David Capital 的 Adam Patinkin 更新 Vistry 投资逻辑 $VTY

Hello, and welcome to the Yet Another Value Podcast. I’m your host, Andrew Walker. With me today, I’m happy to have on, I believe for the third time, my friend and one of my favorite people in finance, Adam Patinkin. Adam, how’s it going?

I’m doing well, man. Thanks for having me back. I appreciate it.

A double header this week. Listeners don’t know this, but we recorded one podcast earlier this week. I was hoping to have it up right before we recorded this, but they’ll hear that soon. Then, boom, a double header.

We’ve got a lot to talk about today, so I want to hop into it. I’ll start with a quick disclaimer: Nothing on this podcast is investment advice. Please do your own work, consult a financial adviser, and keep that in mind. We’re going back across the pond to talk about an English stock, so for my domestic listeners, foreign stocks may carry a little bit of hidden risk. Everyone should keep all of that in mind and consult a financial adviser.

Adam, I’m so happy to have you back on because I think the most frequent request I’ve gotten over the past year is for an Adam Patinkin podcast on Vistry. The first one was great. I learned so much and had so much fun. All of my podcasts are my babies, but it was one of my favorites. People can probably remember it because it was almost 2 hours long; we were jamming and covered so much.

An update on Vistry has been the most requested podcast I’ve had. Vistry just reported its full-year results earlier this week, so we planned the update for now. I want to dive into everything that’s happened at Vistry over the past year, but maybe just give us a quick 30-second to 1-minute reminder. I’ll link to the first podcast in the show notes for people who want the background, but what is Vistry, and what was the overall thesis before we start updating it?

Of course. I’m happy to go through all of this and share the update, and thanks for having me back on to do it.

I originally came on the Yet Another Value Podcast a little over a year ago, at the beginning of January 2024. At the time, Vistry’s stock was around 900 pence. Over the course of 2024, the company delivered on a lot of the things that we had outlined. The stock was up over 50% at one point, and then it went down by over 50% from there. It’s now trading around 600 pence.

To get it out of the way, I don’t want to bury the lead: At current levels, we have doubled our shareholding. We have not sold, and we have not maintained our position; we have doubled our shareholding. I’m not telling anybody to do the same thing. Please do your own work. This is merely me sharing what we have done.

I feel like I owe it to your listeners to talk through what happened, what our views are today, and why we’ve doubled our shares. We feel that this is as compelling a setup as it’s ever been. Obviously, in every situation like this, you run the risk of sunk-cost fallacies or being too far in it and becoming biased. I think we do our very best at David Capital to be as objective, fact-based, and evidence-based as we can, and I think the facts support this determination.

Should I jump into the thesis a little bit?

I think it would probably be helpful. To jump to the investment thesis, at David Capital, our approach to investing is what we call “Value Plus a Catalyst.” We’re looking for securities that are meaningfully undervalued relative to our assessment of intrinsic value, and that have a clear catalyst or event path that we can point to. We want to be able to say, “This is how an undervalued security is going to become fairly valued over time.”

It’s not just that we have a margin of safety because we’re buying a stock that’s cheap. It’s also that we have the ability to achieve attractive returns based on the time value of money because we have that clear catalyst-driven event path.

In this case, it was a very clear thesis. Vistry had 2 businesses: a Partnerships business and a housebuilding business. The Partnerships business is a crown-jewel business. It’s a great business, with returns on capital employed, or ROCE, of over 40%; growth at 3 times GDP; low cyclicality; an asset-light model; fast asset turns; high barriers to entry; and a significant competitive moat. It’s the dominant number-one player, probably 50 times or more the size of the number 2 player. It has all the characteristics you’d look for in a great business. That is what Vistry’s Partnerships business is.

The housebuilding business is almost the inverse of that. It’s a mediocre business, with returns on capital approximately half, or a little less than half, of Partnerships—around 20%. It grows in line with GDP, is highly cyclical, asset-heavy, and has low barriers to entry. Those are all the characteristics of a housebuilding business.

Our thesis was very simple: Vistry would become a pure-play Partnerships business, exit its housebuilding business, and use the excess capital generated from exiting it to buy back shares that were meaningfully undervalued. The company was being valued as if the whole thing were a housebuilding business.

You could essentially create what we call “NVR on steroids.” For your listeners, NVR is one of the 3 best-performing stocks in America over the last 30 years. It has done 30% a year, and it has done that by following this model: being a pure-play, asset-light housebuilding company that uses all excess capital to retire shares and buy back shares along the way.

Our thesis was that this is even better than NVR because Vistry’s Partnerships business has higher returns on capital than NVR, is growing faster than NVR, and is starting at a lower valuation than NVR. You put those 3 things together, and I think you have a recipe for really attractive returns.

