Yet Another Value Podcast - Uncovering CATO's value with Mike Melby

Episode Date: June 30, 2021

Mike Melby, Founder and Portfolio Manager at Gate City Capital, makes a repeat appearance to discuss his investment in CATO. CATO is a small retailer with a rock solid balance sheet; Mike thinks their low multiple combined with a focus on returning cash flow to shareholders and some hidden tax and real estate assets creates an attractive investment opportunity.Mike's first appearance on AXR: https://youtu.be/mSEgw2529Q4Gate City Capital website: https://www.gatecitycap.com/Chapters0:00 Intro1:00 Cato Overview5:45 Cato's target demographics8:45 Cato's online strategy (or lack thereof)13:15 What's driven Cato's store base recently15:30 Discussing CATO's management22:05 Valuing CATO's land27:35 Quantifying CATO's Sum of the Parts (SOTP)30:15 What's the endgame for CATO?37:25 Mike's closing thoughts on CATO

All right. Hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have on for the second time, Mike Melby. Mike is a founder and portfolio manager at 8 City Capital. Mike, how's it going? Hey, doing well. Thanks for having me. Excited to be here. Hey, excited to have you on for the second time. And since it's your second time, you know, I start every podcast by pitching you my guest. Guests can go back to the first podcast to hear the full pitch. But I will say, you know, just to add on to that, I will say you're one of the, most requested repeat guess, which is kind of surprising because the first stock we talked about was a $100 million kind of little land bank out in Arizona, but it's double sense we talked about six months ago. So maybe that's why you're so popular. But look, I enjoyed the last pitch. I'm really looking forward to this one. And I'm just happy to have you back on. So that out the way, the company we're talking about today, it's Cato Corp. The ticker is C-A-T-O. I'll just give a blanket disclaimer. This is a little under $400 million market cap company. That's very small, so everyone should remember not investing device.

Please do your own research. Remember very small, so you need to be careful with this. But that all said, I'll just flip it over to you. Who is Cato? And why are we so interested in them? Yeah, thanks again for having me. Cato is a retailer of women's fashion clothing. They operate 1,300 stores in the United States through three, I guess, separate concepts.

One is Cato. One is its fashion. And the final one is Versona. They're no frills retailer, all private label merchandise. I get 1,300 stores focused in the southern and southeastern United States. And they've taken an approach that our shoppers, our customers, are going to shop in the store. Only about 5% of their sales go through the online channel. But very long history, stores have been profitable consistently.

As you see, a lot of retailers go in and out of favor. They've been consistently profitable, generate good free cash flows, and returned a lot of capital of shareholders, which I think we can touch on later as well. But what we're seeing now through the pandemic and maintain a very strong balance sheet, as Andrew mentioned, a market cap right around $360 million. Over $180 million in cash and marketable securities,

They're also getting back an additional $33 million through prior income tax refunds from the CARES Act. So we're looking at an enterprise value of around $150 million. We've got them generating well over $50 million in EBITDA. We think a lot of that goes to free cash flow. And at our core, we're deep value investors and margin of safety investors. And generally we look for companies with some sort of real assets, as we talked about AMREP, last time with a big land holding in Rio Rancho, New Mexico. But Cato, while they lease all their stores, they own their corporate headquarters and distribution center, they're located in Charlotte,

have 600,000 square feet of space, around 150,000 square feet of office space, 450,000 square feet of distribution space, we think then has significant value. And they also own 350 acres of land in southern suburb of Charlotte called Fort Mill, South Carolina. It's called the Southbridge development. They partner with a local developer, have constructed one commercial building on that, still have about 335,000 square feet to go. And it's a very popular area. We're seeing a lot of activity there. A couple of companies looked at it and passed for big corporate headquarters, including the Carolina Panthers, Sintin Corporation also looked at it. And we think it's a matter of time before they're able to monetize that for significant value.

