A Real Asset Ownership Marketplace for Family Offices
Mr.Chad Brownstein CEO, Rocky Mountain Resources
In an interview led by Sumehr Sondhi of MarketCurrents, Chad Brownstein, CEO, Rocky Mountain Resources (who Bloomberg television called the “Shale Pioneer” for his findings in the Niobrara Shale), talks about the advantages for family offices in real asset ownership and investing in natural resources.
Can you provide us with an overview and mission of RMR?
Rocky Mountain Resources is dedicated to natural resource investing. Our focus is the rocky mountain region of the western United States, with a business model to discover finance and operate industrial assets that include industrial minerals, aggregates, and construction products, as well as services to the end markets. We believe that a successful industrial operator vertically integrates assets to create the strongest and most consistent margins, thus generating long term extended value through the chain of upstream, midstream and downstream integration. Aggregate prices have increased in 70 out of the last 75 years, it’s a formidable marketplace.
Your focus is the Colorado market. Can you tell us more about the specificity of the region and why you chose it?
The rocky mountain region in the U.S. is centered around the state of Colorado and includes all the surrounding states that are contiguous to Colorado. Denver is arguably the fastest growing, largest metropolitan city in the country, with an extreme depth of residential and commercial projects, $9 billion of unmet infrastructure demands and a highly diverse economy. For instance, in the 70s the city was oil reliant, in the 80s it relied on real estate, and in the 90s it was telecom reliant. Colorado is a reflection of the new economy in today’s America, which is a contribution of 15-20% from each of these industries, including agriculture and marijuana businesses. It is regarded as among the top 3 places to live in America. The job growth is forecasted to be almost 3%, while building permits have gone up almost 30%. Roughly, in one segment of downtown Denver, there is currently over $3 billion of primarily commercial construction. There are 4 meaningful cities in concentric circles that are within 10 miles of downtown Denver. With 4 sub cities around, there is billions of dollars’ worth of construction, which is a combination of residential, commercial and government. Not only does Denver have a diverse market place of communities, but there are also multi-billion dollar projects being built, including the National Western Stock Show Complex(livestock), and replacing the interstate-70. Even with 12,000 home starts projected in 2017, which is up another 20%, it is still at least at 50 % below the average home starts in 1973. There is a very deep market and there is managed growth here, unlike a periodic boom and bust. Colorado never faced a deep housing crisis when the rest of the country did, in 2009, because there’s so much depth in employment, wages and lifestyle. Colorado was at a 50% discount from the rest of the country related to the crisis and has consistently displayed moderated growth, as opposed to expanded growth.
You have attracted a lot of interest from family offices and they currently make up a good part of your investor base. Can you elaborate on why this would be an attractive proposition for them?
The marketplace for family offices is moving towards real asset ownership. The growth of the FO market started out with placing capital in the wire houses, then with hedge and private equity funds, and finally evolved into direct investments. Rocky Mountain Resources allows FOs to make direct investments in a cash flowing American industrial asset that has got long term potential with the resource life of the different mining assets. It allows achievement of either a dividend yield or a meaningful upside through the development of the asset over time. Looking at the history of FOs in the country, they were pioneers in the natural resources marketplace and much of the wealth was driven by the material on U.S soil. We provide a long tail of opportunity by buying assets that are sell regionally through distribution networks. It’s dollar in dollar out. If you’re looking for an emerging market play, the U.S. natural resource market is as good a real asset as you can own directly. The average price of aggregates in the USA is at about $8.50 a ton. In 2015, there were 2.5 billion tonnes sold at that price. We provide a vast market place wherein if you own the asset, distribution, and retail, you’ve got a nice value chain that will maintain a consistent margin for the investor.
In terms of returns, would you define this as a patient investment or one that generates quick returns?
Rocky Mountain Resources views returns as cash on cash measure, based on the old model of dollar in dollar out. For every asset dollar we spend, we want 20-30% cash on cash yield. Our policy is ‘money in year 0 and money out year 1’. We recognize that to get this cash on cash yield, we have to provide a cash flowing asset. Although we are interested in projects that have outsized returns on a risk adjusted basis, we have the expertise to deliver cash on cash in the mid-20s, which is significantly higher than most fixed assets, the average of which is 8-9%. Our added advantage with our assets is that they are not marketed, they are not of the size and scope for private equity interest. Because of our diversified platform we are able to tuck in these assets and create outside value through our regional and operational capabilities. The industry trends aggregate prices have increased in 70 out of the last 75 years. The types of historical capabilities, from a price increase standpoint, make this a solid investment.
How would a family office get involved – what is the process?
We have family offices that get involved in 2 ways: either by buying securities in a company that we own and operate, or by buying individual pieces of assets directly, if they have larger scale and scope. We are also open to a co-investment on a direct asset basis with the right strategic family relationships.
How guarded are you in terms of approaching larger institutional investors?
Interestingly, we have had such an inflow of interest from large institutions ranging from mutual funds to pension funds. They are looking for very large opportunities and we continue to monitor them due to our leading reputation in the market. However, the larger acquisitions are a competitive market place and are usually agented by an investment bank. We like to buy off-marketed high yielding assets that is harder to do when the deal is bigger. Thus, Rocky Mountain Resources has created a niche in buying family-owned organizations.
Finally, what is the operative strategy that distinguishes RMR from conventional players in the industry?
We have a deep bench of operations that are embedded in the rocky mountain region culture, which has an extraordinary infrastructure in education and operation. The top universities in the region focus on mining and agriculture. There’s formal training that goes into the people we hire. We also have a large amount of air force academy graduates with a powerful engineering program. Our talent is educated locally and is empowered with a mining capability. Colorado has got a base of about 50 million aggregate tonnes a year spread out among ten companies, including us. There is a large pool of talent available to us.
Could you provide us with some background of the team at RMR?
Our team comes from the largest infrastructure oil and gas companies in the country. Our secret weapon network is our board of directors who come with an extraordinary amount of business experience. One of our members, Dr. Barry Munitz, was a vice chairman of Maxxam in the 80s– a pioneer in owning and operating natural resource assets from timber to aggregates. Additionally, we have Andy Peltz, who brings a depth of knowledge in the financial realm.
About Rocky Mountain Resources
Rocky Mountain Resource Holdings (“RMR”) is a limited liability company that acquires and develops natural resource assets. RMR focuses on the identification, acquisition and monetization of unique natural resource assets that require specialized operating capabilities. Target assets include oil and gas reserves; agribusinesses; energy infrastructure; and industrial minerals and chemicals. RMR seeks to utilize its differentiated operational capabilities to outperform conventional operators through diverse markets. Principals of RMR have been active natural resource investors and operators for a combined 75 years and have worked together for over a decade. The firm has offices in Los Angeles and Denver.