Yet Another Value Podcast - Mike Melby from Gate City Capital on Amrep $AXR

Episode Date: November 3, 2020

Mike Melby, Founder and Portfolio Manager at Gate City Capital, comes on to discuss his background and his investment into Amrep (AXR), which his firm owns 18% of.Gate City Capital website: https://www.gatecitycap.com/Show Chapters:0:00 intro1:00 Mike's background22:45 Amrep's history29:30 How Mike thinks about Amrep's land55:15 Walkthrough of Amrep's Sum of the Parts (SOTP)1:12:30 Amrep's recent big repurchase

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Mike Melby, the founder and portfolio manager at Gate City Capital. Mike, how's it going? Hey, going great today. Thanks for having me on. I'm excited to do it. Hey, no, thanks for being on. And let me start this podcast the way I do every podcast. And that's by pitching you, my guest. I actually got introduced to you a few months ago through a mutual friend of ours. And I've really enjoyed reading through Gate City's letters and getting to know your investing. style more kind of having a dialogue. And then, you know, the other thing that I would say is I posted this morning that I was interviewing you and like, I thought you were sharp and I enjoyed getting to know you, but the overwhelming response on Twitter for someone who focuses on microcaps thoughts, you know, like obviously you've got a great reputation and people are really excited to hear from you. So, you know, I think you're writing and stuff speaks to yourself. I think people are really going to enjoy this interview and I'm just happy to have you on. So that out the way,

maybe you can launch a little bit into your background. Yeah, and thanks again for having me and I'm excited to be here. And yeah, in terms of my background, I guess I'll start with where I was born. I grew up in a small town in eastern Montana. The nickname for the town of Glendon, Montana is the Gate City, and hence the name of Gate City Capital Management, and the logo also speaks to Montana. So it's a little bit of a confusing part because we're located in Chicago, Illinois,

but I think people can get through that. After, I guess I left Montana, went to undergrad at Notre Dame, majored in finance, graduated in 2003, then went to work for Deutsche Bank in New York and their debt capital markets group. Left there in 2007 to join the Notre Dame Investment Office, focused on real assets, fixed income, and risk management for them. I left the Notre Dame investment office in 2009. I got my MBA at the University of Chicago and left to join a firm outside of Chicago called Fristlerock Capital. And in terms of Gate City Capital, started initially with my own capital in 2011, launched it to outside investors in 2014. We manage a concentrated portfolio of microcap value companies, targeted right around 15 companies in the portfolio. portfolio. We don't use leverage, don't short anything. I have a long-term time horizon

look to invest for a minimum of two years whenever we make an investment. I have a couple things we like to do as well. We make it a point of trying to meet with company management before making an investment. So when travel was a little easier, we made a point to meet with everyone and did a lot of trips that way. And one other thing we do is we tend to go to annual meetings. We find that's a nice part of being an investor and an investment partner with both the management team and the board of directors. We found that's a good way to further our relationships, not just with maybe the CEO or CFO of the company, but with other members of the management team as well. And also get to know the board directors, which I think provides us with both a relationship with the team. We think they kind of think of us as partners and then also tend to, I think people appreciate

in a day where you can do a lot of things from home or electronically to be able to stay high in person and show that interest. So that's a little bit about how the firm is started. We have three people, including myself, and again, located in Chicago, Illinois. Great. No, that's perfect. And let me ask some questions about Gate City before we dive into. the company we're going to talk about AMRA. So I guess the first that's jumping out is like,

you mentioned going and doing the in-person due diligence, which I think for microcaps more than anything is the most important because microcaps, you know, if you're buying JP Morgan, like, yeah, or a big bank, like, yeah, the management's going to matter, especially in a crisis, but a microcap, like the management can have such a huge pull on it because, you know, there's only one person in a lot of these things like kind of to get it done. So management's so important. How have you built and maintained those relationships kind of during COVID when annual meetings are online and that type of stuff. Yeah, I think what you said by microcap companies is especially true.

It's a neat part of the microcap world too is a lot of times our conversations, if you're working with a JP Morgan, if you get through it all, it's generally with an investor relation professional or an outside professional. And with a lot of the smaller companies, you're able to have a relationship with the CFO or CEO. And as he said, those are a smaller company. companies, they're really the point person, and they drive a lot of the value one way or the other. So I found those relationships to be especially helpful. And in terms of COVID, it has been challenging.

Travel is greatly hindered. And in terms of both us being able to travel and then also not wanting to put anyone else at risk in the event we go to say I burst into someone. So we've done what we can. it's been helpful to build up a lot of those relationships beforehand and it's easy to continue either electronically online or through phone calls as well. And try to do as much work as we can from our desk with the hope that things change around here at some point in the future and we're able to get out and show our faces again. Can't wait until 2024 when we're allowed to travel again. What about so, you know,

Gate City, I think a lot of the names I was kind of just flipping through looking at Am rep, you own, just shy of 20%, we'll call it, OPX, OPS, just shy of 20%. Like, do you guys normally look to establish such big kind of, not controlling, but semi-controlling influential positions in the microcaps that you're investing in? Or is that just the function of size, link? How are you looking at that? Yeah, it's a function of, I guess, liquidity is one thing in the microcaf space. And then, We don't have any set target of. We want to be X percent. I think the companies you named were larger investors in. And for reasons we saw a lot of value at the prices, we were able to establish positions. And as you get bigger in size, then there are tradeups there, certainly with the liquidity and ability to exit at certain times as well. So what we've tried to do when we do take bigger position size,

is to be very, very comfortable with the downside risk of the companies we're investing in. And so in those cases, the two companies you name both extremely strong balance sheets and where we were able to enter the position, we thought very highly that first we would not lose money at those levels. And it would ideally put us in a good situation to see some capital appreciation. So go back to your question. It is a final. of the company, the liquidity available, and I guess what we see is our most importantly potential downside combined with what we think we can get to in terms of capital appreciation to fair value. A lot of questions I got were from people, and it tended to be people who

were similar to me managing smaller funds who are maybe having dreams of, oh, what happens when I eventually do this? But a lot of the questions I got were, hey, when you buy 20% of a smaller company. Like, what are you thinking for your exit strategy? Is the exit strategy, oh, I'm going to have to sell this whole company at some point? Or is it, hey, five years from now, you know, I bought it at 10. I thought it was worth 30. It's traded up to 28, 32, something like that. And I'll just slowly sell it out over time. Or does it just vary by company? Yeah, I think it varies by company. We take, I guess, the philosophy or had the philosophy internally, one of our key points is we're buying companies and not stocks.