And finally, they own 185 acre parcel of industrial land in another southern suburb of Charlotte. We think that has a good amount of value, too. We've valued around $10 million. And we think if the company doesn't sell that, that can be used for a future distribution. facility while they could like to monetize some of their Charlotte land and buildings there. So overall, we see the retail space really opening up and people are looking to get out and go shop. And one of the subsets cater, or Cato caters to is plus-sized women. And we think with a fair amount of potential weight gain or even weight loss during the pandemic,

that people are going to look out and try to get new fashions and clothes that don't remind of being inside. So at a high low view, we see a company with an extremely strong balance sheet in the retail space. They're not going anywhere, right around $150 million enterprise value when you take out their income tax receivable and generating north of 50 million an EBITDA, and we think well, north of 30 million in free cash loan. So that's kind of a summary of why we like it and who they are. Look, that's a great overview. And I guess I have two. comments on it. First, you mentioned the weight gain in COVID, and I'm very familiar with that part of COVID. But second, this is why you're the people's one of their most requested guests,

because yesterday I flipped through the 10K, I put together some notes and stuff. I read about the real estate and I was kind of like, oh, this is an older company. I'm sure the real estate. They don't own their stores. I'm sure it's negligible. You're coming out here and hitting me with tens of millions of dollars and potential some of the parts value there. So I want to dive into a couple different things, but let's start. Let's start with Cato, the retail side. The first thing, I believe the first word in their 10K is they target the junior slash missy side as well as the plus size. And it just strikes me as a little bit strange to target junior missy and plus size women. Am I looking at that correctly?

Was I reading that right? Yeah, that's correct. And just visiting their stores, it's kind of split up half and half. And so you have half the store that's more junior missy, which is primarily focused more at, I guess, guess the younger demographic and the other side is more for plus sizes. In terms of the store base, and maybe just going back to their strategy, again, they've operated for 50-plus years, they focus on strip centers. And so the whole mall concept is a big focus in retail right now. And right around 6% or 7% of their stores are actually located in mall. The vast majority are

are located in strip centers with about 50% of their stores being located near a Walmart or in a Walmart strip center. And so that I think caters well to who their target market is, which is probably at the lower end of the income side, all private label clothes, just perusing through the stores, a lot of materials in kind of the $15 to $35 price range. And so I think they've done a good job of focusing on the demographic that fits them best and not trying to be too much else. So it's very, I think it's a very frugal concept.

They're focused on making money in terms of stores. There's a store manager, two assistant managers, and then a handful of part-time help. And they've cut back a lot during the pandemic as well. And so their total employee count went from 10,000 employees. down to 7,500 employees. And so we think they've probably found some ways to operate more efficiently than they have in the past. But yeah, going back to the target market, lower end on the demographic and income side,

we think that probably caters more to a less online crowd as well. And generally in smaller markets where women don't have a lot of options to a shop, again, located oftentimes by Walmart where their products are going to be significantly more fashionable than Walmart, but it is a much better value point than your mall-based review. So I think going back to your question, those are kind of the target customers with the interesting opening line in the 10-game. No, that's perfect. You beat me to my next question. The majority, or a lot of their stores are kind of focused on Walmart, which is perfect, so you can kind of understand their target market a little more. I guess my next

question would be, so keeping in mind, Cato, it's still a controlled company, the CEO, he's obviously not the founder. I think he's the grandson of the founder, if I'm remembering, but he is 70 years old. And when I think family controlled retailer, 70 year old CEO at the helm, the first thing that comes to mind is a lot of these guys are slow to move into the future. You know, I think Dillers, which didn't really have an online strategy, even though that somehow became a meme stock. These guys, less than 5% of their sales are online. And you could look at it two ways, right? I think the nice way to look at would be they don't have a lot of, they don't have a great brand, a lot of online distribution.

And so they're just playing in places where they can make money. It's smart not to do this. The other way you could look at it is, hey, online is the future. They've got a 70-year-old CEO. It's kind of tired, tired, stale, store base. And they're not, they're not really making that investment because it's not what he wants to do. This is what happens with older family-controlled mall company. So I guess I threw a lot out there at you, but if you could just kind of comment on overarching

and how you look at both the lack of online sales and the family controlled aspect. Yeah, so just on the family controlled aspect, John Cato controls 40, approximately 48% of the voting shares through around at 12% economic interest. So there are two classes of shares, and the stake he owns has 10 times voting rights. And so while it's not essentially controlled with 48% for all purposes, he controls the company. And, yeah, I think there are several ways to approach it. And I think the way the company's approached it, and maybe they're behind it, maybe they made a huge misstep here. But they're focused on ways to make money, and I think with the significant economic interest of John Cato, that he wants to make money. not interested in doing investments in technology that doesn't generate a return.

