In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, and Bill Lenehan discuss:
- Why Simplicity in REITs Wins
- Capital Allocation Strategies for REIT Success
- Applying Raymond Loewy’s MAYA Principle to Modern Markets
- Why REITs Can’t Compound Like Berkshire
- Why Doing the Work and Thinking Independently Sets You Apart in Investing
- Improving Corporate Disclosure: Lessons on Transparency, Valuation, and Investor Relations
- Challenges of Indexation, Investor Relations, and Efficient Capital Raising in Modern Markets
- Balancing Judgment and Discipline: Expanding Beyond Restaurants in Net Lease Real Estate
- Stress Testing Real Estate
- Rare Opportunities: Navigating Misvaluation and Building Durable Strategies in Real Estate
- How Robust Mental Models Helped a REIT Navigate COVID Challenges
- Why Positioning Beats Prediction: A Low-Leverage, Efficient Model for Real Estate Investing
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Breaker
Overcast
RadioPublic
Stitcher
Transcript
Tobias: Welcome to Value: After Hours. I’m Tobias Carlisle, joined as always by my cohost, Jake Taylor. Our special guest today is Bill Lenehan. He’s the CEO of Four Corners Property Trust. And he’s an investor. He’s got a lot of experience in public and private markets from a lot of different perspectives, board roles, as a deployer of capital. Welcome, Bill, how are you?
Bill: Oh, doing great. Looking forward to this. Should be really fun.
Tobias: Let’s perhaps start with your current role as Chief Executive of Four Corners Property Trust. What does Four Corners do and what’s your role there?
Bill: Sure. So, we are a real estate investment trust. We own 1200 or so buildings in almost all the states. We own 300 Olive Gardens that we lease back to Darden, the parent company of Olive Garden. But we own LongHorn Steakhouses, Outback Steakhouses, Chili’s, tire stores, medical retail, a lot of buildings that are all sort of between $2 million and $10 million in value. And we can get into this at times, hyperacquisitive of small dollar buildings, so we’ve had quarters where we’ve bought a building every business day and a half, but we’ve also had months where we felt like acquiring assets wasn’t accretive. And so, we modulate our acquisition strategy to maximize the accretion to our shareholders. So, that is my day job.
We’ve got about 40 people here in Mill Valley corporate headquarters. Our business has minimal, not nonexistent, but minimal obligations to the landlord. So, real estate taxes, capex, are the responsibility of our landlord. So really, if you think about it, it becomes a bit of capital allocation redux where we’re not going to generate better returns by marketing the building to a tenant better in any meaningful way or maintaining the building or having a better designed building. It really is a process of raising capital on the stock exchange and investing in buildings and doing so to maximize the accretion for our shareholders. And otherwise, it’s very simple.
Jake: I think I’ve always– We’ve talked before, you and I, Bill, offline about REITs being the C Elegans of the capital allocation world. So, C Elegans being worms, which are a very simple model, that actually is very illustrative of how something works in a more complex biological model. That’s why they’re used so much in research. But maybe it’d be fun for you to unpack that a little bit on why REITs are this [crosstalk] sheer model of capital allocation.
===
Why Simplicity in REITs Wins
Bill: I had been thinking about this idea for a decade when you used that example. And I have to admit, I had to look up what it was, but I think it’s really perfect. Why would a scientist experiment on a very, very simple organism? Because it isolates variables. And so, you could be really bad at capital allocation at a pharma company, and you issue equity at a low price, and you waste money on overhead, and you do a dumb acquisition, that’s dumb on the face of it. But some scientist somewhere in the lab figures out how to combine two compounds and make the next killer drug, and your stock goes up like crazy. And the fact that you issued equity 20% too cheap, or the fact that you blew some money on overhead, or you offered too much stock to employees for a long period of time to make your income statement look like it was more earnings generative, might not matter.
Whereas with REITs, it’s pretty simple. And I tell people my job is sort of like someone who goes to a baseball card conference and says, “Here’s my collection.” And the person at the front door says, “I will value your collection at X.” And I can say, “Not enough,” and walk home for the day and come back the next day, or I can say, “That value for my collection works,” and I’m going to take and sell a little bit of my collection and take the money and go into the convention and buy more cards.
Now, what’s particularly interesting– And in some ways, were a spin off out of Darden. I was on the board. An activist named Starboard Value did a long process of maximizing the value of that company, and part of it was taking the real estate and creating Four Corners. In some ways, that’s almost not the only way you could do this the way it’s been done, but it’s really helpful that we could start with such a high-quality portfolio.
And so, in the beginning, to use this baseball card collection analogy, when I went to the stock market to say, “How much would you value this?”, it was like a collection of All-Star cards. High investment grade, 100% occupied, all triple net, good disclosure in the leases. The leases were very well covered by cash flow. And so, it wasn’t practical to say, “Okay,” and then we’re going to only buy All-Star cards. But we needed to have a framework to say what we’re buying is high enough quality that while not all All-Star, cards that will have real value later on. And so that’s how I think about the business, and what I find interesting about it because– and I actually love this.
The fact is the buildings we buy are not– There’s no other reason to buy them than other than the economic reason. So, when you buy a tire store, it’s not something you’re going to fall in love with like you might a–
Jake: Yeah, there’s no Picassos in the portfolio.