And so when we enter into any position, whether it's 1% or 15%, we take the philosophy that we're buying the whole company, just made me a slid rubbing. So in that regard, we value companies on a free cash flow basis and ultimately think that the free cash flow of the company will generate over its life will more than compensate us for the price we paid when we made the initial investment. And so with that philosophy, although we're aware of the underlying liquidity of the companies we invest in, we invest with the mentality that from a free cash-lust standpoint, we'll get paid back our original investment and more over a long-term holding period. So I think it's partly the philosophy of going in as we're owners of the company. We've done the work to be comfortable owning the whole company if it does come to that. And based on the cash flows, we expect the company to generate that we're comfortable with owning it just not for a few months, but for a long period of time. And in the event, it kind of gets to the sell discipline as well. And we try to keep it pretty simple in terms of when you sell.

And we think you sell one, the reason you bought is gone. And so we try to lay out our investment thesis. and ideally that cell decision comes about because the company's stock price appreciated in value and the discount fair value is no longer there. But it's very difficult with smaller companies to predict what liquidity will be like in one month, two months or a couple of years. And so we try to be fairly opportunistic on that side as well and purchase companies when others are looking to sell them and then to sell them

when there might be some excitement or other things surrounding the company, ideally because of good results. Yeah, I've also found, and I've probably undertraded in this historically, but a really nice exit or entry point for microcap stocks is getting added to Russell 2000. So if it gets added, there's this huge rush of people trying to buy into it. And I mean, every time I think, oh, like people are going to see this, it's not going to pop. And every time I find that sometimes the stocks can get to wildly crazy values on the. the way in and similarly on the way out something gets booted from the Russell 2000 and a lot of

times just non-fundamental sellers just driving the thing down like crazy. I don't know if you found that or had any experiences with trading in or out of the Rust 2000 indexes. Yeah, it's a really unique dynamic and it's it's kind of prevalent because of the increased in growing popularity of passive investment strategies. And yeah, certainly when when you have a group of investors that are either buyers or sellers of a company for reasons that are not economic in nature. They're more technical in nature. We think those can be opportunities both on the monetization side when you could have a Russia of people looking to buy a company because it will not be added in an index and we're looking to mimic that index. But also on the buy side. And so

In similar situations, companies that might be out of favor anyhow, if they're being removed from the Russell 2000s, generally because the market cap is lower. And for one reason or another, people have moved on to different companies and compound that with a for selling, if you will, as that company is no longer in the index. we found that those can be some attractive times to put money to work when others are are exiting a position, again, for reasons that might not have anything really fundamental to do with the business. Yeah, my favorite is a few years ago, there was a bank, and it got added to the index, and its share price went from, like, treating that 80% of book where I thought it was attractive to 1.2 times, so you know, you kind of sell into that and you make the money.

The next year, it got kicked out the index, and it traded right back to 80% of the book. I was like, oh, I've already done all the work here. This is pretty simple. Last one, and we'll turn to AMREP. You know, Am rep, as we'll talk about, a lot of land holdings, kind of hard assets. I know you guys used to have a stake in PICO, which very similar. There was a lot of land holdings in, I believe, water rights there. OPS, it's not really land holdings, but it's more of an old line kind of value story, I would say. Are you just more attracted to those type of old line value stories? Is that where you see the microcrap value? Or are, are there's some really like growth your names that you you ever get interested in? Yeah, I should

go into that more, but one of our key things we look at is the ownership of some type of real asset, and that can include land holdings, buildings, equipment, and water rights, as you suggest as well. And it's, I guess I should walk through our evaluation process a little bit, but we conduct We conduct two main things when we look to value a company. The first is a traditional DCF analysis. And so we're ultimately looking at the pre-cash flows. We expect the company to value to generate over time. And I have a philosophy that the value of those free cash flows is ultimately the value of a company.

And the other thing we'd like to do, we find that investment professionals can sometimes be overly optimistic in their forecast of what a company can do. And so we also conduct what we call a floor value analysis, and similar to a liquidation type analysis, where we look at what the company would be worth in the event that all assets are liquidated in maybe not a bankruptcy situation, but in a orderly liquidation of the company. And by doing that, we see what we think the company would be worth in the event that they just stop being a company. And we compare that ratio then to the current share price. And we look for companies that have both what we think is significant upside, and we define that as 50%. And so we're looking at for companies that are trading at a 50% discount to what we think the fair value or intrinsic value is based on a DCF analysis

and trading very close or maybe even below what we think the liquidation value of the companies. And so by combining those two things, we look to minimize our downside risk and also provide for significant capital appreciation should things turn out as we expect. And just going back to the real asset component, we've found that things like land buildings and maybe even water rights tend to hold their value over the long term. and think although there can be fluctuations in those with the economic environment that they provide a margin of safety and a store of value and I guess have a general philosophy as well or general thought that with an extreme amount of financial stimulus that has gone into the economy over the last decade or so very, very low interest rates and low discount rates that in the event that that the world or the U.S. does see a higher level of inflation,

that companies that own their own assets not only should benefit from seeing their own assets appreciate in such an environment, but also don't have maybe the rent expense associated with renting assets, which in an inflationary type environment is going to go up. And so you're kind of fixed on some operating costs, but that we think it's leverageable is you're not going to see your rent go up in future periods as well. You mentioned you do the DCF and you do the kind of real asset liquidation valuation. And your hope is you have upside to the DCF and maybe even upside or at least a lot of downside protection from the hard asset value in the liquidation you're doing.

