MI308: The Options Advantage For Value Investors w/ Matthew Peterson

24:03It's just sort of like my own personality. I don't want to overpay for these securities. So for years, all of the fangs were totally out of reach. I think some value folks got a chance to move in a little bit over the last year or so. But it's challenging to get a very low price when you get the great business model and the great management team, which is why when you do have that opportunity, you really back up the truck. You make it at 10 % holding. I mean, it's like a totally missed opportunity if you get one of these small chances in your life, and then you spend 2 % on your net worth on it.

24:38It just doesn't move the needle. Let's take a quick break and hear from today's sponsors. Even Einstein had blind spots. That's why modern science is built on the idea of peer review. Investing may be more art than science, but that doesn't make peer feedback any less valuable. The tricky thing is finding qualified people who are interested and willing to help vet your investment ideas. That's why we built the Intrinsic Value Community. It's a place to connect, share ideas, learn, and get feedback. Nobody ever wishes they'd spent more time buried in spreadsheets, but connecting and building relationships with others who may be smarter on a topic than you, but who are also schooled in value investing, that's valuable.

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25:55That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus, industry-leading yields on your cash with no fees or minimums. Switch to the platform built for those who take investing seriously. Go to public.com slash T-I-V-P and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash T-I-V-P. Paid for by public investing, full disclosures, and podcast description. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on.

26:40But it's never too late to get smarter about stock investing from the ground up. At The Investors Podcast Network, we've made a habit of studying the world's best investors. And now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with. With my how to get started with stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros. The course covers 10 different sections, beginning with the basics of what a stock actually is and how the stock markets work to strategies to optimize your retirement savings, how to pick great companies for the long-term, what to look for in ETFs, and how to monitor your investments, plus so much more.

27:19To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. Absolutely. So one of the problems of having a concentrated portfolio like yours is that when a new idea comes onto your plate, it can be difficult to try and draw capital from your other ideas because there's so few of them. So what is your strategy on this end in terms of finding capital for a new idea provided you have no new inflows?

28:00It's a good question. And I don't know if the best answer exists today. I'll tell you what we do philosophically. We're making investments. The seven that you talk about, we have a few other holdings that come in and out, or we take little toeholds in positions, but these are what we call our infinite compounders. And we classify them as infinite compounders actually so that our partners, investors, et cetera, if we start making changes, that becomes their concern. Not that we're just holding this passively because we're really trying to hold these for decades. So the question is, what do you do with your last bit of capital?

28:40We have about 15 % of our capital in cash. And when we're making these investments, our intention is not to sell it. So even when we find a new, very attractive opportunity, we often are skeptical because we know the firms we're invested in so well. We know them, we've done years and years of research often before we even start making our first purchase. And by the time we find some new opportunity, that's usually filled with a lot of known unknowns and unknown unknowns. And so the risks inside of that new position are greater than the risk in our current holding. Everything in finance, many things in finance is an opportunity cost consideration.

29:22So if you have a long-term compounding position, and then there's an opportunity that looks like it may do slightly better, it's not even something we consider switching. we would never really consider switching. The positions that we have in our compounding portfolio are compounding. When we find new opportunities, fortunately, we're raising capital. So we don't have the problem right now that you're discussing. We're bringing capital. We do have ideas. We could put more capital to work, but I'm patient. We're not in a hurry. And I don't know if that answers the question totally. I'm just sort of telling you our philosophy, Kyle, is we're making these investments.

29:57And until we discover that something isn't working or our thesis was wrong or we're learning about the business model and as we do, we recognize there's going to be a different, new, better opportunity. We actually hold and we try to hold forever and we talk about that. So, we're always looking for new opportunities and we find opportunities and we do have some cash. But if we found some outstanding opportunity, I would probably just write a note to our partners and say, if you want to own this, we're going to buy it and we need some capital and we'd probably get a nice response. Excellent. So you've done many great interviews on utilizing options for generating profits for reducing cost basis in stocks that you want to own.