Bill: I used to work at a big hedge fund here in San Francisco and we did all sorts of stuff. So, I developed an island in the Bahamas. And while really fun, it’s harder to be dispassionate. And again, to just to use your comment, an island in the Bahamas is the opposite of the simple organism. It needs to be complex. And so, there’s all sorts of variables that get put into that, entitlements. What are you able to get for the lots? What’s the construction cost? Can you placemake? We weren’t responsible for the placemaking aspect of it, but the person who was did an incredible job and that changed the value of that investment enormously. There’s no placemaking in a tire store. It’s just a much more simpler proposition.
===
Capital Allocation Strategies for REIT Success
Tobias: The REIT sounds like it’s really geared towards good capital allocation rather than trying to identify any sort of individual trophy property or trying to have like a flagship big property that everybody can say, “Oh, that’s the Four Corners flagship. It’s emblematic for what they do. It’s really bread and butter. Capital allocation is the key.” So perhaps, you could just walk us through a little bit how you think about capital allocation very broadly and perhaps apply that to an individual building, theoretical or real.
Bill: Sure. So, our business basically rests on a couple of mental models, and I really feel strongly that it’s important to have these mental models. By mental model, it’s just sort of how you think about the world or maybe a tradition. And one of those mental models is looking at the stock price versus different valuation metrics and understanding that at certain times, it’s accretive to issue equity to buy buildings and other times, it isn’t. And if it was accretive 97% of the time, you’d say, “Well, I don’t need a mental model.” We will do it correctly most of the time and every once in a while, it won’t work, but you know 97 is pretty good, but it doesn’t work that way.
And so, our stock spun at mid-teens price. It went up to 33 during COVID, and in a week, it went down to 15. It’s back up. At different prices, you need to behave differently. And it’s very difficult to align a board around your activity. It’s very difficult to say to a board, “Well, last month, we bought 25 buildings. This month, we’re intentionally buying none, and it’s on purpose.” So, we came up with this mental model to say, if we’re in the green zone, i.e., a stock price that where we can buy accretively, we will buy. If we’re in the red zone, in theory, you should buy back stock. For a RIET, that’s a little bit harder than it sounds, but you certainly don’t want to be issuing equity.
And so, in many ways the best thing that we’ve done as a management team is when we spun at a low price and during COVID we were not in a position where we had to raise equity.
And we’ve talked about this, Jake. Everyone tries to be Henry Singleton and Warren Buffett and Charlie Munger. One of the things I’ve thought a lot about is I’m probably not smart enough to be Henry Singleton, but what can I do to be in that second decile of capital allocators? What’s the not best, but what can I take and take off the table being in the worst decile or second worst decile? And I think low leverage and having these mental models that provide some guardrails during times of extreme stress are really helpful. And so, when our stock went from 33 to 14 in a week during COVID, there wasn’t a question of what we were going to do. We were in the red zone. We’d already discussed as a board what we would do if that happened. And it was a lot smoother sailing than my experience during the financial crisis where there was a lot of discovery of what we should be doing as the time went on.
===
How Robust Mental Models Helped a REIT Navigate COVID Challenges
Tobias: COVID impacted restaurants particularly. How did you handle that, given that’s a large part of the portfolio?
Bill: True. At the time, it was 90 plus percent I bet, something around 90. It’s about 80% now. So, the first step is you’ve got to think for yourself. So, everyone is telling you, the stock market’s telling you there’s a problem and you’re seeing the small restaurants in where you live go out of business. We’re in Mill Valley, California. So, we locked down hard. I mean, I didn’t leave my house for 85 days. So, things were going out of business left and right.
But we took a step back and said, “Wait a second, we don’t have Mom and Pop restaurants in our tenant roster. Our largest tenant is Darden. They now have a $20 billion market cap. They’re high IG.” And most of our tenants were like that. And with the exception of some private equity owned tenants, which ended up being fine anyway, we looked at it and said they have the financial resources. And by the way, there was never a question of what our lease said. No tenant came to us and said, “I have a novel theory of the case that this term in your lease is enforceable in this jurisdiction,” or something like that. They had to pay, that was obvious.
And so, we talked to tenants. We did some really crafty, interesting things which, I think, long term will add a lot of value to the portfolio. But at the time, all my shareholders wanted to know is could we collect rent from Darden and maybe one or two other tenants. And it became very clear that we were going to, and we collected like 99.9% of our rent by June, but our stock price certainly seesawed pretty meaningfully, but we were pretty level-headed at the time.
The thing that was interesting, just maybe to give you like, what was going on in the room, which in this case was my middle daughter’s bedroom because I couldn’t go into the office, I was on the phone 10 hours a day, six days a week, talking to tenants and investors. And when you take a step back, there wasn’t a good argument to say, “I have the right not to pay rent.” So, we were all trying to figure out in real time what to do when there wasn’t legal language to dictate that. No one else had been through a pandemic. So, we literally had the highest stock price we’ve ever had within weeks. And then, the value of the company went down by 70-something percent. But we knew that our rent roll would be in good shape. We ended up turning back on the acquisition spigot by end of June, early July 2020. And our stock price was actually up in 2020, if you can believe that. But the ability to sit there and think level headedly, but we were able to think level headedly because we had these really robust mental models.
Another model that we use that I think plays into this is, we bought 800 buildings in the last nine years, we came up with a system to assess the buildings. We call it our scorecard. And so, when the world threw this curveball at us, we had scored every asset we bought. It wasn’t bought on one person’s power of advocacy or some urban legend that XYZ brand was good or something like a cuisine preference, which is, I guess how you could buy restaurants. It was based upon a really analytical scorecard. We’re going to own these buildings for decades. So, the fact that they had a few months where paying rent was challenging was something that we’d be able to recover from in any event.