Ultimately, that’s the thesis: Partnerships is a crown-jewel business, Vistry is going to become a pure-play Partnerships business, and Vistry will use its excess capital to buy back shares along the way.

That’s a great overview. Again, we tore apart this business model in the first podcast, so people can listen to that if they really want to dive into the different pieces.

Let’s go to the update. Things, as you said, were tracking along. If I remember correctly, over the summer they started the share repurchase. Returning capital was a big piece of the thesis. The stock was ticking along, getting closer and closer to where you thought fair value was—or maybe fair value is a lot higher because it’s NVR on steroids and a compounder over years.

Then, if I remember correctly, in October they had a profit warning, and in November it just kept coming. Over the past 6 months, there have been a lot of profit warnings and disappointments. That led up to the conference call 2 days ago, where they said share buybacks were going to be lower. There was a lot going on.

Over the past 6 months, what happened? They called them headwinds, saying they had faced unbelievable headwinds since they released their medium-term plan 18 months ago. What were these headwinds, and why do you—and probably the company—think they are headwinds rather than signs that the thesis is off track or that something else is going on?

To think about this from the perspective of the thesis, what does “Value Plus a Catalyst” mean? Fundamentally, it means that we’re looking for change. We’re looking for a business that is changing from one thing to another—from a lower-quality business to a higher-quality business, or from a less profitable business to a more profitable business. We’re looking for change.

This is not looking for a business to keep doing what it has done for 10 or 30 years. It’s looking for a business that is going to improve itself, and that improvement is what’s going to drive returns. But sometimes, when there’s change, there can be hiccups along the way.

Whenever we look for investments, we’re disciplined about looking for companies with clean balance sheets, great management teams, and positive free cash flow. Our view is that if you’re going to invest behind change, there will almost inevitably be hiccups along the way. You need those 3 things as buffers to allow you to get through to the ultimate reward that the change will bring.

Fortunately, Vistry has all 3. It has a great management team, a clean balance sheet, and lots of free cash flow. To go through what the hiccups were: The company is transitioning to being a Partnerships business, and the management team used the 80/20 rule. They said, “We’re going to spend all of our energy on the 80% that matters, which is the Partnerships business.” The housebuilding business was in wind-down mode—literally just delivering sites until they were done, or selling sites that hadn’t been built yet.

They were effectively liquidating the housebuilding business, and they took their eye off the ball. That’s where the hiccups happened. The punchline is that they’re navigating it and resolving the issues. In fact, essentially all of the issues are now almost fully resolved.

The company has 6 divisions. In its South division, which was the only division run by a housebuilding executive and had a significant housebuilding presence, there was a subset made up entirely of legacy housebuilding. It came to the management team’s attention during their annual budgeting process that there were some issues in that legacy housebuilding business.

In the UK, you are required to announce immediately whenever you think profits are going to come in either 10% higher or lower than consensus. You can’t wait. In the US, you can announce it at your next earnings result, but in the UK, you have to come to the market immediately.

The company discovered this on a Friday and reported it on a Tuesday. They raced through the weekend and did their best estimate. They estimated that there would be a £115 million writedown in the housebuilding business.

At the time, this was a company worth £4.5 billion. This wasn’t the end of the world; it was a one-time impact in a legacy business of £115 million. But the market reacted as if it were an ongoing profit loss that would never come back. The market capitalized it, and the market capitalization dropped by £2 billion, even though it was a one-time £115 million writedown.

The company then went through its full review. They hired a fire-breathing auditor to conduct a line-by-line evaluation of every business in the entire company—not just housebuilding, but the entire company. The audit firm concluded that Partnerships was totally fine. There were no problems in Partnerships. It was great, and all of the targets, earnings power, and everything else the company had put out were fine.

The auditors were incentivized to pull every possible expense out and report it as a one-off because the last thing an auditor wants to do is leave some expense unfound. A month later, the company came out and said, “It’s not £115 million; it’s going to be £165 million.” They increased it by £50 million to reflect the additional costs that the auditor identified.

Was it really £50 million of additional costs? Or were those one-time items, where some things come in a little better and some things come in a little worse? I think you could make an argument that £115 million was the right number, but they came out with £165 million, and that’s fine. That was the writedown in the housebuilding business.

Since then, the company has said there are no additional writedowns. There were none in January, and there were none this week in March. It has been fully contained. The company has fully replaced the management team that oversaw this, and it has accelerated the exit from the housebuilding business because of it.

What is just as important is that not all of this is a cash cost. In fact, the cash cost is less than £100 million out of the £165 million. If you were to say, on a blank sheet of paper, “What is the economic loss to shareholders here?” it’s less than £100 million on a business that should be worth many billions.