And so they do have an online presence. You can go to cato.com or persona.com, which persona is more of an accessory store than is their mall-based concept in a higher-level income consumer. But right around 100 persona stores just for background there. But they'll sell online, but they don't want to have it degrade their profit margins. So I think going forward, they'll do what they think makes them the most money in the current environment. Again, their customers like the shopping experience. They like being in store.

And they try to make it a store where it's a social activity. And again, a lot of their stores are in locations where you don't have a lot of options and try to coordinate the store so you can pick out a full outfit. And we'll see how kind of spending goes in terms of apparel purchases going forward. But it is always helpful to try clothes on to see how it looks to make sure it looks the way you think it looks. And I think from a Walmart standpoint, too, a big amount of their customers are going into the store and shopping physically in the area. So overall, I think it's a space where the company does not want to invest in things that make them less money and subsidize the online experience for the in-person experience. And historically, it's been a very profitable mode for them.

And I guess going forward as well, a lot of, we think they've been able to renegotiate the leases on a lot of their locations. Leases run from one to five years and in the event that a store is not profitable, average leases between two and a half three years and they're coming due each year, we think the company can migrate out of that fixed cost base if it's no longer profitable for them. We don't see that happening right now. But they've kept their flexibility open in terms of fixed costs. They're not 10-year high-rent areas that they're going to be stuck in for a long time. So we think that mitigates some of the risks there, too. And in the meantime, they're generating a lot of cash restrictions. Perfect.

We'll come back to management in a second. Let me ask you about that fixed-cost store base because one of the things I noticed when reading the 10K, they peaked at just under 1,400 stores in 2016. that drops that from, it was 1372, I think is the actual number, drops to 1281 by the end of 2019. So actually pre-COVID, they've cut 100 stores. You know, that's more than 5% of their store base. This is relatively meaningful.

But in the past year, it looks like they net opened about 50 stores, which I was surprised, you know, the past year includes the COVID area. So they were kind of expanding during COVID. And one of the cool things about this company and a lot of microchap companies, there's not a lot out there on there, right? Like they don't do investor calls. if they don't have investor presentation. So I'm only pulling this from the 10K to say this and they don't give a lot of description.

So I'm wondering for you, like, how do you look at the store base at how it's evolved, you know, for shrinking for five years and kind of growing over the patch year. Yeah, we think over the time the company will continue to like to grow their store base and should be able to take advantage of a lot of competitors that have closed up shop in their key areas and attractive red areas. But for our assumptions going forward, we have the store base staying right around 1,300 stores, which may be a bit conservative. As you mentioned, they increased their store account in 2020, and that was due to commitments

made prior to COVID. So it was pre-COVID commitments. They were actually planning to expand pre-COVID. They were exactly. And they put those expansion plans on hold. I think they just want to get a little firmer footing in terms of expectations on the store model and also see what opportunities become available. they're looking to close around 25 stores in this fiscal year.

So we think that will come down a bit and then likely look to grow it over time. And so we assume a flat store base. I think the company feels that there are stores and locations they can expand to that are profitable, but I want to be able to sure on the COVID environment and where we are at coming out of the pandemic before committing more store expansion. So we've got, I'm staying right around 1,300 stores, but I think there's upside to natural there. It makes sense of sense.

That makes sense. Well, let me turn back to management here, because one of the things I'm really impressed by, there were so many companies that shut off the share repurchase programs during COVID and just haven't come close to the turning back on, especially physical-based retail companies. And this company, I think at the height of COVID, they paused it, but they got pretty aggressive with their repurchase

towards the end of last year, of this year. They're buying back a lot of shares. So I look at this company again, I look and say, hey, these guys are not afraid to step into a share price that is pretty low and say, let's retire shares, even though the environment is very uncertain and very rocky. And I think that's going to turn out to be a great investment. But the counter is, you know, I come back to CEO. I'm like, hey, this guy, he's willing to, he's willing to shrink the store base from 2016 to 2019 when the stores might not be profitable. He's willing to buy back shares at the height of uncertainty. but at the same time, he doesn't have an online presence.