Tobias: My recollection of that period was that there were some of the bigger chains, the restaurant chains that came out and said, “We’re not going to pay rent for a period of time.” And then, there were some– Because you’re an institutional owner of many of these locations, but often these locations aren’t owned by a large institutional holder. They’re owned by– they can be just a Mom and Pop’s property investor. And they said, “These big chains have the resources, we don’t. You should be paying rent.” But you didn’t encounter that?
Bill: At the time, we had one sort of local tenant out of several hundred buildings. And I had a very short conversation with him and sort of said, “Don’t worry about me. I’m not worrying about you.” It was one out of a couple hundred. But yeah, you bring up a good point, like there were some A rated tenants who CEOs said, “Just don’t pay.” And that sort of cavalcaded down to people saying, “Well, if XYZ brand, that’s a household top 10 brand in this country, isn’t paying, why should we?” But there was never any legal standing for that argument.
I will say I was called– I suddenly became partner with a very large number of people I used to think of as tenants. But what I said to them was like, “Look, partners share risk, upside and downside and partners share information. And so, to the extent that you want to share information with how you’re doing, and we want to structure something that’s fair to my shareholders from a risk-reward standpoint, I am all ears.” But it never really came down to that.
Another thing, we own assets across the country. And we don’t own any assets in urban areas. We don’t own any assets with elevators. We don’t own any assets where someone else has to unlock a door so the tenant can unlock their door. And those particular dynamics really impacted other buildings much more than us, than our portfolio. Politically diverse portfolio, our two largest states are Texas and Florida. Not a metric I would have thought mattered, but it mattered during COVID.
===
Tobias: Let me. Let me just do a quick shoutout to the folks at home and then we’ll come back and we’ll talk a little bit more capital allocation. Bellevue, welcome. Tallahassee. Gavere, Belgium. Chuzzwuzzer, Australia. I know that’s not a real place. [unintelligible 00:17:43] Helsinki, Finlandia. But I enjoyed it. San Rafael. [unintelligible 00:17:46] wants to know is Value: After Hours going to take the L on calling out micro strategy dumb. No, I think micro strategy is smart. I think the investors are dumb. You have been pretty quiet on Bitcoin lately. Yeah, it’s gone up a lot. Can go down a lot too. Nashville, Tennessee. That’s Poojan in Ahmedabad, India. Okay, moving on.
Jake: I think in fairness, we said like this could go on for a really long time. So, I don’t think–
Tobias: No, we said that last week. So, it’s seven days, JT. It’s over.
Jake: I’m not ready to take the L yet.
===
Tobias: I’m not taking the L ever on that one from first principles. So, I liked– You put out this– You sent me a great document on capital allocation, Bill. And I just wanted to go through a few of these headings. Avoiding misjudgment is easier than chasing genius. You sort of alluded to that a little bit earlier, but care to expand on that one a little bit?
Bill: Yeah. I think you find that executives love to predict things. “My stock’s going to be higher next year. The price of oil is going to do X.”
Jake: Bitcoin yield.
===
Why Positioning Beats Prediction: A Low-Leverage, Efficient Model for Real Estate Investing
Bill: Bitcoin– There’s all these predictions. I really consciously try not to predict. And I take that time, and I try to use it to position because positioning is a lot easier to get right than predicting. So, what do I mean by that? We have low leverage. I’ve existed in a period with intentionally very high leverage when I was making private equity investments. It can make your returns higher, but it makes a lot of other things more difficult, and it’s more difficult to act rationally when you have very high leverage.
We have very low overhead. We don’t do many things at Four Corners. And so, a lot of things that other companies involve themselves with, we just don’t do. And that means when a lot of attention needs to be spent on something, I don’t have a ton of distractions. And so, I don’t spend really any time thinking about what would other people find interesting for us to be acquiring or dramatic or buying buildings that I could later point to my grandchildren and say, “I bought that 20 years ago,” or whatever. It really is about discovering a model that works. If you issue equity at the right price and buy buildings that continue to pay you rent and you finance it with a little debt that’s efficiently raised and you raise the equity efficiently, that algorithm produces a result that will be financially rewarding.
And we were talking a little earlier, before we started, about Cliff Asness. He has a great saying that there’s no investment strategy so good gross that it can’t be made bad net by fees. [Jake laughs] I would also point out that the bargain that we offer our investors what they’re signing up for doesn’t have layer after layer after layer of fee that will eat away and take what is potentially a great gross return and make it likely mediocre at the end of the day. It’s a very efficient model. And you contrast that with some other ways to invest in real estate, where you’re sitting behind at least two, but up to four layers of other people taking economics out from an asset that, by the way, doesn’t know who owns it.
===
Why REITs Can’t Compound Like Berkshire
Jake: Yeah. Do you have any– Is there any reticence or– I don’t want to say regret, that’s not the right word. But the fact that the REIT can’t really retain capital and compound the way that a holding company could, the way that Berkshire has, and therefore that compounding series, we all know what the math turns into on that. There’s a forced discipline, which is good, I think, because you always have to go raise capital again and then distribute it when you get it back, but you do kind of miss out on that compounding element. How do you think about that?
Bill: Yeah, it’s a great point. I thought at some point that I’d make a t-shirt for my team that says, “We don’t have to pay corporate tax. We don’t have maintenance capex. We can have 1200 buildings and 35 people. Not a bad business.”
Jake: [laughs] Yeah.