When you look at the market capitalization dropping by between £2 billion and £3 billion at this point, I would characterize that as an incongruent reaction relative to the actual economic loss.

At the end of December, there was a third profit warning. I’m not even sure you can fully characterize it as a profit warning. The company had a number of land sales agreed, and at the end of the year, some of the buyers noticed that Vistry had had these 2 profit warnings. They tried to chip them—they came in and said, “We’re going to retrade the price on this deal.”

Vistry said no. They were going to walk away. They weren’t going to do the deal; they would push those sales into the following year rather than do them immediately.

That is exactly what I would want them to do. That’s what a good management team does. They say, “I’d rather report a profit warning now than do something worse for the business, especially if I can renegotiate these deals 60 days from now at better prices.”

Lo and behold, a lot of these buyers have already come back and agreed to the deals on the original terms. It was absolutely the right thing to do, but it was very different from the writedowns. The writedowns were really just 1 profit warning; they had to report it very quickly and then report it more conclusively as a result of the review.

As a result, the share price dropped from 1,400 pence to 600 pence. As we think about the investment thesis now, those are the things to consider: where the share price is, whether our thesis is still intact, and how we think about the management team’s credibility and the business’s ability to put these issues in the past.

That was a great overview. I’ve got a lot of questions. I can’t remember whether I told you before we started recording or right at the start, but I had so many shareholders reach out to me. They said they had done the work, but they really wanted to get your take on it.

The thesis, as I had it laid out, was 4 points. First, Partnerships is a great business. Second, starting in 2024, the Partnerships business was going to generate a lot of cash. Third, starting in 2024, as the company shifted more toward Partnerships and wound down the high-capital, more commodity-style homebuilding business, it was going to generate even more cash by releasing capital from that legacy business. Fourth, it was going to take all of that cash and buy back a ton of shares.

I hear you on the profit warnings, and I think this comes back to their role. But when I hear that, I say, “Okay, number 1 might still be true—probably true. I think the Partnerships business is a good business. But at this point, number 2 is in question, number 3 is in question, and number 4 is in question.”

Three of the 4 points seem to be off track. Maybe those are one-time headwinds, but on the call they said that this year they’re really not going to buy back the same amount of shares. They’re going to buy back a little, but it’s not the same amount of buybacks that everyone was hoping for. The cash flows are looking wonky.

I had a lot of people reach out to me. We’re both members of VIC, and there was a lot of debate on the VIC boards. One person humorously said, “The math isn’t mathing.” A lot of people are struggling with the guidance on the debt balance. Those aren’t the questions you really want when you’ve got this great capital-light business.

The overarching question is about management credibility. They’ve had 3 profit warnings, including one that they dropped on Christmas Eve. People are understandably hesitant around the business right now.

That’s obviously fair. A company needs to reestablish credibility after profit warnings. But again, it was really 1 profit warning around the writedown. They missed that in the legacy housebuilding business, which is in liquidation. It was split into 2 announcements because of how the audit review went.

The deferral of some land sales wasn’t a profit warning. That was profit deferred, not profit lost. When I look at this, I think it was really 1 profit warning, and the company has its arms around it.

When you think about the investment thesis, I would articulate it slightly differently. This gets down to first principles. Always think about things in first principles. What fundamentally is our thesis here?

The first question is: Is Partnerships broken? I think the answer is clearly no. The Partnerships business is every bit as good, if not better, than we anticipated it would be.

We know that because the company put it under review and then, 2 days ago, formally came out and said that it is reinstituting all of its medium-term profit targets: £800 million of operating profit, 40% returns on capital, 5% to 8% annual revenue growth, and 12% operating margins in the Partnerships business.

They did this after conducting an exhaustive, line-by-line review, not just internally but using third-party auditors to make sure the targets are real and every line item is fully vouched for and supported. I feel a lot better about that than I would if it were just the management team saying it. They’ve had an exhaustive analysis done from every direction.

The Partnerships earnings power is real. It has been reaffirmed, and they are going to deliver it. That should give more confidence in the thesis, not less.

The second question is whether they’re going pure-play Partnerships. On the earnings call, Greg Fitzgerald, the CEO, said that they had moved more in the last 3 months toward a pure-play Partnerships business than they had in the prior 12 months combined.

To me, that’s music to my ears. That’s exactly what I want to hear. They’re recognizing that they need to get out of housebuilding. That’s where the issues are. Partnerships is beautiful, and they’re accelerating their exit from housebuilding.

They have replaced essentially the entire leadership team at Vistry. It is now made up of 100% Partnerships people; there’s no one left from housebuilding. Housebuilding is being aggressively wound down.

Can I pause you there? The statement that they had moved more toward a pure-play Partnerships business in the past 3 months than in the prior 12 months really jumped out at me. This is what you want if you think Partnerships is the crown jewel—you want them running toward it.