And, you know, I think if you look at the companies that I was just comping in some indexes, you know, they're, they've way underperformed. He took over a CEO in May 1999. I think they've way over performed outperform, underperformed, I'm sorry, underperformed the Russell over that 21 year period. So again, I'm of two minds here. So could you kind of touch on both the share repurchase program and how you're looking at the history of this company's management?

Yeah. And the share repurchase program, they've been, while the stock price has not performed well over his reign, they have been very active in returning capital shareholders. And we tracked it going back to 2009, the company's returned $350 million in dividends. So I think as you look about share price performance, it is good to add back the $350 million in dividends over 12 years. which is a return, and maybe it is a total return calculation, but sometimes I thought I told or returned it, but, you know, who knows? You probably did, but, and they've bought back $200 million right around there in stock over that time. And to your point, they were really aggressive last year. And in terms of

repurchasing shares, they repurchase almost $20 million of stock at under $10 a share. And this was at a time when sales were still down 20% and there was still, as there is today, a large amount of uncertainty on the COVID environment. And I think going into a pandemic where so many retailers have failed, they went into the pandemic with almost $200 million of cash and securities on the balance sheet. And I think from a flexibility standpoint, even when generating all that cash and returning it to shareholders, that they've been able to utilize the significant flexibility that both their asset base and their cash base provides to take a contrarium view when others are not as positive on the long-term outlook. So I'm a share repurchase or a capital allocation standpoint. I think recently it's been contrarian and is very value-incretive. And just in Q1, which ends at the end of April,

it repurches another $5 million in stock, which is significant with their market gap in enterprise value. And we think that all be value-increated to shareholders. And I lost the second part of your question, I guess, just in terms of managing through the cycle. I think they focus on what they're good at. And there have been a lot of retailers that have done poorly and a lot of their peers that are no longer around. And so I think they've built the company for long-term success. They were certainly hurt by the COVID pandemic with sales in Q2 falling well over 50%.

and had more than 20% last year. Despite all that, they just lost operating cash, so they lost $30 million last year, which is, I think, a pretty amazing achievement given how their industry was decimated. And I think have set themselves up well here going forward. You mentioned in 2016 to 2018, how they closed stores.

And that was a time when the company struggled from a profitability standpoint. And they blamed it, on a switch from being focused on kind of the target market we talked about before, to really catering to women with a smaller bill. And so they repositioned their clothes and their assortment to be more geared to a millennial-type buyer. And that really hurt their sales. It alienated their core customer.

They saw comps declined at a high single-digit rate, and their profitability really contract. And I think to their credit, they recognized that that that approach was wrong. They brought in, they brought back their old vendors. They started sourcing, again, to target their, the demographic that liked them best. And so in 2019 or the fiscal year, right before the pandemic, comps were again positive. And I think they had, again, figured out who they were. and their credit were able to transition back to serve their target customer, and I think they're focused right there right now.

So, yeah, the years 2016 to 2018 were rough years, and they closed stores of the result. But going back to the beginning of 2020, they felt at that time that they had the model figured out again that they could grow their store base profitably, And we're planning to do that. Everyone kind of hit the big pandemic roadblock. But we think they're by that now.

Yeah. No, it's perfect. And it's funny because everybody wants to capture the millennial audience and get bigger. But you say, hey, we're Cato. We target plus size women and we're in strip malls next to Walmart. Are you like, we're going to switch to millennial buyers. You kind of look at this and say, oh, maybe you, Cato company, who doesn't have an online presence. maybe you're not the right person to go after millennials. So it seems easy in hindsight,

but good for them for shutting it down. Let's go over to, so you mentioned three, I'm just using your numbers from the beginning, 360 million market cap, about $180 million in cash, brings you to $180 million EV, plus you get another $30 million tax credit, which were taking down to $150 million EB. And again, I read through the 10K and I kind of just dismissed the land, but based on what you were saying earlier, that land in Charlotte, I mean, Charlotte is a growth area. I like that city. I've tried to talk my wife into moving there, and she's told me, Andrew, you've only spent a couple hours there. You can't know you want to move there. But, you know, that land's obviously super valuable. So how are you looking at that land?

