At the risk of sounding like Jimmy Carter, I felt a sense of malaise at this year’s commercial real estate summit. Last week, the Omaha conference reached its 35-year milestone under the guidance and creativity of the indefatigable attorney and developer, Jerry Slusky. Maybe it was the panel discussion that devolved into career counseling for young brokers by a grizzled veteran. Perhaps it was the lack of statistics on rental trends and square footage absorption, leading a developer to wanly muse about seeking out markets where “demand exceeds supply.” This revelation produced solemn nods and much chin-stroking from the pilgrims.

Lenders assured me that none of their loan books had the faintest whiff of distress, yet a panel on the subject implied otherwise. One general contractor told me that many of his clients in the southwestern portion of the US are going ahead with apartment projects “even though the numbers don’t work” because they know they are locking in today’s cost basis for the future. I had no response to this business plan. Using such logic, one could have made this justification to move forward on a real estate development at virtually any moment in the past 75 years.

It was the irascible Creighton economist Ernie Goss who brought out the wet blanket. I love an economist who is one-handed. There aren’t many. Dr. Goss gamely mixed John Maynard Keynes with Warren Zevon, befitting a professor who could pass for Bob Dylan’s cousin. Goss talked about the agricultural sector in gloomy tones. Corn at $4 a bushel is no bueno for Nebraska. His most sobering reminder was the chart showing that interest on the national debt now exceeds spending on national defense. No empires have survived this inflection point. All that Aztec bullion filled Spain’s coffers for two centuries before an overextended domain began to unravel in the late 1800’s. France sold its New World colonies to pay for Napoleon’s conquests. Lest one thinks such fate can’t befall the holder of the world’s reserve currency, it was Britain with her once-invincible pound sterling that was hobbled by two world wars and went cap-in-hand for an IMF bailout in 1976. George Soros heaped further ignominy on the beleaguered pound in 1992.

I can be prone to cynicism. It’s a blind spot, and an especially poor trait in a real estate developer where one’s raison d’etre is the rosy future. But I can’t help but feel there is a bit of the “end-of-the-Roman-Empire” feeling around. There’s bacchanalia galore with stock indexes hitting all time highs, private jets whisking families on vacation, the return of the Hummer, liquor lockers at private clubs, multiple country club memberships, CNBC masquerading as due diligence, billions of dollars in NIL money for college athletes, the de-facto legalization of THC and sports gambling, and Nebraska finally going all-in on it’s own casino gambling. Meanwhile, the low end of the income spectrum faces insurmountable home-ownership costs and pain in the grocery aisle. There are two wars being waged on the doorstep of NATO, a former president was nearly assassinated, and the current president all-but-admitted he was too senile to serve another term. And yet! And yet. What’s the VIX at? 100? Nope, try a benign 15.79. Credit continues to flow. Jerome Powell just declared victory. Game on.

You’re starting to ramble. Are you turning into an old man? Well, I don’t think of myself that way, but in actuarial terms the answer is unfortunately, “yes”. But there’s a place for old men. I’m not talking about ending up like Sheldon Levene in Glengarry Glen Ross. I’m envisioning Clint Eastwood here. Cigar and a Smith & Wesson. Let’s take another wise old Omaha guy I like – Warren Buffett. Berkshire Hathaway owns $235 billion of Treasury bills after significantly reducing holdings of Apple. Buffett may be old, but he’s not cynical. I can’t recall an annual meeting where the words “America’s best days lie ahead” weren’t uttered. However, in this instance, I prefer to watch what the man does, not what he says.

Dude, this is bumming me out, and your Hollywood references are beta. Let’s move along to that book you’re reading.

Ok. I’m about halfway through Nate Silver’s On the Edge: The Art of Risking Everything. It’s a fun read, but I think Silver could have used a better editor (pot, meet kettle). We follow his poker exploits, head down his sports betting rabbit-hole, take a tour of the venture capital industry, and then make an off-road excursion into the bizarre downfall of Sam Bankman-Fried. These are members of “The River,” Silver’s term for those who think in terms of probabilities and make wagers using their best estimates of positive expected value (EV). Yet, so much of what passes for rigorous evaluation of odds based on massive amounts of data often coalesces into little more than well-informed gut instincts. Silver seems to recognize this despite his continued attempts to explain most decisions in probabilistic terms. Take bluffing, for instance. Poker players smoke out a weak hand with a massive bet. Brute intimidation can often work better than the best statistical calculator. Venture capitalists are guilty of herd mentality and they have been conned by the likes of Adam Naumann and Elizabeth Holmes more often than they care to admit.

