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Chris Tell
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Baptized into the world of business and travel at a young age I’ve subsequently lived in multiple countries, traveled to many more and built myself a small fortune investing in businesses and markets that I spend an extraordinary amount of time doing due diligence on. People sometimes ask me... More
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  • Mongolia Growth Group – Cash Flow Positive 0 comments
    Apr 10, 2012 2:41 PM

    It's been a while since we've updated our readers as to what Harris Kupperman, CEO of Mongolia Growth Group, has been up to.

    If you are a new reader to our site then we humbly suggest you go and read "A Mongolian Capitalist - Part I", and "A Mongolian Capitalist - Part II", where we first interviewed Harris about his move to Mongolia, the company he founded, and just what does mare milk taste like anyway?

    Mongolia Growth Group is presently our favourite means of gaining exposure to a country we believe will be the richest place in the world per capita in 10 years.

    Here's my latest conversation with Harris (aka "Kuppy"), for your reading enjoyment. Oh, and for a chance to meet Kuppy (and quite a few of Mongolia's movers and shakers) in person, make sure to check out my comments after the interview.

    -----

    Chris: March was the first month that MGG flipped into positive cash flow. Personally, I find this highly unusual for such a relatively new company who's stated focus is on aggressively buying top-quality RE and building an insurance business. How'd you do it so quickly?

    Harris: No matter what we do in business, we want to be cash flow positive and able to self-fund without the capital markets. We simply cannot rely on the kindness of our shareholders.

    Now that we have reached this point, we can push a bit more aggressively into lower yielding properties that have more upside (not that we haven't been doing that for a few quarters now). We honestly thought that positive cash flow would happen more rapidly, but we were surprised by the costs of the audit and the property valuation report.

    Chris: Yeah, you've chosen to go through a very expensive audit process. Do you think this was a wise use of the firm's capital at this point? Would a cheaper option have provided much the same market perception without the expense?

    Harris: You know, this is something that we've struggled with. Remember, that I own 15% of the company, so fifteen cents of every dollar that we spend comes right out of my own pocket. At the same time, we have over 2,000 shareholders living all around the world. Most of these guys cannot come here and do their own due diligence. We need to ensure that everyone has absolute confidence that our numbers are accurate and our properties are valued correctly on our books.

    It's simply a cost of doing business. I believe strongly in doing business at a very "high class" level, and that means using the best quality firms - even if they're expensive.

    Chris: Given that some of the property you've acquired is solely for redevelopment purposes, they are going to require larger capital infusions to redevelop. What is your strategy to deal with this reality?

    Harris: The great thing about top-quality redevelopment opportunities is that there are many potential joint venture partners. We're looking at all options, from financing them ourselves, to partnering with outside firms.

    The key for us is to ensure that we have enough capital to build these assets out and make sure that they're well-built. Ideally, we would look for a model where we build smaller assets out ourselves, but then look to partner with foreign firms to build our larger assets. This would mean that we would inject our property assets, and some additional capital into a JV. We would then manage the property when complete, meaning that we end up with fee revenues from management, along with a substantial percentage interest in the property as well. However, we are looking at all possible options.

    For now, the most critical thing is to ensure that we can continue to acquire and improve our redevelopment packages. Later on, we can focus on how to redevelop these assets.

    Chris: Will MGG be using any debt financing?

    Harris: Thus far, we have no debt. Jordan and I are very risk averse individuals. However, we think that a bit of debt would be beneficial, especially as we are constructing assets. In the past, we needed to ensure that we were cash flow positive before looking at any debt. Now that we've reached this benchmark, the next step is to ensure that we also have the cash flow to cover potential interest payments.

    Chris: You've mentioned before that MGG's policy is to honour all existing lease contracts when taking over a property. This isn't required by law and has the effect of achieving lower yields on those properties. Why are you doing this?

    Harris: We want to be good corporate citizens. We intend to be in Mongolia for a long time and do not want to be seen as pirates. If we conduct business in an ethical way, people will also honour their commitments to us. In the end, our reputations are important to us.

    Chris: We'll all be watching the political process closely as it unfolds over the next 3 months. What is your take on how things are going to pan out?

    Harris: I guess that you're talking about the election in June… No matter what happens, someone will win. Mongolia has a 2 party system with a number of smaller third parties. No matter who wins, I think Mongolia wins. Most major parties favor a free market, foreign investment and to see the Mongolian economy continue to grow. My thinking is that I wish that whoever loses could become our (US) next president, as the Mongolians are infinitely more attuned to economic policy than either candidate running in the States.

    Chris: I'm sure Mark would agree with that statement, with the notable exception of Ron Paul, of course. Since I'm a Kiwi I guess I shouldn't elaborate on my thoughts (laughs). I note that you continue to write detailed monthly letters to your shareholders. What was your thinking on that? It's unique amongst public companies.

    Harris: It really comes down to disclosure. As an investor, I've always been disappointed to learn that I never really knew what was going on at the company's I invested in, at least until the Q's or K came out. Even then…

    I really value transparency. I write these letters just like I would write a monthly letter to my mother (also an MGG shareholder), to tell her how things are going and point out any significant events that she should be aware of. I honestly wish that more companies would treat their shareholders in a similar way. Instead, you get an occasional press release written by lawyers that tells you very little. I wouldn't do that to my mother, and I wouldn't do that to shareholders either.

    -----

    Our number one rule as investors is to buy great management! Harris and Jordan are the epitome of the sort of guys we look for in the company's we invest in. They're smart, flexible and honest, with a high level of ownership.

    We believe that actually meeting management in person, in a smaller, more informal venue is one of the most valuable experiences an investor can have. To that end, Mark and I will personally be hosting an investment meet up in late July in Ulaanbaatar, Mongolia!

    One of the main reasons we created this site is because we're both keenly aware how difficult it can be for investors to source information in frontier markets, let alone make the contacts and set up the meetings necessary to do proper due diligence on an investment located on the other side of the planet.

    We have designed this meet up to accomplish in a few short days what would easily take months of planning, and several weeks on the ground to achieve on your own. Participation will be strictly limited so as to get as much one-on-one time as possible with our panelists and speakers.

    So, if you want to join us and spend a few days with a carefully-selected, hand-picked group of the people making things happen in Mongolia, get in touch with us. We're only able to accommodate 25 attendees for this event, and in full-disclosure about half the spots have been reserved by close associates and friends of ours whom we've shared our plans with, so drop us a note a.s.a.p. if you're interested.

    - Chris

    "It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to." - Bilbo Baggins, Adventurer ( J.R.R. Tolkien, The Lord of the Rings)

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