But I also thought about the hot-dog meme, where the guy is in the hot-dog suit saying, “We’re all trying to find the guy who did this.” You were in charge of the company during the prior 12 months. I love that you’ve got a fire lit under you for the past 3 months, but why did it take the profit warning and everything else? They were in charge the whole time.

Do you think the profit warning made them realize how risky the housebuilding business was? Or do you think something else was going on?

The main answer I would have is that they were so focused on the Partnerships business—growing it, putting the institutional foundation behind it, setting up the systems, and getting all of the processes right across what’s going to be a very large business over time. It is already the number-one housebuilder in the UK.

They weren’t focused on housebuilding. They said, “These are housebuilding people; we’re going to let them run it. The businesses will run off and then disappear.” They weren’t as hands-on with the housebuilding business. That is the fault of the management team.

That has changed. Housebuilding is very much at the center of the management team’s sights now. They’re making sure there are no more problems in housebuilding and that the business gets gone—that it gets exited.

You’re now progressing toward a pure-play Partnerships business faster than we had expected when we first did our podcast interview. That’s a good thing. As soon as this is a pure-play Partnerships business, Partnerships will have had zero issues here. That is the biggest risk off the table for the Vistry investment thesis, and this thing can fly.

The last point I wanted to mention is the share buyback. They actually accelerated their share buyback a little bit this week. It wasn’t a whole lot, but they said they bought back £38 million over the last 6 months and are going to buy back £92 million by the beginning of 2026. Essentially, over the next 9 months, they’re going to be buying back £92 million.

That’s something like a 50% increase in the pace of the share buyback. We’ll see if they actually do it, but that’s what they said.

I don’t think that’s where our focus should be. They’re buying back shares every day, and I hope they continue to do it more aggressively. I think they will buy back more aggressively, and there could potentially be some extra or special share buybacks.

The reason is that it answers the question of why the share price hasn’t recovered and why David Capital doubled our position size. When you look at Vistry’s business right now, the Partnerships model has a diversified customer base. They’re selling to 3 different end customers.

One is PRS buyers, which are large institutions buying units to use as rental stock. They’re going to rent them to people. The second is open-market sales to homeowners who are going to live in the properties. The third is affordable housing, which they sell to housing associations—nonprofits that buy and manage affordable housing—or to government entities, especially local authorities, which are regional governments in the UK that also maintain affordable housing stock.

PRS sales are very strong right now. They’re up nicely year over year. Open-market sales are also very strong right now. Vistry said that PRS is doing very well and that it is experiencing a bump in open-market sales in line with the rest of the sector.

The stock fell a little bit this past week, and I think the most important reason was that Vistry reported sales rates that did not have quite the same pickup that other housebuilders had been reporting. People have been asking why that was the case, and all of it has come from affordable housing.

Affordable sales have been a little lighter because the UK government operates through 5-year plans, allocating a certain budget to affordable housing. Under the most recent 5-year plan, the British government allocated just over £12.5 billion to affordable housing over 5 years—about £2.6 billion per year.

We’re coming to the end of that 5-year plan, so almost all of the funds have been allocated. There’s an air pocket that started in the fourth quarter and carried into the first quarter, where the new Labour government said very strongly that it was going to allocate a lot of money to affordable housing, but there wasn’t certainty about when the money would come through or what exactly it would look like.

The Labour government has now topped it up not once but twice. It took the £2.6 billion allocation for this year and added £500 million, bringing it to £3.1 billion. Then it topped it up again, from £3.1 billion to £3.4 billion. These are really positive signals.

Ahead of the announcement of a new 5-year plan—it could be £3.4 billion a year, although I don’t know—the day before Vistry reported, the UK government came out and said it was going to provide an additional £2 billion of funding and get it out the door immediately.

Even in the last 72 hours, I’m hearing from our channel checks that the government is telling everyone it wants this money out the door in April. An additional £2 billion of funding is massive, and it can be leveraged 3 to 1. Vistry’s numbers for this year do not include that incremental £2 billion of affordable-housing spending. It was too close to the reporting date; they had already set their budgets and prepared the press release.

We know PRS sales are running very well. We know open-market sales are running very well. The only thing that has been lagging is affordable housing, and our view at David Capital is that you’re going to see a massive catch-up here.

I think the market has missed this. The market has totally gotten it wrong. Vistry is positioned to deliver beats and raises through the rest of this year on the back of this significant bolus of affordable-housing spending that just came through from the Labour government.

One last point on the Labour government: It has been much better than even I had anticipated for what Vistry is doing. It has made the housing sector, construction, infrastructure, and building a central part of the government’s program to juice GDP.

