Transcript of Sitestar’s Online Shareholder Chat on Dec. 30, 2013 at 1:00pm EST
Frank: I want to welcome you to the Sitestar investor chat. Today’s chat will be archived
and available upon request.
Roberto: Thank you for taking the time to chat with shareholders
Frank: Good day, ladies and gentlemen, and thank you for joining us today. This is
Frank Erhartic, President and CEO of Sitestar Corporation. I want to welcome you to the
Sitestar investor chat. Today's chat will be archived and available upon request. A
question-and-answer session will follow the formal presentation. Joining me today are
Sitestar board members Dan Judd and Jeff Moore. Dan is also our Chief Financial
Officer. Jeff has been added to our Board recently and has investment and real estate
knowledge.
Frank: I realize that we haven’t had a shareholder chat like this in a while and I
apologize for that. We will start again doing these more often. We are also planning on
an Annual Shareholder meeting in late April or May.
Frank: I ask that everyone hold all comments until I finish my prepared statements.
Then type ? and I will call on you for answers.
Frank: Please be advised that statements contained in our press releases and those
that we make during the chat that are not historical facts are forward-looking statements
that are based on management’s expectations, estimates, projections and
assumptions. The Company assumes no obligation except as required by law to
update the forward-looking statements contained in this chat as a result of new
information or future events or developments. These forward-looking statements
generally can be identified by words such as “believes,” “expects,” “projects,”
“anticipates,” “foresees,” “forecasts,” “estimates,” “should” or other words or phrases of
similar import. Forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, as amended. These
statements are not guarantees of future performance and involve certain risks and
uncertainties, which are difficult to predict. Therefore, actual future results and trends
may differ materially from what is forecast in forward-looking statements due to a variety
of factors, including and without limitation, as found in the Company's reports filed with
the Securities and Exchange Commission.
Frank: We will begin by providing an overview of Sitestar’s accomplishments for the
first three quarters of this fiscal year of 2013. We will also discuss our real estate
division and goals for 2014. Lastly, we will invite your comments and inquiries.
Frank: Year In Review so far:
Frank: In short, 2013 is expected to be a profitable year for Sitestar. We are reporting
on the three Quarters of 2013 since we have not closed out the year yet. We achieved
or made strides in closing in on many of our goals. Total Revenue was $1,870,332, a
decrease of $988,553 or 34.6% from $2,858,885 for the same period in 2012. Earnings
before interest, taxes, depreciation and amortization (EBITDA) was $316,044 an
decrease of $300,208 or 48.7% from $616,252 for the same period in 2012. Net
Income was $187,214, a decrease of $172,218 or 47.9% from $359,432 for the same
period in 2012.
Frank: The decrease in Internet sales is attributed to the lack of acquisitions of Internet
access and web hosting customers of the ISPs. Although the Company continues to
sign up new customers, competition from nationwide telecommunications and cable
providers threatens significant and sustainable organic growth.
Frank: Cost of Internet revenue decreased $284,501 or 23.5% from $1,208,176 for the
nine months ended September 30, 2012 to $923,675 for the same period in 2013 as a
result of declining revenue and expenses. We have also cut some major expenses in
our Internet division that should be reflected starting late this year and into the first
quarter of 2014.
Frank: While sales are down in the Real Estate division this year, we have been
concentrating on redeveloping the properties we bought for rental properties. This has
taken away from actual sales of homes but it is preparing us for long term cash flow and
the ability to leverage these assets to purchase many more properties.
Frank: Real Estate Division:
Frank: In 2010, we realized that there weren’t as many nice size Internet Service
Providers left to purchase to keep this division growing. As a result we started investing
in real estate with our extra cash and to develop a plan to start the real estate division.
