← The Bitcoin Treasuries Podcast with Tim Kotzman
The Bitcoin Treasuries Podcast with Tim Kotzman
How Strategy Just Changed the Bitcoin Corporate Playbook Forever | Kenny Alves
00:40:03
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- [00:00]
A
Welcome back to the Bitcoin Treasuries podcast. I'm Tim Kotsman. I'm here with Kenny Alves of West Main Self Storage. Kenny, thanks for joining us today.
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B
Hey Tim, thanks for having me.
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A
I like that orange background. Are you feeling extra orange this week as the price is in the low 60s? What's the vibe over there in California?
- [00:22]
B
Yeah, feeling bullish, excited to talk current events, especially what was going, going on with strategy. There's been a lot of talk about whether they can pay the dividends and they just had a big press release today that I'm excited to dig into. West Main Self Storage has, has been an early adopter in the digital credit. We purchased our first shares of Stretch in January, added more Tom in May and intend to add more, you know, in the coming months. And we've always looked at it like a medium to long term asset where we would hold it for the rock dividend to be complete, at least to get our full return of capital, tax deferred. And when we, we first bought Stretch, it was about 8.25 year payback. And that's how we tend to look at things. As a real estate operator, we're always looking when we acquire a new property, how long is it going to take for us to get our money back? And normally we get it out through a refi and this is very similar also we've done a lot of solar projects where we look at it, how long is it going to take us to get our money back? And it reminds me of solar because kind of the expression that you would hear 10, 12 years ago was it's too good to be true. You're going to get your capital returned in two, three years. And so I look at strategy and some of the prefs were trading at a steep discount, some as high as 18, 20% last week. And at 20% return of capital that's a five year payback. So, so these are pretty attractive instruments because they require no maintenance. Where with real estate and solar you're going to have a property manager, you're going to have maintenance. And with these preferreds, they're, they, you know, they, they don't require capital expenditures. So the way that I've been looking at it is that when, when these things traded down, it's almost like distressed real estate, right? You may have tenants in place and the rents are still coming in, the rents are still the same, but the property is, is maybe slowly getting worn out or maybe there was something that, that happened, maybe a car crashed into the side of the building. Maybe you know, the parking lot is, is no good and you have a large capex expense coming, coming soon and, but that doesn't mean that your cash flow is disrupted by this. And I think that's what we've seen with strategy is what we've seen is something happen where the management has, has to react and, and that's exactly what they've done here. They are like reacting to, to the damage and in this case I think the damage was just, just kind of fear mongering, you know, a lot of fud fear, you know, fear and uncertainty and doubt. And they did what they needed to do. They, they came up with a framework that allows them to reclaim par and you know, get stretch back there and, and I, I'm excited to dive into that. You know there's five key things that they did this week and one of them we're like super excited about is the dividend policy. They're going to keep 12 months of dividend payments in cash. Now that is something I think a lot of people are going to feel more comfortable with because it's always been how are they going to pay the dividends and because they are doing a lot of financial engineering and they don't have reoccurring revenue to support those dividend payments. It's always been a question but anyone that's been paying attention knows they, they've always had the ability to sell bitcoin. They've always had the ability to raise capital and sell common shares. But another thing we're seeing here is, is that they're, that they have announced that they're willing to buy back these, these preferreds when they're trading at a discount. And I know it looks like they, they want to get the, the converts off their balance sheet first. And it must be a little frustrating because I think given that the preps are kind of more in your face and that they're trading at a live price every, every day the market's open and people see it trading you know, 40, $50 under par. I think it's just, it looks worse than it is because it's bond math. Right, and what does that mean? That means that they're paying