A DOJ Probe Into Elon's Tweets Could Spell Yet More Trouble for Tesla

The Department of Justice has reportedly opened a criminal fraud investigation into Tesla, after CEO Elon Musk announced on Twitter last month that he was considering taking the automaker private and had “funding secured” to do so. Musk later revealed that the funding required to go private at $420 per share, which he had believed would come mostly from Saudi Arabia’s sovereign wealth fund, wasn’t exactly locked down. Seventeen days after that initial tweet, in late August, Tesla declared it would remain a public company after all—but the backtracking hasn’t stemmed the fallout from the incident. Bloomberg’s report of the probe sent Tesla shares down nearly 10 percent early this morning. (Stocks ultimately closed down 3 percent on Tuesday evening.)

While the Justice Department’s probe appears to be at a very early and not yet consequential phase, it’s yet another headache for Tesla and its embattled CEO—along with a reported Securities and Exchange Commission investigation and shareholder lawsuits over the same issue, a libel lawsuit filed against Musk by a man he accused of being a pedophile, and a stream of departures by high-level executives. Most crucially, it would add to ongoing questions about Tesla’s production capacity and profit margins as it works to ramp up the rollout of its Model 3 sedan.

In a statement, a Tesla spokesperson says the DOJ did send Tesla a voluntary request for documents and that the automaker has been cooperating. “We have not received a subpoena, a request for testimony, or any other formal process. We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received,” the statement said. A DOJ spokesperson declined to confirm or deny the existence of an investigation into Tesla.

The Securities and Exchange Commission is also reportedly looking into the “going private” statements and whether the “funding secured” tweet was materially false, or even an attempt to manipulate the company’s stock price. The Fox Business Network initially reported that the federal agency subpoenaed the electric carmaker in mid-August. Many SEC investigations take months or years and end without the agency bringing a civil suit or enforcement action.

If it’s true that the Justice Department has not issued Tesla any subpoenas, it likely indicates that the probe, reportedly being handled in San Francisco, remains in its early stages. “It’s something that happens at the very beginning of the process,” says Jay Dubow, a partner specializing in white-collar litigation at the law firm Pepper Hamilton. “It’s just nosing around.”

It’s common for issues to be investigated by both the Department of Justice and SEC, Dubow notes, because federal securities law violations can be prosecuted criminally or civilly. If federal investigators find that Musk purposely misled investors and the public to goose Tesla’s stock price, then he, the company, and/or other employees involved could face fines or penalties (like being forced to take time-outs from roles in the public company), or possibly even prison time, says Stephen Diamond, who studies securities law and corporate governance at the Santa Clara University School of Law.

“The SEC only has the ability to get monetary relief. The DOJ has the ability to put someone in jail,” Diamond says.

If both the SEC and DOJ find evidence of some sort of violation and decide to move forward with their investigations, the two packs of lawyers would share information, legal experts say. If the DOJ moves forward with its probe, it would impanel a grand jury and issue subpoenas, which could eventually lead to indictments. Again, it’s early. “There are a lot of facts we don’t know here,” says Dubow.

We do know, though, that Tesla has faced a barrage of bad news in recent months—steadily driving down the automaker’s stock price and pushing some shareholders to question Musk’s leadership as Tesla’s CEO and chairman.

On Monday, British diver and cave explorer Vernon Unsworth sued Musk for libel in a California district court. (The filing said another suit, this one to be pursued in the United Kingdom, will follow). The lawsuit comes two months after Musk called Unsworth “pedo guy” on Twitter, following an interview in which the Brit denigrated Musk’s attempt to build a mini-submarine that could rescue a group of Thai boys trapped in a cave. Though Musk later deleted and apologized for the tweet, he doubled down on the pedophilia claim a month later, claiming to BuzzFeed News that Unsworth was a “child rapist” who had married a 12-year-old while living in Thailand. The suit (which notes Unsworth is in a relationship with a 40-year-old woman) cites Musk’s tweets extensively and seeks more than $75,000 in compensatory damages.

However those cases turn out for Musk, the clearest determinant of his company’s near-term future will be Tesla’s quarterly earnings report in October, when the automaker will reveal how many cars it produced and sold in the third quarter of the year. The automaker finally hit its goal of making 5,000 Model 3 sedans a week at the end of the second quarter, a rate it hopes to sustain as it strives toward profitability.