I am not a mathematician, and my knowledge of statistics is only good enough to read a Nassim Taleb book without a thesaurus. Nor am I a gambler. However, one character seems to be missing from Silver’s book – the 18th century Swiss mathematician Daniel Bernoulli. Silver relegates him to the footnotes. It was Bernoulli who first started to ask why people didn’t take certain bets, even though the probability might yield a positive expected value. Bernoulli figured out that the value of a bet was in direct proportion to the utility of the additional wealth to be gained. A rich man probably wouldn’t take long odds if it meant a major loss of capital, but a poor man has little to lose on a longshot. If you want a great discussion of Bernoulli and his role in finance, pick up The Missing Billionaires by Victor Haghani and James White.

Silver brushes right past Bernoulli’s revolutionary discovery. In a parenthetical aside, he writes “If you had a net worth of $1 million, would you gamble it all on a one-in-50 chance of winning $200 million and a 98 percent chance of having to start over from scratch? The EV of the bet is $3 million, but I probably wouldn’t.” Probably wouldn’t?!?! How about “no way”! Unless you are very young and have immense confidence that you can re-earn your million-dollar nest-egg, you’re not going to take that bet.

The marginal utility of wealth is critical to understanding the business wagers called “investments.” A venture capitalist on Sand Hill Road with $200 billion of assets under management will not agonize over staking $20 million on an AI-powered start-up that automates logistics in warehouses if it has a chance for asymmetrical upside returns. A solo investor with a net worth of $20 million would never take on such a venture alone, despite his or her immense personal wealth. Kahnemann and Tversky famously uncovered the psychology behind such thinking. Humans are risk averse. Most of the time expected pain of loss is greater than the appeal of a gain.

All of this talk of Bernoulli and wagering based on one’s wealth rather than simply the expected value of a bet reminds me of another Warren Buffett gem: When discussing the failure of Long-Term Capital Management which was headed by Nobel laureates and nearly brought markets to a standstill in 1998, Buffett remarked:

But to make money they didn’t have and didn’t need, they risked what they did have and did need. That is foolish. That is just plain foolish. It doesn’t make any difference what your IQ is. If you risk something that is important to you for something that is unimportant to you it just does not make any sense. I don’t care whether the odds are 100 to 1 that you succeed or 1000 to 1 that you succeed. If you hand me a gun with a million chambers in it, and there’s one bullet in a chamber and you said, “Put it up to your temple. How much do want to be paid to pull it once,” I’m not going to pull it. You can name any sum you want, but it doesn’t do anything for me on the upside and I think the downside is fairly clear. So I’m not interested in that kind of a game. Yet people do it financially without thinking about it very much.

I think we’ll leave it here for now. Coming soon… I have crunched some more numbers on Peakstone Realty Trust (PKST), and I think it trades at a 30% discount to it’s net asset value. You also get a 6% dividend while you wait. Elsewhere, Iron Mountain (IRM) seems to be infected with the same kind of data center hype that is artificially buoying the legacy data center stocks Digital Realty Trust (DLR) and Equinix (EQX) – companies that inflate their earnings by minimizing their depreciation and distorting operating cash flow by attributing far too much weight of capital expenditures to “growth” vs “maintenance”. Finally, I ran some numbers on Carnival Cruises (CCL) with the thesis that it would make a good short. It’s leveraged to the hilt. There were no COVID bailouts for cruise operators who are domiciled in tax-havens. Sorry, you can’t have it both ways. It seems I am wrong about CCL. Barring a major consumer slowdown (not entirely out of the question), the stock seems fairly valued. Until next time.

I’ve read a lot of business books and I have to say that The Secret Life of Groceries now ranks in my top four. It’s right up there with Power Failure: The Rise and Fall of General Electric, Shoe Dog, and the Enron book by Bethany McLean, Smartest Guys in the Room. Benjamin Lorr spent over four years working alongside the army of the invisible who feed us every day. Lorr introduces readers to the groundbreaking approach of Trader Joe, but quickly descends into the harrowing world of industrial fishing where human slavery still exists. The indentured servitude faced by many long-haul truck drivers is only slightly more uplifting. You can learn about the battle for shelf space by following the journey of the unheralded condiment known as “Slawsa”, but your stomach will get queasy reading about everything from industrial chicken plants to the seafood counter at Whole Foods. The writing is masterful.

