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Rangeley Capital manages a value-oriented, event driven strategy that seeks to exploit durable inefficiencies in the financial markets and invest with a wide margin of safety. We invest in businesses that trade at an attractive price with respect to intrinsic value. We look to corporate events (i.e. mergers, spin-offs, restructurings, etc.) to unlock value for shareholders regardless of the direction of the markets. Our firm leverages the investment team’s complementary skills and experience through a cohesive process designed to combine fundamental valuation analysis with in-depth corporate event research. Critical to our strategy is a focus on identifying structural inefficiencies in the market that cause the price and value of a security to diverge, where our research gives us a meaningful advantage.
Monthly Returns (net of fees)
Annual Return Event Hedge Rangeley S&P 500* Index** 18.2% 0.0% 24.7% 73.6% -14.8% 16.0% 2.1% 15.1% 26.5% -37.0% 6.0% -4.9% 2.0% 16.6% -22.1%
Year 2012 2011 2010 2009 2008
Jan 0.5% 2.9% 3.4% 9.2% -1.6%
Feb 2.0% 1.3% 2.9% -1.5%
Mar 0.8% 1.3% 2.2% -2.9%
Apr -0.4% 11.9% 4.1% 7.3%
May -1.7% 3.3% -4.1% 1.4%
Jun 2.1% -2.0% -2.5% 5.5% -5.3%
Jul 0.2% -4.5% 6.3% 13.8% 3.1%
Aug 5.9% -9.1% -1.4% 5.3% 0.9%
Sep 2.8% -7.4% 3.5% -6.7%
Oct -1.6% 7.1% 3.3% -8.2%
Nov 4.0% -2.2% -0.6% 7.0% -6.3%
Dec 2.6% -0.7% 6.0% 7.7% 5.1%
* S&P 500 is a total return index, including dividends. ** Event Driven Hedge Fund Index is sourced from Hedge Fund Research, Inc.
Cumulative Return (Since Jan 2008)
Growth of $10,000 Investment (Since Jan 2008)
Rangeley Capital (net of fees)
Rangeley Capital (net of fees) S&P 500 Total Return Event Hedge Fund Index
S&P 500 (Incl. dividends)
Event Hedge Fund Index
80% 100% 120% 140%
Performance Statistics (Since Jan 2008)
Rangeley Capital (net of fees) Cumulative Return Annualized Return Correlation to S&P 500 Best 12-Month Period Worst 12-Month Period 118.0% 16.9% 0.65 145.9% -30.6% S&P 500 Total Return 8.6% 1.7% 1.00 53.6% -43.3% Event Hedge Fund Index -6.7%
Return vs. Risk (Since Jan 2008)
Sortino Ratio measures the return of an investment per unit of downside risk. A higher ratio indicates a better risk/return tradeoff.
-1.4% 0.75 16.6% -22.1%
0.2 0.1 0 -0.1
Rangeley Capital (net of fees)
S&P 500 (Incl. dividends)
Event Hedge Fund Index
Rangeley Capital performance is shown net of 1.5% management fee and 20% incentive fee. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. Individual investor performance may vary from the overall fund return due to timing of capital activity and other reasons.
Our investment partnership celebrated its fifth year in business on December 31, 2012. The fund returned 18.2% net of fees in 2012 compared to 16.0% for the S&P 500 (including dividends). When we began this partnership 5 years ago, we set out with the long-term goal of generating superior returns to the S&P 500 with a higher degree of safety. Since January 2008, Rangeley Capital has outperformed the S&P 500 consistently on a 1-year, 3year and 5-year basis. Since we started, Hedge Fund Research, a global database of hedge funds, ranks Rangeley Capital among the top 5% of funds in the world. Annualized Performance
Rangeley Capital (net of fees) S&P 500 (including dividends) Event Hedge Fund Index
-5% 1-Year Return 3-Year Annualized Return 5-Year Annualized Return
2012 In Review We would like to begin this letter by first thanking our partners. These last five years have been some of the most challenging markets we’ve seen in our lifetime. It would have been infinitely more difficult to accomplish these results if it were not for the long-term investment horizon of our partners. We also have a number of new partners this year, and we look forward to our next five years together. Every few years we go back and re-read some of the letters that Warren Buffett wrote to his partners, before he became the lovable grandfather who drinks Coke and before there was a Berkshire Hathaway as we know it. What’s fascinating about Buffett is that he does what he does today in large part because of structural opportunities (people bring him deals because of who he is) and structural impediments (so much capital to invest and a lack of anonymity). This makes his current decisions and style less relevant to everyone else. However, digging deeper into Buffett’s past, there are lessons that can teach us exactly how he got to where he is today. In 1969, Warren Buffett may have been tap dancing to work, but he also would have tap danced right over anything that got in his way. He was the furthest thing from folksy: he was an arbitrage specialist. While he puts on the appearance of someone mildly befuddled by complexity, he was as sophisticated as it gets at exploiting “workouts” as he called them. Workouts referred to securities with a specific timetable that arose from corporate activity – liquidations, acquisitions, reorganizations, spin-offs, etc. These were all publicly announced activities that could be read about in the newspaper. Buffett’s edge wasn’t that he had better information than everyone else; it was that he understood that in these “workouts” there was the potential for significant mispricing by the market, where the market price of the security no longer accurately reflected the true value
of the underlying asset. Buffett is a winning card player, and similar to how he invests, he only plays with an edge. What Buffett called “workouts” we call “corporate events”. We seek to find these types of opportunities where, regardless of the direction of the markets, we can buy companies for a discount to their value and use corporate events to unlock that value. One of our largest positions for 2012 was in Dollar Thrifty (DTG). Throughout the year, we held a small long position in DTG believing it was likely to be acquired by Hertz (HTZ) for a premium to the market price. In late August 2012, HTZ announced publicly that it would pay $87.50 per share to acquire DTG. DTG stock subsequently traded up to pennies from that price as investors assumed the deal’s conclusion was imminent. Rich’s analysis of DTG’s business led us to believe that on a conservative basis, the company’s stock would be worth roughly $75 per share if the deal were to fall apart. With an upside of pennies and a downside of over $10, this was neither safe nor attractive to us anymore.