When you look at the GDP forecast the Labour government has come out with, the primary driver of accelerating GDP growth over the next 5 years—so that it can get to a balanced budget and everything else—is more construction and more building. This is central to the next 5 years of UK government policy.

The Labour government has instituted mandatory housing targets, essentially forcing local authorities across the country to meet minimum housebuilding targets so that the government can reach 1.5 million new homes over the next 5 years. That would be 300,000 homes a year. The UK built something like 215,000 homes this past year, and because you can’t immediately increase production to 300,000, that means years 4 and 5 will probably require 350,000 homes a year to make up for years 1 and 2.

That would be an increase of as much as 50% over the course of the Labour government. Even if they don’t hit those targets, it’s still a massive increase.

They’ve changed planning approvals from a default “no” answer on brownfield land to a default “yes” answer. Automatically, brownfield regeneration—which is what Vistry does—now has a default “yes” answer from planning authorities.

They’ve gotten rid of environmental mandates. There’s a famous story in the UK about a highway they were building where there was an endangered newt. They ended up spending £100 million building a tunnel around where the newt was, and it received a lot of press. The Labour government is saying, “We’re not going to spend £100 million on a 50-foot tunnel to go around newts anymore.”

Labour has launched a new towns policy to build whole new towns where none existed before. It has streamlined the planning process, hired additional planning employees to accelerate the approval process, allocated £600 million for skilled-labor training, and reduced the requirements on banks for loan-to-value ratios on mortgages.

If you try to get a mortgage right now in the UK, it’s really hard to get one with anything more attractive than a 25% down payment—literally a 75% LTV. That’s totally unnecessary. You can do loans at 85% or 90% LTV and be well protected. It looks like that’s where Labour’s policy is heading.

On top of all that, Labour has been openly talking about bringing back a program called Help to Buy, which was a major driver of demand, especially for first-time buyers. There are no guarantees that it happens, but it would be a major positive shock to demand if they do it.

When you look at all of these things, Vistry is now trading at a much lower share price, with much more certainty around the profitability of the Partnerships business and with the company much closer to becoming a pure-play Partnerships business. In the meantime, it has bought back millions and millions of shares.

The negative is that the company now has to prove it. We’ve had back-to-back announcements with no profit warnings, but the announcements since then have been good. The company is now in the process of rebuilding its credibility.

The reality is that this stock is trading at a lower price, with more certainty that our thesis is going to be right.

I love hearing that the Labour government is taking a YIMBY approach to building. I wish Manhattan had a similar approach. I’m thinking about leaving Manhattan, and one of the reasons is that the rent is so high. But that’s neither here nor there.

Let me ask about the medium-term targets. You’ve got all these great tailwinds, and everything seems lined up. The headwinds were real, but they’ve been dealt with. A lot of them were self-inflicted, and a lot of them were in the legacy business. I don’t think they were macro, aside from the reduction in affordable-housing spending during the little air pocket we went through, which is now essentially over.

They say they’re still committed to the medium-term targets: 40% return on capital employed and everything else. But they’re no longer giving a timeline for when they’ll hit them. It’s now some indefinite point in the future.

I understand management’s thinking. Maybe they’re saying they never gave a timeline at the beginning. But when I hear that, I think, “You’ve got short-term headwinds, all of this accelerating momentum is coming, and yet you’re extending the timeline for hitting the medium-term targets.”

What do you make of that?

They never gave a specific timeline. When I hear “medium-term target,” I’m thinking 3 to 5 years, so maybe I was misinterpreting it. They said the timeline is extended, but let’s say they extended it by a year. I think there’s good reason for that.

It’s the South division. They’ve had to pause growth in the South division for a year while they got their arms around the issues and fixed them. To the extent that there is any delay, I think it’s not coming from the other 5 divisions; it’s coming just from the South division. They’re getting it in order so that they can reaccelerate growth there.

The quote was, “We’ve simply removed the timescale.” They never had one at the beginning, and that’s fine. But they’re going to get there.

When you look at the numbers right now, the company just did £360 million of EBIT this past year. In 2024, it did £360 million of EBIT. It is guiding to a notable step-up in operating profit in 2025. I don’t know what that number will be, but it could easily be £400 million or more.

I think it’s going to accelerate as the year goes on. The company was very clear that a lot of legacy projects, including legacy housebuilding projects, are rolling off in the first half of the year and being replaced by much higher-margin projects in the second half. That should continue going forward.

In the second half of the year, you’re going to reset the profitability base of the company at the same time that you’re seeing this bolus of spending come through from affordable housing. That affordable-housing spending was not included in the company’s guidance.

I think there’s a clear path to operating profit north of £400 million, clearly on the way to £500 million or £600 million of operating profit within the next couple of years, alongside a freshly pure-play Partnerships business.