Bill: You’re absolutely right. The bargain for not having to pay corporate tax is the distribution requirement. The bargain of being in the public domain is that you have to have what I call permission from your investors to buy things. And obviously, when I buy an asset, it needs to be approved by a board. Obviously, the team needs to be aligned with what we’re buying. But even if it was approved by the board and the team was aligned to do it, if the investors don’t agree with it, you would–
If I went out and bought an apartment building, which would be not part of our strategy and obviously our investors have a way to express a view on apartments with the dozens of public REITs that do that exclusively, if we bought an apartment building, I would anticipate the value of our equity would go down by more than that apartment building. So, you have some constraints on what you can do.
I came from an environment that was incredibly creative, super interesting. Mentioned an island in the Bahamas. That wouldn’t actually have been all that unusual. We did amazingly interesting things. Whereas I don’t have permission to do that at Four Corners, which is something I knew when we signed up for this, and it is okay. We’ve expanded from restaurants to other sectors, but it has to be in sort of concentric circles.
I would say, Jake, in some ways the almost– I can calculate sending the money out and then we figured out some really interesting ways to raise capital that’s very efficient, much more efficient than it’s been done in the past. So, I can sort of calculate the frictional cost of that. What is less obvious, but maybe if you were to build a 30-year, 50-year model, even more impactful, is we don’t have organic reinvestment opportunities with high ROIs. And that in the long-term algorithm of the business means that we don’t have that-
Jake: That runway.
Bill: -Buffett-esque with his insurance investments, type of ability to take retained free cash flow, reinvest in things that he knows and earn high rates of returns from that. That said, we have an acquisition program that’s active if it’s timed correctly with the right sort of capital. And so, that’s provided much higher than organic earnings growth over time. But I think you have to think correctly about that because if you’re just buying stuff, no matter what equity price you’re using to raise the money, you can quickly destroy any opportunity for excess returns.
===
Rare Opportunities: Navigating Misvaluation and Building Durable Strategies in Real Estate
Jake: One thing I’ve noticed in the stock market is that when Buffett started out and Ben Graham, there were just this conveyor belt of continually cheap things that were sort of always available. And you could always just keep trading up in them, and it worked beautifully. And it seems like that now you get those really cheap valuations, but they tend to come in clusters now, like in a temporal basis. Like, everything kind of gets cheap at once. Like, all of a sudden there’s net-nets available, but then you’ll go 10 years without seeing them again. Is it the same thing in buying the buildings that you look at? Or, is there enough stuff that sort of for whatever idiosyncratic reasons is getting cheap and you can make a move? Or, does it tend to now cluster more than maybe it did before for macro reasons or whatever?
Bill: So, it’s funny, I grew up in Southern Massachusetts, actually in between the Berkshire and the Hathaway, Mills is the town I was born in. And my dad was an investor, and he actually had an opportunity to work with Max Heine and didn’t take it. If he had, I wouldn’t be on this podcast I’d be on a boat in the Caribbean islands.
Jake: [laughs] On your own island.
Bill: So, I grew up listening to these stories of buying railroad bonds at a discount to the liquidation value of the railroad times and things like that. And I remember thinking, “Dad, this is great, but am I ever going to see anything like that?” And the answer is not often, but it happens. I remember during the financial crisis, some securities that were cents on the dollar, usually there’s complexity, usually they’re wildly unpopular. The kind of buildings we buy are probably too simple to ever have that level of misvaluation.
But I think the way to think about it is you go through all this training and hours of reading and trying to understand what happened in the past and having a collective network of people that you can talk about these things. And I think you need to have some level of faith that a handful of times in your career, a handful of times in the investments that you cover, you’ll have an opportunity to do something that’s wildly differentiated. But if you think it’s going to happen every day, you should do something else professionally because you’re going to be really disappointed. But it happens, it’s just rare. And it probably happens on the other side where things are wildly overvalued.
Jake: More often.
Bill: But shorting is just so challenging to do and it’s just hard to do. And there’s some great examples of people who’ve been totally right on shorting frauds and other things and still didn’t make any money because the borrow is so expensive and the timing is so tough.
Tobias: Charlie Munger has got a similar quote to that where he says, you can’t expect to find these opportunities all through your life. You find one or two over the course of an entire lifetime and that’s– And Buffett says there’s 20 in your punch card.
Bill: Yeah.
Jake: When it’s your turn, your trip to the pie counter, I think Charlie said [crosstalk]
Tobias: You’re allowed to the pie counter?
Jake: Yeah. Get a big slice of pie.
Bill: And I think a lot of it is being in a state of preparation so you can take advantage of those things when they occur. But I would also say I know folks who bought Enron secured bonds by the bucketload at 15 cents, 20 cents on the dollar and end up getting par plus accrued at 130 cents. My cousin, who’s an incredible investor, bought an enormous amount of FTX and made off trade claims at the absolute bottom and made a fortune for investors, super bright guy. But it’s also possible to have a great financial outcome by finding a business that’s pretty good, has some advantages, running it sensibly, not stepping on your shoelaces and plugging away thoughtfully. And if you have something that’s durable that can– A restaurant REIT that was put together in a sensible way such that COVID didn’t create issues and an acquisition strategy where we’ve largely avoided some of the pitfalls, that’ll work too over time.
Tobias: I mean, that’s a pretty compelling stress test for the–
Jake: Yeah, it’s not going to probably get much worse than that, right?
===
Stress Testing Real Estate
Bill: Yeah. Someone said to me every once in a while, you have to sink a submarine to see if it leaks. And that’s what it felt like, and we sat there, and we said, “Okay, we had done a good job on asset selection. We had set rents at reasonable levels.” The interesting thing about COVID is if you were to have asked me in August of 2020– and at the same time I was on the board of Macy’s, recently retired. So, we also had 400 Macy’s that were not operating and that summer was busy as a board member in that context, I would say one of the big takeaways is actually the inverse of what you might think, which is retailers need and appreciate the value of really good retail real estate. They know how important it is to be on the right corner. They know the difference between really good real estate in second tier or the other side of where the consumer traffic is driven.