Dollar Thrifty (DTG) stock price
In October, something changed. The deal ran into trouble with its antitrust review at the Federal Trade Commission (FTC). What happened next is where we get our edge. As the merger became less certain, investors who used leverage and held DTG stock with only pennies of upside, now focused on their massive potential loss if the deal did not close. Our interest was piqued because these investors were forced to either sell or overpay for insurance on their position irrespective of price. As a result, we had the opportunity to buy DTG stock below what the company would be worth as a standalone business with a definitive upside of $87.50 per share if the deal went through, which we still thought was very likely. The FTC required that HTZ divest a number of the airport kiosks in order to calm antitrust concerns. It was Rich’s contention that this merger was incredibly lucrative for HTZ based on DTG’s underlying value and based on the synergies between these two businesses. He believed there was very little likelihood that HTZ’s management would pass this up because the value of DTG was far greater than the cost of losing these airport locations. Chris’ efforts on understanding
all the underlying factors of the antitrust concerns, people involved, past decisions, incentives, etc. led us to conclude that this deal was very likely to go through. Dollar Thrifty and Hertz completed the deal in November 2012 at $87.50 per share. This was a lucrative investment for Rangeley Capital, and the opportunity existed because other investors needed liquidity or insurance at any price, and we were ready, willing and able to oblige at a price that gave us a big margin of safety. As for those FTC staffers who opposed the deal out of concern that HTZ would have pricing power… they were not entirely wrong. Since the deal closed, HTZ stock has increased from about $14 to $17.50 per share. Rich’s thesis on these two companies and their respective value proved to be correct.
Looking ahead to 2013 As we observe the investment landscape in 2013, the real return on government debt dips ever deeper into negative territory. High yield bonds could be sued for false advertising based on their very name. Quality, dividend paying equities are fully priced. Master Limited Partnerships (MLPs), among the best values following the Lehman collapse, have fully recovered. Where can a bargain seeker turn for yield? Why should we care about cash yield anyway? Looking at conventional investor behavior, it is hard to find any type of yield-y security on sale at the moment. However, it appears as if there are any number of foundations, endowments, advisors, and even families who are currently demanding yield at any price who are, in the process driving those yieldy securities to any price. In some cases, these prices are now decoupled from value and decoupled from risk. It is an interesting dilemma for someone who primarily seeks safety that when one overpays for ostensibly safe securities, they become risky securities. Unlike a few years ago, when the marketplace was littered with securities that offered both high yield and low risk, such opportunities appear to be rare today. But why should the market offer us opportunities where we want those opportunities to be located? In most instances, the market does not even know who we are, let alone care about what we want. To say that we want to make an advantageous bet and to say where that bet is to be found is mighty demanding and probably foolhardy. So, there are not currently safe, yieldy opportunities; too bad for us. Let's not try to see something that is not there. Well and good to avoid a pitfall, but can we go beyond that to somehow exploit this mania? We suspect so. Securities with low or no yield could be cheap and securities with high yields could be expensive, but this state could last longer than we are able to predict or tolerate. Our solution is to find securities that are on the verge of changing teams so that we can collect the difference between the out-of-favor security that will shortly become the beneficiary of our current era's latest fad. We want to find something that has no yield but is soon to have a high yield and will almost certainly be loved by conventional investors. Referring back to Warren Buffett, in his 1959 investor letter, the first investment that he cited was the Commonwealth Trust Co., a bank which was trading at about $50 while its intrinsic value was conservatively estimated at around $125. The discount arose because the company paid no cash dividend at all. The value to Buffett came from the mispricing and the opportunity came from the market’s arbitrary infatuation with cash dividends. Our favorite modern example of how to put this idea into practice is Gramercy Capital Corp., a commercial REIT with both common and preferred stock (GKK and GKK.A respectively) that is safe,