30:40But from talking with many value investors, I know many of them seem to associate options with having a gambling addiction. As a result, many investors choose to never utilize options. So what truths would you tell investors who are afraid of options due to the negative spotlight it's had in the last few years? Warren Buffett uses them. That's one truth. Warren Buffett sold puts to buy Burlington Northern, sold puts to buy Coca-Cola. People don't realize, I think, how much they're used in some places because it doesn't always show up on the 13Fs. But for me and for the firm, my background's in math.

31:14And so this is just, to me, it's just a little puzzle. And when I was out on... I'll give a small piece of background to answer the question. When I was out working at Goldman, we were doing these model validation documentation. It was actually for the SEC. And I was going through these products that were traded on all the different desks at Goldman firm-wide and analyzing and figuring out risk and exposures, et cetera. And during that time, in maybe 2004 or five, realizing that even internally, because there's siloed organization, there would be these offsetting positions between desks. And so, they were neutralizing what they thought was exposure by accident.

31:50And it was at that point became pretty clear to me that there was a real mathematical advantage. It's just algebra to writing a put and receiving a premium and then hoping to receive the shares that you've written the put on. And so that's when we started really implementing this and we call it structured value. There isn't really a name for it. We're just using structured products inside of a value investing framework. And what it does, the truth is it lowers your entry point. So when you've spent less on the exact same investment as someone else, you have a higher IRR when you exit because you're exiting for the same price or higher than that person as well.

32:29So with the same exact security, we actually make much more than a retail investor. And there's many people who have been taught wrong, or maybe what they've been taught is the sort of populist view of options. And I've read most, I think, books out there on options. They're not because they're such quick reads and they're so basic for the most part. I think Taleb has one, Dynamic Hedging, right? That's like off the charts on the other side. There's nothing in the middle for anybody who is a little more than a novice. And what these books tend to show is what a call option is and how it gives you a right to buy the stock in the future and a put option just protects you.

33:08So, you buy that and you sell in the future. Then they might start talking about covered calls in a book. Maybe this is like chapter 15 you're in now, and they're like, oh, here's a covered call. You can write a call to exit. Great. And then in the fourth option, with the fourth possibility, you can only buy and sell a call and buy and sell a put. And they either leave it out entirely, or they just talk about how dangerous it is. And it's not clear to me that the authors of these books have ever taken a course on value investing. Because if you know what the underlier is worth, and what they're talking about, is not dangerous.

33:41They're talking about the option price itself being risky and you might have to buy the shares. But what if you want to own the shares? Because that's what we want. So instead of writing a market or limit or in the market, if there are options available, I would always sell a put option. I would never buy in the market. I don't in a personal account. I just would never do it. It to me feels like paying retail price when I know how to get the wholesale price. And it's a very nice advantage. Our entry point is oftentimes maybe 20 % below the market price. And you can imagine if instead of buying for a hundred, you buy for 80.

34:15When that share goes to 800, you've made 10 times your money instead of eight times your money. So do that over any amount of years. Your IRR is percentage point higher, percentage points higher, many percentage points higher than someone else who made 800 % instead of a thousand percent. Excellent. So let's start with the simple stuff first. So you just discussed put options. So let's start with put options. To someone who's brand new to options and doesn't even know what a put option is, could you just explain exactly what that is? And then could you explain what the process would be like for them to decrease their cost basis using put options?

34:50Yeah, definitely. So a put option is considered an option to base. If you're the buyer or owner of a put option, it gives you the right to put your stock to someone else for a predetermined price. And so you buy that in the market, just like sort of a stock for a different price, which is called the premium. So you pay a premium to have the right to sell your shares in the future. So one thing to remember for those that are new to this is that one option is 100 shares of stock. And that's another reason why, if I'm weaving this all together, why you would need a pooled asset vehicle and you couldn't have separate accounts.

