Steve Romick: Trade Into The Gold You Can Eat, Farmland

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So as you have these improving diets, you’re going to have to work these fields much, much more.

We need much greater productivity. We’re only growing herbal acreage globally at 0.3% a year, versus population growth is 0.9%. So you better get that productivity improvement.

So I don’t think you can just generalize and say, “Farmland, why don’t you just buy?” We’ve actually partnered with some people who we believe have the ability to find better farms, at a discount to the market, and are able to really improve the productivity on those farms. So those numbers have been shown where farmland is traded with a cap rate of around 3.5% or so. We purchased a portfolio of farms at a 5.1% cap rate and finished buying a couple years ago, year and a half ago or so. In fact, we’re actually generating cash flow on those, before fees, of a little over 7%, with the fluctuants that we get. So we’re actually buying these farms at very handsome discounts to what we see out there.

Forbes: So it’s an ag REIT?

Romick: Yes, it’s a private REIT. And someday, hopefully, it’ll be a public REIT.

Forbes: Picking equities, describe Orkla, which most people aren’t familiar with, it’s Norwegian.

Romick: Orkla is a Norwegian holding company that is controlled by a Norwegian billionaire namedErik Stein Hagen who created his wealth in grocery. And he had a Norwegian grocer, merged it with another Scandinavian grocer estate, which they sold as a package together to Ahold, became a billionaire in the process, reinvested that capital in a number of things. But his largest, single investment is in Orkla.

Orkla is the number one food brand in Norway. They’re number one or number two in most of their brands that they have under their umbrella. But they also have all these other silly assets that are unrelated to the food business, whether it be a paint business, a chemical business, which they’ve spun, or an aluminum smelting business and so on and so forth. Businesses that are non-food-related.

What we did was we looked at the business, applied a conservative evaluation to what they established as being more non-core assets. And what was leftover was this stub of a food business that was trading at about 10 times earnings. And so that stub is now traded, since we bought it, at mid-teens. So it’s worked out.

Forbes: So how did you discover a Norwegian company? And what kind of screens do you use since you cover everything?

Romick: We have a pretty good team, and I’m supported by a great team. And in particular, Mark Landecker and Brian Selmo, my two key people on my team that I couldn’t do this without them. And Mark Landecker is the gentleman who pointed Orkla to us. I’d have to call him up and ask him where he got the idea. But Mark knows all the better businesses in the world. So he focuses on that. This was something that came up on his screen.

Forbes: Microsoft. Microsoft huge cash flow, does well, very profitable, but as somebody once described it, Microsoft stock, not the company but the stock, is like Brazil. It was once described as having a great future and always will. Why do you think it’s finally going to have its day in the sun?

Romick: I don’t know that it will, candidly. I just think it’s priced as if it won’t. If it happens, the stock’s going to go up a lot. You’ve got a tremendous cash flow. You’ve got the Windows business. You don’t need the Windows business to do great. Windows 8 is not doing great right now.

You’ve got the entertainment business with the Xbox, which doesn’t make that much money, but is valuable nonetheless. They’re one of the top spenders in the cloud. That cloud business could be worth a lot. But leaving those things out, just like at their Office business and servers and tools. And the cash they’ve got on the books, including discounting the cash that’s held overseas, which is most of the cash. You’re getting the stock, everything else for free. That covers the stock price, where you are. So we like to say good things happen in cheap stocks.

Forbes: Google, when did you get into Google? And that’s had a big run.

Romick: We invested in Google along with other companies, at the time, when there was a pull back in 2011. Market was weak. And there was a chance to pick up some very good branded businesses at nine to 11 times earnings. And in that space of advertising, which will include the more technologically-oriented Google along with our public group and a W.P.P., that’s an advertising company, we purchased all three of those companies.

Forbes: Financials, A.I.G., C.I.T., what’s in them?

Romick: Well, C.I.T., we actually accumulated our position in C.I.T. through the debt and the restructuring. So that was one of those debt investments that you talked about, where the debt position came down and stocks went up. Well, they gave us the stock. We bought it when it was deeply out of favor. I bought the bonds as low as the 40s. And we ended up getting equity as a result, expecting to get equity in the restructuring, and happily got it and held it. What happens next is anybody’s guess.

A.I.G. not dissimilar. A.I.G. we owned a lot of the debt of subsidiary companies of A.I.G. We own debt of American General Finance. We own debt of International Lease Finance. We knew the business quite well. A.I.G. is in two businesses. They’re in the property casualty business both here and abroad in Chartis. And they’re in the life insurance business.

Well, the Chartis P.N.C. business here in the U.S. had not been terrifically well run. It seemed like they had to get every last policy underwritten, regardless of whether or not it was gonna be profitable for them. Whereas in Europe, they actually were much more circumspect and allocated capital more wisely in budgeting in their underwriting.

The life insurance is an okay business. When you add it all together and look at turning the U.S. business around, allocating the capital more wisely, valuing the other assets, including mainline assets et cetera conservatively. We bought this at less than 50% of its book value. And again, good things can happen to cheap stocks. And they were buying their stock back from the U.S. government at significant discounts to that book value. So every one of those transactions was quite accretive.

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