The news of the DOJ’s preliminary investigation, though, compounds questions about whether Musk needs to divide his responsibilities as company chairman and CEO into two roles, or hire a number two to help him steer the electric automaker toward that goal—and whether the current corporate board is willing to make that hard call. “The reported DOJ investigation ramps up the concern about the current governance structure of the company,” says Diamond. “At minimum, it’s a cloud over Tesla.”


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Data Firms Team up to Prevent the Next Cambridge Analytica Scandal

A bipartisan group of political data firms are drafting a set of industry standards that they hope will prevent voter data from being misused like it was in 2016. The guidelines cover transparency, foreign influence in elections, responsible data sourcing and storage, and other measures meant to root out bad actors in the industry and help fend off security threats.

The conversations, which are being organized by Georgetown University’s Institute of Politics and Public Service, come at a time when data collection more broadly faces increased scrutiny from lawmakers and consumers. Ever since news broke this spring that the political firm Cambridge Analytica used an app to hoover up data on tens of millions of Americans and use it for political purposes, Facebook and other Silicon Valley tech giants have had to answer to Congress and their customers about their mass data collection operations. But the Georgetown group focuses specifically on the responsibilities of the companies that undergird some of the country’s biggest political campaigns. Among the firms participating in these discussions are Republican shops like DeepRoot Analytics, WPA Intelligence, and Targeted Victory, as well as Democratic firms, including Bully Pulpit Interactive, NGP VAN, and DSPolitical.

“These are the firms that power all of the elections in America, and so my hope was if you can get them in a room and get them to understand the importance of the data they’re using and to self-regulate, you could achieve a dramatic improvement on behalf of voters,” says Tim Sparapani, a fellow at the Georgetown Institute who is overseeing the group.

Sparapani served as Facebook’s first director of public policy from 2009 until 2011, after spending several years at the American Civil Liberties Union. A self-proclaimed privacy advocate, he has warned about the need for stricter oversight of data brokers for years. These are companies that collect, store, and analyze data about consumers for a variety of purposes. In the political world, that data can include basic information about how many times a person has voted, their party registration, and their donation record, but it can also include social media and commercial data that can help campaigns better understand who a given person is and target them with political advertising.

The data broker industry remains largely unregulated, both inside and outside politics. The Federal Trade Commission has urged Congress to regulate data brokers since at least 2012, but nothing has come of it so far. In June, Vermont became the first state to pass a data broker law, which goes into effect in January.

The Georgetown group first met last fall, months before Cambridge Analytica began making headlines. At the time, the industry’s primary concern was the risk of a data breach or a hack at the hands of a foreign threat: In the summer of 2017, a cybersecurity firm discovered DeepRoot Analytics’ entire trove of 198 million voter records was exposed in a misconfigured database, constituting the largest known voter data leak in history. Brent McGoldrick, CEO of DeepRoot, says the leak was a shock to the system.

“You just have a different mindset coming out of something like that, where you start to think differently about everything from security to privacy to the data you have and the perceptions of it,” he says.

Coupled with the intelligence community warnings about Russia and other foreign actors’ continued attacks on the American electoral system, McGoldrick says, it seemed well past time for his company and its competitors on both sides of the aisle to talk about protecting themselves and the people whose data they hold.

McGoldrick brought up the idea with Mo Elleithee, a former Democratic National Committee spokesperson who founded Georgetown’s Institute of Politics and Public Service in 2015. Together, they tapped Sparapani to oversee the effort. “We understand that in order to move the ball forward on privacy and security issues, we’re going to have to hear from people who, maybe we don’t like hearing what they have to say,” McGoldrick says. When the Cambridge Analytica story broke months later, he says, it only underscored the need for this kind of work.

The group, which has yet to be named, has begun circulating a set of guiding principles among data privacy advocates and the companies themselves to see what the participants are willing to agree to. While the final list is still being ironed out, Sparapani described a number of commitments for which there is broad-based support. One proposal would require the companies involved to alert one another and the proper government officials of any attempts by a foreign actor to influence the election. Another would have the companies vow to only use their tools to support people’s right to vote, not to suppress it. The group is working on a standard that would guarantee some transparency for consumers and educate them about how their data is being used. They’re also working on security standards around data storage, as well as language that they would commit to include in any contract with a potential client.

