Remember How I Was Going to Buy That Storage Business?

Remember How I Was Going to Buy That Storage Business?

Back at the end of 2016, I was openly considering buying a storage business. I even wrote a bloggening asking you guys what you thought about it.

The business had the potential to generate $15,000 a year before any expenses, which consisted of eight different storage facilities (a garage, shed, and some older converted shipping containers), as well as spaces to store 15 RVs. The physical storage lockers were renting out at approximately $100 per month on average, while the RV spots cost $25 per month. There was potential to add more RV spots at least, which I planned to do.

The place wasn’t full when I was looking at it, with the property generating around $10,000 in annual income. It was for sale for $95,000, but word around town said it could be had for a much cheaper price.

I crunched the numbers and figured I’d like to pay a maximum of $70,000 or $75,000 for the place. So I did a little sniffing and made it known I’d be interested in the place at somewhere around $60,000. I was willing to pay a little more than $60k, of course, but I wanted to gauge interest.

It was nonexistent. The owner wasn’t interested in trying to make a deal.

In hindsight, this was the best possible outcome for me. I dodged a bullet.

What happened?

The summer of 2017 was not a good one for that particular storage lot.

One of the things I liked about the property was it is near a main road, but it was tucked in behind some buildings in a private location. I thought this would help insulate the place from unwanted attention.

Unfortunately, some thieves also thought the same way. One night while the rest of the world slept they cut the padlock off the gate and took their time stealing a $40,000 trailer. The owners of said trailer discovered the unit was missing a few days later right before a weekend getaway.

Naturally, they were pretty pissed. The incident got plenty of attention on local media, and the victims themselves didn’t have nice things to say about that particular storage facility. It didn’t even have a camera! What a two bit operation!

Nothing nice ever comes from italics.

Storage has also become a sexy business to enter. There are two new RV-only storage facilities located in my small town, which opened within a few months of each other in 2017. Both are less than a kilometer from the facility I was looking at. The local UHaul dealer has added a few Sea Cans on the back of their property. And town council recently squashed a self-storage business on a piece of land located near downtown that needed new zoning.

These people have discovered that storage is a great way to get paid while speculating on the general direction of real estate. The two storage lots that opened in 2017 are both on a main road. The land will get sold at some point to a business that wants a great location. But in the meantime they’re undoubtedly taking away revenue from my potential acquisition. They don’t even need to advertise. Both places are filled with RVs using nothing more than word-of-mouth advertising and a ginormous sign strapped on the fence.

Ultimately the biggest problem with storage is there’s no moat. Any moron with a little land can compete with you. I realized that when looking, and insisted on a huge margin of safety. I’m glad I did.

Mortgage Payoff Update: January Edition

Mortgage Payoff Update: January Edition

Everybody (in unison): WELCOME BACK NELSON

Wait, have you guys been waiting this whole time?

No time to address that creepy-ass question, because it’s time for me to blow the dust off this bad boy and tell the seven of you left reading where we stand with our mortgage, something you sick freaks care about for some reason. Is there really nothing better on Netflix?

As a reminder, we started off with a $190,000 loan owing on a $195,000 house, which was purchased in July, 2016. Yes, you can buy a house for that much in rural Alberta. It’s not even one of those shithole houses, either (OOOH, KINDA TOPICAL).

When I last updated you kids back in October, the balance on our mortgage was approximately $78,000. I continued to shovel all the money I could towards paying off the loan mostly because I didn’t see any better available uses for the cash. Markets continue to bounce up against all time highs, which has prompted me to harvest some winning positions and hide out in bonds. I’m also taking a bit of a breather from the private mortgage business because too much of my portfolio was becoming concentrated in it.

I also got an unexpected boost of cash in December when I made a big dividend payment from our company to my wife, specifically. Thanks to my GOOD PAL Justin Trudeau’s desire to stick it to business owners, we made the decision to withdraw most of the assets from the corporation. This gave us a sizable piece of cash to plunk down on the mortgage.

Where are we at, then? Great question. I won’t tease anymore. As of January 31st, 2018, our mortgage balance is…

$0.00

That’s right, baby! We paid the damn thing off. And a year ahead of schedule, too.

Blog genies, insert some sort of gif of somebody who’s happy.

giphy

I need better blog genies.

Remember, this isn’t all that remarkable

There’s a certain member of the personal finance blog-o-net who leveraged his own mortgage payoff story into as much attention as he could muster. He marketed his story as something more remarkable than cats and dogs actually becoming friends. No, Cute Animal Friendships, I refuse to believe that’s natural.

In reality, our mortgage payoff story was made possible by a few smart decisions along the way.

  • We bought a reasonably priced house in a small town filled with affordable real estate (seriously, half a mil here basically gets you a mansion. In Toronto it gets you a decent condo or an average house in Scarborough).
  • Our lives are anything but glamorous. We pack lunches most days, read library books, and find cheap stuff to do with our friends. This helped us create a huge savings rate, which we funneled back into our mortgage.
  • I invested every spare penny — and every penny I could borrow — when I was a young man. These assets are now paid off, and they spin off oodles of cash flow.