When you look historically at multiples for Partnerships businesses and housebuilding businesses, housebuilding companies have traded at about 1.5 times book value. Partnerships businesses have transacted anywhere from 5 to 7 times book value. Right now, Vistry is trading at 0.8 times book value.

Looking at an earnings multiple, Partnerships businesses have historically transacted at 12 to 13 times EBIT. Let’s say Vistry does £400 million or more of operating profit this year. You’re talking about a business trading at 5 times EBIT on this year’s numbers and 2.5 times EBIT on the medium-term target, versus transactions at 12 to 13 times EBIT.

It’s just not the right valuation. The upside potential is significant, and the company is buying back shares every day at attractive prices. The issues are behind the company. There have been no more writedowns for months, they have their arms around housebuilding, and the business is accelerating as it becomes a pure-play Partnerships business.

The margins were going to inflect in the second half of the year anyway. Now you have this affordable-housing spending on top of it. I think people have missed the crux of it: This business is accelerating, and a one-off issue in its legacy wind-down business is overshadowing what I think is a wonderful crown-jewel asset that is going to be the entire business very soon.

Let me ask 2 questions on the debt balance. I don’t think this is about getting hung up on accounting. There’s a nice story here: accelerating momentum, things to believe in, and a lot of potential. But I think people are getting hung up on the debt guidance because they’re gun-shy with the company right now.

They guided that the FY 2025 debt balance would end lower than the FY 2023 balance, if I remember correctly. I had a lot of people reach out to me. One person humorously said, “The math isn’t mathing.” A lot of people are struggling with the guidance on the debt balance. I’d love to hear how you make sense of it.

This is a low-debt company. It just doesn’t have very much debt. We’re talking about a business with under £200 million—about £180 million—of net debt at year-end, and it did more than twice that in operating profit. I’m not even talking about EBIT; I’m talking about operating profit.

You can look at the debt balance another way. What is the average net debt over the course of the year, measured on a daily or monthly basis? That would be higher because the company gets a big cash inflow at the end of the year.

Even if you were to say that the average daily net-debt balance is £500 million, you’re still talking about a business that, if it does more than £400 million of operating profit this year, is trading at not much above 1 times net debt to EBIT. That is not a high debt balance. It’s a very manageable, moderate debt balance.

I think people struggle because housebuilding companies run with net cash. The reason is that they’re so asset-heavy. If you run into a situation where the market stops and you need capital, you can’t get it because all of your capital is tied up in land and housebuilding projects. Your asset turns are so low—you might have an asset turn of under 1 time a year.

A Partnerships business has much higher asset turns. You might have 3 times asset turns, and it’s a very different set of financial conditions. Because you have much readier access to capital, the Partnerships business is consistently producing capital, and you have such high asset turns, you can run at a modest net-debt position.

One times net debt, or close enough to zero times net debt, on a year-end balance is manageable. I think of it as a red flag if it goes above 3 times net debt to EBIT. We’re nowhere close to that here.

I really like that they’re breaking out the average daily debt balance. I got a lot of questions from people about not just the year-end debt balance but how it fluctuates during the year. You get cash at the end, so I like that they’re saying they’ll give you the average debt balance. That way, they’re not playing games by saying, “We ran with £4 billion of debt for most of the month, paid it down on the last day, and then borrowed it back.”

I think the transparency is good.

Transparency is good, but this is not a levered business. It has a very modest amount of debt, and it’s easily manageable. Sometimes housebuilding analysts struggle with it because they’re used to businesses that always run with net cash.

During the financial crisis in 2008, the hedge fund I was at was short all of these companies. We were short the mortgage lenders, and we watched housebuilders go bankrupt and collapse into each other’s arms. I know what that looks like.

Back then, traditional housebuilding businesses were levered. Now they run with net cash, and that’s a much smarter thing to do. But that’s not the case for a Partnerships business. It’s a different model with different characteristics, and it requires a different financial profile.

One more thing on the debt. This might be very British of them. I’ve seen this at a few British companies I follow. IWG is one that comes to mind. They say, “Our franchise business is taking off. We’re about to experience a real acceleration in cash flow because franchises are asset-light. We can’t wait to buy back stock, but we must bring net leverage down to 1 time before we can really lever this up and start buying back shares.”

I say that because Vistry is saying there’s accelerating momentum, things are getting better, and the Labour government’s affordable-housing budget is accelerating. We’re going to see accelerating momentum in the second half of the year and especially into 2026.

Then they say they’re going to end the year with a debt balance lower than they had in FY 2023. In 2024, they bought back £170 million of stock, and this year they’re going to buy back £92 million through the end of the year, on top of the £38 million they’ve already done. That’s £130 million.