How do you guys think about management capital allocation when you do that? Because one of the things I've had with microcaps is a lot of times I'll find a microcap that trades for, know, $5, and I think they've got $10 of value. But a lot of the issue has been, oh, there's a management team who seems unable or unwilling to realize that $10 of value. And, you know, sometimes they realize it quickly when you invest and you make great return. But a lot of times I've had, you sit there and your seven years later and that $10 has somehow become $7.50. And your stocks gone from $5 to $4 and you say, oh, like my margin of safety is strong. My opportunity cost was massive, like all this sort of stuff. How do you think about that when you're doing that downside?

protection. Yeah, I guess on the downside protection thing, I think what you said certainly can be the case. And capital allocation is a very important component here. In terms of downside protection, I guess just to touch on that for a second, that we're, ideally a lot of those hard assets or things like that, don't go away even if there's a management misallocation of capital. And the real things that get to go down is really the cash value or maybe other things that the company's not making money in a period where you think they should be making money. How we, I guess, directly try to account for that. I guess just in terms of management mismanagement is to meet with the management team of all the companies we invest in.

So that, I think, gives us the chance to get to know them to understand what their objectives are. And we're really looking for three things, intelligence, ethics, and the, I guess, mentality of conducting hard work and being good workers. So we think we're pretty good at making those evaluations of management when we see them in person and are looking for groups that will add value over time. in terms of how we, I guess, directly incorporate the capital allocation process and through the DCF analysis. And so we attempt to forecast out what cash flows will come based on how management's currently managing the business and allocating capital and try to incorporate everything we know in order to accurately forecast those cash flows.

So I guess come back to your question, a few things we try to do is to prevent that sort of situations, meet with management teams, see the assets in person to make sure they are what they claim to be. So I think the bad situation is they disappear or they're not there or something like that. And so by getting out and kicking the tires, we try to avoid that type of situation entirely. and then ultimately rely on the DCF analysis to take into account how management law, okay, capital in terms of how much cash in. Have you ever been taking, I want to say, like, you know, go kick the tires on something. And one of the issues I've had previously is I go kick the tires on something, right? And I know in my head, hey, this company owns a New York skyscraper, and that's worth $500 million or something. But then you go see it and it's very easy.

to, you see the building, but it's tough to say, oh, is this worth 5, 3, or 700? You know, obviously when you're dealing with microchap, it's probably not a skyscraper, but, you know, with Am rep, the company will discuss. They own, I think it's 18,000 acres of land in New Mexico. You go see it and you say, oh my God, like that's more than you can see, even if you stand in a mouth on top and look around. Have you been taken by, you go and see something that kind of anchors you to a higher value or it just kind of anchors you in your views? Does that make sense? Yeah, I think any time, I think there are a few critiques maybe about going out and seeing things. And one is it takes time away from reading and doing other things at your work

station, but also can, both by meeting with teams or seeing things, you can say, hey, this is great. These guys were great, and it can change your view. And then you've also invested time and energy and money into going to do that. And so it can have, I think, where you can raise a problem is that because you've done that, you are more impressed as something than you necessarily should be. So I guess going to the real asset component, even on the margin of safety standpoint, whether it's a land or building or anything else, the value of that property will ultimately be related to the free cash flow that someone who owns them.

land, building, equipment, water is able to generate from holding it. So it's a skyscraper in rural Montana is probably not going to be worth the same as something in Midtown Manhattan, regardless of how much capital you had to invest to put the skyscraper there. So, yeah, I guess you don't want to get anchored and try. try to take a level head and a simple approach when going to see it, and ideally see if it's suited for what purpose you think it should be suited for. And if you're a business owner or someone else in the area or a resident or whoever else,

does it make sense that you pay cash in order to own that asset to generate more cash on your own at some point in the future? I guess it's a roundabout way of saying that we try not to get anchored on things and incorporate, I guess, a level of skepticism when we do make these trips and take a look at things with their own eyes. Yeah, no, that's perfect. No, that's perfect. All right, so let's turn over to Amrath, and I'm just going to throw out, you know, nothing on this podcast is investing in vice. Obviously, Mike owns almost 20% of the company, so he's got to. view here, but I think this is going to be a really interesting conversation. So Am rep is, the ticker is AXR, 50 million dollar market cap company, and I'll let you take it. I know they've

got a super interesting background, actually, a lot more interesting than most 50 million dollar companies, I would say. But why don't you take us through some background and what attracts you to Amrap? Yeah. And yeah, I think everything you said is the case. And going back, the company initially bought, I think it was 90,000 acres of land in an area of New Mexico that borders very close to Albuquerque and kind of incorporated it as its own town. And it was an East Coast company and marketed the land to East Coast investors or other people as an investment opportunity as a place to have a retirement home. or I guess save it for your kids one day.

And so over the, I guess the course of the 1970s and maybe early 80s, this was done with a very skilled marketing team, and they sold a lot of single lots to a lot of different people. And ultimately, this did not result well. They were charged with various levels of, I don't want to say fraud, but overstating what they're selling. They're selling lots without

a lot of infrastructure or anything like that that you really weren't able to build anything on. And so I think a lot of those suits were sold in the early 1980s. And I guess looking here now in 2020, it's very interesting that a lot, the town that they had incorporated is called Rio Ranch in New Mexico.

And today, a lot of the things that they originally marketed have come to pass. And so Rio Ranch is now that their largest city in New Mexico, almost 100,000 people, two universities. Intel continues to be a big employer. They set up a shop and Rio Ranch in the 1980s. And it's a growing and bustling city. It's about 15 miles from Albuquerque,

the largest city in New Mexico, which has about half a million people, and less than an hour's drive from the capital of Santa Fe. And I guess going back to our visits or our due diligence, we've made numerous visits there. And I think the impression is it's kind of like the land you see in Breaking Bad. And that's probably an accurate description. Breaking Bad was based in Obakirky, but it's not a lush oasis by any means. but it is, I think, a decent place to live.

