Enviva (EVA) is a biomass company that manufacturers wood pellets from residual wood left over from harvesting of trees for telephone poles, furniture, etc. The company exports these wood pellets to the United Kingdom, Europe and Japan for use in power plants that can burn these wood pellets instead of using coal.
The company was the the subject of a short report by Blue Orca Capital that you can read here and the company responded by issuing a press release here. I am currently in the process of reading the book Dead Companies Walking by long/short fund manager Scott Fearon. Having seen this drama play out many times before, I agree with Fearon that companies that are doing well can for the most part ignore short sellers and continue executing on their business.
While I cannot comment on Blue Orca’s claim that Enviva is an ESG farce and that they are sourcing the wood for their pellets not just from residual wood but from clear cutting forests, many of the points they make about the company’s financials and dividend bear out. Reviewing the company’s financials, it is clear that the company is losing money, has negative free cash flow, continues to grow its long-term debt and yet chooses to pay a large dividend. Revenue growth was impressive for several years but growth appears to have tapered off in recent quarters.
It was interesting to note that the largest insider purchase of Enviva was by Jeffrey Ubben, the Co-Founder and Chairman of San Francisco based activist firm ValueAct Capital. He resigned from the CEO role at ValueAct in 2020 and now runs a firm called Inclusive Capital Partners that is “in pursuit of a healthy planet and the health of its inhabitants”. The fact that Inclusive Capital Partners was an early investor in electric car company Nikola (NKLA) should given us pause. This cluster of insider purchases after a 23% drop in Enviva does not give me enough confidence to consider it as a long investment, especially in a market that appears to have lost patience for money losing companies.
The insider purchase that stood out the most for me was the one by the CEO of small-cap multifamily REIT BRT Apartments (BRT). The REIT trades for 14 times trailing adjusted FFO, has a dividend yield of 4.94%, a payout ratio of 68% based on AFFO of $1.48 during the last four quarters and an occupancy rate in excess of 95%. While this is not the time to buy REITs, BRT Apartments along with American Assets Trust (AAT) will be top contenders when I am ready to start buying REITs again.