What I’m hearing is accelerating momentum and things getting better, but at the same time they’re going to pay down debt and reduce their share repurchases while the stock price is lower. I don’t know if that’s just very British of them or if there’s something else going on. I understand that companies need to run with a margin of safety, but I’d rather see them leaning into it. Do you see what I’m saying?

Remember that this company, like all companies, has a lot of different audiences to appeal to. One of those audiences is its customers, which are primarily local governments, nonprofits, and government authorities.

You don’t want to spook those customers. It’s easy to say, “We’re going to have less net debt a year from now than we have today.” That gives those partners a lot of comfort, so I don’t blame the company for saying it.

What that gives them, though, is a lot of wiggle room. If the business accelerates the way I think it will as all of this affordable-housing spending comes through—and after last year—you can bet that Vistry did not guide aggressively for this year. They’ve set expectations as low as they can so they can make sure they do not issue another profit warning.

This is a beat-and-raise story from here on out. They are absolutely not having another hiccup here. They’re making sure of that.

That opens the door to expanding the buyback. If cash flows come in better and all they’ve guided to is net debt lower than the prior year, every bit of incremental profit can go to incremental buybacks.

On the call, the company said, “We’ll assess where things are as the year progresses. If our cash flows are coming in where we expect them to be, we can evaluate more share buybacks.” It’s on the table.

You framed it one way, but I’ve toyed around with this investment in a slightly different way. At today’s prices, you’re paying below tangible book value for the company. You could literally liquidate the whole company and get more than your money back.

Obviously, you would not want to do that. It’s too good a business to liquidate. But it shows how crazy the multiple is right now.

Part of me says that if you buy this and Adam is right, then Partnerships is a great business, cash flow starts rolling in, and all of the working capital they’re talking about drawing down from housebuilding is released. You win massively.

The tail is that it’s trading below book value. Maybe we’re wrong on Partnerships, but it’s trading below book value, so you have this firm asset protection. I generally like having asset protection plus capital-multiple-compounder upside.

Is that the right way to think about the risk-reward here? I know that’s a softball question, but I’d love it if you told me no—if there’s something about the tangible book value that’s in question or something else. I think that’s probably what the market is saying because of the writedown.

That’s an appropriate framing, but it’s not necessarily the framing I would use. In my experience as an investor—and I preach this a little bit—everybody has to figure out the approach that works for them.

There isn’t an approach that works for everyone. For some people it’s growth investing; for some it’s quality investing; for some it’s dumpster diving. There are lots of different ways to get to heaven in investing. Just because you do it one way and I do it a different way doesn’t mean both of us can’t get to heaven. We can. That’s the beauty of how it works.

For me, Value Plus a Catalyst has made a lot of sense throughout my career and investment track record. I’ve found that margins of safety are better when they’re cash-flow-based than when they’re asset-based.

Yes, to a certain degree, it’s a margin of safety if you can liquidate the company and get more than your dollar back. But is Vistry going to liquidate? No. Vistry is not going to liquidate anytime soon. The stock is going to move based on cash flows.

If you keep your eye on the ball and focus on cash flows more than anything else, I think that’s how you find stocks that are going to perform well. My thesis here is not about the asset value. It’s not unreasonable to say that you’re buying it below book value, but what gets me more excited is the idea that free cash flow and cash flow overall are going up.

Cash flow is going up as the business transitions to a pure-play Partnerships company, and it’s going up because of the tailwinds from affordable-housing spending. I wouldn’t focus too much on the asset value. I’d focus more on the cash.

I love how you framed that. You’re right: I’ve had more success and conviction with investments where I could develop an asset-based margin of safety with cash-flow kickers. That’s why the below-book-value framing appeals to me.

One of the big things with investing is finding investments that fit your style. You’re going to research them better, and you’re going to have a better ability to build conviction and think through everything. I really like how you framed that.

All investing is opportunity cost. Technically, we should be comparing an investment in Vistry with buying a restaurant in Istanbul or with everything else on the planet. But it can be useful to compare it with direct peers.

Several people mentioned that there are other homebuilders listed in London that focus on the UK and are trading below book value. There are also homebuilders in the US that have become pretty cheap after the craziness in March. Lennar is getting close to 1.1 times book, and I think it’s pretty capital-light after spinning off Millrose. I haven’t done a ton of work there, but there are several other homebuilders trading at or below tangible book value in the US.

I think I know your answer, but I’d love to touch on this briefly. It’s no longer just that Vistry trades cheaply; a lot of the industry trades cheaply. Why is Vistry the better opportunity relative to those direct, pure-play comparisons?

Inflation is well anchored and under control, and I think interest rates are likely to go down over time. That tailwind is a separate discussion, but as you look at real-time data—whether it’s shelter data, car data, or even the 2 primary components that go into CPI—there’s a catch-down happening.