cheap, and ignored. The common stock currently trades for about $3 per share and the preferreds trade at about $32 per share. In 2008, after significant turmoil in the company's financing business, GKK stopped paying dividends on the preferred and common shares. Five years later, they have yet to reinstate their dividend, despite having enough cash to do so. As a result, the stock has lost its logical shareholder constituency and suffers from a bias against non-dividend paying investments. The good news: we believe the company is positioned to reinstate their dividend within the next year and GKK stock will be the beneficiary of a large re-engaging shareholder base and the market's dividend euphoria. This past year was a period of transition for Gramercy. Since 2008, the company and management have been in survival mode. They almost did not make it out of 2008 due to the highly levered business model and the timing of the crisis. So although they had cash at the management company level, it's understandable that management was hesitant to pay that out. Now, the board has hired a new experienced and talented management team to take the business forward. Also of note, upon his hiring, the new CEO purchased one million shares of the stock. After a strategic review, the decision was made not to liquidate or sell the business outright. Instead, they are selling off the legacy businesses and taking the proceeds with which to focus on the triple net lease space. We believe there is a lot of merit to that business strategy; however, what's more interesting to us is that Gramercy is re-engaging with the markets in order to be successful in this new endeavor. That would be impossible for a REIT that is unwilling to pay their dividend. Despite the issues they have had in the past and the large CDO liability on their balance sheet today, we believe there is a big margin of safety in this investment. First, the consolidated financials only tell half the story. The CDO liability, although significant, is non-recourse to the parent. So, when you look at the company's financials and net out the CDOs, the picture looks very different (see chart below). Secondly, this company has over $175 million of cash. They are using the CDO losses and tax loss carry forwards to delay dividend payment and retain their REIT status. However, this masks the true financial health of a healing, growing business. Condensed Financial Information Consolidated September 30, 2012 Total Equity/(Deficit) $(294,041) Less CDOs $510,849 Adjusted September 30, 2012 $216,808
Source: Gramercy Shareholder meeting report (12/13/12)
Over the course of the next year, we believe GKK will choose to pay off the accrued dividends to their preferred holders. While few investors seem to have much interest in buying this non-paying preferred now, the shareholder base and demand will shift once Gramercy becomes a dividend payer. Between receiving the accrued dividends and a market re-pricing, there is value left to be collected from this safe and cheap preferred stock. We anticipate the common stock will likely begin paying regular dividends within a year as well. The stock will probably be worth about $6 per share by the time that they finish the process of resuming dividends. This REIT survived the financial crisis, has restructured itself to thrive in the future, and will be well regarded as a sensible investment… after they turn on their dividends. The corporation's future is
still vulnerable because it is not yet sized appropriately as a standalone entity. The major risk factor to our thesis would be if a larger competitor lobs in an acquisition offer closer to $4 per share before the company completes their transition. Such an offer would be easily justified based on the potential cost savings. What are we watching for? Gramercy's management team is in the process of trying to sell their legacy CDO business. If they are able to announce a sale at a good price, that will be an auspicious sign that they are on track to complete this transformation. They will have evolved from the financial crisis' orphaned detritus to a staple holding of yield hungry REIT investors. With positions like Gramercy in the portfolio, we are excited about what lies ahead in 2013 and we appreciate your continued confidence in us as we invest together in the coming year. Our next subscription window will open at the end of the month. Please contact us if you would like to take the opportunity for an additional investment with Rangeley Capital. Sincerely,
Christopher C. DeMuth, Jr. 203.801.9969 email@example.com
Richard J. Townsend 203.801.9970 firstname.lastname@example.org
THIS LETTER SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY WHICH MAY ONLY BE MADE AT THE TIME A QUALIFIED OFFEREE RECEIVES A CONFIDENTIAL PRIVATE OFFERING MEMORANDUM DESCRIBING THE OFFERING AND RELATED SUBSCRIPTION AGREEMENT. THESE SECURITIES SHALL NOT BE OFFERED OR SOLD IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL UNTIL THE REQUIREMENTS OF THE LAWS OF SUCH JURISDICTION HAVE BEEN SATISFIED. THIS PRESENTATION IS NOT INTENDED FOR PUBLIC USE OR DISTRIBUTION. An investment in the Partnership is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio, which is under the sole trading authority of the General Partner, will not be concentrated in any particular industry or strategy, resulting in higher risk for investors. Leverage will be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. The information contained herein (the "Information") is confidential. By accepting the Information, the recipient (which shall include its directors, partners, officers, employees and representatives) acknowledges that it will use the Information only for authorized purposes. The recipient further agrees that the Information will not be divulged to any other party without the express written consent of Rangeley Capital LLC ("Rangeley Capital") provided, however, that the recipient may make any disclosure required by law or requested by a regulator having jurisdiction over the recipient.