35:24Because if you have separate accounts, with a pooled asset vehicle, you just have$100 million sitting in one place. And so So you can use these quite easily. But if you were to, I'm just thinking of, I think Google is a hundred and, I don't know, 30 or 40. So dollars per share. If you write one put, you're basically exposed to 13 or$14 ,000. Depending on the size of your portfolio, you might not be able to get the diversification and things you need. So that's why pooled asset vehicles help. Keep in mind, these get big very quickly. So sometimes if people are looking to practice or see how this works, I actually do recommend it, but I recommend it slowly.

36:04So you'll need to change your account so you have the capability of using these products. And then you would probably write one on a low price security that you would like to own. If the share declines, you will be paid a premium and you will see how it plays out in your account. You will see that day one, there's no value creation. You have a premium that comes in and an equally offsetting liability, which is your short put. And what happens is if the stock price expires above the price that you're going to pay for your counterpart shares, they won't sell them to you because they can get more in the market.

36:39You'll keep the premium and the contract's finished. So if earlier we discussed a hypothetical$100 share, maybe we pick up a$20 premium. And in a scenario like that, if the price of the stock is greater than$100 after, say, a year, and it expires, everything's finished, and we keep that$20 they paid us, which is$20 on 80 in collateral. So, we're fully collateralized. If we have 80 plus their 20 makes the 100, we've actually made a 25 % IRR just on the premium that we've held. So, even if we don't buy the shares, it's actually still a very nice return. So, we try to price these where we're indifferent between owning the shares and just receiving the premium.

37:21We want to be satisfied if the shares go up a little bit that we've still delivered a very good IRR to our partners. Excellent. So let's look at the other side of things. Let's say someone now already owns a stock. Maybe they don't necessarily want to sell it, or maybe they do, and maybe the price is getting super high above intrinsic value. How would they use call options to help increase their IRRs? So we're talking on the simplest plain vanilla points right now. If you have 100 shares of stock, we wouldn't write a market order, limit order, and try and sell them. Market order is like the worst way.

37:57And then limit order, at least you're saying, give me at least this price. You're specifying a price. You can actually do a limit order with a covered call. So we would basically put a limit order on our premium. We'd say, we'll sell you the right to buy our stock for this premium. So if in that scenario where we said the hypothetical$100 share climbs to$800, at that point, if we're interested in exiting, we may sell a 850 strike call for$80. And now we just wait for that to expire. And if the shares go up another$50, we're out, but our exit price is now like 930. So where everyone else is selling for 800 and a person who just has the ability to do a limit order, maybe they set the limit order at 850, we're actually far exceeding that in terms of what we bring in.

38:49So it's very important. We're just bringing in a premium to enter the shares at the beginning. And then we're bringing in a premium as we exit the shares at the end. And those two cornerstones can add double digit percentages at that moment. And then over the span of 10 years, you can quickly see like, oh, your returns are like two, three, four, 5 % higher annualized throughout the entire holding period. So before we discuss your structured dividend capture system, are there any other options strategies that are worth learning for long-term investors that you can go over briefly? This is where it gets tricky because your audience will have such a range.

39:25We've gotten very good at what we do and we've back-tested a lot of different strategies. So I'll share. That's sort of interesting. We've hired a lot of Python developers over the years, and we've been doing a lot with technology. And we've found it a little bit difficult to communicate some of the strategies to the technologists because they are quite fairly complicated. And if somebody is new to finance, they're very complicated to start talking about all these terms and Greeks. And so, we've come up with a system that actually seems to be working pretty well, and we'll see where this goes.

39:56But for anybody who has a musical background, is a little related to, it starts to look like sheet music. So, what we have is an at the money and some staffs and we sort of, the at the money is sort of in the middle. And then what we've gone to is something that would look like a half note as a sale because it's an open circle and a filled in circle as a buy. And then we use like a stem up and stem down to reflect if it's a call or a put. So, that's really what we're trying to do. We're either buying or selling a call and a put through the entire strategy. Look, I think there's so much value that people are leaving on the table when they just go and buy the stock.