It's a growing city, it's business-friendly, and it's a place where I think people are attracted to based on a low level of crime, good jobs, very good schools, and a low cost of living. And so we think over time it will be a place with a good climate as well. So I think the initial people, salespeople in the East Coast had a lot of things right when they were initially marketing it. But so, yeah, over time, while going back until last year, the company had both a real estate business in New Mexico. And so today, they own about 18,000 acres of land in and around Rio Ranch in New Mexico.

they're a land developer, and so they'll take raw land developed into finished lots by putting the curbs and gutters and installing the utilities and then look to sell land on primarily to home builders. The company just started its own home building unit, and we can talk about that in a little bit as well. But over time, we've been able to sell a lot of lots and took it from an area of 90,000 acres that they own all of it. Now they're down to 18,000 acres.

And I guess the other business that the company has historically had, they've also had a media segment. And that's taken on a variety of forms over time. But essentially the main business was as a subscription to fulfillment business to the magazine industry. And so doing a lot of the back office stuff and call centers and things like that to help magazine companies both keep track of their customer lists and handle a lot of the back office and payment functions for that.

AmREP sold that business, I guess, as welled it down over time, sold the last piece last year in 2019. So now they're fully focused on the real estate side. And in addition to the land that they have in New Mexico right now, also still retain two buildings in Palm Coast, Florida that are left over from the media business. They also have several parcels of land in suburbs of Denver, Colorado. We don't think those are core. We think those are marketable.

And a good, strong net cash position and a combination of subdivisions, commercial land, and land that can be developed in Rio Ranch in the next five years. And some that will take a longer period of time. But a very large land base is one of the main assets of the company. No, that's a great overview. And I love the history. I remember reading about this company years and years ago when they had the magazine distribution business and it was a cash cow.

And people were like, well, maybe it doesn't die as quickly as people think and stuff. but now it's it's the pure play Rio Rancho. So what I, you know, I think most of the questions I got looking at this was, hey, these guys own 18,000 acres of land in Rio Rancho, how do you get comfortable valuing that land? Because, you know, if it's land that's directly next to one of the colleges, that land could be worth a literal fortune. Whereas if it's 18,000 acres kind of that starts on the very outskirts of the town and

just runs out into the desert, that land's worthless. So how did you guys get? comfortable with the valuation of land and kind of how do you think about the value there? Yeah, you're absolutely right. The value of their land probably runs from $500,000 to a million for certain acreage and under $500 an acre for land that's on the very outskirts of the city. So from evaluation standpoint, I guess a few things we did for pieces of land that obviously have a higher and better use. They just completed construction. of a building that's being leased to a natural grocers grocery store.

And so that was done on a piece of Amreps commercial land. They did a build-to-suit. It cost them a little over $2 million to build it out. They're getting, I call it $325,000 or so a year in rent, and they're currently marketing the business or the building for sale for $5.7 million. So when you have a piece of... $5.7 million? That's right, yeah.

I thought you said billion. And I was like, oh, my God, this is the... the bottom of the century. That's a skyscraper, about down since a 13,000 square foot grocery store. But so that's one example of a piece of property that is easier to ascribe a value to. I guess we start with the easier stuff like that and then kind of work down to the harder stuff. So other kind of properties that have probably more of a value that you can place your finger on, the company owns approximately 35 acres of commercial land at the corner of Highway 528 and Highway 510.

So that's on the northeast side of Rio Rancho. So it borders a Home Depot and his kitty corner from a casino, actually, the casino in town. And so this land, we think, has significantly more value back in 2016, 2017. The city had plans to bring in a movie theater complex there. And probably, I guess based on what we know now, movie theaters aren't doing great in 2020. But it's a prime piece of real estate. the other acreage in the area goes for $300,000 to $500,000 an acre. But in terms of valuing it, it's still kind of a challenge.

It's a large piece of land in a great location, but what ultimately is the value of it. We think there's the potential that the company can utilize that to do something on their own, whether it's a build-to-suit for restaurants, gas stations, hospitality, or other things, it's in a prime location. We think something will happen to it. We also think the city for tax revenues would like something to happen to it as well. But we try to kind of be on the more conservative end there, but we think even that piece of property is worth $5 to $10 million on its own. And for, and I guess moving away from the commercial land that you can kind of put, put your finger on a little bit. The company has a number of subdivisions where residential subdivisions where it essentially has a contiguous piece of raw land and then looks to, again, put in the utilities and curves and gutters and things like that.

And so a lot of this information, in terms of the progress on these subdivisions, the company provides some information in the 10Ks, but a whole lot is available just on the Rio Ranch of City websites. And so we're able to track housing starts by subdivision and can see as home builders take down lots, the timing that they move forward with each individual subdivision. And so through that, we can essentially model out subdivision by subdivision with our forecasts for absorption in order to forecast out how much cash flow we think those lots will develop. So kind of from a high-level standpoint, an acre of land in a subdivision such as Lomas Incantatus, you generally get five to six lots. per acre, and they typically sell for $70,000 to $75,000 a lot. So more recently, the company's developed land, if you look in the, the case or cubes, has sold for $400 to $450,000 an acre. And so do you put a value of $400 to $450,000 an acre on the whole mess of it?

No, I think that that would be way too aggressive. But when you apply it to the land that they actually have finished lots on and can actually create a DCF analysis when you put in assumptions on how much will cost to develop those lots. So an investor, if they dig in, can get a fair amount of information just from the city websites and other things that the city puts out on the pace of absorption there. And we think that can be a big help in evaluating. and valuing how much some of this line can be worth. No.

