A personal note before I start; I’ve been gone the last two days because I am part of the leadership of my denomination, and we had a regional meeting for the better management of our congregations. The hotel that I stayed at promised internet service, but did not deliver on that promise; that’s why I didn’t post yesterday. My intention with this blog is to put up one or two good posts every day, excluding Sundays.
I don’t trade that often, so being away is not a problem Sometimes when I get home, there is a surprise waiting for me.? This time the surprise was a positive one, where Nelson Peltz does some house cleaning, and gives his shareholders a gift in the process. He has simplified his life by selling his stake in Deerfield Capital Management to the mortgage REIT that they manage, Deerfield Triarc Capital [DFR]. Also, he reduces his stake in DFR down to a 10% level. He gets to focus on the restaurants that he owns through Triarc [TRY].
I would encourage interested readers to look through the presentation that they did for this acquisition, and this presentation that they did to describe their management style. At my previous employer, I suggested that we start a REIT like DFR. Good as that firm was, they did not take my advice.
The price as a ratio of EBITDA for purchasing Deerfield Capital Management was around 7.5x. Pretty good acquisition price, considering that capital is not a constraint for the growth of the combined enterprise. I think the stock goes higher from here. My main concern is this: once they get to full deployment of alternative assets, this company will be very profitable, but also risky. You will likely see me sell my shares once the company reaches maximum portfolio risk. At that point, I might miss some upside, but with Meyer Rothschild, I will have sold too soon.
Full Disclosure: Long DFR
David
Great call on DFR! From $13 to $17 plus an 11% annual yield is pretty good so far. The most interesting comment in the earlier presen tation is the potential for high teens dividend yield at the $15 price — suggests to me a dividend of around $2.25 to $2.75.
I was hoping you could clarify your comment about the stock becoming risky once they reach their alternative asset goals — are you concerned about the credit exposure of the alternative assets or the leverage level and source of funding or is it the volatility of their incentive fees or a potential peak in private equity/alternative assets?
From the context it sounds like your concern is a structural one rather than a cyclical or timing related one — is that true?
The company of course touts their strategy as one of lower volatility and lower risk so I found your comment very interesting.
Kyle
It’s one thing to put yield into a portfolio, and quite another thing to realize the yield over the long haul. It’s one thing to put on levered credit strategies when spreads are wide; it’s another when spreads are tight, as they are today. Diversification is not as much of a help in fixed income investing than in equity investing. In fixed income, one has to be much more in tune with the credit default cycle in order to outperform, particularly when one is levered.
If I were in their shoes, I would make modest allocations to their higher return strategies until spreads widen meaningfully. If they move too fast here, the dividend rate will rise, and and the stock will move up, but will risk significant underperformance if the willingness to take credit risk drops sharply. It does do that every now and then…