Checking Out Ladenburg Thalmann

With a new baby bond offering coming it is past time to check out Ladenburg Thalmann (AMEX:LTS) to see how the company is doing.

As some have reminded me I had originally bought the LTS-A preferred stock issue a few years ago–probably in 2013 or 2014.  I sold it at some point though and no longer own the issue. With the benefit of hindsight I wish I had held it all through the years as it has been a steady monthly payer.



I decided to pull up the 2017 financials and see why I thought it was dicey holding in the past–it took me only minutes to see why I thought that was the case.  Many times in the past couple of years the company has not covered their dividend payments–but that is improving.

For 2017 LTS had a GAAP net income of about $7.7 million BEFORE payment of $32 million in preferred stock dividends.  The primary source of liquidity for the company over the years has been the issuance of common and preferred stock (instead of net income).

Now when we look at cash flow it paints a somewhat more positive picture as free cash generated during 2017 was about $36-37 million ($7.7 million of net income and adding back $28.8 in depreciation).

Now the company has been growing nicely with revenues now over $1 billion for the 2017 and net income in the quarter ending 12/31/2017 was strong compared to earlier quarters with $6.6 million in net income and free cash of $13 million.  So in the final quarter of 2017 they nicely covered the preferred stock dividend of $8.4 million.  They also had a 1 off of a credit of $6.7 million for taxes because of tax law changes.

During the quarter ending 3/31/2018 revenues again grew nicely and they had net income of $7.7 which when added to depreciation (a non cash charge) of $5.8 million means they covered the preferred dividend of $8.5 million with free cash of $13.5 million.

So the company is on the right track with growing revenues, but they are continuously selling some high yield 8% preferred stock which puts a whole lot of pressure on cash needs—$34 million/annually is needed right now just to service the preferred stock dividend.

The history is this for the preferred stock—outstanding shares–

12/31/2014      11.1 million

12/31/2015       14.7 million

12/31/2016      15.8 million

12/31/2017       17 million

This data is from the 2017 10K which can be found here.

At the end of 2017 the company still had 6.8 million shares of LTS-A available in a ‘at the market’ offering so we would have to assume that they are continuing to sell shares into the market when they can do so.

The common shares trade for $3.74/share which is up substantially in the last year or so as the company has improved their financials.  Shares traded as low as $1.70 in 2016.



Now forget the information above.  Phillip Frost MD own 35% of the company.  Ladenburg has a revolving credit agreement with Dr. Frost which pays him (a company he controls) 11% interest.  This agreement continues until 2021.  This data is in the most recent proxy materials found here.

Additionally Frost owns real estate etc. that Ladenburg leases and there are other various incestuous relationships in the company.

Is this information bad??  Common share holders may not think much of the arrangements, but preferred holders should feel some level of comfort having a billionaire watching over the company.  The odds that Dr Frost would let the investment go very far south is remote.  Here is Dr Frosts bio–the biggest downside is he is 82 years old.

So in summary I think that the word ‘dicey’ is appropriate for describing Ladenburg.  I think that holding the preferred shares is ok as the reward is fairly high for the risk involved.  With Dr Frost holding a nice sized purse there is some comfort that he would backstop the company.

We would suggest that holders make sure to watch the quarter earnings releases to make sure the dividend is being covered and to make sure they don’t back slide.

 

9 thoughts on “Checking Out Ladenburg Thalmann”

  1. Tim, thank you for a well-rounded, succinct, and tongue-in-cheek evaluation of of LTS’s ability to service the pref dividends in a sustainable manner. Wondering whether LTS-PA would be called soon in light of the new issuance. Noticed that LTS-PA’s price is moving towards par. Any thoughts on the prospect for a near-term call ?

    1. SPM–I thought the same thing–float debt at 7% and call 8% preferreds—but with at least 17 million shares outstanding they would have to float one hell of a debt issue. Likely they just want to have the preferred because the ramifications to a suspension of dividends (if ever necessary) are less onerous than defaulting on debt.

