Valuable Exchange Between Jay Hickman and Mortgagemaker

The following exchange was posted on the Yahoo Finance Message Board for TAXI between April 15 and April 19, 2016. Jay Hickman is truthincyber.

mortgagemaker • Apr 15, 2016 2:36 PM
The valuation of assets other than cash/marketable securities is an imperfect sciences. The guidelines they are REQUIRED to follow do not specify that they should use values generated in a non liquid market to value the medallions. As disclosed, in the absence of sufficient market data they also look at the cash flow value of the medallions. There are many other instances where carrying values don’t match comparable sale values – take a look at REIT’s that have property acquired for $100m 30 years ago that’s now worth $300m. Not only will their balance sheet not show the $300m it will show way less than the $100m due to depreciation – is that securities fraud – NO, it is required accounting (at least here in the U.S.).
If TAXI were to book a large loss by writing down the medallions to reflect prices from a few sales in an obviously frozen market THAT might be securities fraud!
To give you an idea, they just raised money at 9%. They generate about $1.36m/year in revenue from the Chicago medallions and pay about $733k in interest on the loan for them ($23,495,000 balance) leaving them net income of $625k on the medallions. At 9% ROE that would value the medallions at $190,000. At the $238,000 value they are generating 4.35% ROE on the equity in the medallions. It is very common for companies to value income producing assets based on their cash flow. If financial companies didn’t do this every bank that makes loans that don’t have a liquid secondary market would have to be shut down for being insolvent!

warbuffcharmung • Apr 16, 2016 12:20 PM
Mr. Mortgage, A few Qs sir:
TAXI bond yields = 9%.
TAXI stock yields = 12%
U discount yield to medallion equity @ 9%. Huh?
U sez Chi taxi lend rate of 3%. Who be makin dem loans?
Plz give me hiz name – I want summa doze loans.
Try 6% Chi taxi lending rate.
Try 15% cost of equity.
Whadda u get? (Hint: much less than $190K)

mortgagemaker • 23 hours ago
Try reading the 10k – it’s in there although I would doubt that you could get such favorable terms today.

warbuffcharmung • 23 hours ago
So ummm, if u couldn’t get doze terms now, how can u use dem to value the medallion? Seemz u need a higher borrow rate & so less cash flow to equity, no?

truthincyber • Apr 15, 2016 6:16 PM
How have you been?
True, valuation is an imperfect process, but in a city where 70% of medallion loans are reported to be in default, meter revenue down 50%, and prices down over 70% from peak, the illiquidity you cite is not an impediment to understanding or quantifying what has happened, but rather a symptom of what has been happening in a very transparent way. Hiding behind “illiquidity” as an excuse to maintain indefensible book values of owned medallions should be troubling to you as an investor.
TAXI increased its carrying value of Chicago medallions 486% between 2006 and 2013, during which time lease income went up 215%. That means the cap rate went from 7.5% to 3.3% in 2013. Obviously value is about far more than free cash flow in a single year – your formulation – it’s about expectations about future free cash flow and the perceived risk around those expectations (reflected in cap rates of PE ratios for assets).
$100K Chicago medallions suggest a cap rate of about 8.3%. Sure sounds reasonable to me – probably a bit optimistic, actually. There has not been a single arm’s length transfer in Chicago above $150K in over a year. Those above $200K were all 100% financing (more are promised in April, btw – 100% financing deals above $200K!) Using $238K value assumes a 3.5% cap rate! Now be honest, Mortgage, w meter revenue down 50%, 70% of medallion loans in default and actual arm’s length (albeit all cash) transfers reported at $50K – $95,500 (medallions now readily on offer for $100K), you think TAXI using the same peak cap rate is appropriate? Nonsense. $138K write down per medallion in Chicago should have already happened.
Same funny business occurring in NYC and Boston. TAXI’s real LTV is over 130%.

mortgagemaker • Apr 18, 2016 10:42 AM
Welcome back James. I hope you’ve enjoyed the price fluctuations – I know I have and I’m sure there are more to come!
Accounting standards provide a lot of “wiggle room” for how to value assets with limited marketability. I would argue that “writing down” the Chicago medallions to the $100k you suggest would still not be meaningful because realistically they couldn’t possibly liquidate them at anywhere near that price. Further, the medallions would have far less value to any potential buyer that didn’t have them financed with a low rate LOC and the experience to keep them leased. For reasons I’ve already outlined I think that the value of the medallions, to TAXI, is somewhere in the $190k range. Reasonable people could disagree as they could for any asset valued based on subjective criteria.
No investor other than a clueless neophyte would buy (or sell) a stock based on reported book value or on the headline profit or loss. Sufficient information is provided to enable an investor to formulate their own analysis of the intrinsic and enterprise value, the quantity and quality of earnings and the future of the business model. The very fact that we can have this discussion is evidence of that.
I think it’s entirely proper for an investor to seriously evaluate the demonstrable market value of the Chicago medallions as well as the fact that in many cases medallions no longer provide a full guarantee against loss on medallion secured loans. It’s also prudent to consider their exposure to boat and RV loans and the snowball effect that could occur if they incur losses/write-downs that pose regulatory hurdles for the bank or their status as a BDC and can’t replenish the capital (although given the depth of their personal resources I see this as remote).
If these issues weren’t present this stock would likely trade in the low teens, at least. Whether the current share price represents a sufficient discount to allow for these factors is the $64,000 question!