One of the things that was really interesting is, a lot of tenants, their view was, “We’re not operating right now, but we know we need to get back to especially our best locations in order to have a viable business.”
Tobias: I think that you raised some great points that I think I want to discuss discipline and judgment being more important than intelligence, but we’re right at the top of the hour. So, we might do veggies and then come back to the–
===
Applying Raymond Loewy’s MAYA Principle to Modern Markets
Jake: Wow. Great job teasing that, TC. What a legend.
Tobias: Becoming almost a professional podcaster at this point.
Jake: Yeah, the 3,000th time is the charm. All right, start this one off with shoutout to my dear friend Dan Sheehan for serving me these veggies on a silver platter. And I’ll just reheat them and try to serve them to you, pass them off as my own. So today, we’re blending the worlds of design, innovation, and investment through a principle called MAYA. No, not MAGA. It’s MAYA, M-A-Y-A, which stands for most advanced yet acceptable. And this idea came from a true legend, this French American named Raymond Loewy. And he’s often called the father of industrial design. And his work really didn’t just shape modern aesthetics, it influenced how products, brands, even space stations were conceptualized.
So, let’s start with a little background on Loewy. He was born in 1893 in Paris and served as a captain in the French Army during World War I. And he earned the Croix de Guerre after sustaining injuries. And in his recovery, in 1919, post recovery, he left for the US, and he immigrated to New York. He had this huge passion for design, and he’s a real genius that emerged as companies were eager to make their products not just functional, but also visually appealing. And he got his start as a window dresser for department stores, including Macy’s, which I thought would be a fun tie-in with Bill coming on the show today.
Loewy’s genius lay in marrying form with function and a skill that made him a go-to designer. He designed the logos for Shell, Exxon, TWA, Nabisco, BP, Quaker, the US Postal Service. He designed Coca Cola vending machines and bottle designs, Lucky Strike packaging, several Pennsylvania railroad locomotives, Studebaker’s Starlight series of cars, which are still considered some of the most beautiful, Sears Cold Spot refrigerators, even how Air Force One would be kitted out, which is called a livery. And from 1967 to 1973, helped NASA design the Skylab Space Station. So, his work really shaped like the everyday experience of the 20th century American. In fact, he is quoted as saying, “I can claim to have made the daily life of the 20th century more beautiful.”
And his design philosophy really boiled down to this golden rule that he called MAYA, which is again, most advanced, yet acceptable. And it captures this paradox. People crave novelty, but they resist change that feels too alien to them. So, he understood that there’s this fine line that you have to walk between familiarity and innovation. If you get too far ahead of your audience, they might reject you. And if you hew too close to the past, they get bored and they’re not interested. Think about the iPhone. It wasn’t the first smartphone. Touchscreens and apps were cutting edge at the time. Yet, it was familiar enough to gain quick acceptance.
Now, let’s see if we can torture some MAYA into an investment context here. First, obviously, it might help you just understand the success of a consumer product potentially as you’re evaluating a business. Let’s take Tesla, for instance. Their EVs were futuristic, but yet familiar enough. They didn’t look like those weird go-karts of previous EV vintages. They were actual cars, but just better in a lot of ways, like the torque especially–
Tobias: Arguably simpler too.
Jake: Yeah, simpler, right. Just a screen to turn the windshield wipers on.
Tobias: And to open the glove compartment. That’s like three levels down in the menu.
Jake: All right. Anyway, Tesla balanced MAYA beautifully. And on the flip side, let’s think about like Google Glass, for instance. Like, marvel of technology, amazing stuff packed into it, but it didn’t strike this balance. Like, people found it too futuristic, too invasive and which led to then like ridicule and non-adoption.
So, I think we can apply MAYA to the types of companies that we invest in. There can be these adjacent possibilities to your circle of competence. So maybe, Bill, this is you moving from restaurants into adding tire shops because it’s just that little bit of outside of the circle. You get to know an industry, it happens touch another industry and gives you a little bit of foothold to start learning about it, and then you can expand your circle from there. So, it’s kind of the most advanced for you. Yet, it’s acceptable to make this manageable leap in what you’re understanding.
I think it also can steer you wrong in some cases if you aren’t careful. So, when you are pattern matching to something that has done exceptionally well, you might make the mistake of thinking that you found the next big thing. And Uber for ABC or Airbnb for XYZ like that was a very common refrain in the venture world for the last decade. I’m not sure any of those businesses will eventually make it. I don’t know. And then, I’ve actually often wondered if there will be more money lost chasing the next Amazon than there was ever made finding the original Amazon. I think that’s a pretty common thing in markets. So, you have to be a little bit careful in handling MAYA.
But let’s close out this veggie segment with my favorite Loewy quote, which is, “The most beautiful curve is a rising sales graph.” There’s some industrial design from one of the original in the 20th century.
Tobias: Who’s the modern version? Jony Ives or something like that?
Jake: Yeah, probably. I mean, he’s definitely got the aesthetic right.
Tobias: Clean lines. White clean lines.
Jake: But familiarity to it enough where it’s not jarring.
===
Balancing Judgment and Discipline: Expanding Beyond Restaurants in Net Lease Real Estate
Tobias: Just before we segue back into that judgment and discipline. That’s kind of an interesting– How did you make the decision to move away? Or, how did you come up with the idea to move away slightly from restaurants to tire shops? And what was the analogy?
