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Guest Piece: Q&A Time with Eric Speron

Eric is an investor at First Foundation in Irvine, California where he is a co-manager of their First
Foundation Total Return mutual fund (FBBYX) which has $91 million of assets and a trailing 5 year
annual return of 10.4%. He wrote a guest article for the Newsletter (Issue 23, January 2019) about J.G.
Boswell.

Perhaps uniquely among mutual funds, his First Foundation fund has two Oddball companies in its top
ten holdings: Vidler Water Resources (formerly PICO Holdings) at 7.7% of assets and Keweenaw Land
Association at 2.7% of assets. He is also a member of the Board of Directors of each of those
companies.

Oddball: What is the investment philosophy or approach of your mutual fund? I'm sure you must be
the only mutual fund, and perhaps one of the only investors in the world, that owns both KEWL and
Amazon.

Eric: The way we think about it is if we were to take all of someone’s wealth – making us the “hub”
investment, not one of the spokes – how we would we invest? For that reason we have two stocks most
of our value brethren would detest in Amazon and Alphabet (GOOG), but we have owned those two in
our strategies since 2012 and 2015. As we put it, “if the world is conquered, these are our two.”

Our benchmark is a moderate allocation benchmark. So how do we manage it? As you sussed out, and
the reason I think we are chatting, is that a disproportionate amount of our fund compared to our
competitors' is in esoteric investments where we think we are taking lower business risk because they
are ignored by most of the global investment community. We have tried to get involved here and there
to help steward some of those boats.

While Irvine, CA may be the hinterlands of the investment markets, we view our location and our
trusted client base as major assets. We represent real people with real life goals and I believe our
portfolio companies and their boards earnestly grasp this. Those companies where we have taken board
seats are a low double digit percentage of the portfolio but the companies that we are actively engaging
maybe gets the bucket to ~20% of the portfolio according to our 13F.

Oddball: Naturally, as a ’40 act fund you have to provide daily liquidity and the portfolio can't all be
unlisted Oddball stocks. So where do you go from there?

Eric: We think there are good investment opportunities with wealthy families with whom we can co-
invest, where the liquidity is good ,and the stock trades at a decent discount to a conservatively
calculated intrinsic value. Typically, these pseudo-investment companies control or own higher quality
businesses, albeit perhaps characterized as businesses that lacked unbounded growth.

When we find a business we like at the right price in that realm – we invest. We’ll speak about Vincent
Bolloré later but John Elkan, Warren Buffett, John Malone, Bruce Flatt & Partners Unlimited, Juan-
Domingo Beckman and Sam Zell today are another ~30% of the portfolio according to our 13F.

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As of our last 13F filing we have ~20% of the portfolio in income securities like preferred stocks,
closed-end funds, and REITs as well as a small amount of high grade and government bonds. A little
under 10% of portfolio is small arbitrage situations or cash, which is high but we view as necessary to
run a good allocation fund.

Lastly, and perhaps most contentiously with your subscriber base, another 10% of today’s portfolio is
growth oriented, which is predominantly Google, Schwab, Amazon, Regeneron and Sony. At some
points the valuations here have tested our patience and we have trimmed but they are businesses that
we still believe could look completely different in 10 years.

Oddball: We have saluted Vidler, where you are a board member, for having the best mission
statement of any Oddball company: "Monetize existing assets at maximum possible present value and
return on invested capital. Return capital to our shareholders. Reduce net costs where possible." This
is the largest position in your fund so it's obviously high conviction. How long do you think that it will
take the company to successfully monetize its key asset (Fish Springs Ranch) and what kind of IRR do
you see going forward from the current market valuation, which is up significantly this year? And how
do you think the recent Colorado River water shortages bear on this investment, if at all?

Eric: Thanks for that compliment. Vidler has worked hard at getting to that mission statement. Once
you get there, it is much easier to live by. What I’d say on timing guidance is what the company has
said, “we won’t answer.” To frame the other variables in the way the company has publicly described it,
Vidler has a $215mn preferred that works like a pay-in-kind bond in that every year interest accrues at
Libor + 450 on that large balance payable from the future revenue of the partnership to the benefit of
the company. You can run the math on what that is worth versus our cash burn but when you add to that
some real pricing, our goal is to be in the position to provide our investors with an option with a
positive carry. From those variables including the system-wide supply which you point out is shrinking,
the only other major one is absorption/timing which I won’t posit here to deliver an IRR but the
construct is fairly simple.

