Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Denis J. Gallagher, Founder, Chairman and CEO of Student Transportation Inc. (STB), told TWST this year one of the company’s largest expenses, the price of fuel, has been declining, increasing margin for this transportation company.
“From my 40 years of experience, we’ve seen fuel as low as 5% of revenues and as high as 10%. Last year, fiscal 2014, fuel was about 8.8%, fiscal 2015 was just around 7%, and we are projecting it to be probably closer to 6.5% for fiscal 2016. As fuel prices come down, it does create a nice increase in margin for us, and we are expecting it to put an additional one point or 1.5 points on our margin for next year,” he said.
He said STB doesn’t hedge the price of fuel, but at-risk fuel has resulted in one of the lowest prices the company has ever paid for fuel.
“We don’t do any hedging, but we work with our largest vendor, Mansfield Oil, to actually lock in a contract prior to school for a portion of our fuel. And then a portion of it is at-risk, where we are in some very rural markets around North America, and they have to go to the pump. But for last year and the year that we are looking forward to, the at-risk has been the lowest price that we’ve gotten,” he said.
Gallagher also said STB is moving toward cleaner hydrocarbons, which he says improves the company’s image.
“I want to also mention that I made a conscious decision to make a shift toward propane, which is liquid petroleum gas, and it has been a tremendous marketing advantage for us. It is 60% less carbon monoxide in and around schools. The bus is quieter. Blue Bird was the first manufacturer that came up with this new product, and I studied a lot about the engine and the fuel injection system in it. We are running some CNG — compressed natural gas — vehicles in California, but the infrastructure cost for those is very expensive, whereas with propane we can literally set up tanks in our own facilities and our own yards, and fuel our own vehicles there. Propane is a great alternative fuel; it’s considered green technology and green fuel. The young Millennials like the fact that it’s less carbon monoxide in and around school. And it is really starting to lower our fuel costs as well,” he said.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Michael Ruffolo, President & CEO of Internap Corp (INAP) told TWST this year the company plans to expand data center services.
“Long term, we see significant opportunities to continually expand our data center services margin, and that’s really based off of the shift that we have made toward core data center services in our company-controlled locations,” he said.
He also said INAP expects to grow margins through utilization of its data centers.
“In addition, we’ll continue to increase the utilization of our recently deployed data center expansion footprints. As I mentioned earlier, we’re currently at 54% utilization, and we expect that utilization to allow us further upside to the margins that we delivered in Q2,” he said.
Ruffolo was confident Internap‘s strategy would be able to increase revenue, as well as growth for shareholders and customers.
“Short term, through the end of this year and into 2016, we expect to continue to drive profitable topline revenue growth as well as continue to improve our EBITDA profitability, and those improvements will be driven around customers adopting our new products and services, as well as us doing a better job of execution. As the CEO, I’m very confident in our strategy, and I believe our ability to execute against this strategy and grow will become clearly evident as we go through Q3 and Q4 and into next year. Personally, I think all of us are excited about the future, and we look forward to delivering long-term profitable growth for our shareholders, and increasing customer value to our prospects and customers around the world,” he said.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Allen F. Grum, President and CEO of Rand Capital Corporation (NASDAQ:RAND) told TWST this year the defining characteristic setting his BDC apart from others is the focus on management and whether they are people he can do business with for the next five years.
“There are some characteristics of the types of businesses that we look at. We don’t invest in retail; we don’t really invest in restaurants. We do like to invest in companies that have an emerging product, service or technology concept with good growth prospects. We also then want to make sure that we can find other investors to invest alongside of us. The real issue is whether it is a company we are comfortable with and if we are comfortable with management,” he said.
He says RAND focuses on western and upstate New York state, preferring to invest locally in businesses the BDC can easily access.
“Venture capital, by its nature, is somewhat of a regional business. It is a very hands-on business, and we spend a lot of time with our portfolio companies. It makes sense that we want them in a region or an area where we can easily access them. It is not like when you buy a stock and then decide you don’t like that stock so you sell it the next day. It is a long-term relationship. We are in business with our operating partners for many years. All that means that we tend to invest locally,” he said.
Another focus for Rand Capital is small businesses, Grum says.