And maybe we can just use that to roll into some of the parks for Cato. Yeah, exactly. Just in terms of their, both their headquarters and their distribution, so we don't, we don't ascribe any additional value to that when we're thinking about the fair value of the company. the tax assessed value of those 600,000 square feet is right around $25 million. The headquarters, 600,000 square feet? That's right. And we think that's significantly, well, we think that's too low. So we think fair value is probably closer to $50 million.

Now that is needed to both operate the business at the headquarters and all their clothes coming through the distribution facility so that that's essential in the business. and we're not advocating a sale on lease back or anything like that. But in the event that, from a margin of safety standpoint, if a bad environment persists, we think that could be a source of value. The Southbridge development, we think, has significant value. And again, they own 335 acres in a southern suburb of Charlotte called Fort Mill, South Carolina. It's right off the interstate, I think it's interstate 77.

and the road or the overpass, it goes to their subdivision. It's being redone and completed this year. So we think it'll allow a lot of easy access to companies that look to actually headquarter there. They have completed one building on the site. It was the corporate headquarters of a company called Round Point Mortgage. Cato contributed 15 acres of land. Roundfoy built their headquarters. The total cost was $35 to $40 million.

And Cato partnered with a North Carolina developer called Lincoln Harris in order to complete that. And they're working on getting demand for the entire subdivision. Cato and Lincoln Harris recently sold that. Cato received proceeds of just north of $3 million and booked a $2 million gain on that sale. So we think at the end of the day, through their land interest, we think there was probably some leverage that was put on that. And the Lincolnaires did a lot of the other equity and development work. We think that can be something that's a similar model for the rest of the development, where Cato contributes to the land and a developer looks to build it out. And, yeah, as I mentioned, it's been considered.

There are a lot of competing developments here. And what's happened over time is this is in the state of South Carolina. And historically, South Carolina has had a lot of incentives for businesses to come on in. And the Charlotte area has picked up kind of the competition there recently, which I think is sent in eventually headquartered in Charlotte. But Carolina Panthers are actually going to be in another suburb of South Carolina. But overall, a limited amount of land. We think a lot of groups are living there or relocating there.

And we think it would be a good location for hotels, offices, retail. And I think they're keeping their options open. It's not a great time to build, I think, even at this point, offices. and so a lot of the conversations they were having in the past were put on hold. But we see that abating as concerns about the pandemic slow, and we think it can be a very value, creative, low-risk way for the company to add value over time. So in terms of value, we value it around $100,000 an acre for their remaining $335 acres, which is, call it $33 million of value to the company.

We think it could be a lot more than that, depending on how things go. But it's tough to find comparables for such a big parcel, but a lot of commercial land that are trades north of $200,000 an acre for land that you can develop into hotels or retail or offices. So it's tough to tell the time frame. I think if a big corporate campus comes in, it can be monetized very quickly.

But if that does not occur, we think there'll be coming up here, probably a building or two that goes up each year and both allows the company to create more value off of its land and potentially monetize a good chunk of that going forward. Perfect. So I was trying to keep track of all the numbers as you threw some of the parts out of me.

But I guess the way to think about it is right now, $16.50 or so per share, that comes out to about a $360 million market cap. $180 million of net cash on the balance sheet would take you down to $180.30 million of tax receipt coming back, takes you down to $150, $25 million tax assessed headquarters. You guys think it might be worth $50 million, but call it $25. That takes you down to $125, $30 million of value for the other acreage they own around, Charlotte. That would take you down below $100. And you can see why this is so interesting to Mike, because in 2019, pre-pandemic,

they did $53 million in cash flow from operations and $8 million in CAP-X. So you're paying about two times free cash flow. That's after-tax, after CAP-X, everything, free cash flow. You're paying two times that some of the parts. Am I looking at that correctly? Yeah, you sounded up really well. And as an example, on 2-1-EPS of 92-sand-sme results will be balked on it's time to predict. the back half the year, but we think they do somewhere between $1.50 and $2.25 in EPS, and

you started a $16.50 share price after cash, you take it down to the $8 range and after the tax refund, excluding all real estate, you're in around $6.50 net of cash, and they did 92 cents of EPS and Q1, and we think to somewhere between $150 and $2.25 over this fiscal year, and it seems to be trading kind of the four times EPS-type range X-cash and the cash they expect to have coming in. So we think that's valuable or that's an attractive value to us and I think it could be for others as well. You know who this is in the wheelhouse for?

