Delayed post as we were fortunate to spend extended time in the sun over the past month in Costa Rica. If thinking about a trip there, Puerto Viejo was our favorite spot. Much less touristy and much more soul than locations on the west side of the country, in our opinion.
Inflation expectations have changed from the prior quarter’s summary, which shouldn’t be surprising to most:
That said, while people debate the likelihood of reaching the 2% target and the potential for changing the target to 3%, for the purposes of keeping up with or exceeding the rate of inflation – expectations of 2.5% over the long term seems manageable for now.
Investment income was up 32% over the prior year’s quarter again due to timing mismatches and reallocating to new investments. The problem child list continues to be three investments. The shopping center is essentially a poster child for getting hung on higher rates as they didn’t refinance out of their bridge in time and rate caps eventually expired. While the actual asset performs well, the balance sheet does not and only lower rates cures the equity here. The hotel is consistently struggling with retaining labor, which is not surprising, and while it continues to make distributions, it’s a shaky asset at best. Last, a financial we own has taken a major hit as it has become a lightning rod for short sellers. I won’t get into the details – but there’s a lesson here for me personally. And that is that I ignored concerns I had about the balance sheet.
Looking forward, I expect Q4 income to be down 1% from the prior year as the timing mismatches start burning off, with total annual income for 2023 up 25% from 2022. I did a quick projection of 2024, and with no increases to distributions I expect 2024 to be down 3% from 2023 as the catch up distributions we received in 2023 won’t happen again. Perhaps we end up flat to 2023 with some good fortune on distribution increases. That said, going back to the beginning of this note, the hope is that 2025 investment income materially exceeds the 2.5% inflation expectation to stave off long term degradation in purchasing power.
In Q3 I added Legal and General to the portfolio, if it wasn’t obvious from prior posts. It’s cheap and has a good core engine. Expectations are so low vis-a-vis its share price and nothing heroic has to happen for the business to be bigger in five years. While share price based expectations can always get worse, it doesn’t get much worse than UK financials across developed markets.
Last, I mentioned in my past note that paying down our 6.75% mortgage was potentially attractive from a combination of financial and personal money psychology perspectives. I believe that still holds true but for some reason it also doesn’t feel like a slam dunk. I continue to chew on this and expect at some point it will become clear one way or another, like it always does.
Have a great holiday season.