AYFKM Chutzpah
Is it just me, or do some days feel like the world is trolling you?
I’ve been catching up with a lot of people on the phone recently, and one question that keeps getting asked is “How did your year go?” It’s obviously not done yet, but my answer is always along the lines of “More good than bad.” Operations have been strong, but there is something disappointing about having not done a deal.
That’s not for lack of trying, though, I point out. We’ve seen strong deal flow, but the quality of some of those deals hasn’t proved out. A consequence of squinting to see opportunity – believing you have a shared understanding of what’s growth and what’s maintenance capex, for example – means spending more time than you should on things destined to go nowhere. And that can be disappointing too.
Then I saw the CIM that took the cake.
This was a warehousing-for-relocations business that looked solid, with a long history of performance and reasonable ~35% gross margins earning chunky adjusted profits. But those chunky adjusted profits were clocking in with ~32% margins. In other words, there was allegedly almost no slippage between the gross and operating lines.
Weird.
I flipped forward to the addbacks detail to discover that nearly all of the adjusted earnings included an addback for rent with the justification that “Buyer could also purchase the company’s real estate, which is held by a related party.”
AYFKM? (Which is also what I put in our review notes.)
This is a company whose product is literally space, adding back the cost of that space because by swapping rent payments for interest payments (assuming you borrow to buy the real estate) one can technically create EBITDA (which also doesn’t change the fact that there is no beer money.)
In one way I appreciated the chutzpah: it saved us time. Because we didn’t spend a second more on that deal. And as I’ve said before, if something is going to be a “No,” better a quick one than the least helpful, most disrespectful thing.
As for whether the world is trolling us or not, I only wish the answer to that was a quick no.
– Tim
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