And, oh, I was just going to say the city website hint is great because I actually read through the 10K yesterday and obviously it's got the historical numbers and something like 400,000 for commercial lots jumped out to me. But I was like, wow, it is, it is tough to get information on this company. So that's great. Were you going to say something else? Please, go ahead. No, I think that kind of highlights for, call it 1,500 to 2,000 acres of,

of the company's 18,000, what value you can place on those subdivisions based on absorption, or maybe you can say if they were to sell this outright, what another developer would pay. And then it gets tricky from there. So they own another 15 to 16,000 acres of land once you take out those major subdivisions and major commercial properties. And it's not all contiguous. And so as back in the company's day when they were marketing a lot of these lots, they at least sold some East Coast investors in here and here and here and here. And it makes it so it's more of a checkerboard pattern in some spots than others. So as we look to that, they've got about 2,000 acres of contiguous land in addition to

they're active subdivisions that should be fairly easy over a course of, call it five years, five to ten years to should there be demand to also fully consolidate that and move it forward in various subdivisions. And then on the outskirts of town, they're interesting things too. And so it's tough to tell, I think, going back to the housing boom of the early 2000s,

the company was able to sell a lot of land that very good prices that might not be prime, just it has value when people want it to have value. And so I think a neat thing about New Mexico, there have been things like solar farms that have been either contemplated or starting to be put in place in outskirts of cities. And I think over time, it'll be an area that fills in and you might see value in there in more like the 20 to 50 year range, but you can put a big discount factor on that. But I think over time, you'll see a lot of the land

consolidate and have the opportunity to be put to the better use as well. And I guess a big, it's not really, it's not going to be a huge value driver today, but the company does have 55,000 acres of mineral rights, left over from the 90,000 acres of land. And it's an area that's supposed to have hydrocarbons. And there's not a lot of exploration work being done now. The old sandwich energy was ready to drill well probably three or four years ago.

Then's no longer going forward. But I think it's interesting just the optionality or the option value that can be there. Should something change or should the environment, Chairman change. So that's there as well. That's great. I've got a few questions on that. First, you mentioned that in the early 2000, they sold some lands at attractive prices. I think you were being a little bit too conservative there because listeners can go, look, the stock peaked at over $100 per share in 2006, 2007. I think they did a couple deals and people were like, oh my God, this is a gold mine and then it soon crashed back. But let me ask you a few things here. First, you know, obviously, I think the core piece of their value comes from these lots that they kind of do some developing on and then sell to home builders or increasingly, it sounds like they'll do the home building themselves. Has the pandemic really kind of accelerated that development process? You know, a lot of the home builders are, the results are kind of record lights out. Has this been, have they been a big beneficiary of that? Yeah, they have. And I don't think

it's all been incorporated or recognized yet. But yeah, housing starts over the last two or three months in Rio Ranch have been the highest since they've been since the housing bubble or housing boom in 2005 and 2006. And so I think houses are very affordable in Rio Rancho on a relative basis. And so you see a lot of new homes, three or four bedroom homes selling for $250,000 or less. And I think what you've seen from the pandemic is people don't or have hesitations about living in cities or the benefits of being in big places has been reduced and that includes I think anything from Albuquerque to neighboring cities and states as well. We've also seen record load levels of interest rates. I think that's really helped

to facilitate the demand for housing and probably where you've seen the millennial population want to live in cities, I think the desire to be there has decreased as a result of the pandemic. And as you mentioned, this has had a big impact on home builders, seeing very strong demand, but a problem that was the case even before the pandemic was just the availability of finish lots in order to build homes on. And I think what we've seen is the value of houses and new houses appreciate a good amount as a result of the pandemic. And at the end of the day, I think at least a good portion

or a substantial portion of land value does accrue to the landowner as well. And so you've got a land base that's in short, And I think as you've seen home builders in strong demand for lots, then places provides a lot of value to AMREP, both in terms of velocity or absorption of their land, but also in the price they're able to charge. And from an operating leverage standpoint, other than the additional cost that AMREP might experience in terms of developing those lots, all of this should be going to the bottom. want. So it's, it's going to be a fixed cost type scenario. And when you're able to raise price in that type of environment, it should be very beneficial in terms of what flows down to the bottom line. A different way of looking at this. So, you know, when you describe what Amrap's goals, you know, they've got these lots, they're going to develop them, give them to home

builders, develop that type of stuff. The first thing that pops into my mind is, and then you also mentioned the mineral rights that they've got. And when you say all this, the first things that pop into my mind are Howard Hughes, HHC, St. Joe, over in Florida, Joe, for the mineral rights, like a BSM or actually Texas-specific land's done really well. But, you know, when I hear all those, those are things that I don't think AMREP fits completely squarely in those, but those are types of stock that the market, they just, you know, the past 10 years, I don't think they've gotten any recognition or had any success in the market. Do you kind of worry about that at all? Or am I being too, painting too broad of a brush here? Yeah, I think it probably gets grouped in what you call an asset player or something

like that where the sum of the parts makes sense. But in order to realize that value, it takes a long time or doesn't come about as quick as he would hope. So yeah, it's certainly a worry. And it's tough to predict the pace of development. I think that's always going to be a challenge. I think it ultimately comes down to, well, it's nice to see. I think you threw out St. Joe as an example, but one thing they've tried to do is to do a lot of their own development and make the pan-anaddle of Florida.

If you build it, they will come type of mentality. And I don't think maybe that's necessarily where AMREP is, but I do think that the company's had a lot of success, maybe on a limited basis, but in areas where they're able to add additional value to their land and also make the city more attractive. And so I mentioned the natural grocery store, but right next to that in 2016, the company built a Starbucks restaurant. And they built it for a million dollars and sold it for two and a half million dollars.

So I think there are opportunities like that going forward. I mentioned the 35 acres of commercial land known as Commerce Center, that that can, that's an opportunity. I think they'll be conservative in doing that. But if there are opportunities that are attractive and they don't have to take a lot of risk in terms of building it out on spec that that's something that the company can do and it'll be interesting to see too i think where people run in trouble is that there is a lot of uncertainty just in the pace of selling lots yeah and so what what kind of multiple do i put on that and what kind of run rate and uh it's it's

kind of interesting to see if you are in kind of an if you have an opco company or a yield company in addition to the land, I think maybe that's where St. Joe has benefited in recent years. And there's no reason that rather than selling the natural grocers for five and a half or six million dollars that they can't retain the operating income associated with that and have a series of commercial buildings that are much easier for outsiders to recognize, to value. And take kind of an approach of we're going to have this big land asset base in our pocket while also being able to generate current income by maximizing value of the lots we have. And I think that's something that the companies like to accomplish.