This is Wall Street Betts. This is their wheelhouse right here. Like retailer with a decades old history right next to Walmart, no online sales. This is what they need. We need to get this over on Reddit real quick. Yeah, that sounds exciting. And, yeah, there have been a number of retailers. And we think a lot of excitement in the retail space just on the reopening.

And we've seen a number of small microcap retailers that have done really well over this period over excitement over the reopening. And Kato's general, the stock has also performed well. But we think from a valuation standpoint, it's still looking really, really attractive. I guess 100%. I guess the last thing I want to touch on here, $360 million market cap, over $200 million in cash after we include the tax refund and whatever they're going to generate this court and everything. So over 50% of the market cap is in cash. I think we know that a lot of the capital allocation is going to go to shareholder returns, right? They pay the dividend. They're buying back stock pretty aggressively. Maybe that would change if the stock ran off a lot.

But we can be pretty confident that at these levels, a lot of it's going to capital returns. But it does, you know, again, the CEO is 70. Everyone on the board, I think the youngest board member, if I'm doing this from memory, was 63 or so. So I do kind of look at this and say, hey, what is the end game for a family controlled, all physical retailer where a lot of our returns are going to be dependent on how they use this cash and what they decide to do. So if you could just touch on that for a second. Yeah, I think the dividend is something I did touch on that you brought up as well. But pre-pandemic, they're paying 33 cents a quarter or a $1.32 a year in dividends. They did stop the dividend during the pandemic.

They recently reinstated at 11 cents a quarter or so 44 cents a year or a yield just below 3%. And just in terms of use of cash, we haven't touched on it directly, but they have too much cash on the balance sheet. I mean, they survived COVID with earning just $30 million in operating cash flow and really don't need what comes out to be $200 million north of cash and securities. To burn $30 million during COVID, I mean, that it is unbelievable for, because remember, this is a story. And yes, they have no debt, but they have 1,300 operating leases they had to pay. And they were south-eastern, so they could probably open a lot sooner than you're, we're both in the north, a lot sooner than the northern should. But still, the traffic was way down.

They had to shut down to only burn 30 million. I mean, it's a credit to the management team. And it also says, hey, if in an environment when your stores really couldn't operate, if that's all you could burn, that's all you burn. Maybe you do deserve a higher multiple than four or five or six-s, whatever you're trading for right now. Sorry, that was my tangent. Go ahead. Oh, yeah. And, And I think going forward, they used to pay a dividend in those three times as high as long as they declared now. We think, assuming that the results come back anywhere near as strong as we think they will, that the dividend will return to somewhere in the 30 to 40 cents, a quarter range, and bring that dividend yield from college up to 3%, up to 8% to 10%.

And we think that provides both another investor base, but overall a return of capital. And we think the company balances out where they think the value of their stock should be with how they return capital. So again, started the repurchase program before restarting the dividend program, which we think was just a – they thought the stock was way, way undervalued at the time they repurchase it. And so we'd be aggressively to do that. And in terms of kind of what the company might look like in five or ten years, it's difficult to tell what we think is kind of our base case is John Cato continues to lead the company. And you mentioned kind of the tenure of the board, but the senior management of the team

has been there a long time. And we think, and unlike, I think, a number of retail concepts where you've seen a lot of management turnover and a lot of people coming in to fix things, the team here has been very consistent over time. And a lot of the C-suite is 20-plus years of experience all in C-Dos. So we think there are people there that can take over in terms of what occurs. Should John Cato not be there anymore, it's difficult to tell, but we think from an operating standpoint, they're still in good hands. And from an operation standpoint, they don't want to continue on the path. They are.