“It would make contractually binding not only their practices, but their clients’,” Sparapani says.

The hope is that these guidelines would act as a sort of seal of approval for political campaigns. “If firms have publicly stated they’re following these guidelines, hopefully candidates, committees, and causes will look for this when they’re trying to hire someone,” says Mark Jablonowski, DSPolitical’s chief technology officer, who has been involved in the initiative since its early days.

Of course, getting dozens of political opponents and business competitors who have never been regulated before to agree to any set of standard practices is no easy task. “Everyone’s got to have everything vetted through their lawyers,” McGoldrick says. “The last thing a lawyer likes is you voluntarily saying something you don’t have to say.”

“Sadly over the last few cycles there have been bad actors on both sides working in multiple campaigns,” says Chris Wilson, CEO of WPAIntelligence, which worked briefly with Cambridge Analytica during senator Ted Cruz’s 2016 presidential campaign. “I believe all in our industry, WPAi included, are hopeful that a set of standards will allow us, and the public, to be cognizant of the origins of data and its ultimate use.”

Until the details are finalized, it’s impossible to assess the effectiveness of this collaborative effort. As with any discussion around data privacy, it’s the fine print that matters. In California, where the governor recently signed a landmark privacy bill, lobbying groups have already begun picking apart nearly every sentence to better align with their interests.

Still, it is worth asking how much good this kind of work can ever do. These are well-known, well-regarded players in the industry committing themselves to a certain set of values. But what about everyone else? What about the people who are intending to deceive? Without substantive regulation, there’s nothing stopping anyone from harvesting data for nefarious purposes with impunity.

Then there’s the fact that these proposed guidelines don’t give consumers any real power. While other data privacy laws like the one that passed in California or Europe’s General Data Protection Regulation give people the ability to control what data is collected and see who it’s shared with, these proposed guidelines can’t promise the same.

Elleithee stresses that this is just the first step. Once the companies have all agreed to a set of standards, the Institute plans to convene a larger group from the broader tech and privacy communities. “As the conversation progresses, we want to bring more voices in,” he says.

Whatever the group eventually proposes, Sparapani says he fully expects pushback from privacy advocates. Even he has concerns. “If it were me, and I was critiquing this document, I could point out a dozen things I’d have the companies commit to,” he says. “In the room, they get an earful from me every time we meet, where I find this to be insufficient.”

But he also believes that waiting on the perfect solution that satisfies all parties will take more time than the country can afford. “Is it a fulsome commitment that I have been pushing for as an advocate? No. But does it begin to push companies to raise their standards to meet government and consumer expectations? Yes. And that’s a good thing.”


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BMW’s Vision iNEXT SUV Concept Sets a New, Electric Course

Changing notions of what customers want from cars have pushed automakers to do plenty of weird things. They’ve unmoored the driver’s seat from the left side of the car, revived the rotary engine, and turned windshields into screens. BMW, though, is most likely the first to put down carpeting in the cabin of a cargo jet.

Sitting on the tarmac at San Francisco International Airport’s cargo facility, the Lufthansa Boeing 777 has been converted into an unusually human-friendly vehicle. Along with the soft blue stuff underfoot, BMW has installed swanky, modern furniture throughout the cabin. The walls, floor, and ceiling of one bit are decked out in screens. And near the front sits the centerpiece of this flying showroom, which has already passed through Munich and New York and will soon set off for Beijing: the Vision iNEXT, a concept car BMW created to lay out its bet on the future.

“This is not just a show car,” says Klaus Fröhlich, a member of BMW’s board and the company’s soothsaying spokesperson, with the SUV, an early view at BMW’s next generation of forward-looking vehicles, behind him. “It’s a promise. In 2021, you will get it.”

Something like it, anyway.

Along with the rest of the auto industry, BMW has been scrambling to prepare itself for a future in which fewer people own and drive their own vehicles. It has dabbled in car sharing and launched an Uber competitor in Seattle. It’s researching autonomous technology and even talks about wild ways to encourage (electric) cycling. And because there’s no doubt that building and selling cars will remain the core of its business for decades to come, it’s adjusting there, too.

BMW has put some muscle into developing hybrid, plug-in hybrid, and fully electric models and is on track to sell 140,000 of them in 2018 (it moves about 2 million cars a year). But putting gasoline and diesel in the rearview is an early step on a long and perilous journey. “For us, electromobility is the new normal, it’s understood,” Fröhlich says. “Fine. Therefore, we take up the next challenge.”

