Capitalism 2 and Capitalism Lab Forum

I feel like I might be making the posts a bit tedious with so many charts. But, the series demands it.
Until now we have found just tailwinds and the corporation has used available credit to go deep into a market without competition, quite succesfully. How far we can go depends mainly on us, on our ability to forecast future conditions properly and allocate our stream of revenue in accordance.
As you well know we´re studying how profitable it can be, to build RE firms with "free money". One can always guess how profitable the building of an extra apartment or an extra office could be. We planned to unveil the dynamics of such little investments with some numbers.
So, lets see how we are doing so far with a bit more of detail.

The next four charts show the progression of a few residential buildings built in each of the cities with the so mentioned "free money". The rent derived is used to pay the interests of the credit used, and the surplus "stored" until there is enough to repay the principal fully.
Most of the chosen buildings (the first ones built in most cases) are, after 6 years, showing a net profit. From this point on, the quality of the investment changes from risky venture to steady annuity.
You can see too that there´s a district having some difficulties. We´ll deal with that later, as such underperformance shouldn´t be taken lightly considering our total current liabilities.
Next, we offer a detailed summary of the performance of all our RE buildings in all cities (the IS&BS for RE, as we call it), by city. Being the two most important parameters profits and value (assets), we focus on them.
Apart from showing oddities, which we can try to correct visiting the firm in question, the data helps to understand our profitability in terms of our assets, also by making the information available per square of land. Finally we get to know how much land we have available for sale (the "liquid land" we mention) in case financial (global) conditions turn against us and we have to start selling it.
(note: we have improved the structure slightly from previous posts).
This new chart shows the average profit and value we get, per square of land, in each city, as well as compares the performance between cities and between apartments vs offices.
The ratio% value would be the "dividend" we get each year in each city per class of building.
The data is gathered from the IS&BS for RE.
Finally we have the financial situation chart, to understand our "real" current position regarding our liabilities, and how we could best deal with stormy weather ahead, considering three different approaches: an "immediate" sale campaign (maybe I went too far by including here our Private firms); next, a sale campaign for next year; finally a conservative course.

OK, so what to do next? Where´s the next money maker and how could we participate?

We´ve been saying before that conditions are changing, from cheap to expensive money. Also, inflation will be constrained, as loans will become both harder to come by and service, and so money available to invest. New projects financed through debt will have to show higher margins of return and current ones will find they must make "adjustments" to stay profitable. Those already unprofitable will probably go under.
We have no saying there so we must accommodate.

As proven in our last post, our debt remains manageable. We just have to detect when servicing it will become the most profitable investment around.

What´s our current return, from the value of our invested money? For now, we can take a look at the comparison sheet (last post) and see very decent returns everywhere in most of our RE firms. The lowest being the apartment districts in Funk, with a 5,22% return on value, so we´ll focus there. Next is the apartment district in Glen Fork, with a 6,56%. But debt has not been considered...

Assuming we get higher real rates in the future, these apartment districts will become a burden unless we can improve their profitability: We might rise the rent to squeeze the current tenants or lower it to attract new ones. We could adjust some buildings on the one side and others on the other and see both reactions. Time is an issue so we must compromise.

Another option could be to "package" them into an "investment vehicle" and sell them to willing investors. They will become subprime if real rates widen too much, but shhhh...
Let´s see:
Current public corporation´s quoted prices are 1.5 times book/value, easily.
We have about 500 million in property value in apartments in both Funk and Glen Fork: 11,63% of our total assets.
That could be about 1.5 billion worth, if made available to the market.

If we reduce our debt by 1.5 billion we save 120 million/year. by 1 billion we save 80 million/year.
Current yearly profits of both "packages" are 57 million/year. We assume we use 11,63% of debt payments to service them (33,5 million/year).
If inflation remains at 6%, the 11,63% of our apartment packages assumed debt, 410 million) decreases by about 24,5 million, this year.
Interesting puzzle.
Aren´t they subprime already?

Also, in case we proceed, we´d like to make them available to investors one year before they become subprime, so there´s ample time to become a target for the investment companies money-shuffling, and to use some public relations to enhance their perceived quality.