They started a home-building venture internally called Amristan. on. And the ideas of a lot of home builders are looking for these big areas of land that are hundreds of acres where they can really incorporate their economies of scale and build something out home after home after home. Yep. And just based how Am rep sold lots at the company's inception, they have a lot of lots that in the city that are just single lots.

I remember reading and I was like some of these lots, like I think it's like an eight home lot or something that they could fit into or something. And Lenar is never going to want to go buy that because it's more management headache than natural profit for them at that point. Yeah, exactly. And the benefit the company has in terms of, I guess you'd ask yourself naturally what your competitive advantage is of competing with a national home builder. that has done this and their pros at it is just the lot cost.

And I think this is a potentially very interesting way of putting a value-ad product, which is a home on something that previously would be very difficult to build out, unless you sell it to someone who's looking to kind of build out their own home. what Amrups able to do is to both build out on single lots or in smaller, as you said, eight or 15 or 20 acre parcels. And also, I think from pricing standpoint as they go back to the home builders, when the company has their internal capabilities to do this on their own, that in terms of maximizing value that they're able to obtain to the loss,

they do sell to builders, that it provides them a lot more leverage. in order to get the best price. That's perfect. And then, you know, one of the other things I think, we mentioned St. Joe, which it's been a battleground stock. It's probably just starting to get some momentum, as you said, because they've built up enough of these income producing things. When I look at Amrep, is the right way to look at it over time

almost kind of as a very long-term liquidation in that, look, they're going to develop this round of lots or sell this round of lots. They'll take that cash to go develop the next round. But eventually, you know, they'll have sold most. of their acres and there's only so much, and maybe it's a 20 or 30-year time period, but eventually do they just give all that cash back to shareholders, or do you think the long-term is, hey, they go and they build some of these buildings and they keep them on their income statement, and then they go buy some land out by Las Vegas or something and look to develop

that. Like, how do you think about the kind of longer-term play for this? Yeah, I think there are a lot of different ways they can go. And in terms of building out properties and then either monetizing them or taking the income, I think it's a very challenging situation right now. And I think all investors right now would prefer the yield code type opportunity where you're able to put a cap rate on income that's coming in. But at the same time, I think the Starbucks restaurant, they sold, they had a cap rate of 4% on it.

Yeah. And so I think that becomes a pretty difficult situation on whether you take the cash up front or take the cash over time. And I think in, I think therefore just with their balance sheet, the flexibility of, if there is a motivated buyer,

an attractive cap rate to monetize those upfront or I guess really a, an investor owner should be indifferent to taking something now at fair value or taking the cash flows over time. But, yeah, there are two different situations, I guess, and it will all be a situation or property dependent. But ideally, I think if they do decide to, say, sell the natural grocers building, that they either put that capital to work in building out more natural grocers. or similar things, which can perpetuate, I guess, an income-producing stream later on if they're not able to sell something for the cap rate they want. They can buy property in another area, or they can return that to shareholders.

And I think any of those are appropriate as long as the investments you're making are within risk-and-return parameters of what investors are looking for. So I guess to go back to your initial question, what I think will happen, it'll be a very, very long-term liquidation if they were to sell everything off. And so I think it can be kind of a problem, too, that the 18,000 acres, as he said, if you're on a mountain or a hill and you look over it, it's just an immense amount of land. And would the valuation be any different if they had 2,000 acres? I don't think it would change all that. based on what people are looking for. But I think the duration of your asset then is much, much longer.

And assuming that Rio Rancho continues on the growth pace that has been on, their runway is more of the 50 to 100-year range with the land asset they have in place. And would it be appropriate if they sell things over time, keep no, yielding properties and just return that to shareholders in excess of their daily operate needs. I think that would be a good use of investor capital and something that's rewarding to investors. On the other hand, if they decide the properties we build and the yield we get, we're going to retain that and have this be major investors not only the land outside of Rio Rancho, but in properties within Rio Rancho,

which should also benefit from growth in and around the city. So I think either way, as long as they're getting fair value for their developments that they sell, it should work out fine for investors. But I guess the, I want to say the volatility or the consistency of those cash flows are going to be much different. depending on which path you take, with a yielding type property much more steady over time, with a development and sales strategy being much more volatile depending on how the underlying economy is going. My personal belief, and I suspect you would feel this as well, is I would prefer them, you know, tax considerations can come and play in here.

But I'd prefer them, hey, take the million, build a Starbucks, sell it for two and a half at a four percent cap rate, and then take that two and a half and return some to shareholders, go build another Starbucks, all that sort of stuff. But at the same time, you do kind of look in the stock market and you'll see, oh, like, that's a bunch of land income producing buildings and the stock market is valued at a 3% cap rate. Like, I wouldn't mind getting valued at a 3% cap rate right now. Let me ask, so, you know, you said Rio Rancho's thriving. I know Intel's a big producer there. I'm not super familiar, but Intel's obviously running into some issues. They're still a giant company, but they're running some issues. Has that affected the presence in Rio Rancho at all? Or is that?

Is everything kind of okay there? Yeah, I think everything's okay there. And I don't have the name of the exact technology. But over time, Rio Rancho was at its peak, employed probably 5,000 people there. And then had gradually decreased down to just north of 1,000. They have a number of contractors there as well. And there were questions on whether Intel needed to continue a presence in Rio Rancho.

And Intel went through a number of facility reductions. And ultimately, it appears that Intel continues to make a big investment in the Rio Rancho property. And the employee count, I think the last time I saw it is 1,800 to 2,000 people. So it's increased. And I think just based on Intel's investment and from what I've seen there, that it continues to have a, the facility there is an important part of Intel's portfolio and one that they'll continue investing and doing forward. Perfect. Perfect. So, you know, shares today trade for about $6.50 per share.