So the iNEXT is fully electric, of course, and quite capable of driving itself, though a human can still take the wheel. (We’re far enough into concept-land that you shouldn’t expect any numbers on performance, range, or price.) From the outside, the baby SUV, about the size of BMW’s popular X5, looks roughly believable. The design team swapped the sideview mirrors for cameras that improve aerodynamics (a standard move on concepts, which European regulators have started allowing on production cars.) The narrow headlights resemble sideways apostrophes, and the bow-tie-shaped grille is clearly connected to BMW’s signature kidney design. The 24-inch wheels are likely a bit much for production, Fröhlich says, but otherwise “you will get what you see here.”

The backseat stretches from door to door, a jacquard-fabric-wrapped, sloping thing you could see the Little Mermaid hanging out on.

BMW

Tap the button to swing open the car’s suicide doors, though, and you get the hazier bit of the Vision iNEXT. The microsuede front seats don’t swivel around (an idea that has gone from daring to expected to trope in a few years’ worth of autonomous concepts), but they don’t look like conventional car seats, either. They seem to flow out of the wall, sit on aluminum legs, and don’t force you into looking straight ahead. (They will be a challenge for crash testing, Fröhlich admits, since airbags and crumple zones are designed to work for people sitting in particular positions.)

The backseat marks a new level of bönkers: The bench stretches from door to door, a sloping thing that invites you to curl up with a book, or whatever will entertain future you (your latest phone, presumably). It’s wrapped in blue-green jacquard cloth, a color BMW calls Enlightened Cloudburst and the sort of thing you could see the Little Mermaid hanging out on.

The controls for the two large screens mounted on the dashboard and the ceiling-mounted Intelligent Beam projector are not so much tucked away as hidden in plain sight: Thanks to integrated optic fibers and LEDs, the backseat and the walnut, coffee-table-like center console are themselves control pads. Want to hear your jams? Draw a little music note with your finger. Pinch to adjust the volume, swipe the change the song, and tap with three fingers to return to silence. BMW calls this “shy tech”—advanced but unobtrusive. “You decide where you want to have the interaction,” says UX design lead Olivier Pitrat. It’s a neat, if unnecessary, idea but far from ready for the real world. When someone asks Pitrat how it might handle spilled soda or a dog, he says, “That’s not a use case we have in the concept car.”

So the freeform seats and butt-side controls are unlikely bets for a car you’ll see on the dealer lots, not in 2021, anyway. But Fröhlich insists that the principles of an interior focused on lounging in luxury will make their way onto the production line. And while he also insists that performance will remain important, the iNEXT’s little steering wheel, programmed to slide back and away from the human when the computer’s in charge, looks rather vestigial. This just might be the ultimate riding machine.


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Here's Why Valuation Determines Total Dividend Payments For Overvalued Stocks: Johnson & Johnson

Introduction

In my most recent article, found here, a reader made a comment where a question was asked that I believe deserved a good answer. The following excerpt of the comment really reached out to me because this person claims to have been asking this question for 5 years without receiving a good answer. Here is the excerpt:

“Again, someone please explain to me how valuation determines the future direction for dividend growth and total dividend payments for overvalued stocks. I’ve been asking this question for five years here on SA w/o a good answer. Nothing theoretical please – I want to see actual data.”

Consequently, I felt compelled to write this article because this question is highly representative of what I consider my current life’s work. I have been in the investment business since 1970, and over those many decades, I have always followed a strict valuation investment strategy. However, when I was younger, I applied valuation to growth stocks because my objective was to build as much wealth as possible. As I have matured, my objective has become more focused on protecting my wealth while simultaneously letting my money that I worked so hard for to start working for me. In simple terms, I evolved from a growth investor into a more conservative dividend growth investor.

Examining the Theoretical In Real-World Conditions

The comment cited above asked to see actual data and nothing theoretical. Personally, I think that is a fair request because for theoretical to have any real value, it must apply under real-world circumstances. On the other hand, for a hypothesis (theory) to be proven, it must first be clearly articulated and laid out. Therefore, what follows is the theory, or perhaps more appropriately, the rationale as to why valuation has a material impact on total dividend payments.