Bill: Yeah, it’s funny. In 10 years, probably the best investor question I’ve ever gotten was from Mutual of Omaha, and it wasn’t an equity investor, it was a debt investor, who asked a question about that, “Who gave you permission to do this?” And I think we have what we call the triple sort of layer mental model. Do we have permission from our investors to do this? Do we know enough to do this? Would we do this with our own money?
And as simple as that sounds, a lot of investment activity would fail that on its face. Just because you work for an incredible investing organization and now, you’re investing in something that the firm has never invested in, why do you think your knowledge in large cap equities applies to distressed real estate? Or, we have tremendous permission to do it and we figure we’ll just learn as we go. Or, tons of investing where the people investing would not want the vast majority of their net worth tied into the strategy that they’re pursuing.
And that’s not the case here. We’re predominantly compensated with stocks. So over time, the majority of my net worth is aligned with the shareholders. So, I want to make sure that what we’re doing, I’m comfortable with owning. And so, it was really a process of looking at a lot of different things and saying very simple, two by two, is it as good or better than restaurants or definitely not? Is the rate of return achievable that’s higher or the same as restaurants or worse? I wouldn’t want to be buying two-story bank branches. They’re pretty obviously not the future. Local mortgages aren’t serviced locally, and they’re not serviced in the United States anymore. So, you don’t need a second floor to service the mortgages that’s underwritten in the bank branch. But a high-quality bank would have a rate of return that’s lower than a restaurant property. And so, a lot of things fell into that.
Now, what I would say is really interesting is there’s a lot of novel net lease. So, the subsector of real estate that I’m in is called net lease, where the landlord has very little responsibilities. And so, it’s relatively a new kind of real estate, and it really became popular in the 1990s and onward. And so, the executives who were in the industry spent a lot of time proselytizing that lease to users of real estate. So, they’d go to a car dealership and say, “You don’t need to own this dealership. We can own it. You can lease it for 30 years, free up that capital. You can own two dealerships with the same amount of capital. And I’ll own the real estate. You will own the business.”
Well, the executive spent all this time proselytizing net lease and they, I think, sometimes they made a mistake to say this is true in many cases that institutional or third-party ownership of the real estate makes a ton of sense, but it’s not true in every case. So, what we see is people try to push the boundaries of what can be net leased to things that perhaps the user should have to own that building.
Jake: What kind of things fall into that category?
Bill: A lot of it has to do with basis, Jake. Like, we don’t own very many car washes but I would be comfortable owning a car wash at a low basis, call it $3, $4 million. But like a $9 million car wash, if you’re going to build a car wash like that at the scale and expense, maybe the operator should have to own that. It’s funny, you made a question about what happened during COVID, a great example of a tenant that had a lot of leverage during COVID is Bass Pro Shops, Cabela’s. And you might argue that if you’re going to have a 40,000 square foot building or grader that has a 200,000-gallon aquarium in the middle of it.
Jake: Stuffed bears everywhere.
Bill: Stuffed bears everywhere. And you need a gun, a license to sell firearms, and you need a fleet financing arm to finance boats to make it work. That might be a model where you’re taking on additional risk to be the landlord because you have very little ability to find another user or another tenant and you have no [crosstalk]
Jake: You’re not going to plug Applebee’s into the–
Bill: So, Cabela’s and Bass Pro are the same entity. So, if you lost one, you’d lost both. I bring it up because a lot of people in our space, they do what I would consider novel net lease, which you don’t see a lot of people buying Bass Pro shops with their own money or there are many other property types, I don’t want to get people mad at me, but it wouldn’t take much imagination to think of sort of very unique, very low levels of fungibility of the real estate where you take a significant risk.
That’s not to say that our 300 Olive Gardens don’t have a distinctive look. They’re not a white box that you can easily put a new tenant in with no big deal. But we set our rents really, really low, so the coverage of those buildings now is nearing six times.
You asked a question about sort of discipline over intelligence. I think that’s–
Jake: Yeah.
===
Why Doing the Work and Thinking Independently Sets You Apart in Investing
Bill: Maybe I’ll have a little bit more credibility in talking about this than Munger, who obviously was a super, super great guy. I remember when I started at Farallon in 2001, this investor named Bill Duhamel, who’s been a mentor for me for a long time, pulled me aside and said, in essence, build a model from scratch, read a 10-K/10-Q including the footnotes, and spend one hour with management with organized questions and follow up on what you’ve come up with doing that and you will be I think he said top 5%. And I thought, “That’s ridiculous. I mean, that’s what everyone does.” That’s table stakes in fact. I think he was overstating it. It may not be 5%, it might be 2%.
One thing that we didn’t get into but I made this comment about being on the phone during COVID with investors. I never had someone show me an investment memo. I had never had anyone show me a model. I never had a really serious modeling discussion with the exception of one investor, Jed Nussdorf, who’s actually a friend of mine. But basically, people just were trying to figure out different ways to ask the question, is Darden going to pay your rent? And this is for a stock that was 33 one day and 14 a week later with exactly the same number of buildings, exactly the same people, exactly the same balance sheet, same corporate governance, etc.
So, if folks are sitting here saying, “God, it’s a much more competitive world than it was 30 years ago,” it certainly is. We put a lot of really bright people into this industry. There’s more tools. But I would also say that if you do the work, if you think for yourself, you’ll be lonely.
===
Challenges of Indexation, Investor Relations, and Efficient Capital Raising in Modern Markets
Jake: Maybe I can wind you up a little bit with talking about the quality of participation in earnings calls now and maybe indexation and the lack of ownership mentality that has kind of infiltrated the US. I know you and I have lamented about that together.