Oddball: Keweenaw, where you are also on the board, has had a great year so far, with operating
income for the first half of $3.6 million versus $836k the year earlier. We rate corporate governance
highly here as well, with owners with skin in the game represented in the boardroom. What do you
think is the value maximizing path forward here? Should the land be retained as an operating business,
or sold? How would you compare KEWL with the other timber Oddballs, PDER and BVERS?

Eric: Jamie Mai spoke at Keweenaw’s annual meeting about there being distinct buyers for each asset
but those potential buyers may not overlap. Keweenaw’s first bucket of value is the higher-and-better-
use land best for a cabin or development which today grows timber. KEWL also has a mineral portfolio
that the previous management team publicly quantified in the proxy battle. There is value in the carbon
offsets that 180k acres of timber provides and as you point out there is low cap rate timber business.

At the water company (Vidler), we talk about putting marks on the board but this applies here as well.
The question I think Jamie was correctly addressing is that the optimal NAV is derived by having
different customer sets, how the management and the board balance that is a question of price, risk and
time.

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I think one thing you get at Keweenaw that is similar to Vidler is that alignment between the board and
shareholders is extraordinarily high. In terms of our portfolio management philosophy and the way you
write your newsletter, we have seen the discount for poor alignment range from 20% to maybe 80%.
Great alignment doesn’t necessitate great outcomes but I think it helps raise the probability that the
organization can execute against its opportunity set because there is a like-mindedness in areas like
governance, economics, and mindset.

Oddball: We have to admit we had never heard of one of your largest holdings, Bolloré. Can you tell
us about the thesis for that one?

Eric: Bolloré, Odet, and Vivendi trade in Paris and the three are collectively an even bigger part of the
portfolio than the combinations of the two Oddballs (Vidler and Keweenaw) in the portfolio where I am
on the board. We mentioned that we like family controlled companies because of the discounts, the
asset quality and the capital allocation/stewardship.

What is different here is that we LOVE the core business here. Any investor reading this that has met
us over the past 3 years at an idea dinner or the recent Twitter spaces chat hosted Steven Wood has
heard our spiel.

As I write, 9/1/21, the price in the stock market for Bolloré is the value the market is ascribing to its
Vivendi investment, which is also publicly traded. That asset sells for 17.9x forward earnings – an 18%
discount to the S&P 500 at 21.2x – so under a market multiple. 72% of Vivendi’s value is derived from
the one business (maybe other than Costco & Disney which trade at 39x and 36x respectively) that we
think is strong enough to fight off the digital onslaught, Universal Music, that will spin-out later in the
month.

What we like about the business:

• Digital music opens up emerging markets.

• UMG is strategic to the tech giants & a key application for a growing array of smart devices &
social media whose adoption is being subsidized by big cap tech.
• We see a multiplication of revenues on significant fixed costs backed by copyrights that make
big pharma jealous with a drug (the music) whose prescription never runs out. A Rolling Stone
fan is one until their burial and it shouldn’t be selling at below a market multiple.
• Someone asked if you wanted to bet on one business for 100 years what would it be? The two
that I think qualify are Disney and Universal Music.
• Spin-off dynamics are ahead where we are getting 50% of net income in dividends and a
management who is entirely cash compensated finally moving to equity comp.

So we think Vivendi is too cheap but we also get a leading solid state battery business, an investment
portfolio from an owner who is nearing a 100 bagger since Odet’s IPO (Odet is the family holding
company) in the early 90’s and a transportation business that is globally top 10 in revenue and we think
would fetch north of €10bn.

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Oddball: Let's say we give you the following ingredients and you have to make a portfolio that you
can't touch for the next ten years. How do you weight them?

• First, an equal weighted basket of small banks trading below 1x tangible book value, returning
more than 1% of assets, and that are net share repurchasers over the past year.
• Second, an equal weight basket of big tobacco (PM, MO, BTI).
• Third, an equal weight basket of oil royalty companies like Dorchester Minerals, Prairie Sky
Royalty, Cross Timbers Royalty, Brigham Minerals, and Kimbell Royalty Partners.
• Fourth, an equal weight basket of Canadian oil sands majors (SU, CVE, CNQ).
• Fifth, your choice of a basket of pipeline/midstream-focused closed-end funds at ~20%
discounts to net asset value.

Eric: That’s a hard one. If you were to ask me a year ago, you would know my answer in my 13F as
TPL was our 3rd largest holding. With the index adds and oil rebound it is harder. My partner on the
mutual fund, Jim Garrison, is a terrific investor who will speak later about it but he would answer
tobacco hence our current portfolio weight.