truthincyber • 22 hours ago
as always, appreciate the civility.
There is one part of your response I think is critical:
“Further, the medallions would have far less value to any potential buyer that didn’t have them financed with a low rate LOC and the experience to keep them leased. For reasons I’ve already outlined I think that the value of the medallions, to TAXI, is somewhere in the $190k range.”
No accounting “standard” allowing for valuation based on what asset owner perceives to be the value – as you say “value of the medallions, to TAXI.” If capital is deployed more profitably by one company than another, the difference shows up in book value over time as the asset out-earns the competitors deploying less profitably, and the market assigns a premium multiple to that capital. Company’s cannot write-up assets to levels that could never be realized in an orderly sales process, including arm’s length agreement, based on asset being “worth more to us” than the market value. Carrying at a premium to fair-value is no different than writing up – must be written down.
The low-cost debt you cite as evidence that asset is worth more to TAXI than another owner of same fungible asset is unsupported by any data or logic. The 3.12% interest rate on the $23.495 mm term loan secured by those Chicago medallions is in line with TAXI’s own medallion loan book. That note is due in December 2016. Market just priced TAXI debt at 9%. Market has changed greatly since 2011 when TAXI negotiated 3.1% on Chicago medallions (selling above $300K by year-end). As mentioned, the current cap rate is between 8% at $100 K and 16% at $50K – using TAXI’s current lease income – falling. By your own reckoning, TAXI couldn’t fetch $100K on average for 159 medallions, so you think the lender is going to just rollover that debt at 3.1%? Even so, irrelevant to fair value.
All goes back to obligation of company to carry Chicago medallions at fair-market value – regardless of its perceived val.

mortgagemaker • 20 hours ago
Because only $14.8 m of the debt is guaranteed by the company – the other 1/2 is non-recourse (see the notes in the 10K). If they decided to walk away they could stick the bank with 159 medallions and $15m balance – if the bank doesn’t want to stay in the medallion leasing business they would probably have to liquidate them at zero and eat the loss.
As I noted before, to any prudent investor where they mark them for “book” is meaningless. In my opinion having an asset where THEY can produce income while the bank financing them is shouldering basically all of the remaining risk makes these medallions pretty valuable.

warbuffcharmung • 20 hours ago
Da fair value iz not based on what TAXI borrows at but what an arms length buyer borrows at. From FASB summary of FAS 157:
“This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.”

warbuffcharmung • 17 hours ago
Think we can agree there aren’t many “market participants”.
But zatz due to da fact that historical lending metrics no longer work in a world where da risk of owning da asset is much higher, and any new “market based” loans dat reflects dat risk (either much higher rate or much lower LTV) would imply much lower equity value.
Soooo, no existing lender wants an answer to da question “What are they worth with a market rate loan”. Sooo, lending for arms-length trades has stopped. Don’t open dat box bro – only bad news in there if you own taxi loans. Surely, Mr. M, you must see that.
No reputable external advisor gonna bless a value using pre Uber financing cost. Dat dog don’t hunt.
Respectfully, ur missing the implication of 9% cost of debt w da parent. It is a clean market price of risk in the bizness.
U can’t discount levered equity payment stream at 9% when cost of unsecured debt is at that price. I think ur $190K need a trim.

truthincyber • 20 hours ago
“Because only $14.8 m of the debt is guaranteed by the company – the other 1/2 is non-recourse (see the notes in the 10K).”
I am aware of that already. But I don’t follow your logic – TAXI pays the bank $14.8 mm guaranteed, and gives back the medallions, equivalent to “valuing” them at $53K per medallion (the remaining debt divided by 159). How is that good for TAXI?
Moreover, the questions you still have not answered:
1) what discount rate are you using on the cash flows of TAXI’s Chicago medallions and for how many years are discounting to get to the $190K value you have stated? You have to be using a combo of low discount rate and many years of this level of cash flow – i.e., you see very little risk to the asset’s performance from current levels going forward – despite fact cash flows are declining and taxi insiders are saying medallions “worthless” and 70% of loans are in default.
2) Do you really think if TAXI properly writes down Chicago medallions to $100K or $50K that the stock won’t react because only “neophytes” will care?