In a recession, you can buy houses inexpensively and there is a lot of money to be
made here. We started partnering with other investors on many of the houses initially
that were bought from foreclosure. Although this provided us with less income per
home, it worked out well as we were able to do more deals
Frank: Recently, we have been purchasing homes without other investors. This gives
us the ability to potentially make more on each deal. The downside is that it does take
longer to get the homes prepared to rent or sell. This year, we have been concentrating
on fixing up the homes we have purchased and renting them out. We currently have
about a dozen houses rented so far this year with about $10,000 a month in rental
income. We have many more houses that we are working on for rent and we hope to at
least double the monthly rental income in 2014.
Frank: Many of the homes we had purchased in the past needed a lot of work and we
had issues with contractors getting things done on a timely manner. This year, we
increased our contractor base significantly and weeded out contractors that were
costing us money. We are now able to work on more houses at a time. I have also
hired an assistant to help me manage the properties, projects and the contractors more
closely. She has been instrumental in freeing up some of my time and keeping projects
moving more smoothly. We should be able to get most of our properties available to
sell or rent within the next 6 months while adding additional properties.
Frank: 2014 Goals & Objectives:
Frank: 1. Increase our rental income by at least 2x
Frank: 2. Complete all of our existing home renovations that need to be done
Frank: 3. Buy and Sell significantly more homes this year
Frank: 4. Further develop our in-house systems to make things run more smoothly
Frank: 5. Further develop our in-house systems to better capture leads for sale, rent,
buying and investing.
Frank: 6. Redo our existing home page to better reflect what we are currently doing and
to help capture those leads.
Frank: 7. Partner with more investors to purchase or invest in more real estate deals
Frank: 8. Increase our revenue and net profit significantly
Frank: 9. Continue to find ways to cut costs and streamline operations
Frank: 10. Increase Shareholder value
Frank: With our objectives clearly stated, we believe that we shall continue to deliver on
our promise to generate value for you, our shareholders. We are committed to keeping
this company profitable and sustainable for the long-term. We have seen our stock
price increase this year and hope that it will continue to increase as we continue to
develop our real estate division.
Frank: This concludes our prepared remarks and we thank you for your attention. We
now invite your questions and comments.
Frank: Please type ? if you have a question and I will call on you one at a time.
keating3: ?Are you partnered in any of your current properties or does Sitestar own
them outright?
Frank: We have a couple of properties that we are still in partnership with. There is one
in Bedford VA and there is some land in Roanoke. The one in Bedford is mostly bought
for the land.
Frank: I don’t like to buy land in this market as it is more long-term but we are financing
Frank: the one in Bedford for the partner with interest.
Nshanske: ?
Roberto: ?
Tony: Looks like SYTE is transforming further away from internet into real estate. Will
the company consider a REIT structure at some point in the future to benefit from
potential advantageous tax treatment?
Tony: ?
Frank: We believe our growth is in real estate. I am not sure that a REIT structure will
benefit us too much but we are open to looking into it. At this point REIT doesn’t make
sense.
asd: ?
Frank: nshanske
matthew: sorry, don’t meant to interrupt, just wanted to point out that the chat does not
seem to refresh properly under chrome. internet explorer works much better.
jeff1: I have the same problem.
Nshanske: Perhaps I missed the previous disclosure, but I was surprised to learn that
RE had been purchased in partnership. Do you plan to upgrade your financial reporting
to show what is held in partnership, what is for rental and what is for sale?
Nshanske: second, at current valuations, is RE still the best use of capital?
Nshanske: and third, have you considered 1031 exchanges to defer taxes on the RE
Frank: I realize that some people are having difficulty with this chat working with certain
browsers. We will provide a transcript to everyone that requests it. I will also answer
questions via email and post on here during the chat.
Frank: I think that we should update the reporting to reflect all that you are asking. Yes.
What we have now in partnership is not material but we do plan on partnerships in the
future to help us grow. I believe that RE is the best use of capital at this point as this is
something that I have experience with and is very low risk. We have the ability to
purchase real estate easily in this market and should be able to in any market. Warren
Buffet himself said that if he could buy hundreds of thousands of homes now, he would.
We cannot do 1031 exchanges the way we are set up right now. We would have to set
up separate entities do this effectively.
Ari2: ?