Bill: Yeah. So, let’s first– Every time you point a finger, three are pointing back at you. Let’s point a finger at IR. Investor relations is almost entirely something that could have been done almost exactly the same way 50 to 100 years ago. In-person meetings, big investor conferences at hotels, a very standard cadence of financial reporting that’s inefficient because it’s all on top of each other. A reluctance for companies to provide the disclosure, to use a Buffettism that their sister, who is a big investor in the business but isn’t a financial professional would want to see. And so, we’ve tried to break through that a little bit by being more communicative, whether it’s things like this or putting out a press release on everything we acquire. So, as much as you can criticize investors, index active, passive, which I we’ll do in a moment, you could also say companies perhaps could be a little bit more innovative and provide new tools to have investors have a chance at being better informed.
Having said that, we are 50 plus percent owned by index funds that doesn’t have the influence of the remaining active investors. I would argue it doubles it because to your earlier comment as a REIT, I have to send the money out and then I need to ask for the money back. And where I’m asking the money from isn’t indexes, it’s active managers.
So, the research community has been substantially de-resourced because it’s not as economically viable as it was when I started in the business. So, I’m sympathetic that if instead of making a fortune, having lots of resources, many junior analysts, less companies to cover and pre-FD, an ear to the CFO and CEO to get information that was differentiated in some contexts. Now, very high level of stringent FD compliance. I think you would agree. That’s why all the investors asked me whether Darden was going to pay during May of 2020, didn’t get them anywhere because I knew what I could say and what I couldn’t. But the research community has been de-resourced. The active investment community in many ways has been de-resourced. And so, I’m sympathetic to that– Could it be–
Are there frustrations? Yes. Has the trend become more significant since when I joined? Yes. But I would definitely say I knew what I was getting myself into. What’s challenging for us because of this dynamic of sending the money out in dividends and then asking for it back in the form of issued equity is really figuring out a way to do that equity issuance as efficiently as possible. And in my mind, that comes down to the form of equity issuance, which we use is called ATM, which has very, very low discounts and fees. And so, for every dollar I raise, I get 98, 99, 97, 97.5 cents, versus a traditional methodology with fees and discounts you might get 93 cents, 94 cents. That may sound like a small difference to folks, but over a long period of time with the benefit of compounding, that efficiency is enormously important.
And so, for me, it’s really having an investor base that knows this is how we’re going to grow our business the most efficient way we can, versus offering larger discounts and fees, which would make me popular, but long term, is probably not the best strategy.
Jake: Yeah, it’d make your life a lot easier, I’m sure, to have intermediaries hawking the equity for you.
Bill: Yeah.
Jake: Taking a big cut out of it while they’re doing it.
Bill: Yeah. And look, it doesn’t make a ton of sense for me to be super, super focused on being selective about the buildings I buy, the pricing that I’m willing to pay down to the second decimal basis– Arguing over basis points on acquisition and then accept–
Jake: –5% on the cost of capital, basically.
Bill: 5% on the cost of capital– But maybe to loop back to your original question on sort of– I don’t think you need to have 150 IQ to be successful investing. I think a lot of it requires–
Jake: Oh, thank God.
Bill: -being disciplined sometimes and making sure that you’re in an environment that you’re comfortable in, that there’s– You can do things sensibly. It’s not rocket science, it’s just– For me, I do better with lower leverage.
===
Jake: Was there any temptation in COVID to add a turn and buy back? Just knowing the assets, knowing what you had.
Bill: So, we were really careful because we were in constant contact with our tenants that we weren’t buying back stock with an information asymmetry. And in essence, we didn’t believe that we had a period where all the conditions were right. Investors were on an even playing field as far as information. Our stock price was advantaged and that we could buy back stock long enough for it to matter, in essence–
Jake: Pulling your Singleton card for that one, for such scruples.
Bill: It wasn’t going to—Now, we said, look, we put out a cleansing disclosure that said this is what we know. And we felt that we had met the conditions for a period of time where we could buy back stock, and we thought that would show the market that we had confidence-
Jake: It was going to pay.
Bill: -that it was a good investment opportunity. And it’s interesting you made a comment earlier about investors. And I have been surprised that in the last nine years, there’s probably been half a dozen times where I bought stock. There’s an investment firm that shares our floor here in Mill Valley and they asked me, what signal would you look for? And I said, “Well, look, if I ever buy stock, I’m doing it for investment purposes,” but that doesn’t seem to be the marker that people historically thought of at least. I’ve never gotten a question as a follow-up, when the disclosure is almost immediate, when management buys stock.
Jake: Yeah. What do they say? There’s lots of reasons to sell, but there’s only one reason they ever buy?
Bill: Yeah.
===
Improving Corporate Disclosure: Lessons on Transparency, Valuation, and Investor Relations
Tobias: One of the challenges, I think, with the disclosures is gap is imperfect. And one of the best examples of that is Berkshire with the changes in asset prices flowing through the income statement, having to unpack that. But then on the other hand, you have something like WeWork putting out community-adjusted EBITDA to help people understand. I always think– I can tell, I think, when an activist has control of a company because the disclosures start becoming capital allocation type disclosures. “This is what we’re doing with– We’re paying down this debt. We’re going to spin this asset.” As an activist who’s now inside, do you think that informs the way you talk to investors? Are you imagining that there’s someone like you standing on the other side and you’re talking to that person?