Ultimately, there’s no huge secret here. We paid off a big loan in a short period of time because we had cash flow from already invested assets and above average earning power. And that’s before my wife increases her income by becoming a full-time teacher. With years of dedication (and starting the compound interest machine early enough), I firmly believe anyone reading this could be in the same position as I am.

There’s no need for a whole book explaining our success, in other words. It’s just a matter of numbers.

So what’s next?

Now that we’ve paid off our mortgage, what’s the next move?

To be honest, damned if I know. I still think stocks are expensive and I’m nervous about putting huge amounts of cash to work in an overheated market. I’ll continue to look for opportunities in the market and I’ll probably shovel some more cash into bonds. Canada’s largest bond ETFs are yielding close to 3% these days, which is a decent payout. And bonds also offer fantastic capital protection compared to stocks.

And no, there will be no douchey mortgage burning party. Act like you’ve been there before, son.

Aecon Merger Arbitrage

Aecon Merger Arbitrage

After putting itself up for sale a few months ago, Aecon Group Inc. (TSX:ARE) finally found a buyer. Chinese construction giant CCC International (or CCCI for the rest of this post) agreed to pay $1.5 billion for the company, or $20.37 per share. The deal is expected to close by the end of the 1st quarter, 2018.

Aecon shares currently trade hands at $19.56 each, translating into a potential profit of $0.79 per share in approximately five months. A gross profit of 4.03% works out to 9.7% annualized, assuming the deal takes the full five months to close. An early closing could easily push the total return into the 10% range, and the company does owe at least one more dividend payment to investors.

Let’s take a closer look at this merger arbitrage situation and see if it’s a good place to park some cash.

Deal type

This is as straightforward as they come. CCCI agreed to pay the full purchase price in cash money, baby. I like to think they’ll actually deliver the money in a series of unmarked briefcases like a bunch of drug dealers.

Buyer’s willingness to pay

Experienced merger arbitrageurs (spelled that one right on the first try, what’s your superpower?) know that Chinese buyers have a terrible reputation for actually completing these kinds of deals. They’re as reliable as your slacker kid brother, essentially.

The good news is CCCI bucks that trend. The company acquired 100% of Houston-based F&G Construction in 2010 and followed that up by buying John Holland in Australia in 2015. Both of these deals closed without incident.

Scuttlebutt

What a great word. Scuttlebutt.

The big risk to this deal is the small chance the Canadian government squashes it. There are several reasons why this is unlikely to happen.

When he isn’t appearing at gay pride parades, Prime Minister Justin Trudeau has indicated his government will be more friendly to foreign takeovers than his predecessors’. Trudeau also has much stronger links to China than Stephen Harper, which is also a positive for this deal.

Both Aecon and CCCI have taken steps to ensure the deal goes through as planned. The company’s head office will continue to be in Canada and the current management team will stay in charge. There’s also a decent-sized break fee of $75 million if CCCI pulls out of the deal.

Most government observers say the deal will close without incident, and I agree with them. This looks like a fairly low-risk merger arb situation.

Disclosure: No position today, but shit can change yo.

New Position: Hibbett Sports

New Position: Hibbett Sports

Somebody prepare the fainting couch. Nelson is about to do two blogs in a month. MY STARS.

Shitty retailers are pretty much my kryptonite. I just can’t help myself. They continue to be the cheapest stocks out there today. If the market’s outlook can only improve slightly from “this thing’s going to zero,” then I”m in business. Sometimes this works (I’ve made money on Hudson’s Bay twice now), and other times the investment turns into Reitmans, which continues to languish under my purchase price despite reporting pretty good numbers.

After selling Dream Office REIT and Cloud Peak Energy for nice gains, I found myself with a 39% cash position in my TFSA. That is way the hell too much, even if you think the market is long overdue for a correction. So I put a bit of it to work.

The stock

I went ahead and took a relatively small position in Hibbett Sports (NASDAQ:HIBB). It’s about 5% of my TFSA at this point, and my cost is $13.90 per share.

Canadian investors should think of Hibbett as a mini version of Sport Chek. It operates more than 1,000 stores in small and medium-sized communities across the United States. They call themselves a “sports-inspired fashion retailer,” which basically means they sell a lot of shoes, athletic wear, and so on. The average store size is about 5,000 square feet.

The stock has really gotten hammered of late. Shares peaked at just over $45 each in November, 2016. A few quarters of disappointing results later, the stock currently sits under $14.

While earnings have taken a hit, the company is still solidly profitable. Hibbett earned $2.02 per share in earnings over the last year, despite posting a loss in its most recent quarter. Free cash flow was even better; its been just over $49 million in the last 12 months. The company has less than 21 million shares outstanding.