Opinions are welcome. I´ll try to work out an answer.
Thanks for reading.

PS: the save file. Version 5.1.33 (sorry)

I´ve been playing a bit with some numbers and this could be the answer to our worries (another sheet, for your amusement).
We´ve called it the subprime detective.

A brief explanation, as shown inside the sheet:
We use the RE firms to carry all debt burden: we divide it between all 8 sectors according to their mkt value and make each sector pay their part of the interests.
This way we have a different measure to asses their saleability. The lower the ratio the higher its saleability.
Adj RP/SD is the % of profit by value we get, considering current debt and its payment (adjusted for inflation). By our standards (not perfect). Negative=subprime.

We use the label "subprime" when current income cannot cope with debt incurred.
This one is for current conditions. IR=8%. Funk´s residential district is bordering subprime. This other is to simulate what level of IR (13%) turn all our apartment districts subprime. Offices are much more resilient due to their higher profits, but affected nevertheless. Next one shows how the sale of the Funk apartment district (debt reduction) will affect (NOW, in case it´s sold immediately) the rest if sold at 1 times its value. The other at 1.5 times value. We´ll proceed with our plans with this data in mind.

FEBRUARY 2001 - FEBRUARY 2002.

I´ll start this year by showing graphic data about one of the cities: Funk.
Then, I show the reports of the Frankenstein we´ve created...

This is how the city looks like: These show how the city´s doing: Our subsidiary, Funk Apt. Holdings (FAH) It´s already public, with 95% owned by Tomahawk corp. and 5% by its own CEO.

A brief summary about Funk:

There´s a huge supply of apartment buildings, and the population is leaving because of pollution and lack of public services spending.
The Mayor´s a miser, keeping all funds idle in the city´s coffers.
We can deduce then that demand for housing (and so, for offices) will shrink in the years ahead in case present conditions remain.

About Funk Apt. Holdings: Our attempt at getting rid of our ownership in a potential subprime venture.

First, mention that it sits on assets valued at 850 million and has a profit of 6 million per year.
Observe that we merely transfered our residential assets in Funk city to it, so zero cost to us in terms of cash. We have to consider lost revenues of about 26 million for that this past year.
We chose Brandon K. Lell Sr. as a figure man because we know he has a tendency to buy back shares. That might be a plus once we lose the majority shareholder position.

When we transfered the property, we detected a decrease of 20% in value to their book (100 million) and we couldn´t figure out why. Their loss was recorded in Tomahawk´s book as asset appreciation. As we are trying to sell them and not us, we decided to do something, bold, it seems...
We IPOed the Frankenstein and with the proceeds (297 million) we bought land and built even more apartments. You can verify a total increase in asset value of just 20 million last year in FAH´s income statement, and that was our aim: to make them show a book profit.
The flip side is that the new apartments might never be profitable, hurting revenues. As we´re selling value (valuation), we might be justified, but we don´t know if future investors will agree.
Then, with 25% of shares in the hands of the public, the price of the stock started falling. Tomahawk bought back 20% and Mr. Lell used his life savings for a 5% stack.

Now the company quotes at 8,8$/share, and that means over a billion in market cap, 1.22 times book value.
At that price the sale would be quite a killing, but we fear that pretty soon the price will start falling again.

We´ve also used some of their cash to buy a stack in the public investment companies, and hope (crossing fingers) that their price gyrations will affect FAH´s price too, and so will in turn help us unload at decent levels.
Our other plan to hire a PR man to allure investors to buy remains off the table at the moment, as with such meagre income the company will have a negative cash flow.

----------------------

Inflation now stands at 5.65%, and interest rates at 8,5%. That means a 3% money rate.
Having said that, we publish our company´s files for February 2002:

BALANCE SHEET
An increase of a billion in net assets, due mostly to increases in our stock in public companies. Half of it in our subsidiary, FAH.
A decrease of our liabilities, due mostly to inflation, of 196 million. INCOME STATEMENT
An increase in net profits of 4 million/month to 46 million/month. STOCK MARKET
We´ve become the majority shareholder in Fusion corp. by buying shares at a premium from Samurai Trinity (about 125 million spent), so now we can use our weight to demand an increase in the floating stock of the company, with a view to hold 75% of it and then making it our furniture subsidiary.
Also, we´ve kept buying the Swiss watch-maker Global Link, as they´re still showing an appetite for growth in a market without competition and decent margins. Any comments are welcome.
Thanks for reading!