Bill: Yeah. A couple thoughts around that one. One, if you look at a board and no one on that board has ever made a public stock investment in a company that they don’t work for, of size, or have never professionally invested in stocks, don’t think that they think exactly like you think, sitting behind a Bloomberg machine. Now, it’s good that we don’t have every single corporate board member in America as former securities traders. We need other skills, but they don’t necessarily bring to the table the same knowledge and experience. Again, this is a positive. You wouldn’t want– I think it’s good to have some experience in security selection on the board. That’s one.
Two, it’s very difficult for board members to really reconcile what’s being provided to them and what’s available in the public domain. And you might get 300 pages of documentation for a board meeting. And there may be very, very little overlap of what’s in an investor deck. And it is unlikely that you’re going to have a director who goes through every page and highlights and says what’s yellow is also in the public domain. So oftentimes, when someone says this is misunderstood or a board member feels this is misunderstood, it’s simply because you don’t have the same level of information.
The last point I’d make is there seems to be a corporate gravitational pull on information that, in my mind, the owners of the company would like to see. And there’s this view, and I’ve heard it many times from very thoughtful people that say, “If you provide these 10 pieces of information, you will regret two of them one day.” And I would say, I totally agree with that. If you provide 10, you’ll regret some. I can’t tell you which ones you’re going to regret. The answer to that is not to then provide no information because, A, I think the look of disclosure from one’s heel, you’re being attacked, you’d provide a lot of disclosure is never a good look. I’ve never heard investors, when you do that, say, “Ah, that’s exactly what I wanted to see. Thank you. I now feel really great about your management team.”
Most of the time, it’s– we provide supplemental reports in the REIT industry. It’s sort of a quirk of our industry. So, SUPs are what people really look at. I think I’ve seen firms go from a 20-page SUP to a 70-page SUP and investors say, great, thank you for 50 pages that I don’t need. You didn’t tell me these three things that I wish I would have known before your stock went down. Versus, we provide tons of disclosure press releases. Every day we buy something or sell something, we press release it that day. So, we have more press releases per dollar of market cap, I’m sure, than any public company. But we take our investors along with that process. And so, when I say we’re not buying things because our stock price doesn’t work, you don’t have to wait until many days after the end of a quarter, which is up to 90 days from the beginning of the quarter to find out what we’re doing. And when we say our stock price is back to where it makes sense to grow, now there’s obviously a period of identifying, diligencing, negotiating, closing a building. But once that’s done, we don’t then tack on 110 days.
I think disclosure is a place where there’s a lot of room for easy improvement. Let me give you a funny story about disclosure just to give you a sense of how out of whack this can get. So before Four Corners, I ran a company in Canada, and it was a publicly traded company. And it was all screwed up when we got there. I was an activist, it was a position at Farallon. I became CEO. And they owned something like 119 buildings. And 118 of them were normal way institutional buildings. And the 119th was a house in Palm Beach, Florida. If you’re a company based north of Toronto and you want to have a real power over board members, having a $4 million party pad in Palm Beach is a really good way of doing it. And if you’re a director who gets offered February in Palm Beach, and you live in Toronto or New Jersey, that’s a big perk. This company would not provide any information about its 118. And I think the reason was because they’d have to show the 109th was a 3,000 square foot house in Palm Beach, Florida.
So, this company stock traded at a value that was probably to your point, Jake, about massive discounts. This company traded at a value that was less than the top two buildings of the 118 or maybe the top two, three buildings, but you got every other building for free.
And one of the reasons was– There’s a lot of reasons, but one of them was, is that you couldn’t as an investor say, as long as they actually own these buildings, this stock is mispriced, but you could– And I had one very large investor say to me, if there was something great there, they’d tell you. Investors presume if there’s something positive, a company will find its way of communicating that. That’s a presumption, a fair presumption. But every once in a while, it isn’t right. But I think if you’re on a board, you should–
The test I always used when I was at Farallon, because we were based in San Francisco and I flew to New York a lot like I’m going to fly this afternoon, is if you have what’s on the investor page printed out to you in a binder and you take off in SFO and you land five and a half hours later in JFK, you should be able to write on the top of the 10K a stock price and maybe three or four questions, not more than that, and call back to your office and say, “Well, what does the stock actually trade at?” And if you’re a public company director and you can’t do that with a company that you’re on the board of, just what’s in that public binder, great challenge to the management team to address why that’s the case. And if you are a professional investor and you can’t do that, you should be able to look at the company that you want to invest in and say, “Why can’t I come up with a value for this company? Why aren’t you telling me what I need to know to value the company?”
===
Tobias: That’s a great thought to end on, Bill. We’re just about coming up on time. If folks want to follow along with what you’re doing at Four Corners or get in touch with you, what’s the best way of doing that?
Bill: Yeah, publicly traded. So, email is bill@fcpt.com. So, we’re not hiding from anybody. This is what we’re passionate about. So, we try to be communicative with investors. We do conference calls that are obviously public, and you can sign up for our emails to follow what we’re doing. But yes, certainly love to get feedback and it’s terrific to do things like this. It’s extremely fun and has a broad reach.
Tobias: Any final words, J.T?
Jake: Well, hopefully we’re lowering Bill’s cost of capital as we speak right now.
Bill: Every little penny.
Jake: Yeah.
Tobias: Bill Lenehan, CEO of Four Corners Property Trust. Thank you very much, sir. We’ll be back next week, folks. Final episode of the year. It’ll be a holiday party. We’ll have Jason Buck along to bring the fun. So, we’ll see everybody then. Until then, stay well. Ciao.
[Transcript provided by SpeechDocs Podcast Transcription]For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