Frank: roberto
jdhoops: ?
matthew: ?
Roberto: How many properties are in inventory and are they all owned free & clear?
Frank: there are over 40 properties that we own and all are free and clear. As we build
our rental property inventory, we can leverage this for bigger deals and more deals
when we need the money. In the past, I have had to borrow money for Sitestar
personally since Sitestar didn’t have many hard assets.
Roberto: are any owned in partnership?
Frank: only 2 are in partnership.
Roberto: Will renting be future plan? I.E. rent instead of selling?
Frank: we will do a mixture of the two.
Frank: asd
Roberto: thanks...
SFF2: ?
Frank: ari2
Frank: then matthew
Ari2: The RE market has come off its lows and in some markets is even hitting multiyear highs, at what point is the opportunity finished and what criteria are you using to
evaluate that?
Frank: I don’t believe that the opportunity will pass. There will always be opportunities
to purchase distressed real estate. IE. Divorce, foreclosure, probate, and job loss.
Frank: We will better use marketing to find these opportunities better and will use other
forms of creative buying and financing in the future if needed.
Frank: We evaluate our RE opportunities for which way we want to handle them. IE: flip
vs. rental. We are looking at really good ROI’s on rental properties. Our target is
approximately 20% ROI on rentals. On higher end properties, the ROI doesn’t make
sense for rentals so those are typically flips.
Ari2: Have you run into competition in the market, others trying to do similar?
Steve: ?
Ari2: Also on the internet side, is there an exit strategy or are you just taking the cash
and letting it decline naturally?
Frank: matthew
matthew: is the isp business cashflow negative? at what rate? how do you evaluate
if/when you should totally get out of the business?
matthew: and what is your plan if at some point you are unable to find 20% ROI real
estate in your area
Frank: the ISP is cashflow positive and is funding many of the real estate purchases
and rehabs currently. We shall evaluate what to do with the ISP division based on what
we can get out of that business vs. how much it is kicking off cash for us. We certainly
don’t want to get out of this business and have cash issues in the future.
Frank: ARI2: We do have competition in the business as we compete with others trying
to purchase properties we are interested in. The market in the Roanoke VA area is very
good for investment and there are tons of properties at good prices there still. This is
where most of our property is currently.
Frank: Back to the internet division. This is a cash cow for us right now. We can either
continue to let it decline naturally or sell it in future to some in the same business as we
are that it makes sense to. At some point, it will no longer make any sense and we will
have to get out of that business. That is how we purchased many companies like ours in
the past.
Frank: We have significantly cut costs in our ISP division so we are looking to see the
results of that first. We are almost complete on those costs but we still have some left to
do.
Frank: jdhoops
Frank: then SFF2
Frank: then Steve
SFF2: i was going to ask about hurdle rates on the rental side, you mentioned 20% ROI.
Can you elaborate on the financing structure (cash on cash returns)?
Frank: We have been buying houses with our own cash thus far. I evaluate the ROI on
the cash we put in. In the future as we partner or finance deals, our cash on cash ROI
can be much higher. If we buy a property with let’s say, no cash down and 100%
financed, our ROI would be infinite. We plan on finding investors that want a decent
return on their money and no time to deal with investing and partnering with them. This
will give us higher cash on cash ROI.
SFF2: my point is what kind of deals do you see to hit your ROI?
Frank: We are open to looking at any deals that make sense with different structure to
achieve high ROI for the company.
matthew: For those being timed out, try setting the refresh using the /refresh 5
command
Charles: ?
Frank: did I answer what you were asking, SFF2?
Frank: by the way, after I answer all your questions, I have some emailed in that I will
answer here.
matthew: ?
SFF2: sort of jaja...i was looking for cash on cash returns on rentals from the company
point of view, and then enhanced via financing (if needed) to hit 20%...
Frank: SFF2: In the future, in order to do more deals and get higher returns, we will try
to put down less of our cash on deals in order to increase that ROI. But it has to be a
safe investment for all.