They're not needing an influx in new talent in order to do that. Yeah. The only thing I was going to add there is you had a chart in their proxy average years of service by position. And I was pretty struck, you know, the average, for a sales associate, the average year of services two years, which strikes me as pretty high for kind of a mall-based retailer to have two years of average tenure just at the sales associate. And then it goes way up from there. Store manager, six years, district manager 15. The C-suite is, you know, 10 plus. So,

yeah, I was really struck by the length of tenure of just the employees and stuff. I never know if that's a probably at the C-suite. It's probably a good sign. I never know if it's a good sign or bad side. But I was just impressed by it. It struck me as atypical for a retailer. Yeah, and they have a promoter within mentality. I think they say 80% of their management is promoted from within. And I think they like to build the culture and train people who are anything. They want to train people. So I think it creates a, I don't want to say a family,

but a group of employees that know the company well and help with their customer. And let's just serve that customer. Yeah. And just bringing it back to management. So Cato is 70. It sounds to me like what you're saying is he's, your feel is he wants to run this for a while. And even if he's not, the management team behind him, they're going to keep this going. There's no, you know, because you see CEO who 70 owns a lot of stock.

My first thought also goes to succession planning. Is he going to look to sell this to private equity, sell this to a bigger buyer? He's 70, which is young in the corporate world, but, you know, it's always in the back of your mind. Yeah, I think both of those are options, our base cases. he wants to stay on probably as long as he feels he's able to. And I think kind of growing up in the industry is what and his namesake help me that basic cases he'll want to be in control and be at the helm for as long as he's able to physically go to work.

So, yeah, we don't see anything changing there and feel comfortable with how he's allocated capital before that he's going to do it in a way that's beneficial to all share rules. Perfect, perfect. Look, I think we've hit just out everything I had in the notes on Cato. It's nice. You know, it's so easy to get caught up in studying the latest synthetic biotech company coming public at a $10 billion valuation. But I was enjoying myself reading, you know, it's a pretty simple 10K.

They didn't even have earnings calls, so I didn't have to go read the earnings calls transcripts. It's pretty simple company. But anything else you think we should be talking about with Cato? Yeah, I think you hit on a good thing there in terms of they're not a promotional company, and so maybe others want to promote it, and maybe I'm getting back to here today. That's your job. That's why you're coming on the podcast. Yeah, no earnings calls, really no IR presentations or anything like that. So I think they can fly under the radar for a lot of people.

Just, yeah, our history on the company, from a team standpoint, we've followed them since probably 2017 or 2018. And in 2018, my colleague Nick Bonder, who was really not a lot of our process there, so I have to give a shout out to Nick and all the work he's done there. But we went down to visit their headquarters, and just in terms of our investment process, especially pre-pandemic, we've been a point to go and see and meet people whenever possible and see the facilities and see the landholdings. So, yeah, we went down there. We were very impressed. The corporate headquarters looks new. It's a, it's an nice building, and we had a good meeting with the team, and then went to their two landholders.

So we went down to the South Bridge development, and it's, I should go into it a little bit more, but it's the former home of the Charlotte Knights minor league baseball team. And so they bought that out of bankruptcy for $10 million or so in 2012. and just kind of held on to it and then announced plans to kind of move forward with their own development. But Daimler-Kreiser has an office building there. There's a school not far away. And from a development standpoint, I think it's a good area for a corporate campus. And it looked like a place where people would want to live and work.

So that made it exciting to us, especially in a growing area. And the other landholding that we really don't value as well, it's 185 acres in Rock Hill, South Carolina. And that's where the Carolina path is already located, too. And they've got 185 acres there. We think that's just a land bank for them now. And there are a couple other distribution facilities there, again, right by the interstate. And we don't think that's going to be monetized in the near term as they keep that as an option. for future expansion, but it's there and it has value.

So that's the point we try to make is go and see stuff in our visit. Kind of less believe that there's a lot of land and property value and a good management team in place. Just in terms of our process, as a pandemic struck, we took a really close look at it and fell below kind of our target where we wanted to own the company at and probably got in a little too soon, but then looked at what to add is it felt further and I thought just from an asset value standpoint,

we gained a lot of comfort in the concept and in their land holdings and assets. And that was kind of our process as we moved through our diligence process. It started a few years ago to pursue saying where we're right now. That's perfect. You know what I like about that story? I do love that you guys had visited it. This is one thing I've tried to tell people like a lot. of investing to me is you've done the work and then something crazy happens, right? And because

you've already done the work and in your case, you had visited the company in 2018, probably not expecting a global pandemic that shuts down the whole country. But you know, you've done the work. Something crazy happens. The stock drops 20 percent or the stock's up 10, but you've done the work and you know the stock dropped 20 percent and it should have gone up four or it goes up 10, but you've already done the work and this news comes out and you say, this should be up 100 percent on this news. And a lot of investing to me is like, The windows can be pretty brief, and I'm not saying this is the only way to invest, right? But a lot of times the big alpha is where you've done the work.