“The SBIC program is important for small investors like us. In essence, it creates a situation where the SBA is our biggest investor and biggest partner. That allows us access to very-low-interest-rate money. We borrow 10-year money from them at very good pricing. Right now, it’s in the low- to mid-3% area,” he said.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Christopher H. Volk, President and CEO of Store Capital Corp (STOR), told TWST this year the REIT’s cash flow benefits from having typical leases of 15 to 20 years, 97% of which don’t require capital expenditures from the REIT for renting the property.
“When we write the leases, the typical lease is for 15 to 20 years. It will have a base rent, and it’ll have some rent increases. I should add that these are triple net leases. Around 97% of our portfolio is comprised of triple net leases, where we have absolutely no obligation at all to maintain or improve the property over time, which obviously benefits our free cash flow,” he said.
He says STOR has been able to examine its tenants metrics, and he adds that combining leases aids in lowering potential downside for the REIT.
“Roughly 97% of our properties actually give us store-level profit and loss statements that we can examine. We get tenant financial statements on a regular basis. About 85% of the multiunit property transactions that we do are in the form of master leases, where instead of doing one lease contract on every single property, we can actually aggregate properties across a single lease, which allows us to have a better diversified pool of risk,” he said.
Volk adds that, although he doesn’t give guidance far into the future, in 2014 STOR materially outperformed expectations.
“When we went public at the end of 2014, our general guidance was that we might do $750 million worth of investment volume this year — in 2015. Last year, we ended up doing $1.1 billion worth of acquisitions, so the $750 million outlook for 2015 was materially less than what we did last year. But it’s hard for us to always see out in advance because we run a flow-/relationship-oriented business. It may take 60 days to close a transaction, and it could take six months to find an attractive transaction,” he said.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Michael Happel, CEO and President of New York REIT, Inc. (NYSE:NYRT), recently told TWST the company’s New York City properties are currently renting below current market value.
“We’ve got a great portfolio. As you know, it’s 100% located in New York City. We have 23 properties, and our average occupancy at the end of the second quarter was approximately 97%, and our average remaining lease term was approximately 10 years. It’s also important to understand that we believe our average existing rents are 10% to 15% below today’s market rents, so we think there is embedded value in the portfolio,” he said.
Happel says the New York City focus on NYRT gives the real estate investment trust an edge, and he says New York is rebounding and is now stronger than it has been.
“I will also comment that the leasing market in New York City is really stronger than I have seen it in the last seven or eight years. It has absolutely shifted, in my opinion, from a tenant’s market to a landlord’s market. Vacancy in the New York City office market is declining, and maybe even more importantly, we are starting to see double-digit rent growth year over year. For the last couple of quarters, the New York City office market has seen approximately 10% rent growth year over year. And it’s interesting, for many years now, some experts have been predicting rent spike in New York City, and I think we are probably in the early stages of the rent spike,” he said.
Featured in The Wall Street Transcript’s Best CEO Interviews of 2015
Walden C. Rhines, Chairman and CEO of Mentor Graphics Corp (MENT), told TWST this year MENT has been able to significantly outperform the semiconductor industry as a whole thanks to its leadership in electronic design automation.
“I’d say, in recent years anyway, like many software companies, it has been very rewarding for shareholders and generated a lot of cash. If you look over the last year, the whole EDA industry is up about 15% over the last year, and if you look over last five years, the EDA industry, and particularly Mentor, has done much better than the semiconductor industry. Mentor over the last five years is up 160%. The semiconductor industry is up around 50%. So it’s been a good way to become involved in high technology without the volatility,” he said.
Looking toward the future, Rhines says MENT will be focusing on the automotive, aerospace and the system industry in general, as the Internet of Things and automation continue becoming an increasingly important part of previously analog technology.
“It appears that the automotive and aerospace and system industry in general is embarking on the same path that the chip industry has over the last 30 years and automating their design activity. Cars and planes to some extent today are designed with very limited automation. Ten years from now, their design will be automated just the way chip designs are, and Mentor is the leader in providing software to make that happen,” he said.
Apple Hospitality REIT Inc. (APLE) CEO Justin Knight recently unveiled the strategy APLE will follow as a hospitality industry REIT, targeting high margins and stable performance.