A summary of different sectors, with a view for the use of next year´s money:

REAL ESTATE
The supply remains ample in all 4 cities, so we´ll be filling it as they grow, but not in Funk, where population growth is now negative and we don´t see profitability there. We won´t use the bank to finance new RE projects as conditions remain neutral and the bankers might be plotting to raise rates further. We will remain cautious.
Also, we´ve plenty of good urban land to develop already, so if we purchase some more it will be to consolidate, in that case, our cores.

CITIES
Both Lynden and Lambs Grove, where our men call the shots, are decidedly in for expansion and growth.
Income taxes were increased to balance the budget, and public land sales create the surplus to finance the building of new public utilities. Quality of life stands at around 70, so there´s good supply for newcomers. We have an open borders policy and jobs are available.
The universities in both are fully engaged in research in different industries, so we hope to encourage new firms to set up home there.
In Lynden there´s a thriving food industrial structure. In Lamb´s Grove there´s luxury goods. We hope to participate there next year or so through new research facilities.

STOCKS
We´ll be focusing our purchases in the Swiss watch-maker and in Fusion corp.
The first will be probably receiving much of our revenues as they have the ability to make them grow further. We´ll sell it if the spread between inflation and IR becomes too wide (meaning, if debt expenses get too big to our taste) and the stock price stops rising.
The second, we´ll attempt to take over and make them our subsidiary. As you recall, the CEO has an expertise in the furniture area and our country imports all of it from abroad. It won´t be cheap but we look ahead. In case it becomes prohibitive we´ll cancel our plan. At present they are just retailing 2nd party merchandise.
The rest of the public companies are still too expensive for the returns they generate.

R&D
Our last CTO resigned as we didn´t want to raise his pay, so our current projects are being directed by our CEO. Next year we´ll finish them all (I believe I published our tech research in a previous post) and we´ll be closing half of the labs in Glen Fork, keeping our trained scientists only, and will open new labs in Lynden and Lambs Grove to hire their university graduates that, we´ve heard, are coming out geniuses.

LIABILITIES (meaning, our debt)
We expect inflation to eat up 185m. next year.
The sale of Funk Holdings could mean 1 billion cash if it goes well, and that´s almost 1/3 of our liabilities.
We still see more profitable areas to invest at the moment.

Now, to our residential districts report:
This will be the last year we publish it, as all except one building have covered costs already.
The one in question being number 29 in Glen Fork, and we worked an estimate for it.

I've enjoyed following your write ups, quick question though. How much has the population in your cities grown? I play on a crappy old laptop so by the time my games get 20-30 years in so many companies have so much built up that it slows down my game like crazy. So I've never had the patience to play a CES game long enough to see cities grow much past 1mil population. As someone who usually plays this game from the angle of a retailer / manufacturer low population means low demand and its just not that fun after the novelty of running efficiently and making use of small factories, and smaller retail stores wear off.

With that said I'm attracted to CES for its mayor feature and all of the city management that comes with it, especially zoning. It's very annoying how most of the prime retail land ends up being taken over by factories, farms, and R&D labs. As someone who is running pure RE and has started taking control of a few cities and improving the quality of life I have to imagine your play style is as good as it gets when it comes to boosting population. I'm just curious if you'll be able to grow a city to 2 or even 3 million pop, and how long it will take to get there.

Hey bdubbs, glad to know you´re enjoying it.

Yeah, I think the CES would improve a lot if the cities would come with pre-zoning, from the beginning. That would change things the way you mention.
You just pointed to something important I´ve overlooked, so I´ll post three pictures to show how the population has changed from 1990 (beginning), then 2000 (mayors) and 2002 (now).
And, a small observation: We can always rely on the city budget to build new apartment districts. We want the cities to grow, but not at the expense of our shareholders

Regards.

