In his book (summarized here), Mohnish Pabrai describes the investment philosophy of value investors as follows: "Heads I win, Tails I don't lose much." Recognizing that it is very difficult to predict the future, value investors look for situations such that even if things don't go so well, the downside is protected. Pabrai's favourite example illustrating this technique is the motel owner/operator model. If a motel owner finds himself one day unable to generate profits, at least he can sell the land, since that has likely appreciated in value. On the surface, an investment in Syms (SYMS) appears to have similar benefits.
Syms is an off-price retailer throughout the United States. Throughout much of its 50+ year history, the company's strategy was to outright own the real estate on which it operated its stores. As a result, even though the company's operations have been rather poor of late, the company sits on a pile of valuable real estate that appears to far eclipse the company's market cap.
Syms trades at almost a 50% discount to its book value, which in turn understates the company's real estate by a significant amount, since land is carried at cost and buildings are depreciated on the balance sheet. With this in mind, some minority investors have actually asked the company to get its properties appraised and made public. (We discussed a recent example here where a company is actually doing just that.) To that end, there is a great rundown and estimation of Syms' properties over at Ragnar is a Pirate. Don't be fooled by the site's title; you are still privy to the investing gold available on that site even if your name isn't Hank Rearden.
But there are impediments that can prevent shareholders from ever seeing a gain. First, the company is majority owned and controlled by its CEO, Marcy Syms. Normally, this is not such a bad thing. Indeed, if management is financially motivated by its interest in the firm, this can actually be a really good thing. But when management sees the benefits of running the firm as more important than maximizing shareholder value, it can be trouble.
Syms is the daughter of the company's founder, and has so far rebuffed attempts by minority shareholders to realize value via the company's real estate holdings. In a rather sharp-tongued letter to the minority activists, she writes that "Syms Corp operates a chain of off-price retail stores. It is not a real estate development company, and will not become one, no matter how much you wish it were otherwise."
But frankly, the retail operations stink. While other off-price retailers continue to show positive comps, Syms blames the economy for double-digit same-store sales declines. The company's returns on capital weren't amazing even during the strong economic period a few years ago, and this is despite the advantage of having selling locations with understated values on the balance sheet.
Despite this, capital expenditures consistently out-pace depreciation, and that trend has continued so far this year; capex in the first nine months has been 40% higher than depreciation. This suggests that either depreciation expenses are underestimated, or management continues to allocate capital towards trying to grow the company, which is the exact opposite of what a poorly performing company should do. Neither scenario is good news for shareholders, as good money is being thrown after bad, causing the company's cash flow to be poor.
Syms has shown a willingness to shutter and sell the real estate of a couple of stores, but only when absolutely necessary. The cash generated from such sales has been used to finance the company's losses. If this mode of operation continues, investors looking to profit from the real estate values will continue to see value erosion. In the latest real estate sale, the company actually plans to lease the property back from the new owner! Therefore, the sale likely took place only to fund the company's cash outflows.
But perhaps this behaviour shouldn't be surprising. CEO Marcy Syms has written a book titled Mind Your Own Business and Keep It in the Family where she argues that the family's job is "to keep the business healthy for the generations to come." and that "the business of a family business is perpetuating itself."
Those don't sound like the words of someone interested in realizing shareholder value. Ironically, by doing whatever it takes to keep the business running as is, she appears to be putting the company's future at risk. At this point, it is unclear if she will cease growing the business into the ground before the company's valuable assets are completely eroded.