40:34So, I strongly encourage people to write a put, see how it works. You can write it out. I'll tell you how things have evolved a little. So, we used to write out really long data puts and we still do at times, but typically, we actually like capturing a lot of the time value. And so, what we've learned and realized to be a little more effective than one long put is actually repeated short duration puts. So we make much more being a little more active, but in our mindset, we're just exposed to this security over that period of time, but we tend to do them a little more frequently. One thing that I think is a nice little evolution for some of your listeners is we found when there's catalysts on the horizon and when something's very mispriced, the FOMO of the rise in shares is what makes our sleepless nights, right?

41:27So, we don't want to have the shares run up and then we're stuck with only 25 % and we missed a huge gain. The way that we've overcome this is by instead of selling that one long put, maybe out to 2026 from today, which would have been like an older, simple strategy. We will actually sell repeated weekly or monthly contracts out for quite a period of time. And we will continue to put those in and we'll continue to execute on those and sell those. And we take that capital and we will buy a deep in the money two-year call. And what that does is it ultimately gives us a free call. That's our intent when we're doing that.

42:07I don't want to get into all the detail on it, but very briefly, You can see in our reports, we own BABA. That is exactly what we're doing on BABA. So it looks like we own BABA, but in reality, we're just writing 80 and it's so inexpensive, but we're just writing these. We will write puts out for two months. We'll pick up$4 for each put. We'll do that for 10 weeks and then we'll buy another$40 50 strike call expiring January, of 2026. And that ultimate call holding will convert to stock in a few years, probably be a much higher price, and that will be our infinite compounder that's in our portfolio.

42:45So as you outlined in your latest annual report, you found that the fund had excess cash that you should deploy. Now, the opportunity cost of staying in cash is very high, especially in these high inflationary environments. So you came up with the structured dividend capture system. Can you discuss how the system works? Yeah, I can. We actually used to be, and partners asked me, should you be talking about this? There will be a few of your listeners who are able to go in and do this and dabble in this. And I think that's wonderful. For most, it's just much too complex. And so we have found that I don't think we're eroding the opportunity.

43:20It's too small for major institutions. And it's just too time intensive. and it's very difficult, I think, for just like an individual retail investor to do it in the scale that we're doing. But they can certainly do it on an individual level. So, let's back up for a second because I think it's important to point out that this is, we are presenting something, this structured dividend capture is how we're handling the cash right now. And we are, when we share this, it sounds really simple, but it was really not easy. So, by 2017, we launched in 2011, I actually gave a presentation in Switzerland because we had been looking for this opportunity for so many years.

44:01And all we knew was a bunch of stuff that wouldn't work. And we were looking at how we could flip between Google A and C shares or how we could trade a share that was on listed in two securities and the price, two exchanges and the prices were different. We're looking for all sorts of arbitrage opportunities. We're looking for opportunities to even change between Berkshire class shares, all share classes we were considering. so many opportunities, and then they would fall apart, usually in their implementation. So if the opportunity sort of existed, theoretically, taxes or liquidity would cause a bunch of problems.

44:36So I gave this presentation and we didn't have anything to show anybody. It was basically showing this group of really sophisticated investors, we're looking, has anybody found anything? We're finding nothing. Or we're finding nothing that works. Things that might work in an IRA in the US where you don't pay tax, but nobody has that much scale in the IRA except for a few lucky folks. So, it's hard to put these into action. And we really realized this was going to work around 2019 and started doing all the back testing. So, this very simple solution is a little like Edison. We found all the ways not to build the light bulb before we discovered how to build a light bulb.

45:16And we feel really fortunate. I feel so fortunate that we have this. Value funds in particular tend to hold cash to deal with the old problem you mentioned, the opportunity costs, and they've made all their investments and they don't want to miss the next big opportunity. So they have to sit there with a little cash. And the challenge you mentioned is exactly right. We sit with millions in cash. And in fact, it's even a little more extreme for us because we have cash backing some of these puts. it just looks like a massive pile of cash. And especially in zero interest rate environments, it's painful.

