs in the U.S. And so as that happens, that should be a tailwind for any company that's interest rate sensitive, including all of the companies that you just mentioned. And so am I negative on the

sector? Am I negative on any of these companies? No. I just think that there is something not sector-driven, but company-specific about Vistri. And that is, that you have a wonderful business that is far more valuable than any of these traditional house builders. And it's trading at a multiple that's actually the same or even below these house builders. And so you're going to have a situation where you can have the Lollapalooza scenario that Charlie Munger always talks about, right? What is the best investment you can make, period? It's where profits go up and the multiple goes up. It's where you have both. It's not just the multiple, it's not just earnings, it's both.

Vistri is positioned to substantially grow its earnings power or grow, you know, grow earnings over the coming quarters, years as they become a pure play partnerships business and as, you know, this ballast of funding comes through and as they exit the lower return projects from house building, profits are going up. And the partnerships business is going to become 100%. percent of this company, which should mean that the multiple goes up. And when you're starting at the same multiple as other house builders or even lower than other house builders, that means that the multiple re-rating can be really significant here. You could go from under book value to trading

at three or four or five or six times book value. That's entirely possible on top of the profitability step up. So what I buy in the UK, you know, Barrett Red Row or would I buy Persimmon or what I by Barclay Group. No, I mean, there's nothing wrong with those businesses. Those are all fine businesses. But why buy those when I can buy at a lower valuation the best business in the sector right as it's about to hit a profit inflection? I mean, that's to me pretty clear which one I would rather own.

I will make this a softball because we're running quite long. This was supposed to be a 30-minute update and we're over an hour at this point. So I'll make it a softball, but if I'm wrong, please tell me. I'm just looking through my notes and the one thing I didn't hit was You know, again, they're transitioning to the partnership business. So I thought net assets were going to come down, which would cause release a lot of cash flow. And if I just look, it's a chart from their earnings release, tangible net assets, $2.15 billion in 2023, $2.22 billion in 2024.

I suspect the reason is those delayed sales at the end of the year that you talked about and addressed earlier. So you can give me a yes or no, but if I'm wrong, I'd love to ask because a question that I had when I was first recent is this, why is the tangible net assets not coming down? I thought that was part of the thesis. Yeah, so they've come down a little bit since the transition started, but the reality is, I think, two things. One is exactly what you said, which is that they had to defer some land and project sales, that if they'd had those go through, obviously the net asset value, the capital employed in the business would have been a lot lower. the other bit to it is the company has come out and said that there is a real opportunity

in reducing their works in progress, their whip, and they actually quantified it. They said there's a 200 million pound opportunity. And the company is reiterated now that it's going to get down to $2 billion of capital employed. I think right now the company's total capital employed is about $2.5 billion, down from between $2.7 and $2.8 billion when they started the transition to a Pure Play Partnerships business. And so if you do this, if you accelerate the exit from house building, which appears to be happening over the last 90 days, plus you pull some money out of width, plus you continue to build out and exit house building projects along the way. So not just doing

larger sales, but also kind of just finishing the projects and not replacing them with new house building projects. You put all of that together. And I feel really good. that the capital employed in this business, two years from now, three years for now, it's going to drop to $2 billion or just below $2 billion. And by the way, that's how the math checks out. If you do a 40% Roki on $2 billion of capital employed, that's how you get to $800 million of operating profit. And again, this is a what at this point, if I'm looking correctly,

an under $2 billion market cap company. So you go from $2.2 billion. I'm just looking at tangible net assets. Capital employed is a little higher. One or the other, you drop it from that to $2 billion. It's a significant piece of the market cap getting freed up in cash there. So, Adam, this has been great. My notes were extensive, and I think we hit everything inside of them.

Anything we should have fit that you think we missed or anything that you kind of want to leave listeners with as we wrap this up? Yeah, I mean, I think that I would just say that, you know, it's good to have conversations like this because no one bats a thousand in investing. You do the best you can, but no one bats a thousand in investing. It feels like, for me at least, it feels like nobody bats 250. Yeah, right. And so all you can do is go to first principles, right?

Be fact-based, be evidence-based, look at the data, do your homework, and then try to make the best decision that you can. Ultimately, when you look at Vistri, I just think it's so important to stay focused on what our thesis is. Partnerships is a great business. This company is rapidly becoming a partnerships company, even faster than it has before. And ultimately, you can see it every single day because they have to file it. This company is buying back shares every single day at really attractive prices.

And I don't think that I'm the only one who's noticed. I don't know if you saw it, but earlier today, there was a filing from Anson Funds, which is a really well-respected hedge fund up in Toronto. just took a significant addition to their position here in Vistri and became a filer. Smart money is noticing this. And over time, I think that shareholders will be rewarded here, at least. That's what our view is, and that's where our money is. Perfect.

Well, all right, March 2025, the most popular request I've gotten the update on Vistri. I am looking forward to our March 26, where we say, hey, 2025 was great. It's a five-minute podcast, 2025 was great, everything they said and more, and the buybacks that are starting to stay on. But Adam Patinkin, David Capital, this is an awesome. Thanks so much for coming on twice this week, and looking forward to having you on for the fourth time. All right.

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