Yeah that 10 year growth doesn't look great, but city growth does seem to be picking up some good steam in the cities you have taken over as mayor and improved the quality of life. Maybe I'll start a game with a ton of cash and lower the "donations to rival political parties" and see if I can get control of 3-4 cities in the first election to speed up the process of growing them.

Letting the government have a share of the housing market doesn't sound like a terrible idea if you find yourself in a high interest rate situation and it doesn't make sense for you to expand on borrowed money. Even if the payback period is long the more revenue streams the government has at its disposal the more you can spend on schools, police, and all that jazz.

FEBRUARY 2002- FEBRUARY 2003

The post for this year will be short. Most of our activity has been centered on the Stock Market.

FINANCES.
Inflation is actually increasing again, now at 6%, and the CB raised rates to 9% this same month. So real rates remain at 3%.
Here´s the Balance Sheet and Income Statement, provided without comments. Here´s a view to the Commercial Bank´s report, on our possibility to further monetize our assets. Good luck gentlemen! Here´s a view to the Investment Bank´s report, on our possibility to issue new shares at the current stock price. LAND& R.E. BUILDINGS.
We have constructed two new office buildings and one new apartment building. Demand for new buildings is still growing but supply remains ample. Most of our land purchases have been centered in Lambs Grove with a view to expand our apartment district there, north.
We´ll let current buildings fill up before we finish construction in our cores or create new districts. R&D.
We finished all our ongoing projects in January 2003. This month we´ll choose the location of our new labs and, to make good use of our university graduates, we believe their number will be substantial. STOCK MARKET.
Fusion corp (the furniture expert turned import-merchant).
We spent about 150 million cash, last year, increasing our ownership to 75%.
The CEO caused us some trouble, as he owned about 30% of the company and used the cash we provided (when expanding the stock) to buy shares from Samurai Trinity, the third interest, thus his stack grew at our expense. We had to buy the japanese´s stock first at twice its "fair" price before we could complete the acquisition.
After that we directed them to expand into R&D. In a couple of years we´ll make sure this new player starts creating new jobs, and as all furniture is currently imported, the profits could be substantial. In the meantime, we´ll be offering them fresh capital through new shares issued to the parent company, when/if more cash is needed, preferably at low prices.

Global Link (the profitable Swiss watch-maker).
The company´s still looking attractive, earning about 9 million/month, and spending that cash both to buy back their shares and to build new luxury stores.
Our stack there is currently valued at 830m. With almost 20 million shares, that places our ownership above 50%.
The question arises: Should we use this part to reduce our liabilities? If we have to pay a 3% rate on it we are paying 25 million/year for just holding our chips. We expect to see their business keep growing... until we fabricate a competitor. Until then we´ll use the stock as a savings account.
Also, there´s just 1,5% of "floating" stock left available, so our efforts at revenue allocation will have to look elsewhere.

Funk Apt. Holdings (the subprime R.E. corporation).
Our stack there is currently valued at 770m and our ownership in their business stands at 75%.
Our current expenses there are: 26 million in lost revenues, plus 23 million in interest expenses estimated (from present valuation) making about 50 million/year deficit.
We´ve ordered the CEO to sit tight and do nothing. Once our ownership goes below 75% that same CEO will decide on his own in what avenues to invest, and will probably ruin our plans of keeping this mirage alive. Our ideal scenario would be to see the price rise to 9-10$/share before unloading. And we´ll do it, in that case, all at once. For that we´ve bought for our subsidiary an interest in an investment corporation whose stock price jerks often up and down.
Last year we used 180 million buying their "floating" stock. This year we gained 210 million from selling that same stock, so 30 million profit at the expense of the small stockholders to add to the end profit estimate.

Mergers.
You might remember we were following the demise of a troubled auto-maker: Target Strike. They were deeply indebted and unprofitable and we planned to buy their stressed assets cheap. This year they merged with the other auto-maker: Anlin, creating a de facto monopoly in the automotive arena.
The timing couldn´t have been better. Our research in the auto sector finished, we´ll procceed to spin off a new subsidiary, selling them our technology, to compete with this newborn giant.
Thanks for reading!