45:49It's like, it doesn't feel right. So, we're always looking for ways to maintain the liquidity, not take risk and get a higher yield on the cash. All right. So, that's where we'll start. Now, we'd already been implementing structured value. So, we're already selling puts to buy the securities. That's nice. What we recognize with structured dividend capture is that there are a number of very decent firms. They don't have to be the best firms in the world, but very decent, solid firms. There's trouble in various industries all the time, but I'll say right now at the risk of whatever that there's a lot of firms in the financial industry that pay a super high dividend and are selling for pretty low multiples.

46:30And we don't own any of them right now other than indirectly through like a Berkshire Daily Journal. But they do look sort of attractive as long as we don't have a recession, as long as we don't have a commercial real estate breakdown, as long as we don't have inverted yield curves for years and years. So they look attractive. If you're able to go in and just take exposure for a very small amount of time, we're very comfortable with that. So to summarize, there's a few institutions in the world that are paying really high dividends, like 6%, 7%, 8 % a year, even more sometimes. And they often pay them quarterly, so 2 % a quarter.

47:06So what we do is we write a put with an expiration date right before the ex-dividend date, which is the date that they calculate who gets the dividends. And we pick up a premium for selling a put and it's usually just a week long when that put expires. And we also get over 1 % premium on that exposure. So in a week, we get 1 % plus on our put premium. If we take in the shares, we then often get a 1 % or 2 % dividend that next week. And we've written a covered call to exit, which gives us oftentimes almost a percent, but the covered calls are sometimes we'll take a little less because we just want to get out.

47:44We have found often we're getting 3 % to 5 % over a one or two week period. It's really outstanding what we're able to capture. The problem is that dividends are only paid four times a year. So what we needed was first, First, I did it manually and it was months and months of analysis. Not totally consistent, of course, but it took months to figure out if it would work. And these prices are volatile and change daily. So, the option marks in particular are notorious for being volatile. A$3 call today could cost$6 tomorrow. That's what people are worried about when they talk about the volatility or the risk affiliated with options.

48:23It's because the volatility of the price is really high. So what we focus on is the end. We either want this stock or not. And I don't care how much volatility there are in these options. We're waiting for that outcome. And if we sold it right and we don't get the shares, we still get a nice premium. And if we did everything right and we do get the shares, we're happy to own them. All right. So what we did is we hired a bunch of interns to build a lot of Python and different scripts and help us with a whole system that we have now called AlphaOne, where we do analysis and we do a lot of backtesting.

48:55And ultimately, what we do is we, I'll just share the conceptually what happens. We start with a list of 13F files, over a hundred of them. We come up with a superset of all securities we own. We then pull in a bunch of data and this is all automated now. So we pull in a bunch of financial data and it flags things for us and actually just eliminates things that have, violates certain thresholds, too much debt. We just don't want to deal with it. We also need to identify those that are paying a high enough dividend and those that we have to pull option data in as well. So we have to gather option data and pull in that.

49:27And then we run a whole analysis where we say, if we do this, what's our expected IRR? And ultimately, from that list, so we start with a pool of say 5 ,000 securities we could invest in, 13 NEFs, narrow it down to 400. And then once we get it through all of the final parameters, it delivers a list of about 30 for the next quarter. And so what that does is we can then line up the ex-dividend dates like a Gantt chart. It sort of looks like a project plan. And that's the output of our system. So, I get that output and then we implement it. And we actually trade based on what our system tells us to do.

50:03And we reconfirm it manually, but it's right. And then we start writing our puts to expire right before the ex-dividend dates. We pick up a put, we pick up a dividend, and then we write a covered call and we exit. And some of them don't work, but we do it in a basket form. So, if we have 30 over 13 or 12 weeks. We're doing two or three or four each week. Some of them don't work. One that we had previously that didn't do very well this quarter is Icon Enterprise. So they paid a large dividend, they started cutting the dividend, the shares fell almost in half. I think we've actually maintained almost, I don't think we've lost very much because we get such a haircut going in and then we pick up a dividend and then each week we're just selling calls and we're picking up a dollar a week.