For my money, I would give tobacco a 30% weight with the rest in Prairie Sky. We have an investor we
respect on the board (Bob Robotti) of PSK.TO, the balance sheet is setup conservatively with basically
a royalty position in the Western half of Canada (8mn+ acres) - we like at a very reasonable free cash
flow yield. You get a cartel managing the oil supply and the Western countries not in the cartel are
restricted “ethically” from investing in the oil that derives a large portion of that PSK mineral stream.

I am going to demur on smallcap banks given my firm’s strategic and current participation in the
smallcap bank M&A market. As far as the pipeline companies, our firm is one of the largest investors
in one of those CEFs so you may guess I think that idea has merit too.

Oddball: Do you think it's possible to put a correct share price on shareholder-unfriendly
management? Or another way to put that same question, are you a buyer or a seller of Hanover Foods
here at a valuation around half of net current assets and a quarter of book value? What are the odds that
a purchase of HNFSA here outperforms a basket of some of the extremely high quality, well-run, but
expensive, businesses you own in your fund like Progressive Insurance or Google?

Eric: Yes, but it is imprecise. This was exactly the case at Vidler when we got involved. There is
another company we have been buying very recently you can see in our 13F that Robotti is also
involved with in real estate, CMCT. The stock at $6.90 is trading at what I estimate to be 35c on the
dollar. The discount is for governance but I also see a path to resolution which has prompted us to
become a page one shareholder. I think you need a path to resolution, an estimated cost/time and a
suitable margin for error.

Oddball: Your fund owns both of the Marlboro companies: Philip Morris and Altria. Have you been
noticing the gigantic revenue and volume increases in the newest reduced-risk nicotine products? The
further you get from burning tobacco, and the closer you get to pure nicotine (e.g. pouches), the faster
revenue is growing - and the reduced risk products seem to be higher margin than cigarettes.

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Eric: I am going to let my aforementioned partner, Jim Garrison, take this one.

Jim: Philip Morris International has been working on its reduced-risk product offerings for over a
decade, investing over $8 billion in the research and development of its budding portfolio, including
IQOS. Having followed the tobacco industry for a long time, PM has always had, in our estimation, the
clearest sense of where they were going in terms of bringing reduced-risk products to the market.
Today, IQOS is in over 60 markets, 20 million users (with a majority of these having quit smoking),
and represents low-teens percent of unit volume and nearly 30% of total net revenue. Not bad. The
product roll-out hasn’t always been linear, and as a new technology operating in a market perhaps
resistant to change, there has been doubt in the market as to the whether PM can sustainably grow
IQOS and replace traditional combustible cigarettes.

I think the recent evidence has firmly tilted the scale to “yes, they can and they are,” as seen during the
Covid era where IQOS growth has again accelerated. And yes, the company has said on a revenue per-
unit basis, each IQOS heat stick is worth about 2.4x combustibles. So as IQOS grows and cannibalizes
the combustible business, the revenue mix improves as do profit margins. Now, a good amount of the
revenue per unit premium is due to more favorable taxation for IQOS relative to combustibles, and
governments may decide to implement higher taxes on RRPs, however PM typically sells IQOS heat
sticks at a retail discount to Marlboro cigarettes and has the potential to increase pricing. Additionally,
PM is just now beginning new opportunities in premium vapor and nicotine pouches.

We invested in Altria more recently as we think the distribution scale of its U.S. domestic-only tobacco
business provides a great platform for roll-out of nicotine alternatives in the United States, including its
partnership with PM on IQOS.

Oddball: If you look at a chart of a “Real Asset”-heavy Oddball like Pardee, Keweenaw, Beaver Coal,
or J.G. Boswell, they basically went nowhere in terms of share price appreciation for about fifteen
years, from 2005-2020. Not for nothing, the beginning of that period was a time when “everyone had to
allocate” to commodities. Would you agree with our thesis that over-investment in these types of
industries has led to low profits and bad times, low profits and bad times have led to recent under-
investment, and the current under-investment is going to lead to high profits and good times?

Eric: I see the merit to that argument. Just as I want to co-invest with a family controlled company
when I love the discount and a business that is going into the next gear, we take the same approach in
these Oddballs. Much of the under-performance I see there is an issue of accountability as much as it is
the cycle though. I have known Texas Pacific Land for ages but we waited for oil to be flirting with
negative prices before taking a position as you can see in our 13Fs. The reason we made TPL our 3 rd
largest holding is we also were prepared to be a part of governance changing. So we had what we
deemed a good price for the company, a commodity outlook we favored, and a potential future change
in governance that in this case others delivered to the benefit of all. I only know Beaver Coal from a
distance and I already spoke of KEWL. From what you have written and my students on Pardee, it
seems like self-help is still needed there. J.G. Boswell has gotten simpler and there are reasons for that
simplification I explained in my December 2018 write-up for Oddball Stocks Newsletter that has
helped lower the discount. BWEL was always a smaller position for us because while we loved the
discount, we didn’t trust the governance discount to close and we weren’t making a commodity call.