The balance sheet is a fortress. Hibbett has no debt and a cash hoard of nearly $53 million. This gives it an EV/EBITDA ratio of just 2.5. You won’t find many stocks cheaper than that. Shares also trade comfortably under book value.

Management are doing exactly what they’re supposed to be doing when shares are this depressed. The company continues to buy back its own shares (shares outstanding went from 22.03 million to 20.75 million in the last year) while insiders buy with more gusto than a horny 1860s teen waiting for the latest copy of Chicks Showing Their Ankles from the Pony Express. FINALLY, A PONY EXPRESS JOKE ON FINANCIAL UPROAR.

Insiders have bought more than 25,000 shares at between $10 and $13.

That’s really about it. This isn’t a very complex story. It’s just an obscenely cheap stock that just needs to go from insanely cheap back to merely cheap and I’ll make a decent return. Hibbett will likely get punted from the portfolio if it gains 25 to 50%. It just isn’t the kind of stock you want to own over a decade or two.

He’s Back, Baby! (At Least Temporarily)

He’s Back, Baby! (At Least Temporarily)

Well, hey there, Financial Uproar. I haven’t seen you in a while. Hold on, let me clean up the dust. You’re looking worse than that time the media caught Hillary Clinton without her Spanx. OH, HE’S STILL GOT IT, BABY!

Should I do an update on my financial life? Or would you kids rather see me hit some dingers? I can totally hit dingers.

Let’s start the update.

Mortgage payoff

As a reminder, the loan was originally $190,000 when we bought the place in July, 2016. We owed approximately $107,000 when I posted the last update, back in March.

We’ve still been aggressively shoveling wheelbarrows full of cash towards buying loaves of bread in 1921 Germany our mortgage, getting the balance down to approximately $78,000. I don’t know what’s more exciting — knowing we’re easily on pace to erase the debt by the beginning of 2019 or a Weimar Germany hyperinflation joke finally appearing on Financial Uproar. Let’s go with the latter.

With markets bumping up against new highs seemingly daily, I think this continues to be a prudent use of my excess cash. There are some interesting stocks out there, but nothing that terribly excites me.

Work

Remember when I posted that financial independence made me lose my ambition? Fortunately for me, those feelings quickly went away. Imagine doing the same thing for 20 years without ever getting promoted or doing anything more exciting. I can’t think of a worse version of hell. Okay, maybe I can. I’ve watched a cirque du soleil play, after all.

Anyhoo, I’ve made it clear to my company’s management that I’d like to get promoted. This would likely involve a move to a different store in a new community, which I’m quite okay with. I like small towns, but I’m kinda over the one I’m in.

We’d likely rent if my job took us anywhere else, for a few reasons. While the risk doesn’t really bother me, my wife doesn’t like the idea of being responsible for a new furnace or shingling a roof. Real estate prices are not as reasonable in other parts of the province, which makes the rent vs. buy debate lean towards renting. And the places where we’d like to go have a much greater supply of nice rentals than where we are currently. And hopefully a Wendy’s. God I love Wendy’s.

Investments

While I continue to hold and like most of my portfolio positions, I have sold a few things into strength.

In the latter part of 2015, the Canadian preferred share market got whacked. Taking advantage of the carnage, I picked up a medium-sized position in Shaw Communications’ preferred shares (among others), paying approximately $13 each. I exited last week at $17 per share. Including dividends, the total return was about 20% a year.

To minimize the tax impact of that sale, I finally punted Winnipeg Free Press from the portfolio and took the tax loss. Let that be a lesson to you kids. Never look at anything associated with Winnipeg in a positive light.

I also tendered my Dream Office REIT shares at $21 per share, netting a succulent return of 40% (plus dividends of approximately 12%) in just over 18 months. That position was in my TFSA, so there’s no tax implications there.

I invested some spare cash into an ETF, specifically the BMO Canadian Dividend ETF (TSX:ZDV). While the MER is a little high at 0.39%, I like the fact the ETF gives me access to an index of dividend payers that isn’t dominated by Canada’s five largest banks. I’d also be reluctant to buy an ETF that tracks the TSX Composite because of the large energy/materials weighting. And with a beta of 0.57 (according to Google Finance), I sort of view it as a way to participate in some of the market’s upside while minimizing the downside.

Will I invest more in ETFs in the future? I dunno, but I kinda like the hands-off approach ZDV offers, and the 4.4% yield ain’t bad either.

Miscellany

We’ll probably buy a second (used) car in the next few weeks, since sharing a vehicle has become hella annoying now that both of us have jobs. That’ll temporarily delay the ol’ mortgage payoff plan, but that’s okay. What’s the point of money if you can’t use it to make your life easier?

One of my Lending Loop loans is currently delinquent, and LL has employed a collection agency to help get the maximum amount of principal back. The rest of the portfolio is performing well, however. This is why something like peer-to-peer lending should only be a small portion of your portfolio, kids.

And that’s about it. Maybe I’ll write about actual stuff next time.