“This segment consists of a rooms-focused product — what’s known in the industry as upscale, select-service and extended-stay hotels — where the primary focus of the offering is providing high-quality rooms for business and leisure travelers. We enhanced our strategy by partnering exclusively with Hilton and Marriott, which hold the strongest brands within this particular sector. This focus has enabled us to gain deep expertise with specific brands, including Courtyard by Marriott, Residence Inn by Marriott, Hilton Garden Inn, Homewood Suites by Hilton and Hampton Inn & Suites by Hilton, and also to have significant influence over the brands themselves,” he said.
Knight says APLE is further declining risk by diversifying geographically, and he says the REIT maintains a strong balance sheet.
“Our management team sits on a large number of advisory boards where decisions are made about brand services and brand standards, and we feel that’s important as we look to enhance and grow the value of our shareholders’ investment with us. We further look to create stability in the portfolio through broad geographic diversification. Our portfolio represents breadth across different geographic areas and market types. This is to avoid overexposure to any single industry or regional trend, which might increase volatility in the portfolio. Additionally, we have built the portfolio largely through equity investments, allowing us to maintain one of the strongest balance sheets in the industry,” he said.
Thomas H. Nolan Jr., Chairman and CEO of Spirit Realty Capital, Inc. (SRC), expects the net-lease REIT sector to continue growing at a strong rate, even as this segment has grown fivefold from $10 billion since 2012, he told The Wall Street Transcript in a recent interview.
“I anticipate, given the market dynamics that are occurring and the fact that so many companies are assessing whether to continue to hold real estate on their balance sheets, there will be substantial growth over the next several years. So for an industry that has been around almost 30 years, the net-lease sector under the spotlight of institutional ownership has only been around for a few. I think that opens up an opportunity to become one of the leaders in this space, and that’s what we intend to do,” he said.
Nolan says SRC has had predictable quarterly performance from an AFFO standpoint, and as investors continue their search for yield, he says Spirit Realty Capital could become a leader in the net-lease REIT industry and reap the rewards.
“The net-lease sector is going to become increasingly attractive. I think it’s attractive already, and that it’s going to be increasingly attractive when this inevitable hunt for yield marches on. With the 10-year Treasury continuing to hover around 2% and the spread between the types of properties that we are acquiring, which are in the mid-7% over the last 18 months, that’s over a 500-basis-point differential. I think people are going to look at that premium and realize that, one, it’s sustainable, and two, it’s very attractive,” he said.
Portfolio Manager Dan Neiman of Neiman Funds Management says that while Nike Inc (NYSE:NKE) may be overvalued, he is still holding the stock because it performs so well.
“If you look at the consumer discretion sector of the S&P, you’ll see it is the top sector of all the sectors in the S&P. There are definitely some bright sides to that, and there are also some downsides to that as far as certain companies or certain areas of that sector. There have been some names that have been into the top for us, and I think that currently those names are overvalued, but I’m not getting rid of them,” Neiman says.
Nike is one of those names, Neiman says, along with Costco (NASDAQ:COST) and VF Corp. (NYSE:VFC).
“Nike is going to do well in all seasons, not just in the holiday season, and the same is true for VF Corp. But being the price they are today, they would obviously have risen considerably; all three are doing quite well year to date,” Neiman says.
“With p/e’s where they are, it’s not as an opportunistic time to buy additional shares, but it’s definitely an opportunistic time to be holding them or to have bought in during those down periods of where the Fed balked at raising interest rates. If you look at the chart, if you look at the comparisons of say, Costco to the S&P, and you’re able to get into Costco when the S&P dips down, you’re going to be pretty well offset, and same with the Nike and same with the VF Corp.,” Neiman adds.
Hamilton Reiner, Head of U.S. Equity Derivatives for J.P. Morgan Asset Management, says that one of his biggest overweights as of September 30, 2015, is United Technologies Corporation (NYSE:UTX), a company that provides technology products and services to the building systems industry.
“It is an industrial company. We actually like what they are doing by selling Sikorsky. We like how they are positioned when it comes to Otis Elevator,” Reiner says.
Reiner runs his portfolios to be sector-neutral, but says that the nonresidential construction space is doing well, which should benefit United Technologies Corporation.
“When it comes to United Technologies, we think that nonresidential construction continues to look attractive. We are still midcycle on that. Given their Otis exposure, we think that’s a good thing for the stock, not just in the U.S. but also on a global basis,” he says.