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Oddball: A few months ago, we saw that “aggregate net equity issuance for the top 10 precious metals
mining companies is now falling”for the first time in history. What are your thoughts on precious
metals and in particular royalty or streaming business models in this space?

Eric: Copper is an important part of the Keweenaw story so it is something we are attuned to. We have
a small position in Altius as you can see in our 13F where we like the organizational setup but we don’t
have a high governance opportunity, price discount, or aren’t wild about the cycle at this point but we
think it is more appealing than the average company trading in a well bid for market. One other that we
like down that vein as well is Compass Minerals that you can see in our 13F. We loved that they
brought in a real coal mining management (not a common bull case!) to clean-up their execution in salt.
We think luck favors the great operators and as luck would have it that great operator found 2.4 million
metric tons of lithium around one of his salt facilities in Utah.

Oddball: What do you think about interest rates? We used to think that we were due for a bond bear
market, but lately we've been thinking that the central bank can cap interest rates (yield curve) at the
cost of losing control of the size of its balance sheet, and probably leading to a lot of inflation. So bond
investors (like banks) do not experience nominal losses, but do experience significant real losses.

Eric: Our fixed income position is as small as it has ever been. We have taken on three preferred stocks
yielding 6-6.5% in weird businesses we like but otherwise have really kept powder dry. We have also
taken about 20% of our fixed income money and bought SPACs run by some of the aforementioned
capitalists that trade around trust value.

Oddball: Is covid "over" or are there more waves - worse waves - coming? Are there companies or
investments that won't survive to see the end of this?

Eric: We have recently added the ability to short into our mutual fund charter. We have identified one
short but it isn’t a slowly deflating balloon that we seek. We are looking for shams and haven’t pulled
the trigger yet on our first one but we thought in this type of environment it could be a small tool in our
tool belt – taking inspiration from John Hempton and his short book.

Oddball: Let's do a game called “long or short.” The time frame is five years, no margin calls in the
interim but you can cover whenever you decide. Are you long or short:

• U.S. government debt securities ($22 trillion outstanding): Short

• Apple ($2.5 trillion market capitalization): No bet
• Cryptocurrency as an asset class ($2 trillion combined valuation): Short
• Tesla ($0.7 trillion market capitalization): Short
• Alibaba ($0.4T): No bet
• LVMH ($0.37T - note that it has about the same market cap as all the tobacco companies but
1/3 of the income): Probably long. Jim likes Arnault, the guy has made him money and he
is one of the few in his country wealthier than Bolloré.
• NFLX ($0.25T): No bet. Seems like pricing power is there but investment needs will be
high and subscriber growth should markedly slow.

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• INTC ($0.22T): Intel’s impact on Rio Rancho helped us quite a bit in Amrep but Intel’s
situation is much harder. I view it as a moderately cheap option on state-side outsourced
chip manufacturing so I am biased long.
• ZM ($0.1T): Short
• CVNA ($0.06T): Short
• PTON ($0.03T): Short. I am a runner which is half of the meaning behind my twitter
handle, @off_the_run, as I think the value of outdoor exercise is important. My partner
would add that people get a lot out of going to a gym.

Oddball: We wish there was a Speron closed end fund so that we could get your top Oddball picks
without regard to liquidity. Besides KEWL and VWTR, what other Oddballs would you own if
valuation were the sole consideration?

Eric: Windrock is probably my most coveted long from that perspective but we don’t own it. I also am
intrigued and have small positions in CMCT and TLFA which are forgotten companies and accidents of
history as well as Amrep that we spoke about last summer but given the run we have decided to exit our
stake. All of these positions and their size can be verified by our 13F.

I alluded to it earlier but I help out with the Benjamin Graham Value Investing Program at UCLA and
gave the students KEWL, WRLC, and Pardee as case studies. To the students' credit, they tracked down
at least one C-suite executive from each company without my help. They did a good job interviewing
the execs but Windrock was the one I was most intrigued to read.

This relates to a funny story I have which maybe is how we end. The students were told to keep their
relationship with me secret, which I verified later with Keweenaw’s CEO. So not only did they track
down corporate execs and board members of these 3 companies but on their own initiative they tracked
down the godfather of Oddballs, Nate Tobik. After Nate helped the students a bit, he suggested they
contact me for more information which they found hilarious.

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