The first and most important point about dividends are that they are paid on the number of shares owned. Consequently, regardless of what happens to the share price of the dividend stock once it’s purchased, the dividend amount is calculated based on the number of shares owned. Therefore, even if the stock price falls dramatically, your dividend income will remain the same and vice versa.

Consistent with this first point is the reality that lower valuation is simultaneously associated with lower stock prices – ceteris paribus. Therefore, when you buy a given stock at a lower valuation, you are initially purchasing more shares than had you bought it at a higher valuation. In this regard, price and valuation are related, but they are not the same. To be clear, a higher price earnings ratio related to a given level of earnings results in a higher price than a lower price earnings ratio related to the same level of earnings.

Moreover, it is true that the specific growth rate of the dividend itself (the rate of change of growth from one year to the next) will be identical regardless of valuation. However, the starting yield, which is often referred to as yield on cost, will be higher at a lower valuation than at a higher valuation. Consequently, your future yield will be higher, but more importantly so will your future level of cumulative dividends received.

The comment referenced in my introduction was presented and asked in two different yet similar ways. Here is a second excerpt, which was originally stated in the first two paragraphs of the comment:

“*** re: NEE “…there are some who think they can redeploy the net $12,000 into a better investment that will grow even more over the next 5 years. ***

In order to define “better”, the question that needs to be answered is what is the goal of the investment? If the goal is dividend growth and total dividend payments over a defined time period, someone needs to explain how the “elevated” valuation will affect future dividend growth and total dividend payments.”

I offer this second excerpt in order to establish a clarification. If the question relates to the current investment, the “elevated valuation” will not change the future dividend growth nor the total payments of that investment. However, if the “$12,000” is invested into a lower valued company that offers a higher current yield than the original investment is currently offering, then the future dividend payments will be significantly higher. On the other hand, the dividend growth of either the original or the new investment will be directly proportionate to the amount of operating growth and subsequently dividend growth rate that each individual investment would achieve.

The following screenshots cover purchasing Johnson & Johnson (NYSE:JNJ) over two historical 10-year time frames. With the first, Johnson & Johnson is purchased when valuation was excessive, and the second when Johnson & Johnson was purchased when valuation makes sense. Both historical earnings and price correlated graphs, as well as the associated performance graphs, tell the story. However, to really receive a clear explanation of how and why this works, I suggest the reader watch the analyze out loud video covering the same time frames that follows.

Johnson & Johnson: Purchased on December 31, 1998 Overvalued P/E ratio 38.4

Johnson & Johnson Purchased December 31, 2008 Undervalued P/E Ratio 13.1

FAST Graphs Analyze out Loud Video: Johnson & Johnson 10 Yr Results Overvalued Versus Undervalued

In the following analyze out loud video, I’m going to clearly illustrate how valuation does have a material impact on the dividend income. As an aside, valuation not only has a material impact on dividend income, it also has a major impact on total return. As a clue to what you will see in the video, when Johnson & Johnson was purchased when it was overvalued was also during a time when its earnings growth was over 13%. In contrast, when Johnson & Johnson was purchased when it was undervalued was during a time when its earnings growth rate was only 6% or half as fast. Nevertheless, Johnson & Johnson delivered more dividend income and a higher total return thanks to attractive valuation even though its growth rate was much lower.

Summary and Conclusions

In summary, and with all things remaining equal, you can increase your income and your total return by selling an overvalued dividend growth stock and reinvesting into a similar quality undervalued dividend growth stock. It’s important to remember that in both cases, the forecast of future growth is equally as tenuous. In other words, this will not work out if the original investment continues to grow while the new investment falters. Therefore, the concept of similar quality is essential, as well as the predictability of future growth.

Consequently, I do not suggest that investors act impetuously or frivolously when making buy and sell decisions on their portfolio. I’m a fervent believer in the old adage that “a portfolio is like a bar soap, the more you handle it the smaller it gets.” Therefore, and to be clear, this kind of strategy only works over a complete business cycle. Investors need to recognize that out-of-favor stocks tend to stay out of favor for a period of time and in favor stocks likewise. In other words, these decisions make sense as long-term decisions and not as short-term trading decisions.

If you enjoyed this article, scroll up and click on the “Follow” button next to our name to see updates on our future articles in your feed.