mortgagemaker • 21 hours ago
I’m a little greedier – I’m hoping to rebuy in the 6’s

mortgagemaker • 19 hours ago
It’s good for TAXI because I can’t imagine the bank wants to take back 159 medallions at $53k each. Therefore it gives them decent leverage to negotiate an extension at favorable terms. Of course, that also depends on their other borrowings/relationships with the bank.At 9% the PV comes out to $190,000 per medallion. I used the 3rd and 4th quarter lease revenues times 2 for an annual lease income to adjust somewhat for seasonality. I actually believe lease rates will increase in the future because it appears likely that there will be further regulation of ride sharing.
Just as with every other stock there’s an initial irrational market reaction to headlines. Look at the stupidity of sell offs based on “earnings misses” of a penny or rallies based on “revenue beats” of a few cents. If you’re looking to trade pay attention to headlines. If you’re looking to invest pay attention to the long term. Realistically the market has already discounted significantly more than the value of the Chicago medallions in the stock price so, to directly answer your question, I don’t think there would be a significant long term reaction.

mortgagemaker • 21 hours ago
$14.8 m guaranteed by company. I found the note in the 10K.

mortgagemaker • 21 hours ago
If the cost of the debt goes up then that clearly has impact on the value of these medallions to TAXI. However, I’m not as confident as you that they won’t roll over the loan at similar terms – it really depends on what type of recourse exists. I recall reading something in the notes in one of their filings at one point that seemed to indicate that some debts are entity level and not guaranteed by the parent. If the loan doesn’t have a guarantee from the parent (entirely possible considering at origination it was low LTV secured by assets assumed to be golden) then they may be happy to just get paid.
Similarly, it’s difficult to isolate the value of the medallion ownership without knowing the structure. If they are owned and financed only at the subsidiary level meaning that essentially they have a sub that can only make them money I would argue that it has great value.
While this is conjecture, these are sophisticated operators that have very likely isolated some of the assets and liabilities. However, even disregarding that point, I disagree with your contention that the assets are not valued based on the cash flow value to the owner. For example, when an asset is securitized the issuer generally books a gain on sale based on the present value of the future cash flow. That cash flow is directly tied to the issuer’s unique costs of securitization – similar companies can issue on similar assets with dramatically different cost structures depending on their strength as a servicer, the overall financial strength of the company, etc…
Once again, any prudent investor is going to assess the company based on their own decision of what the ownership of these medallions is or is not worth. Just as you contend their book value is inflated because they can’t be sold for $238,000, if they wrote them down to $75,000 someone else might contend that their value is understated because they generate significant cash flow.

mortgagemaker • 18 hours ago
At this point there don’t appear to be any “market participants” but I’m sure they are covering themselves with plenty of external opinions.

warbuffcharmung • 20 hours ago
Reports from numerous sources – no banks lending on da medallions at 3%. TAXI just borrowed unsecured at 9%. Medallion loan cost prob somewhere in btwn. Ya need to redo yur model Mr. Mortgage – it wuld never fly w the audit cops – no arms length mkt participant gonna buy based on 3% fund rate. Full stop.

mortgagemaker • 18 hours ago
#1: The nature of banks is that they would rather keep a performing loan on the books than take a large loss. There’s no way they could liquidate 159 medallions at $53k in the present market and I’m quite sure they don’t want to be in the medallion business. If the debt is being serviced they have strong incentive to roll it over.
#2: If you value the net cash flow of $52,500/mo. for 30 years at 9% discount rate it’s worth $6.5m which is about the amount of their present equity at $190,000 valuation. The medallions themselves are worth less, the additional value is from the cheap leverage. If that cheap leverage changes then the cash flow will obviously change as will the value of that cash flow.

warbuffcharmung • 18 hours ago
“The medallions themselves are worth less, the additional value is from the cheap leverage”
And zatz where u run afoul of FAS 157 (to repeat: “fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.”)
That cost of leverage ain’t avail to arms-length 3rd party buyers (if it was we’d see lotza trades), so it don’t fly 4 determining fair value. That’s not GAAP.
Doze Chi-town medallions are in fer big haircut.

truthincyber • 21 hours ago
Of course the asset is based on the cash flow – but the financing or capital structure has nothing to do with it (the basis of the capital asset pricing model – notwithstanding deductibility of interest of expense making a slight advantage to debt). But you are not meaningfully changing the discount rate on those cash flows or the competitive advantage period over which they are being discounted. Those are the two factors that have been at the heart of the market’s revaluation of medallions.
Why would a lender agree to extend same terms on a loan when the market value of the asset has fallen by 70%?

truthincyber • 19 hours ago
all the leverage in that scenario belongs to the lender, not TAXI. Lender only needs to recover $53K per medallion.
If I discount $1.3 mm/year for 17 years, use a terminal value of 190K per medallion, discounted at 9%, it yields a $113K value. How are you getting $190K?
Simplify, if you simply capitalize the $1.3 mm at 9%, suggests $90K value. Again, how are you getting $190K?

warbuffcharmung • 20 hours ago
Wherz the evidence that a bank is willing to “shoulder all the risk” at 3%? Every story out there sez, “No one is lending”. Yur valuation is all about artifacts of mkt that no longer exists.
We just got mkt signal that co w “90% of income from non-TAXI business” needs to pay 9% to borrow funds. What’s zat say about risk seen by mkt participants (u really think a 3% borrow rate for medallion purchase will fly for FAS 157)?
Yur valuation model izn’t realistic. Needs current mkt input for borrow rate.

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