50:43And as the shares go from 30 to 18, we've picked up 10 or$12 along the way. So it's quite incredible how much protection we have, the margin of safety. And at the same time, when they do work, we pick up three or four or 5 % in a single week. So when we run the whole basket, we back tested this. And it's very interesting. And it's fascinating. We have found, I'm confident in saying we'll be like high over 15 % is like easy, looks easy. We're already doing that. And now we're testing individual Greeks and variables. We're back testing the thetas. We're back testing the deltas. We're trying to maximize that.

51:20We're actually testing whether, and we have tested, whether we should be writing in the money or out of the money puts and calls. Where do we have our expected? Where's the expected return the greatest? Historically, we would always write out of the money because it felt conservative to me. And we didn't really have a good way of backtesting it. We're kind of on this edge. There's not a lot of people doing what we're doing. There's almost nobody. And if you're doing it, come and tell me. You know, we can compare notes. But basically, at this edge of this frontier, we have to start making logical assumptions.

51:51And so, when we're putting this in practice, we think, okay, we'll go out of the money and we'll sell our puts out of the money. That way, we won't take as many shares and we feel that it's conservative. What we discovered, because we made a little matrix test where we tested in the money, out of the money for both calls and puts, we discovered that the theory was a little flawed because when we sell out of the money, we always capture everything that falls. and we miss everything that's flat or going up. If we sell in the money, we still capture all the stuff that falls, but we also catch what's flat and going up.

52:22So, when we did our original back test and said, okay, we're going to get XYZ returns based on this, we're now finding, oh, wait, all we have to do is write in the money versus out of the money, and our yields go up again. So, we are just with a scalpel doing these tests and refining our implementation. And with each test, we're getting percents, sometimes jumps, sometimes a few bips, but we're making slight changes. And one of them is that in the money, sales are correct instead of just out of the money. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message.

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56:11That's theinvestorspodcast.com slash TIP-finance. All right, back to the show. Awesome. So let's move on to Seritage Growth Property, a really interesting business. So for a time, Seritage Growth Properties was quite a deep value opportunity, which was why I'm sure you bought it. Before we discuss why you sold it, can you give the audience a brief overview of what you saw in this business that got you interested in the first place? Yeah. So that's in itself a pretty good story. But Sears was... Sears... Eddie Lampert years ago combined Sears and Kmart, and then it was a sort of failing business.

56:52And Eddie's very intelligent and good with these corporate transactions and things. What he was able to do was before Sears really went down and filed bankruptcy, he sold off a lot of their assets and he spun out their assets so that the Sears business model bankruptcy wouldn't take down all the rest of the value. So he spun out all the real estate into a REIT called Ceritage and then had Sears rent from the REIT. All right. So that's how this got started. And then you had a situation where Eddie Lampert, who's a great business mind, was a large owner. Warren Buffett bought five or so percent.

57:25There were a lot of value investors involved. We started doing some real deep analysis. So around that time, they had 212 malls and we do deep research. So, in my view, to find the value of the company, it was one of these things that are simple but not easy. We just need to find the value of every mall. So, simple. Problem is all the malls are a little different, but it's not that big of a problem. We actually did the work and we just valued every single mall and we did it over and over and over. So, when we were first doing this, Seritage was receiving some income from Sears and was bringing in new tenants and they had this capital recycling program and it was a pretty nice model.

58:05They were going to get rid of all their low quality Sears locations and then focus on some premier assets, in some cases build up. And there was a real opportunity for them to be a big player in the space with some really nice assets. For those, most people have never been to a Sears listening to this podcast, but the locations are really nice. There's a location right in the middle of Santa Monica. There's locations all over in Florida, all over at UTC in the middle of San Diego. These are super valuable properties and there's not a lot out there like them. So they're attractive. Anyway, all that aside, we actually made an initial investment by selling puts always.

58:44Very early on, we were first doing the analysis, we realized, okay, they're going to be able to do property level financing. They're going to reduce their debt because they owed Berkshire a 7 % debt, et cetera. So we went in for a little while and then we recognized after maybe a year that this development project and everything that their plans, it's real estate, their plans were going to be implemented much more slowly than was reasonable. So we exited not because it was a bad position. I didn't think it was a bad position when we exited. We exited because it was going to take too long for this to materialize.