their dividends based on par. And a lot of people I've talked to, like friends and family, they've called some called concern thinking that strategies cost of capital has increased but their capital only increases when they issue more preferreds or they increase the rate on the variable dividend on stretch. The rest are fixed prefs and, and we just saw Stretch get increased to 12% which is exciting too because it makes the math a little bit easier. You got 1% every month. Now it's going to be paid bi, monthly so you're going to get a half percent twice a month now. And it's just easy for you to kind of do the math in your head. How many shares do you have, that's how much you're going to get paid. And bringing us to one of the next, one of the other things is like the, the bitcoin monetization program that they enacted I think is going to ruffle some feathers. But as, as we've seen they inoculated the market a few weeks ago selling 32 bitcoin. And I think, you know, they're just prepping us for another sale and not to be alarmed that it's, it's not a panic sell, right? That this is a, like a well methodically thought out plan to have a, a level of unpredictability. I think, you know, when, when strategy says hey, we're never going to sell our bitcoin, well that makes it easier for people looking to maybe short the stock. It puts handcuffs on strategy where they could, you know, just leave it more vague. Even if their intention is not to sell the bitcoin. Now they have this optionality and hopefully it doesn't spook the market if they decide to sell a billion dollars of bitcoin next week. And the market should pay attention to what it does with the proceeds. If those proceeds are used to repurchase these distressed preferreds to increase the, the perception, to make the perception of the company stronger or if you know, I would be a fan of them using it to pay off the converts because I think that builds more credibility with credit rating agencies and institutions like the s and P500. And ultimately that's the goal I think for the management team here. I think they want to be included in more indexes and they know that the converts are not a problem. But like it's an easy low hanging fruit like to get rid of those, to shift the debt to the preferreds in a way. And you know, at the same time they can also clean up the other preferreds that haven't been performing well. They can buy back on the open market and help try to bring it back to par. And ultimately I think if those instruments are not desired by the market, they may end up just slowly buying them at the market or they may call the rest. They have the option to call back those but that would be, you know, pretty extreme because they have better uses of capital. And I think that the, the motive behind management right now is to improve credit worthiness. And that's an intangible asset, right? Like that. Like that's. I guess what I'm trying to say is it's, it doesn't have like a price tag assigned to it. What is it worth getting into the s and P500? Like, what is it like that, you know, you're gonna have billions of, of money flowing in to your company. What is that actually worth? And how do you, how do you value that, especially over the course of the next decade? Like what? Like, you know, so it's like unlocking another portion of capital. And I've been rambling here for, for a bit, Tim. I don't know if I've got off track, but maybe you want to comment on that rant.
- [09:56]
A
Yeah, we're off to a strong start. For those that are catching up or sometimes it's just great to kind of walk through it from the top. This morning, Strategy announced a digital credit capital framework that was designed to strengthen digital credit, enhance liquidity, preserve long term bitcoin exposure and support long term value creation. And so what we're walking through is Strategy increased its USD reserve to $2.55 billion. As you mentioned, Kenny, the STRC dividend rate was increased by 50 basis points to 12%. And that's effective for the record dates in July. Strategy established repurchase programs for up to a billion dollars for both their digital credit facilities and mstr. So up to a billion dollars for all of their preferred equity products, up to a billion dollars from str. And they also established, as you mentioned, a bitcoin monetization program. So what were you seeing on social media last week? I know I saw a representative of, of Strategy CJ posting that they were open to feedback. They're listening. And please, you know, comment your feedback below. Was there certain themes that you were seeing in the feedback? What do you think was the best or the worst ideas as far as feedback? And, and what is your view on what came out this morning versus what the feedback was from Strategy shareholders?
