Q4 2024 Andvari Letter
Cell Tower REITs, CoStar, and Topicus
Andvari Associates has allowed us to share an excerpt of its Q4 2024 letter. Please enjoy.
During the last quarter of 2024, investors shifted their worries back again to interest rates and inflation. It now seems the Fed will not cut rates as much as the market was expecting back in August. As a result, three of our holdings most sensitive to rates—the cell tower REITs American Tower (AMT) and SBA Communications (SBAC), and real estate data group CoStar—declined in the last quarter. These three were also down for the year: AMT at -12% while SBAC and CoStar each at -18%.
The general investment case for all three remains the same. They all have very high-margin businesses that serve the real estate industry. They all have an above average ability to grow their businesses due to the mission-critical nature of their products to their customers. With AMT and SBAC, mobile data usage continues to grow, which requires the mobile phone networks to add more and larger antennas to current towers as well as to new towers.
Furthermore, these REITs either own the land beneath the towers or they have long-term leases in place. Land permitted for mobile towers is generally scarce because it’s a long regulatory process to add new towers. Plus, no one wants to see a large tower from their backyard. This gives AMT and SBAC pricing power. Their contracts call for steady rent increases over time. The same goes with CoStar. Their tools and services for commercial and rural land brokers, as well as owners of apartment complexes and hotels, are necessary and valuable.
More particular to AMT and SBA, another contributing factor to their share price weakness over the past two years is their curtailment of returning cash to shareholders to focus more on debt reduction. AMT hit the pause button on dividend increases while SBA dramatically lowered their historical rate of share repurchases. A positive catalyst for AMT’s share price will be when they resume growing their dividend sometime this year. A positive catalyst for SBAC will be if or when they return to their historical rate of share repurchases. With both companies still trading at low multiples not seen since 2009, and near the highest dividend yields in their trading history, the setup is very favorable for good returns to shareholders in the future.
CoStar, the third of our triumvirate serving the real estate industry, continues to grow in all its most significant business lines. In the 3rd quarter of 2024, CoStar Suite grew revenues by 10%, Apartments.com grew 15.5%, and the new Homes.com business (competitor to Zillow) grew revenues 169%. CoStar also had its first ever (as far as I can tell) Investor Day in December. It was quite informative and Andvari was able to add new details to our understanding of and appreciation for the business.
For example, CoStar has thousands of employees that create, find, and curate real estate data and content. Researchers are on the phone every day asking questions about commercial tenants and leasing terms. They’re in hundreds of cities and towns taking photos of buildings, apartments, and residential neighborhoods. CoStar even owns a plane with two rotating teams that fly it daily to take photos of new construction. As a result of all this, CoStar updates data on one million tenants every year and copyrights 350,000 new photos every 45 days.
With a valuable trove of intellectual property, CoStar has an extremely serious legal team to protect it. Given that I’m a law school graduate, I was particularly pleased that CoStar’s Chief Legal Officer, Gene Boxer, had a time slot in the Investor Day presentation. He detailed all the different ways CoStar monitors and goes after content theft and password sharing. The key takeaway was “Don’t steal from CoStar.” I love the fact that CoStar has been so dominant that some competitors have resorted to intellectual property theft. CoStar even sued one former competitor into bankruptcy. Again, don’t steal from CoStar.
Let’s shift now to some investments that performed relatively well last year. Topicus.com, Constellation Software, and Tyler Technologies, all serial acquirers of niche, vertical market software businesses, performed as well as or better than the market. The performance of Mastercard and O’Reilly Automotive came in just slightly below the market performance of 24.9%. Our investments in Altria and Philip Morris have done well since our first purchase in 2024. In the few taxable accounts Andvari manages that are able to invest outside the United States, the total return of Australian accounting firm Kelly Partners was 114%.
Just recently, Topicus announced it is acquiring Cipal Schaubroeck, a software firm based in Belgium. Cipal has revenues of about €110 million and focuses on the local government market vertical. Although the purchase price was not announced, we expect it will be somewhere between €200 and €250 million, or 1.8x to 2.3x revenues. This will be one of the largest acquisitions yet for Topicus. Since 2020, Topicus has doubled its revenues and free cash flows and we think they can double again over the next five years. Topicus remains a large position for Andvari and we look forward to its continued growth.
ANDVARI TAKEAWAY
On an absolute basis, Andvari’s performance of 13.3% for the full year is well ahead of the long-term market average. However, on a relative basis, we underperformed the market, which is always disappointing. Again, the underperformance is explained by poor relative performance in our equity allocation. Another contributing factor is that Andvari has increased the overall allocation to fixed income for clients that are at or near retirement age.
Regardless of what the market does from year to year, Andvari hopes to own a collection of great businesses that will provide above average returns to our clients over the long-term. These are businesses that have long and predictable growth paths and that can profitably invest their capital at above average rates of return.
Just because some of the businesses we own have had relatively poor performance in the short term, does not necessarily mean they are bad businesses. Interest rates have gone up and valuations have compressed for some of our holdings. Economic and political events can impact any or all of our holdings. These events will always happen and will forever be outside of our control. What we can control are the businesses that enter (and exit) the Andvari portfolio and the prices that we are willing to pay based on our best estimates of future growth and returns.
As always, I love to hear from clients and anyone else. Please contact me with your thoughts, comments, or questions.
Sincerely,
Douglas E. Ott, II
Further Reading
Disclaimers for this Substack
The content of this publication is for entertainment and educational purposes only and should not be considered a recommendation to buy or sell any particular security. The opinions expressed herein are those of Douglas Ott in his personal capacity and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing.
Investment strategies managed by Andvari Associates LLC, Doug’s employer, may have a position in the securities or assets discussed in any of its writings. Doug himself may have a position in the securities or assets discussed in any of his writings. Securities mentioned may not be representative of Andvari's or Doug’s current or future investments. Andvari or Doug may re-evaluate their holdings in any mentioned securities and may buy, sell or cover certain positions without notice.
Data sources for all charts come from SEC filings, Koyfin, and other publicly available information.