59:20And so we were out when COVID hit and there were a number of factors that took place, but the shares dropped a lot. And we had already analyzed these malls. So that's where this compounding knowledge comes into play. We came in early 2020 and Seritage had dropped to$6 a share from 40. And they still owned a lot of the same assets. They were down maybe to just under 200. So we went through in a month and I revalued every asset. and also with an intern and our analyst. And we went through every asset again and had a few discussions and we did a lot of research. So, we determined at that point, I think the prices we were projecting were...

1:00:04And we really knew the asset prices. It was like$28 a share is what I recall a bunch of years ago, selling for six. So, again, we sold puts. We're happy to sell puts. And we ended up owning Seritage for a price of about six or so throughout various puts that we had sold. And I don't mean to go on for so long, but basically we continued valuing these properties. And it's interesting because there weren't too many other people. There were one or two other people that were sort of interesting in the property values, but most of the world in terms of seritage analysis would say, these are A-class properties.

1:00:41They should trade at this cap rate. These are B-class. It was these buckets and they were doing sampling and it wasn't accurate. it. Now they're down to 40 properties. You can watch them on their website. They're all listed there. We valued every single one. We've had calls with multiple brokers about every single one. We visited most of them. And what happened was we recognized that three years ago, it was a 28 value. Then we were doing the analysis and it was like an 18 value. In January of this year, we were doing an analysis and real time, it was like 12 was kind of a floor. In February, they released a document that sort of put their plans in play.

1:01:26And because we had analyzed every property, we were able to solve the puzzle. They weren't giving us all the information. They were saying, we're going to sell this many properties that are worth 50 million or more during this window. Well, then we'd go look at our values and we'd say, which properties? You don't have that many properties worth that much. Or we recognized, we could see around the corner. And then we also knew from 2015 that again, this plan was going to be slow. Because real estate, it's almost in... Everybody knows that it's over time and over budget. So, I don't even think the folks that put in their proposals that place bids, I think they're placing them knowing they'll go over time and over budget.

1:02:08So, when we see this report and And it looks a little bit incomplete and it doesn't seem to match our figures right. And then we recognize it's going to be over time or over budget. All we know is that$12 a share is sliding. And we redid the analysis conservatively again, lift cap rates again. We are always using factual figures from like the CBRE index. And what we know is at the time, maybe it says, okay, there's$10 in value a share. Maybe the market's trading at 11 and we know the trend's been going down for two years. So we have to make a decision. And when you asked me about how that inversion flipped, it used to be a really positive risk return, but we recognize then the risk is actually that they can't sell these, that there's further issues in the real estate market.

1:02:56Particularly, this was around the time that FTX had already gone down, but now the Silicon Valley Bank was going down. Other banks were basically going to be a run on regional banks in America. And frankly, we recognize that financial institutions themselves are restricting their lending. So there's not a lot of people out there lending$50 million or$100 million to buy a cashflow mall. But a lot of these properties are actually a hole in the ground. Or worse, Greenfield with a demolition project on top of it. So when it came down to... When we started to understand all those things, we recognized that the payout wouldn't be as high.

1:03:35And we also recognized the payout wasn't coming soon. So, if you read the management reports, they still say they expect to pay$18 to$28 a share. They've never updated that figure in, I believe, 2024. And I will tell you, from my perspective, it's a fact there's nobody's going to get$12 from Seritage next year. That's not happening. And I'll also share, and you'll maybe find this range wide, but of course we can't. How do we do this? So we look at every mall and we know that there are a few key variables that are important. We know that we need to know about the occupancy rate. We need to know about the rental rates.

1:04:09We need to know about the NOI and what sort of margin they might receive. And then we need to know if there's somebody going to come and buy the property and they need to do some development. What sort of discount to the development? Do they buy into a different cap rate than they expect to sell at if they're going to do development projects. So, we factor in all these variables and then with each of them, we have a low base high for each variable. And so, then the outcome shows us a low, a base, and a high. And I know, for example, Aventura, their mall in Aventura is the most, probably most valuable mall in the property and on their list.