If we were to, if you feel comfortable, like if we were to break down the asset value of AMRAP, so it sounds like there'd be developed, there'd be undeveloped, obviously there's a good amount of cash on their balance sheet. They've got some colleagues. Colorado and Florida assets, kind of how would you think about each of these parts and kind of what would the total value come out to be? Yeah, I think when you look at a market cap of $48 to $50 million right in that range, a net cash value before. They just did a big share repurchase. We're going to talk about that in a second, yeah. Yeah, just in terms of returning capital of shareholders, that was nice to see.

but yeah, following the share re-purchase, call it $8 million in net cash for a $40 million enterprise value. And I guess starting with kind of the non-core assets, they have two commercial buildings that they own in Palm Coast, Florida, that are left over from their media business. And those are currently for sale on the market.

One is listed at $8 million. It's $140,000 square feet. and the other one is I call it 67,000 square feet that's listed for 5.75 million. I've been to both of them. I had a tour of them a year or two back. They're nice buildings.

A good part of them, they're kind of mixed between office and warehouse. A good portion of them is high ceilings, kind of 30-plus ceilings that a lot of the warehouse or distribution companies are looking for. So I think they should pump Coast Florida, it's a city on the eastern side of Florida, kind of an hour from Jacksonville

and an hour from Orlando, just north of Daytona, and kind of a seaside or an oceanside town. I think those buildings have value, and they are not currently occupied, and so that's something where a commercial real estate investor will have a tough time putting a yield on it. But in terms of demand for it, I think it's just a sweet. spot of what the industrial type building that people are currently looking for. And so they're still on the market for sale, combined value of $13.75 million. I guess you can place whatever haircut you want in terms of when that sells or timing on that as well. But we don't think there'll be a big tax impact. The predecessor media company had some operating losses and some capital losses

that we think can be applied against any gain. So we see a good amount of value there. And I guess I'll transition. They've got two properties in Colorado that we also think have a good amount of value, especially compared to what the company's enterprise value of $40 million is. So they've got a four and a half acre lot in the city of Parker, Colorado. It's a southern southeast suburb of Denver. The property is on the corner of Main Street and Jordan, and it's listed for sale at $4.5 million.

So again, it's listed because it hasn't sold yet. But in terms of Parker, it's a fast-growing community. I think the property just in the south is going to be developed into kind of a senior housing facility. There's medical stuff going in blocks away, and it's right. rapidly growing, and the property's only increased in value, I think, over the last year or so. And what was it listed for? Four and a half million. It might be $4.3 to $4.5 million.

And they also own $100, I call it $160, it might be 165 acres of residential land in Brighton, Colorado, which is northeast suburb of Denver, not too far from DIA, Denver, Denver, and Denver. And it's slated for a residential development. It hasn't moved forward yet. A neighboring development has had some water issues. And so I think this ultimate solution here is kind of a compromise with the city where you put in a retaining pond and then add in some water rights downstream in order to make the property I guess is a development candidate.

So 160 acres of land, again, in an area where housing is very hot right now. I guess ballpark figure, we say that's $25,000 to $30,000 an acre. We think that could be low. But I can see it again to another $4 to $5 million of value, which our company of Amherap size isn't. Oh, I'm writing the notes down. now, and I'm already looking at it like, oh, that's a lot of value that we've already talked about so far. Yeah, and then I guess within that property, too, it's called Mount View Estates in Brighton, Colorado.

They own a good portion of the mineral rights under those 160 acres. And great western, I don't have the name exactly right, but great Western drilling or Great Western Energy, drilled a path site just north of there. And for a good portion last year, they were getting, probably got $600,000 or $700,000 in mineral rights just from that property last year. Those have dried up with the drop in energy prices. Yep. But I think our take is that Great Western planned on drilling or refraking those each year.

And you can track those on the Colorado, forget the acronym, but the Colorado Oil and Gas website, they provide well data. And you can get a good sense for what potential revenues would be there. I think AmRef's 160 acres as part of a 1,000-acre combined pad site. But you're able to track that, and it seemed to be fairly prolific when it was first drilled. I guess in early 2019. So those are kind of the non-core pieces. Yeah, I mean, we just went through non-core pieces and my notes has we're at $20 million of value if you, you know, you might have to discount some of this, but we're kind of at $20 million

value. That's about approaching $3 per share after the buyback. And this is a $60.50 share company. I don't think we've got to the stuff you're most excited about. Yeah. And so all that's, we think, extra, it's all for sale. You don't know if or when it will sell. And ideally, when the proceeds come in, they'll be invested either in other good things

or perhaps even return to shareholders, which I think represents over half the enterprise value of the company and is where we come about just with non-core properties. Yep. And, yeah, getting to, I guess, Rio Rancho, we think the natural grocers building is worth in the neighborhood of $5 to $6 million. $2 million of the company's debt is associated with building out the natural grocers building. So we think if there is a sale, then the debt value, essentially the debt value gets cut by $2 million. And you've got called $3 to $4 million. dollars in coming in the door as well.

Commerce Center, 35 acres, northeast portion of Rio Rancho. Again, we put a value that's somewhere between $5 and $10 million on it. And that hasn't sold yet. We think it's an attractive piece of property. But if or when it's monetized one way or the other, we think that's real value to AMREF shareholders. And then the company has a number of residential subdivisions. We think based on the current pace of development, that they can develop 150 to 250 lots per year.

And if you want to say it's $70,000 a lot, you're looking at $12,000, I call it $12,000. 18 million dollars a year in revenue from residential lot development. In terms of the economics behind that, it's fairly challenging to get to. We estimated a cost somewhere between $35,000 and $50,000 to develop a lot. You'll see an interesting, I guess, accounting component to AMREP is they publish their gross margin for a lot. And it's historically come out between 15 and 15% and low 20 percentages. But part of that is that the land value of that lot, they already own. And so it's not a cash expense.