There's a two-day window where the market thinks this is one thing and you think this is another. Obviously, this was a pandemic, it's different, but you had done the work before. Let me ask you two quick questions to follow up on what you said. You mentioned, and you mentioned our talk on AXR. You guys obviously like to do a lot of in-person diligence of companies. I do as well. I have not since the COVID. I'm just asking in general, for my knowledge.

Have you guys started visiting companies again? Have y'all find them receptive to the scene investors? Yeah, we've started the process within the last month or two. And it's a tricky process. As you don't, there's still a lot of health precautions you want to take both for our team and then also for everyone we're visiting. So once we were vaccinated and in the event that the companies were visiting are comfortable with in-person visitors,

we try to be just very respectful and make sure they know. or we know going into it, what their expectations are and what their office setting is. For the most part, it's we've done, call it three to five over the last month, so we've tried to pick it up. But there have been good visits. I think companies have been appreciative of showing interest. And I think overall, especially for firms adapting and the approach that a lot of us are in the office, it's refreshing to see people and to get out and interact again. So it's been nice to do that.

It's been something we just recently. Yeah. I haven't started visiting, but I've just started going back, you know, meeting lots of friends at bars and stuff. And it's nice, but you do kind of get that,

where do I put my arms, rid of my hands? I'm not used to being around people anymore. More company specific question. You mentioned that they own another 183 acres, I think you said, of land next to where the Panthers are moving. Is that the Panthers new stadium?

Or is that the Panthers new headquarters? It's their new corporate headquarters, so they like to relocate, I think, a year or two back. And so the stadium's staying, but I think it'll be a new practice facility and corporate headquarters for the team. And that brings with it a fair amount of tourism and visitors and things like that. So along with that, while the Panthers new facilities in the 185 acres that Kato owns, we do think it will bring a lot of activity. I think the price take of the whole thing or the economic impact was $2 billion that was expected. So we think that it certainly can't hurt for when prices in the year. No, I was just wondering because headquarters and practice facility are really nice.

Obviously, that's going to bring money and stuff around. But if you're talking, if there was a new stadium getting built, right, we're talking just huge fortunes. I'm not aware of too many, but you can make a lot of money. Atlanta Braves, they've got all that Liberty Braves. they've got all that land around the new SunTrost Stadium. I mean, that land, they are making so much money. Because people love to live near ballparks and stadiums. Yeah, it's a good clarification.

The stadium is not located there. But, yeah, we think especially kind of in the current environment, people like to be or have increasingly liked to be where stadiums are. And you've seen a lot of redevelopment in cities next to, big tourist locations and drive people in. So we'll see how our thought is that kind of returns a pandemic when people feel comfortable being in crowds again. That was certainly a trend before.

And we think we'll go back to that as well. Yeah. We move that. Perfect. Well, hey, Mike, this is great. It's a good, simple value investment. And I mean that in the best way, right? Like, you can read the 10K, you can make a decision.

Great capital return team. year, very cheap multiple, and you even threw in some little spicy extras that I like that I hadn't even seen on at first glance with the tax refund, the lane, and all that. So this is great. Mike, thank you so much for coming back on. It was wonderful having you and looking forward to having you on for the third time. Hey, Andrew, great to see you again. Thanks for the interest in the questions. And happy to help with any questions for any listeners that might be out there on Canada or anything else. Yeah, and how can listeners reach you? I think I've got your contact info in the last podcast. I'll

be sure to include it, but how would you like people to reach you? The Gate City website? Yeah, that has a link to our kind of corporate email. That's fine. People want to email me directly. I'm okay with that too. It's MLB, which is M-M-M-E-L-B-Y at Gate City Cap.com. Perfect. Well, if you listen this far, you've got his personal email address. If not, I'll have the link to the Gate City website and the show notes. But, Mike, thanks again for coming on. Looking forward to chatting soon. Hey, great seeing you. Thanks again.