1:04:43And I think our range right now is somewhere between$175 and$250 million for that property. So, kind of wide range, our base is somewhere in the middle of that. And so we see people celebrate on Twitter when they sell a property. And it seems strange to us because what matters is if the property sells for the right price, not if it just sells. So everyone says another property sold and then there's a little chat about it. Until we know the price it's sold for, we don't know if it's good or bad. So Boca Raton, when that sells, it's probably going to be bad because they're dealing with some challenges there.

1:05:16So there's only 40 properties left and we've been looking at 212. So now it seems easy. I can just start telling you, if I'm not going on too long, Kyle, I'll just start telling you some answers to the questions you're probably going to have. I think at the high, they have less than$1.2 billion in assets. And the thing to know about Sertage is because they're doing the strategic alternative plan to liquidate, which by the way, we've learned from John and that can be reversed. So, there's no liquidation trust coming at the end of next year. It's going to probably reverse. If they're going to liquidate this though, there's no compounding.

1:05:54So 1.2 billion is their assets. We know they have 400 million left in debt and they have 70 in a preferred debt. We estimate with the recent sales. So we watched their website, not their filings for their sales because the filings are like months delayed, but we don't always know the price, but we think they have about 150 million cash. When you do all the math and you work out low base high. I'm pretty confident that, and this may sound like a wide range, but there's probabilities of this being totally right. But we have probably, I expect six to maybe 12, maybe. But that gets harder the higher rates go.

1:06:35There's obviously a cost to running the business. Their capital expenditure run rate is about 25 million a quarter. And so, there just isn't more cash coming in. So, you have to remove the debt, divide by the 56 million shares outstanding, and figure out how much you're going to get in the dividends when they start paying that out. The alternative is that they could sell off their non-core assets. And I'll actually, if anybody really wants to look, I'll just tell you, I'll just give you the clue. There's 40 assets left, but I think the top 10 make up like 70, 700 million. So, if you just watch those 10 and you value those 10, you probably will have a good sense of what you're going to receive.

1:07:17So we're basically out of seritage. We've more or less exited and we had a nice return. It was about 100 % return in a very short amount of time. Because we sold puts, we don't have to put the cash out until much later. So I think we put the cash out, I'd have to go look maybe in 2022, and then exited in 2023 and made 100%. We'd had the exposure for longer because of the puts, but we actually had the capital out for a year. So, it was a very nice return. And these things are a little more complicated, but because we feel that there's a floor on the ceiling, I'll tell you for one or two of your super sophisticated listeners, I think there's a really unique opportunity where you can write a put that goes out as far as you can.

1:08:03So, you're pretty sure you're going to get the shares. You could write a$10 strike put and you're not actually going to put capital out. I then think it's pretty attractive, write calls every month, and you're just creating a dividend for yourself. And the return is really high, because the volatility is really high. And I'm not concerned about it going up too much, because it's not sustainable to be up. And if it ever went up and we were... It can't really go much higher. 13, 14, I mean, that would be the price moving away from the market, which is possible, but we could always write another put if we need to neutralize that position.

1:08:41So that selling of a put where you're pretty much going to get the shares and then writing a little bit of a covered call on those is really attractive, like high, high yields at the moment, if anybody wants to go and do that. Matt, thank you so much for joining me today. Before we say goodbye, where can the audience connect with you and learn more about you and your fund? Yeah, sure. So, I'm on X, Matt, Peterson, CFA. Anybody can go to my website, our website, petersonfunds.com. We have a lot of annual, we have a dozen years of letters and a lot of content and research there. We have a YouTube channel.

1:09:17So, search for Peterson Capital Management on YouTube and we've put out quite a bit of presentations, material, research. I think those are good places to start. And if anybody wants to email me, they'll find my email address, but it's matthew.peterson at petersonfunds.com. Okay, folks, that's it for today's episode. I hope you enjoyed the show and I'll see you back here very soon.

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