It’s probably time for a similar book on the convenience store industry. The growth of commercial roadside stores seems to encapsulate all that is right and wrong in our post-industrial society. The bright lights, shiny logos, ice-cold refrigerators, and elaborate coffee kiosks say much about our need for instant gratification, instant calories, and lack of time. Gleaming canopies with antiseptic white LEDs beckon drivers in need of gas for the automobile, but hydrocarbons are merely an appetizer. Fat margins are earned from products that mostly make you fat. What’s your addiction? The gas station can give you a quick fix. Candy, soft-drinks, alcohol, cigarettes, lottery tickets, caffeine and even pizza and brisket can be found in the widening world of convenience. Low-wage employees are surprisingly friendly. Or are those nervous smiles? Anyone heading through the door could turn out to be packing heat and looking for cash, or a strung out junkie searching for a place to sleep.

There’s a reason why Buffett fought hard for the Pilot truck stop empire with the Haslam family. The profits are staggering. (Note: a recent article in the Knoxville, Tennessee paper has a wonderful story on the Omaha son who reached the highest levels of business and now runs Pilot.) Have you seen the returns on capital for Casey’s? My, oh, my they are something to behold. When Casey’s bought Buchanan Energy and the associated Bucky’s chain for $580 million in 2020, I thought they were crazy. That’s an amazing amount of coin for 94 retail stores and 79 dealer locations. Guess what? Casey’s barely broke a sweat. Adding pizza to the stores was sheer genius. More margins. Pile ‘em on. My favorite convenience store owner? Alimentation Couche-Tard, the Quebec giant owner of Circle K and Couche-Tard. I just like saying the name. Buying your Zyns from a French depanneur seems tres exotique.

The chart on Casey’s looks like they sell graphics chips. Au contraire. Just potato chips.   

Casey’s is a $13 billion market cap company trading at nearly 28 times earnings. The stock is not cheap. CASY is the third biggest chain now with over 2,500 stores in 16 states. Adding $5 billion of market cap to a convenience store business in eight months seems a little excessive to me, but hey, when the stock market trades on vibes… you get Fireballs. Casey’s is based in the Des Moines suburb of Ankeny. Iowa is also home to the headquarters of Kum & Go (another store name that people love to say for some reason).

Not all parts of the automobile service world are going up and to the right like French pole-vaulter Anthony Ammirati. Take car washes. Somehow Omaha managed to go for thirty years with a bunch of sad little spinning brush machines at the back of gas stations. These soapy muppet tunnels were augmented by about three full-service “touchless” emporiums that faced varying degrees of near-insolvency. The VIP at 90th and Center wasn’t just a lounge back then, kids.

Now in 2024, there are car washes everywhere! Apparently, we’ve had it wrong for 30 years. Our cars have been in desperate need of more washing! Or at least that’s what the guys in private equity thought. Sign people up for a subscription model to get a car wash whenever they want in a gleaming new facility and your total addressable market is every car owner in existence. If I see one dirty car in Omaha from now on, well that’s just a damn shame. There’s no excuse. You want a car wash? The choices are endless.

I’m going to go out on a limb here with this prediction. There will be a lot of car washes for sale in about three years. Oh sure, some will be fabulous businesses. Dropping by Menards? Get a car wash. Stuck on Dodge St? Get a car wash. Huge amounts of fixed capital investments, low labor costs, a subscription model. Ka-ching. In fairness, the average age of a car is 12.6 years, so there is something to be said for people wishing to preserve their principal mode of transportation.

Well, if there’s one thing private equity is good at it’s finding a business model and beating the absolute sh*t out of it. Yes, there’s that competition problem: a lot of people with infinite amounts of cheap capital had the same idea. At the same time. Plus, did I mention huge fixed capital costs? That operating leverage cuts both ways. When volumes aren’t there, the losses pile up quickly – especially when there’s a lot of debt (and debt masquerading as leases). Oh, and the nice equipment requires expensive chemicals, expensive water, and breaks down eventually. So, you can see the risks. The only publicly traded car wash company, courtesy of an escape act from Leonard Green & Partners, is Mister Car Wash.

Despite the stock collapsing from an IPO debut of $20 per share in 2021, MCW still trades at a market capitalization of $2.43 billion. The company has $1.8 billion of debt and operating leases. Sales grew at a lackluster 5.77% in 2023 at the Tucson-based company, and operating income for the first six months of 2024 is basically flat compared with 2023, at $97.5 million.

The problem with Mister Car Wash is very apparent: It simply is not improving returns on capital and economies of scale. More locations in a saturated market are not a recipe for shareholder value creation. Should a car wash chain be selling at more than fifteen times EBITDA? Probably not.