SFF2: i understand that. my ? refers to what kind of deals you are seeing ...say 12%
cash on cash all cash etc
Frank: charles
Frank: then matthew
Frank: I typically buy at a significant discount. Typically, if I pay $50,000 for a house,
that property probably is worth $100,000. I am looking at about $1,000 a month in
rent. I have to evaluate if we should sell it or rent it for a while then sell it. Or keep
renting it. The location of the property also plays into the decision as good areas that
house sell quickly in and are in high demand usually will be the ones that are sold.
Charles: You said no cash down would be infinite ROI? How? There are still expenses.
jeff1: I think that Frank was taking that to an extreme, Charles. It’s just a way to lever up
some, especially given that there is little here in the way of liabilities.
Charles: Clearly it is an extreme. But there are still significant liabilities. Taxes,
maintenance, etc.
Frank: that $50,000 house I look at the investment we make for the ROI but also have
to evaluate if it should be a short-term gain and then go onto the next property.
Frank: as far as leverage, we can take that $50,000 house that is worth $100,000 and
refinance it to take out say $80,000 in cash to buy another house. If we group all of our
properties together, we can do much bigger deals.
Charles: But it appears you’ve never done that before. What is different now that you’re
going to be able to?
Frank: We haven’t needed to finance in the past. We have already had the cash. We
haven’t flipped many houses this year as we have been concentrating on rental
properties. We are doing some properties on lease to own options currently. Does that
answer your questions as I might be unclear what you are asking.
Charles: Well, I for one am very, very disappointed in the pace. I’ve seen no progress
in the past two years.
Frank: I think you will see good progress in the future.
Frank: jdhoops after matthew.
matthew: what happens when you can no longer find 20% roi in real estate in your area,
basically, what’s the next best use of our capital after the isp and real estate?
Nshanske: ?
Frank: matthew: I see that we can get good ROI for the foreseeable future. If that does
dry up, we can look at other uses for the money. I am open to suggestions always when
it comes to good, safe investments.
matthew: I guess my question is whether you have a plan b now? Let’s say tomorrow
you can no longer buy real estate for whatever reason. How are you going to use the
cash coming in?
jdhoops: As a veteran of the ISP industry, do you see dial up isp existing to any extent
5 years from now
Frank: I see dial-up eventually fading out. I don’t know when it will happen but not as
many people have land lines as they used to and it doesn’t make sense at some point
for our wholesale providers to be in certain areas if they can’t make money.
matthew: my fear is becoming a company like best buy, that kept opening stores
because "that’s what they do." what separates great investors is their ability to allocate
capital. so I’m trying to get a sense of what else you think is possible
Frank: There are other options for the cash but I am not going to get into that here.
Ari2: ?
matthew: could I ask why not? you would just be discussing possibilities no?
Frank: let me ask you guys what you think we should do with the cash and investments
because it looks like you guys have ideas.
Frank: we do not intend to be a best buy and do what we do just to do it.
matthew: well in the situation where management does not have better ideas a
dividend is always nice. let us decide individually then
matthew: of course a buyback is more tax efficient, but you would need to be sure that
the stock is cheap
Frank: I started the Real Estate division, although it’s full potential hasn’t been realized
yet, because I saw that opportunity.
Frank: those are options on the table that our Board has discussed.
matthew: would you consider expanding the real estate division to outside your
geographical area?
Charles: I don’t see how the real estate has provided any value. The stock is much
lower than it was 5 years ago.
Frank: clearly the value of our company on the market is below what our assets are.
We are trying to fix that.
Charles: You should pay a dividend
Roberto: I would suggest strengthen the balance sheet & business and then dividends
or stock buybacks
Nshanske: Since it seems to be a free for all, if we all agree that stock doesn’t reflect
value, we should do a buyback. I would suggest a modified dutch auction tender
Frank: we absolutely can expand the real estate division outside our area.