- [11:47]
B
Yeah, I think that the number one thing I saw people ask and request is a nice cash USD reserve specifically allocated ring fenced for the dividend payments? Because I think a lot of people felt betrayed a little bit when there was a large USD reserve over $2 billion. And it was implied, it was never actually stated that this is exclusively for the dividend payments, but it was pretty much implied. This cash is going to be used to service the dividend payments. And when it was used to buy back one of the converts, I think people felt betrayed. I think the prep holders assumed that capital was there to pay dividends. And I completely understand management's decision there and to try to retire some of these converts because their thinking is if we get these converts off our balance sheet we're going to get into the S&P 500 or have a better shot at it. And I think that that is you know, something that's more difficult to educate and, and convey to shareholders and, and the general public. And it's also not like a guarantee. Right? Like you're, you're, you're trying to like rush the, like get these converts off your balance sheet in like hopes of something. Whether or not that happens is still kind of you know, up in the, up in the air. So I think like this ring fencing of cash and like just allocating USD and saying hey, we're always going to maintain 12 months and having this guidance is, is a good move. I think that was like the number one thing people were looking for and I was actually surprised to see like these other things announced at the same time because really I think they could have just announced this, this new rule or new mandate as far as 12 months of dividend coverage and cash. And I think a lot of people would have just been happy with that. But the fact that they are kind of expanding their, their tool set. One way I look at this is there was a lot of one way roads. There was we can issue shares of, of strategy Common MSTR and we can use that to buy Bitcoin or we can use that to, to fund the, the cash balances. But now they have like we've widened the roads right? We got, it's like the, the 405 now we, we, we can use that to retire the prefs. They can also now like go in reverse and they can sell Bitcoin to, to buy back the common. And I think that is underappreciated. I'm a chess player so I like to think a few moves ahead and we've, we've heard strategies say that they would like to have a cleaner balance sheet. Something like Strive has, Strive has no debt. They have essentially turned their company into a marketplace with common shareholders being the equity long term holders. And then the lenders are essentially the preferred shareholders. They're lending out their money and getting a predictable return. They're getting it in a tax efficient manner and the common shareholders are taking on the risk. So what, how do you, how do you improve from there? And I think one way and this, this can be, you know, debated, but I think by improving the amplification ratio, the, the ratio of common to preferred is like the next. It's like the evolution, it's like, okay, you, you become, you get all the debt off your balance sheet. What do you do now? Well, how do you increase amplification? And it's like, well, if you buy back the common shares and there's less common shares, it becomes more scarce and rare. What happens if there was a company that only issued preferreds and no common? So I think, I try to think like a few steps ahead and I, I think like if they can get an early head start and start chipping away at all of these things, they can chip away at the prefs when there's an opportunity. If, if it's trading half off. Well, if they issued a billion dollars of digital credit and they can buy it back for 500 million, that's the arbitrage that they're doing but like in reverse. And the reason why these, these prefs are trading at a discount can be, you know, misunderstanding. It can be, you know, somebody is just, you know, fearful. Tom But I think what we're going to see when strategy comes and, and buys back their own preferreds, I wouldn't be surprised if we see an announcement as early as next week that they use some of their cash reserves to buy back some of these deeper discounted instruments. In my opinion, like, I, I don't think they should necessarily buy back the stretch first because it's, it's the one that they want to keep on their, you know, that's like the one prep that they want to, that they want to sustain forever. It sounds like, like they want to just have MSTR and stretch. They could forego the other ones. So I, I see them looking to increase the issuance at, when it's trading above 100 of stretch and not really looking to, to buy it back as much. I think they rather retire these other ones trading at a steeper discount. I don't know if you feel the same way when it comes to that, Tim, but I think that they want to expand the issuance of stretch long term and consolidate the other prefs.
- [18:17]
A
Yeah, I think that makes sense to me. You would want to buy something when you, I mean you can't time the bottom quote unquote, or it's very difficult to, but you would want to purchase the instrument Trading at the deepest discount in order to make the most money. Also, if you're buying back stretch, maybe that's a good strategy or maybe that's almost starting this flywheel of, well, if they're always buying back stretch to par, what happens if they have in some scenario, less cash available to buy back the stock? Because kind of might start that doom loop of, oh, they don't have enough cash to buy back stretch to get it to par? I, that's a, that's a very fringe case example. But I definitely agree. It would probably make sense from an economics perspective to want to buy back something that's trading the lowest, the furthest from par, if that makes sense.