Disclosure: I am/we are long JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Printing, document capture and compliance risk in the GDPR era

From the point of view of compliance, printing and document capture devices are everywhere, and range from multi-functional printers and scanners to mobile devices carried by employees.

And every time a document is captured or printed it resides in storage on a device or somewhere else on the network. That risk needs to be dealt with, in terms of compliance.

In this podcast Mathieu Gorge, CEO of Vigitrust, talks about the risks inherent in an organisation’s printing and document capture environment – including from mobile devices – and how to incorporate it into your GDPR risk assessment strategy.

Antony Adshead: What are the storage and compliance concerns in printing and document capture?

Mathieu Gorge: First of all we should recognise that printing and document capture are the forgotten parts of the internal and distributed network from a compliance and storage perspective.

If we break it down, what really is printing and document capture. It’s essentially scanners, printers, whether networked or wireless, multi-functional printers/devices and mobile devices with cameras.

So, if I look at a standard multi-functional device, for example, it allows you to printing, scanning, scan-to-fax, scan-to-email and follow-me printing, which was created by HP a few years ago.

Scan-to-fax and scan-to-email is where you scan a document and it automatically sends it to your fax machine or to your email. If you do that it means your document ends up on your mail server and also on your backups.

With regards to follow-me printing the idea is that you send a printing document to a queue, whether in the cloud or on the server within your network, and you maybe travel to another office, authenticate on the printer and the document is there so you don’t have to carry it with you.

As you can see, from a storage and compliance perspective, you start with one document and you end up with tens of versions of the document, which, again, end up being backed up.

Finally, from a mobile device perspective, all devices now come with cameras and it’s not unusual to use them to take a picture of a document and then email it or text it.

Again, that creates a headache from a compliance and storage perspective, because now the document is stored on a device and also on your network, and may also end up being stored on the network of the mobile provider.

And so from a GDPR perspective, it’s important to map out how you actually use those devices, where they are and if you are taking appropriate security measures to protect that is sent or transmitted or stored from the device.

Storage and compliance

Adshead: How do you ensure your printing and document capture environment is managed appropriately from a storage and compliance perspective?

Gorge: You need to make sure the printing and document capture environment is part of your risk strategy and of the technology that will protect your environment. And so if you look at GDPR again, it requires you to perform a privacy impact assessment (PIA), should you believe the information or the data being dealt with could be put at risk.

And if you look at a printer or multi-functional device that is networked there is potential risk, so you need to include that in your PIA. To do that you need to do an asset inventory that’s going to allow you to see at the click of a button all the scanners, IP printers, multi-functional devices and any type of mobile device whether it’s owned by the employee or the company.

The next thing you need to do is to put in technical security around this: Firewalls, strong authentication, automatic purge of hard drives and so on. You can then train people so they understand the risks with regards to confidentiality, integrity and the availability of that data – the famous CIA concept – and provide them with dos-and-don’ts.

The best way to do that is through e-learning. For example, Vigitrust offers a very short dos-and-don’ts on secure printing that can be added to a traditional security awareness programme.

Finally, you shouldn’t forget that you need to secure the devices from the physical perspective. The devices have hard drives that are as big as hard drives were in laptops from two to three years ago, and you can appreciate the amount of data that is being potentially being saved on those drives. It is important nobody can get physical access to those drives, as well as logical access.

So, it’s a mix of mapping the assets, training people, securing the physical hardware and then securing it from a logical perspective. 

Strong Buy 6.16% Yield Won't Be On Sale Forever

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

Tanger Factory Outlet Centers (SKT) is a solid REIT with a great dividend track record.

Source: SKT

Management has been prudent in protecting their balance sheet and keeping leverage low.

Source: SKT

They are very firmly within the investment grade credit rating and have significant excess cash flow even after paying the common dividend.

The bears on SKT must be ignoring a few simple fundamental factors.

SKT fundamentals

If SKT’s net operating income is simply flat over the next several years, SKT would still be a very reasonable investment. If net operating income was flat, we would expect very minimal pressure on total FFO as interest rates increase and a portion of the debt is refinanced.

The impact to total FFO should be quite small. Since SKT has so much excess cash flow after all of their operating expenses, common dividends, and capitalized expenditures for the properties, they are free to repurchase shares. By our estimate, they could reasonably shrink the number of shares outstanding by around 2% per year. That means even with flat FFO or an extremely minor decline in total FFO, the FFO per share would still be increasing. This also assumes SKT would continue to raise their dividend and maintain a similar payout ratio on FFO per share.