Frank: there are a lot of other hot markets out there.
matthew: I’m not with Charles, yet. but we need to see that 20% roi actually materialize
soon.
jeff1: As a board member, I agree with you.
matthew: my fear is that as you move outside your home area you will be competing
with other larger players
matthew: what advantage could you possibly have in "hot" markets over blackstone
and colony ect?
Nshanske: stock is undervalued by > 20% ROI target
Nshanske: I’m concerned that you seem to be locked into real estate as the highest
and best use of the company’s capital, no matter what the environment looks like, and
what other options are out there. The fact that Mr. Buffett mentioned residential real
estate several years ago does not mean it is the best use of capital now, or will be in the
future. He has also purchased equities, operating businesses and bought back stock.
How often and how do you evaluate those options relative to real estate? Especially
given that you’ve been consistently short of the 20% ROI target.
Frank: We haven’t purchased much stock back recently as we have been investing in
real estate. We will look at buying more shares back in the future. We can only do little
transaction in the open market so if anyone knows of someone that wants to sell large
matthew: well to be fair, we could be having a 20% roi and it just not showing up in
financials yet. I’m not upset that the stock is not up a lot. I’m a long term investor.
Nshanske: someone has 435K shares on the ask right now
Nshanske: but a tender would get those out of the woodwork
Frank: shares, they need to contact me.
matthew: but ya, I’m looking for management’s flexibility to adjust to the rising real
estate prices.
matthew: I’ll throw this out again, because I think it’s critical. what is your competitive
advantage over the larger players as you move away from the small market you know
very well?
Gif: ?
Frank: I don’t think there is any advantage over blackstone and colony. They can do
larger deals and more deals than us.
matthew: so why compete with them in "other markets"?
Frank: There are other markets that we can deal with but over the next 12 months, I will
still be concentrating in our local markets until we can develop a good system to do it in
other markets without losing control
matthew: your competitive advantage now is that you know Roanoke and the
surroundings very well
Frank: The ROI target is on a house by house basis. We are backlogged right now with
projects so over the next 6 months as we get clear of that, we should see those ROI’s
overall increase.
Steve2: Frank- I’d like to see you take a pause on the purchases, and work on
monetizing what you currently have. Progress clearly has been slow.
Frank: who is saying that we are going to compete with them in the markets they are in?
mooch: yes don’t take any unnecessary risk
Frank: again, we are concentrating on markets we know well right now.
jdhoops: its best to concentrate on what you know best
Frank: I will only go into other markets when we have the right systems and people in
place and if it makes sense.
Ari2: ?
Frank: gif
Frank: then ari2
matthew: ?
Ari2: Does the addition of Mr. Moore to the board signal any strategic shift or new
avenues of exploration?
Frank: ari2
Gif: ?
matthew: my question was related to ari’s. how involved is Jeff in day to day operations.
Does he provide input at the individual property level?
Gif: I like the take it slow and grow. This is a good approach Frank. I have faith you can
make this something big. Keep plugging away at the properties. Your proven history of
good cash flow management is all I need. No Divy is needed for me.
Frank: The addition of Mr. Moore to the board doesn’t specifically signal any shift. He is
a significant shareholder and has ideas and experience that he presents to the
company.
Frank: gif
Gif: Just a comment. We know you are not the typical penny stock company.
matthew: my question was related to ari’s. how involved is Jeff in day to day operations.
does he provide input at the individual property level?
Frank: matthew
Frank: thank you Gif
jdhoops: I second Gif’s comment
Frank: Someone asked if Mr. Dash still owed shares of Sitestar. I am not aware if he
does anymore.
Frank: Jeff has been down several times and visits our properties. He has helped move
some of them along. We have board meetings on a regular basis.
jeff: In regard to the question of how involved I am with the RE. I am not involved in the
day to day operations- that falls into Frank’s hands. However, I have made my thoughts
known, in regard to which properties should be a priority, as well as other items such as
governance and capital allocation. I do feel that the progress has been slower than
anyone would want, and there are being changes made.
matthew: that’s great. thanks Jeff. I found this company via your blog so I respect your
opinion and I am comforted you have a second pair of eyes on capital allocation
Frank: thepupil
thepupil: ?
jeff: It is important for shareholders to communicate with the whole board though.