- [19:19]
B
Yeah, it's like kind of like fear's law. Like they're, you know, like the bad money will get spent first, right? Like you're gonna use the, the fiat. You're gonna spend your bitcoin last. And I think it's like the same way with this. Like, if you're gonna, like, if you're gonna retire debt, like, you're gonna like, go for the, the most discounted debt first. And you know, I think that's what they were doing with, with the converts, but I think the market was just like, what are you doing? Like, you know, the financial engineering is too complex. You know, just go on smooth brain mode here. And like, I think that's, that's what we're, we're seeing here. Like, smooth brain wants to see a bunch of cash sitting in the reserves. They want to see the, the prefs trade back at par. And that's going to be management's laser focus now, is to like to cater to the preferred shareholders because they're like the most accretive thing that's happened to strategy in terms of bitcoin per share. Right. If they're trying to increase bitcoin per share, there's nothing better you can do than sell prefs and take the cash from it and buy bitcoin. I think everybody realizes that that's like the, the best way to accumulate bitcoin. And we're seeing other companies engineer their own products to do a similar thing. And you know, last week it was like death spiral. That's all that was on the feed, right? Like talk of death spiral. But I think the death spiral can kind of shoot upward too. I mean, heaven, heaven is above the cloud. So I think we, we'll see the death spiral in reverse here and, and kind of get us going again. And I think we'll see the common stock be sold less. And I think like the goal is to get, get more issuance of the prefs partic or specifically stretch. I could see Stretch being the, you know, the only pref by. Yeah, I don't think it would be difficult for them to, to buy, you know, the outstanding other prefs. Right. Because there's only like about a billion of each. There's like 10 billion of stretch and then there's like a billion roughly like plus or minus a couple hundred million of each other. Preface. And so we've, we saw them like retire $2 billion of converts. I mean that's like two thirds of, of the other press. So I think like we could, we could be this time next year it could just be stretch and MSTR as, as the only equities that they have. But yeah, I'm glad to see that management isn't sitting still like they're, they're, you know, facing this head on, grabbing the bull by the horns and, and they're trying to correct course here. And I think they did an excellent job of listening to shareholders concerns and implementing like they did that very quickly.
- [22:44]
A
And yeah, yeah, I mean I would think it's advantageous to keep all of the prefs in the market because you never know when it might be a different season where all of a sudden one of the other preferred equity instruments is more attractive or becomes attractive to a certain institutional investor or a certain cohort where you're like, oh, well, right, Rule number one, keep like maximum optionality. Any additional thoughts there or agree. Disagree.
- [23:19]
B
Yeah, I'll hammer on that a little bit more. I do agree with you. I think they'll buy back what they can. I don't think that they're going to call it back. The difference between buying it back on the open market is paying what it's trading for today. Now there's going to be some shareholders that don't want to sell it. They're like, hey, I locked in 18% or 20%. I'm going to hold this forever. And you know, strategy may say, well, I'm not going to call it back because if they call it back, they got to call it at 101 if I'm, if I'm not mistaken. And so I think like I should kind of alter my statement a little bit. I think they will try to buy back as much as they can at distress levels. I don't think that they're voluntarily going to call it when it's, if it's trading like at $60 or $50, I don't think that they're just gonna say, hey, let's just get this off the books and call it and pay double. That would be a bad use of cash. But I do think that they can bring it closer to par by buying the, you know, distress whatever is available at these distressed prices. And I think we might have already seen them do that a little bit this morning with STRD and strk. So I could see maybe they, they're able to get, you know, in the next 12 months, maybe it goes from having a billion dollars outstanding of STRF to, you know, 800 million. Maybe they, they, you know, buy 20% of it back. I think they buy back what they can at certain levels and now they just have like so many more levers to, to go pull on. And I think what they're doing is they're becoming unpredictable. And if you're a short seller, you do not like unpredictability. The fact that you don't know what's going to happen now is a reason to cover your short. You don't know if he's going to like introduce daily dividends next month. You don't know what's going to happen. And there's, there's just so many more buttons at the fingertips to push and get course correct. So I think, like, this is very exciting to see, See this? And I think we're like, those new charts are going to come sooner than later.
- [25:50]
A
How important do you think is having an operating company as far as narrative goes, versus something like digital credit? If you had to choose one or the other, or you could choose both, would you choose both? Some conversations today included that it would have actually made more sense to see companies valued more favorably if they had more of an operating business because there's less upside, but it's, there's less volatility than maybe what you would see with a structured finance company that has a preferred equity product. Has any of that surprised you and how these narratives have developed and how do you see operating companies versus the preferred equity digital credit iterations?