And based on the company's massive land portfolio, it counts as an expense where it gets added back each year in the cash flow statement, land that is sold and hasn't been invested in. So we do think that the gross margin understates the actual cash economics over time. And that massive inventory of land that's marked at $55 to $60 million on balance sheet, but that trickles down over time as land is sold without having an investment in that land to upset that. So we think that's a neat function of that. and I think that would add value to the company over time. And then we think about, I guess, the home building business as well, that's new. And we really don't have enough economics on that to make, I guess, a company forecast.

The company's first subdivision was just kind of a 12 home business. It was 12 lots, they were essentially townhomes with two neighboring town homes, six sets of two neighboring town homes. And just through the city data, you can see what, when someone files for a building permit, you can see what they think it'll cost to build it. And the costs for these to build out were $135 to $140,000 each. and Am rep so far the subdivision started in March or April of this year and what timing that they've sold one home and all 11 others are pending for sale yeah and average price is probably $210,000 a home and so you're looking at kind of $75,000 we see as an approximate gross margin just on the company's first subdivision.

They've filed for a few building permits in subdivision number two, and I've also filed for a permit or a housing start on one or two scattered lots. And so I think the ultimate goal is that they're not going to be a horton or Lennar, but if they can build out 30 to 50 homes a year and call it a 50 to 75,000 gross margin or gross profit for home, it starts to add up when you're a company of AMRF size. Yep. So let's see. So if I'm just doing the math, I mean, we went, we talked about 20 million and non-core assets.

I call it 3 million net equity net to equity on the natural grocers, 5 million from the commerce center, the Resi subdivisions. I'm just doing the math of my head. It sounds like the net present value of those is like 10 to 15 million. Am I thinking about that correctly or am I missing something on that? Yeah, I put it higher than that. But it's a more challenging calculation to go about. I think for me, they're probably netting $25,000, call it $25,000 a lot. And if you sell 200 lots, kind of think of that as 4.5 million dollars a year. There will be volatility there. So I don't think you put kind of a 4% cap rate or anything like that, but for that, those type of lands, we kind of value in the 30 to 50 million dollar range.

Okay, okay. I understand if people want to cut that down based on the uncertainty of being a lot developer but just for for the property and how we think about it that's no that's where we put it and it comes down to i don't know they probably have 1500 acres of land that fall into that category and if you call it 30 million bucks it's what 20,000 dollars an acre no that's perfect i was just doing the math in my head and obviously uh the assumptions can wildly swing you there so you know, so that would be kind of resi subdivisions alone in your mind represents basically today's stock price and then pretty much everything else in there is for free. And I don't think we've talked about the kind of other 15 to 18,000 lands that's kind of on the outskirts of

the city of New Mexico. So that would just all be free at that point as well. And that's a very long-term assets. And so a lot of those, unless something happens in terms of a power plant or a solar plant, then those will be long-term. But we think over time, it's a growing city and the subdivisions of today, the city will work its way west over time. And at some point, we just think it provides a very long runway to, I guess, the resident, lot for the residential subdivision business. Zero percent interest rates. The future is today.

So if I put all your math together, would I be right in saying that you think a conservative some of the parts would kind of be in the mid-teens for the company? Yeah. I guess the other aspect of it is there is corporate costs. And so we take out all part $3 million a year and provide cash. kind of a cap rate multiple on that. And so that's assuming it goes on into perpetuity. And so when we think about it, we think of at the end of the day,

the enterprise value should be somewhere between $70 million and $120 million. And equating the share price of $9 to $14 a share. Perfect. No, that's great. That's great. And I think there are going to be some readers who are very happy with the math that you just laid out there because I know a lot of microcat people were looking forward to hearing you talk about this. Last questions I want to end up with on AMRAP. So over the summer, you guys switched to a 13D for about three months and then you switched to a 13G. What was kind of driving that if you can speak to it?

Yeah, I'll keep this at a pretty high level. But I think just based on the 13D filing, we were interested in talking about high level things such as. as corporate governance and capital allocation. And I think as we look today, the company initiated a share repurchase program, initially bought back, called 11,000 shares at 448, and more recently repurchased 675,000 shares in 618. So it I think was nice to see what appears to be

perhaps a change in the main. mentality where, from a capital allocation standpoint, potentially returning capitalist shareholders is, it probably always was an option, but it's more of the forefront now for the company and maybe. And the share repo is actually the last thing I want to tell you on, because it's interesting. I think they buried that they approved a share repo in an 8K, like they announced voting results and then right at the end of it, they said, by the way, we approved a share repo. And then they bought over 8% of the company back in a big block, maybe a week or so,

go for $6,0.18 cents per share, who'd they buy that block from? Do you know? My guess is from Bauer Media, and so as of the last proxy filing, Bauer held approximately 730,000 shares. They were a non-core holder, in my view, a media company that actually took the shares in 2014 in exchange for some accounts payable that Amrap owed them. So a German media company that is my guess. And what I would view is probably a non, this would be a non-core holding for the company. So I think a monetization here wouldn't make sense. No, you know, that's just one of the things I love to see where a company that,

especially a smaller company that doesn't have a lot of history of capital returns, all of a sudden kind of switches a flip. And maybe it's because they had a four-seller here, but that's a really big repurchase. I think that kind of speaks to what management kind of sees the value here. Anything else we should be talking about, Amrop? No, I think we covered a lot. Hopefully it was a nice overview. I think it's challenging to get the full picture and in a place where not too many people have been.

But I've enjoyed my business there. And I think it's a nice place to live. and to the extent that people have other questions or I want to chat about it, happy to talk about it. Yeah, I'll be sure to put the Gate City Capital website in the show notes so people can reach out to you. Hopefully the podcast will either get some potential stock buyers to reach out to you or maybe just a homeowner or two to move out there because we talked so highly of it. But Mike Melby, I mean, this was a great conversation.

I think people are going to be really interested in AMREP and just the silent general. Thanks so much for coming on and we'll be in touch soon. Yeah, thanks for having you. Really appreciate it. Have a good one, ma'am. Take care.