Especially when it comes to their thoughts on capital allocation- the company is all of
our’s.
thepupil: i agree this is not a typical penny stock and like what i see so far. but have
you thought about changing the number of shares outstanding via a reverse split, the
share price increases transaction costs and likely hurts the valuation
jeff: 1) On the balance sheet’s "Notes Payable, current portion" of $900K -- when does
the company thinks that will get taken care of and officially removed? 2) Timing on when
the shares of the former employee will be officially cancelled? 3) What is the total dollar
size of the real estate opportunity within Frank's geography and circle of
competence? Would SYTE consider raising additional equity to take advantage of the
real estate opportunities, to the extent that there are still opportunities but unlikely to last
long into the future?
Frank: I do want to mention something that is a big thing on our balance sheet. That is
the USAT debt we show on our financials. We do not believe that we owe this and in
fact, we believe that they owe us money. We are trying to solve this through legal
means but our auditors will not let us take it off our books as they say that we owe it.
We will be entering into arbitration soon and hope to have this resolved soon. There are
no guarantees on how this will turn out but we have all of our supporting documents to
our attorney and believe we are solid with our claims.
Frank: Let me ask you guys what your thought are on a reverse split. We are getting a
quote on what that would cost if that makes sense.
Nshanske: only insomuch as it allows the company to buy back shares from
insignificant holders
matthew: I’m against a reverse split. It will cost us capital and doesn’t do much
Ari2: It’s just window dressing, but there are some that like dressed windows betters
matthew: in fact, the float and possibly the liquidity could go down
Nshanske: i don’t know what distribution of holders is, but if there are a significant % of
holders with < 10K shares, it could be a vehicle for a buyback
Nshanske: force them to sell
matthew: better of you ask for a quote on a possible tender
Frank: thanks for your input on the reverse split. now on to Jeff’s questions.
Frank: those questions were from other shareholders... and I have more to post.
Frank: #1 already answered.
Frank: #2: Those share are in treasury and do not reflect outstanding shares. We will
probably cancel those officially soon. I am not sure it makes sense to hold on to them
any longer unless we want to cancel more shares from others at the same time.
Frank: #3: is related to the size of the local market. I don’t have exact figures on that. It
is enough to keep us busy for quite some time, however.
Frank: another question related to if we would consider raising additional equity to take
advantage of RE opportunities....
Frank: I really don’t want to issue more shares if we don’t have to so that is probably
unlikely unless we use that as collateral and can purchase them back at some point. I
like reducing the number of shares better and using other avenues to raise money
which real estate can easily do.
matthew: I think with an unlevered asset base, equity should not be raised unless for a
very good opportunity, and even then, only by rights offering to protect current
shareholders
Frank: I agree Matthew.
Nshanske: someone likes the chat. 350K block just traded @ .0448
matthew: that just means someone else didn’t like the chat enough :P
Frank: Would the company be willing to share the shareholder registrar with the public,
or at least its investors?
Frank: I would have to evaluate it on a case by case basis.
Frank: any other questions before we wrap this up?
Nshanske: just want to thank you for doing this
Nshanske: look forward to seeing progress
Ari2: Thank you Frank and Jeff for your time today...
Ari2: Will there be follow-up to this chat and the items briefly discussed here?
matthew: ya, thanks guys. hopefully the communication becomes more frequent
Nshanske: and, Sorry to be so crass, but can’t message privately in this system.
Matthew(and anyone else), if you’d like to discuss this further, you can use the contact
us from on inelegantinvestor.com or @inelegantivest on twitter
thepupil: appreciate this cheap and effective way to communicate w/ shareholders
Frank: If anyone wants a transcript, we will probably post on our website in a couple of
days or you can email us.
Frank: Thank you for attending the chat. If you have any additional questions, please
email investorrelations@sitestar.com and we will try to answer them the best we can.