- [26:51]
B
So I think, I think here bitcoin companies have like higher risk, higher reward, right? Because there's less operations, there's less people that are needed there. It's just easier to, to operate like a pure bitcoin company in that sense, where you don't have an operating company. But I think the operating company is extremely important. I had, I have conversations all the time. I had somebody say, yeah, but you, you're a bitcoin company now. I said, no, we're We're a real estate company for. We're a real estate operating company. Go ask our 477 tenants what they think we are. They think we're a storage company. They, they store stuff in our storage units. We're, we're saving in Bitcoin. And so I think like, you know, the, the hardcore bitcoiners and, and the people in the space, they are automatically assume if you're saving in bitcoin or if you're doing any capital raises to purchase Bitcoin, that you're a bitcoin company now. And you know, that may be true, but like at the end of the day, if you have an operating company, I think that is the lane that you're in, that is the business that you're in. Like when you see Meta Planet, they're, you know, they have, I know they sold off a lot of their hotels, but they still own their, their flagship hotel. And they're, they're a hotel company. They're, they're like a real estate company in a way. The, the Hilton, right? They've, they've gone completely digital in a sense where they used to own and operate all their hotels, but they carve that up into like different businesses, right? There's like the ground lease, the person that owns the land. Then there's the hotel owner that owns the building and, and manages the operation. And then there's like the online aggregator that is leasing the rooms. And like are they a, a digital like tech company now? Like that's what they should be like according to, to, you know, the business that they're in. But no, they're like a hotel company first. And I, I think that the operating business is, is like extremely important, especially in, in bear markets West Main Self Storage has bought for 49 weeks in a row. We, we have like a higher hit rate than, than the pure Bitcoin treasury companies because we're not dependent on capital markets, but we're not able to buy as much as them, right? They have like when, when the, like when the sun is shining, they make hay. They, they're able to raise a lot of money to buy bitcoin, but then they go through dry spells. Sometimes it's cloudy and rainy for, for an extended period of time and the capital markets close their doors. So an operating company allows you to take advantage of distressed prices. It allows you to, to DCA more regularly. It gives you like we were talking about levers and, and having more optionality and that, that is extremely important. And just like the you know, websites and the Internet like changed how business is done. And then the early days you were an Internet company. If you had a website. You're considered a bitcoin company if you have bitcoin on the balance sheet. But we just saw SpaceX IPO. They're, they're a space exploration company. They're like, they have Starlink, they're shooting satellites into space. Yeah, they have, hopefully we see some bitcoin miners in space, right? We're going to see data centers in space. We could see bitcoin miners in space. The, you know, the economics are there. I think as far as the, the energy production is a lot cheaper and stable. You don't have to have property ownership. Like you don't have to own a plot of land or pay rent. But you know, a lot of risks. You know, you could get hit by some space debris or something and can destroy your operations.
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A
But read through all the risk factors in those filings, right?
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B
Yeah, I bet you those are lengthy. But, but back to your point, like SpaceX isn't a Bitcoin company. They're like, you know, they're, they're a space exploration company. Tesla is not a bitcoin company. They're, they're a car company. And I don't think we like have a proper way to distinguish those, those like subtle differences. So I think there's like still a huge opportunity. My thesis has been a little bit different. I know the bitcoin treasury companies. Last year there was like a thesis. Every capital market was going to have a Treasury company. So we saw companies get spun up all over the world. My thesis has been that every industry is going to have a dominant bitcoin treasury company. A bitcoin that you know, saves or sorry, an operating company that saves in bitcoin. And that's what I think. West Main Self storage is in the self storage space. I think Smarter Web Company is an example of that for web design and web development firms and even ddc, they have a, a, a Food Network. And so I think like these companies that are early adopters in different industries, they're not competing against other Bitcoin treasury companies, so to speak. I think that there may be some overlap in capital right now in the early days, but I think they're competing against their core competitors. When I look at West Main Storage and I'm trying to like create the most valuable self storage company in the world, I'm looking at the top self storage competitors. I'm looking at extra space, I'm looking at Public Storage. And I'm comparing West Main to them. Not so much Strategy and Strive and Meta Planet, although they are like, they're, they're like allies in a way, right? Like, like we're working, we have an overlap in, in the way that we save, but we have completely different business operations.