It’s very hard for me to do any math that shows inflation getting out of control because shelter is weighing on the numbers and mean-reverting back to where it has been more recently. In the US, that means essentially no growth in shelter costs. As that happens, it should be a tailwind for any interest-rate-sensitive company, including all of the companies you mentioned.

Am I negative on the sector or on any of those companies? No. I just think there’s something company-specific about Vistry that isn’t sector-driven. You have a wonderful business that is far more valuable than any of these traditional housebuilders, and it’s trading at the same multiple—or even below the multiple—of those housebuilders.

You’re going to have what Charlie Munger called the “lollapalooza” scenario. What is the best investment you can make? It’s where profits go up and the multiple goes up. It’s where you have both. It’s not just the multiple, and it’s not just earnings.

Vistry is positioned to substantially grow its earnings power over the coming quarters and years as it becomes a pure-play Partnerships business, as this bolus of funding comes through, and as it exits the lower-return housebuilding projects.

Profits are going up, and the Partnerships business is going to become 100% of the company. That should mean the multiple goes up. When you’re starting at the same multiple as other housebuilders—or even lower than other housebuilders—the multiple re-rating could be really significant.

You could go from under book value to trading at 3, 4, 5, or 6 times book value. That’s entirely possible on top of the profitability step-up.

Would I buy Barratt Redrow, Persimmon, or Berkeley Group in the UK? There’s nothing wrong with those businesses. They’re all fine businesses. But why buy those when I can buy the best business in the sector at a lower valuation, just as it’s about to hit a profit inflection? To me, it’s pretty clear which one I would rather own.

We’re running quite long. This was supposed to be a 30-minute update, and we’re over an hour at this point, so I’ll make this a softball.

I’m looking through my notes, and the one thing I didn’t hit was the transition to Partnerships. I thought net assets were going to come down, which would release a lot of cash flow. But if I look at the chart from the earnings release, tangible net assets were £2.15 billion in 2023 and £2.22 billion in 2024.

I suspect the reason is the delayed sales at the end of the year that you talked about earlier. Am I wrong?

They have come down a little bit since the transition started, but the reality is 2 things. The first is exactly what you said: They had to defer some land and project sales. If those had gone through, the net asset value and capital employed in the business would have been lower.

The other point is that the company has said there is a real opportunity to reduce work in progress, or WIP. It quantified that opportunity at £200 million. The company has reiterated that capital employed is going to come down to £2 billion.

Right now, total capital employed is about £2.5 billion, down from between £2.7 billion and £2.8 billion when they started the transition to a pure-play Partnerships business.

If you accelerate the exit from housebuilding, which appears to be happening over the last 90 days; pull some money out of WIP; and continue to build out and exit housebuilding projects—finishing the projects without replacing them with new housebuilding projects—you put all of that together and I feel very good that capital employed in this business will drop to £2 billion or just below £2 billion 2 or 3 years from now.

That’s also how the math checks out. If you do a 40% ROCE on £2 billion of capital employed, that’s how you get to £800 million of operating profit.

This is, at this point, an under-£2 billion market-cap company. Whether you look at tangible net assets or capital employed, dropping from roughly £2.2 billion or £2.5 billion to £2 billion would free up a significant amount of cash relative to the market cap.

Adam, this has been great. My notes were extensive, and I think we hit everything in them. Is there anything we should have covered that we missed, or anything you want to leave listeners with as we wrap up?

It’s good to have conversations like this because no one bats 1,000 in investing. You do the best you can, but no one bats 1,000. Sometimes it feels like nobody bats .250 either.

All you can do is go back to first principles, be fact-based and evidence-based, look at the data, do your homework, and try to make the best decision you can.

When you look at Vistry, I think it’s important to stay focused on the thesis. Partnerships is a great business. The company is rapidly becoming a Partnerships company, even faster than it was before. You can see it every day because the company has to file it: Vistry is buying back shares every day at really attractive prices.

I don’t think I’m the only one who has noticed. I don’t know if you saw it, but earlier today there was a filing from Anson Funds, a well-respected hedge fund in Toronto. It just made a significant addition to its position in Vistry and became a filer.

Smart money is noticing this. Over time, I think shareholders will be rewarded here. At least, that’s our view, and that’s where our money is.

March 2025: The most popular request I’ve gotten was an update on Vistry. I’m looking forward to March 2026, when we can say, “2025 was great. Everything they said and more happened, and the buyback started.” It’ll be a 5-minute podcast.

Adam Patinkin of David Capital, this has been awesome. Thanks so much for coming on twice this week. I’m looking forward to having you on for the fourth time.

Great. Thanks for having me.