We see the above as the bear case scenario.

More likely scenario for SKT

It is more likely that we will see same-store NOI growth in 2019. Pressure on NOI in 2018 was tied to the Toys “R” Us bankruptcy. SKT knew the bankruptcy was coming but expected more of the impact to occur in 2019 rather than 2018. Because the Toys “R” Us bankruptcy hit earlier than expected, the weakness in earnings shows up for 2018 instead of 2019. With an expectation for moderate growth in same-store NOI on average over the next several years, we would expect total FFO to grow modestly. Given the expectation for a declining share count, we would expect FFO per share to grow a little faster.

If FFO per share and dividend per share grew at 1%, we would expect long-term returns to the buy-and-hold investor to run around 7% with 6% from yield and 1% from growth. In a more bullish scenario, we would be looking at FFO per share and dividend growth running in the 3% to 4% range which combines with the 6% yield for 9% to 10% in total returns. It is important to point out that this is forecasting the return from the dividend and the growth rate rather than speculating on the price movement over the next month.

Some short-term investors will be focused on the change in share price. We view the most likely direction as up over the next 12 months. However, predicting precisely where the share price will end is not a reliable indicator of long-term results.

Buyout potential

We’ve seen a few buyouts on REITs so far in 2018, including one in the mall space. While these are outlets, it is still classified as a mall REIT (sometimes a strip center).

There is an enormous amount of private capital looking for entry into real estate. This private capital is driving valuations on real estate. Ironically, the funds managing it are benefiting from the lack of transparency in their structure. Investors want real estate, but they are terrified by the day to day price movements in the stock. The price movement in the underlying asset, the real estate, is dramatically smaller. Consequently, investors are occasionally more comfortable with simply getting an appraised value a few times per year rather than seeing the daily fluctuations in market price. It seems absurd that investors would pay a premium for less liquidity and less transparency, but that is precisely what is happening in the real estate market today with an enormous amount of wealth.

A prudent manager in this structure might look to buy a REIT this way and then report the net value of the assets to investors. For instance, Blackstone (BX) recently acquired another REIT for their portfolio of real estate. Prologis (PLD) acquired another REIT. Buyers exist with the capital to swallow entire REITs. General Growth Properties (GGP) was recently swallowed by Brookfield Property Partners (BPY).

It would be sad to see SKT go right after hitting 25 years of dividend growth, but management indicates that they are willing to pick up for the phone for anyone who wants to make an offer. Generally, that would be on one property or a few properties, but a bid could be made for the entire company.

SKT’s confidence

Management of SKT had good things to say on the Q2 2018 earnings call (parts bolded for emphasis):

In terms of our balance sheet and capital position, we’re in great shape. We have a largely unencumbered portfolio, maintained solid interest coverage and have no significant debt maturities until 2021. We are committed to sustaining a stable and flexible financial position. We plan to continue to deliver a very strong level of cash flow and remain disciplined in our capital allocation decisions with a singular focus on creating value. The cash we generate covers our capital needs for investing in our assets, paying our dividends, repurchasing our common shares and deleveraging our balance sheet. Our dividend, which remains a priority, is secure and well covered. We have also continued to execute on our share repurchase program.

Going forward, we do not anticipate any new developments in 2018 and ’19. But we’ll continue to evaluate our priority uses of cash and long-term opportunities for growth. While we recognize the challenges we have discussed related to select overleveraged retailers, we believe industry sentiment surrounding fashion retailers is improving. According to recent reports, nearly 7,000 stores closed in all retail properties were announced in 2017. And slightly less than half of that number is slated to close this year. Importantly, offsetting those closures, approximately 2800 stores are scheduled to open this year. This all suggests a healthier retail outlet.

Our confidence in the long-term growth of the outlet distribution channel remains unwavered. In particular, relative to other retail channels, we don’t believe that outlets have been overbuilt. So the need to right-size and the competition among landlords is minimized. Furthermore, we are increasingly hearing the conviction among retailers that brick-and-mortar is a critical element of their omni-channel brand strategy. While the positive sales are encouraging and our conversations with tenants and prospects are constructive, we know there’s still much work to be done. We continue to employ a strategic approach that has proven effective and successful over the last 37 years, which includes keeping the tenant mix of our centers dynamic and giving Tanger shoppers the brands and designers they want. With this long-term view, we have proven we can successfully adapt to evolving consumer preferences and align those with tenant needs.