      The curious item on this is how much of the preferred does Dr Frost own? Couldn’t find the answer yet.

      1. And how much were “awarded to him” also (along with the commons over the years). I just saw your article, which basically mirrored my post I just made in your other LTS article. But I trust yours better, as mine was from memory, lol… Investing to me is about staying in ones comfort zone and unfortunately its emotional….If I have a bad feeling about something, I wont buy it no matter how much money it winds up costing me. And LTS is on that list, lol… I am on another interesting mission Tim… I will post after I get what I need…Got some today…Actually I am on 2 missions, but one will take longer, lol…Unfortunately I had to sell my PCG-G at a quick 40 cent a share profit the other day to help round up the cash to do it though… 🙁

      2. Tim, I bought LTS-A about two years ago (2 of my PC’s were damaged by Microsoft updating windows with a third one, just received from DELL also damaged by MS update; now reconfigured to NEVER allowing the vicious update). With my due respect to Gribdird, I sold some shares taking some small profit. From the 10-K, I found that LTS reserves the right to issue more LTS-A preferreds at any time, as it was authorized along with more of its common shares as well. I had a difficult time to trigger to buy the old baby bond, LTSL. with 6.5% coupon. LTS IMHO is a legitimate small time brokerage firm, similar to RILY. It is true, as opined by Gridbird that its decent income almost all offset by huge expenses. I am guessing that the management and Dr. Frost use the brokerage firm to compensate numerous cooperating brokers. The details have been revealed and transparent in the 10-K. I have seen their brokers participate in some of the IPO’s for preferreds as well as eREITS Earnings Call Transcript. Their broker (analyst) typically sat the last seat for the Call, allowing the big name analysts to ask questions first. Some announcement by LTS today:

        https://seekingalpha.com/pr/17175353-ladenburg-concludes-inaugural-innovation-symposium-identify-transformative-fin-tech-solutions?ifp=0
        I saw your post on SPKE and picked up quite a few shares of SPKEP when it tumbled. SPKE has problem retaining their customers. I did not buy at the IPO because of negative comments on their unhappy customers. The risk adjusted yield is still good. I was unlucky to buy CODI-B at IPO seeing its long term dividend payment history. Its debt has been downgraded by Moody Yet, they do have decent income with 2 of its acquired companies filing for bankruptcy. The SA writer who wrote a positive article, now not readable on SA because it was too old.

        https://seekingalpha.com/article/4166156-compass-diversified-undervalued-preferred-stock-now-yields-9_7-percent
        Plus a negative article on SA,

        https://seekingalpha.com/article/4176892-value-compass-diversified-holdings-worth-hassle
        Many viewers made comments, POSITIVE for holding CODI-B. Moody rates the commons as speculative grade.
        The founder is retiring as I recall. With debts from preferreds and notes, they are fearless to buy what work for them.

        https://seekingalpha.com/news/3359979-compass-diversified-holdings-acquires-esmi-companies-mkc-enterprises?app=1#email_link
        They pay huge pro forma dividends to its common shareholders. This is a partnership, requiring Schedule K1, unless for small positions in retirement account with income limit of $1,000 to pre-empt UBIC.

        1. Hi John–I understand your position on LTS and am sure Grid does as well. There is no doubt that they are a low grade company, but many people have done well with it and likely that will continue as long as the economy remains strong in the U.S. No doubt this company is ‘controlled’ and things could go wrong.

          As we said “dicey”–watch the quarterly 10 q releases.

    2. SPM, if a gun was to my head and had to choose which happens first…LTS-A being redeemed or its preferred getting suspended, I am going with the suspension. If you like this issue, do not fear a call!

      1. And you base this on what? You Chicken-Little all over the place about possible suspensions but does it EVER happen? It seems not.

        1. Larry, It may pay long past my existence on earth. My opinion only serves to guide my investments and shouldnt be used for yours or as an attack on yours if you so desire to own it. I am sure I have a few you might be uncomfortable owning. There are plenty options for everyone.

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