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A
Do you think every bitcoin treasury company should have a USD reserve whether or not they have digital credit if they're in the public markets?
- [33:46]
B
That's a great question, Tim. That's something actually I've been thinking about this past week. I've been thinking, I know this is from a bitcoiner's perspective. It's like, you know, you got to be shaking your head but just given the, the market dynamics that, that, that we've seen and, and the, the pullback and digital credit instruments and I think it's a good idea to have a cash buffer, especially if you're a business. When you're an individual you can take greater risks. You're, you're dealing with yourself. But when you're operating a business you need to, to kind of be a little bit more conservative in, in your treasury allocations. So that's something that we're thinking about. West Main, we have a refinance coming up where we're looking at pulling out some cash tax free and how we're going to allocate it. We're going to allocate some, some to digital credit, some to Bitcoin. Maybe like a small portion goes to TO T bills and just sits in a cash account just so you're not under stress or pressure. You don't want to be in a situation where your, your mortgage payments coming up and you had it all parked in digital credit and you have a short term drawdown. Originally I think the thought was that these things were going to be a lot less volatile and like anything that is in the open, so to speak, like digital credit, I, I will say it's kind of like in the open in the sense that we're seeing other companies build on top of it. We saw, you know, the greater crypto market develop on top of it and maybe that was the cause. I don't know if there was an actual forensics done of what actually happened last week to, you know, to see that large drawdown. But I think that there's got to be some liquidations in the greater crypto market that we're using these digital credit instruments to, to offer yield in a savings token and, and things like that. So greater amount of volatility than Anticipated, I think by, by management and even analysts. And everyone really, I think thought that these products would trade in a tighter range. And given that, I think it's a wake up call to treasury companies that you better make sure that you have at least a few months of cash in an operating account because you don't want to have to sell digital credit at a discount. It's not a good look for your shareholders, it's not a good look for your company. So I think, you know, we're probably going to allocate like between 1 and 5% to T bills, just that, like the short term T bills just to have like a buffer. And the way that I see it is you, you build out a bulletproof balance sheet. You have your first line of defense, your cash, your checking account, your second line of defense, your T bills, third digital credit. And that can be like a few different issuers. And then you have your bitcoin and us as a real estate operator, then we have our real estate and it goes like the way that I think of it is in like the way that you would want to liquidate it, right? I would want to liquidate the real estate and bitcoin last. Those are like the hardest assets. They're the, the foundation of, of the balance sheet, foundation of the portfolio and the T bills, you know, like if you have to pay a small fee fee to liquidate them early, that's, you know, you're not going to cry over that and you're going to have a little bit of cash in the bank account. So I think that's a great question, Tim. I think it's not like as an individual I try to have as little cash as possible. Right. And I try to operate my life with, with as little cash as possible in the bank. But you know, my fees are in and USD and, and it's not really possible to, to pay all life's expenses on a bitcoin standard just yet. But also, I don't know if you'd want to do that just with the volatility. I like to, to use bitcoin as money when I can, but I like to do it, you know, in a responsible kind of like I'm not looking to, to kind of buy high and spend low, so.
- [38:49]
A
Yeah, absolutely. Where can people follow you online? And you have a weekly podcast with Chris Drizzka and myself called the Real Estate Standard. If you want to let people know a little bit about that pod and where people can find it.
- [39:06]
B
Yeah, you can find me on X at Kenny underscore Alves A L V E S. And we've been doing the real estate standard now since December of last year. I think we're gonna be on episode 25 this week. We're gonna record tomorrow. We have the realestatestandard.com where we have archived all our videos so you can catch up and watch videos there. And then our handle on X is re standard pod. You can follow us on X. And again, that's listed on our website therealestatestandard.com and we're going to have to do another rip one day and go over that website because we have some cool tools on there too.
- [39:51]
A
Yeah, lots of stuff to do while we're building in the bear market. Kenny, thanks for your time today and joining us here on the Bitcoin Treasuries podcast. Always appreciate your time.
- [40:02]
B
Thanks for having me. Tim.