Final thoughts

We believe SKT is still attractively valued and expect it to perform well on the basis of higher expected FFO per share next year and continued dividend growth. The payout ratio is excellent and there is plenty of FFO leftover after paying the dividends. The balance sheet and debt maturities are great. SKT has raised its dividend for 25 consecutive years and is currently trading at a large discount to the net value of their assets. We believe the net value is around $30.00 per share.

If you enjoyed reading this article and want to receive updates on our latest research, click “Follow” next to my name at the top of this article.

Disclosure: I am/we are long SKT, BPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Watch Moritz Simon Geist's Sonic Robots Play Thumping Techno Music in His Video for 'Entropy'

When he plays a techno show, Moritz Simon Geist doesn’t reach for a laptop. Instead, he calls on his army of sonic robots—a collection of small, motorized creations that click, clank, and whirr in an intricate mechanical symphony.

Geist composes robotic electronic music, a burgeoning genre of electro jams that relies on hardware, not software, to engineer electronic sounds and beats. His forthcoming EP, The Material Turn, debuts in October with four tracks made entirely from self-fashioned instruments—futuristic robo-kalimbas, a droning guitar, and salvaged hard drives turned into percussive beat machines.

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Watching Geist play music is a little like watching a mad scientist in a lab. Trained as an electrical engineer, he is a man of materials, constantly tinkering with the instruments as they ping and plonk in front of him. Geist grew up playing the clarinet, piano, and guitar, so when he first started making electronic music in the 1990s, he found it strange that the music was all contained within a software interface on a screen. “I wanted something I could touch,” he says. “So I built my own instruments.”

Each of Geist’s “instruments” is custom-made in his workshop in Dresden, Germany. Some are engineered to produce a specific sound, like his take on a kalimba, made from metal pieces and 3-D printed parts. Other instruments come by way of discovery, like finding that tapping a screwdriver against a metal lid makes a pleasant tinging noise.

The result isn’t just a dynamic, throbbing album full of electrifying techno. For Geist, it’s a way to push the frontiers of electronic musicmaking.

Mr. Robot

Mechanized instruments have been a curiosity for as long as music-makers could rig together parts. Take the first self-playing piano, the Forneaux Pianista, invented in the mid-19th century. It used air valves to inflate a bellows and mechanically thump on the keys, creating an effect of the piano playing itself. Vaucanson’s mechanical flute player and Phonoliszt’s self-playing Violina would follow, and autonomous instruments remained a fascination throughout the 20th century.

“We have a museum full of self-playing instruments,” says Marian van Dijk, the director of the the Museum Speelklok in the Netherlands, which has an exhibit about robots and music on view this month. “People in the 19th century were looking forward to these inventions, and we are in a similar period now—looking forward to all the possibilities.”

As the field of robotics has become more sophisticated, engineers and musicians have developed new ways to incorporate machinery into music-making. Shimon, a robotic marimba-playing robot built at Georgia Tech, relies on artificial intelligence to “improvise” like a jazz musician. In a jam session, it can rhythmically bob its robotic “head” and listen to other human musicians, then tap out a tune of its own. “It’s a combination of old instruments and new robotics,” says van Dijk.

Geist had seen plenty of robotic music—bands like Compressorhead, a Berlin-based group that uses a series of humanoid robots to play traditional instruments—but he’d never seen robots in techno. The combination seemed obvious.

“Robots and techno—I mean, come on,” he says. “It’s machine music.”

His first instrument, the MR-808, recreated the sound of a Roland TR-808 drum machine in an enormous, room-sized box filled with traditional drums and robotic parts. It took him three years to build. When he debuted the instrument in an interactive exhibit, Geist realized he’d struck upon something interesting. He quit his job at a research lab, dropped out of his PhD program, and devoted his time to making musical robots.

Geist followed the MR-808 with a selection of new and futuristic inventions: The Glitch Robot combined 3D-printed parts with relays, tongues, solenoids, and motors to create glitchy, metallic noises. The Tripods One, which Geist calls a “sonic installation,” is a percussive instrument built from hard drive actuators arms and motors that mechanically ping metal pieces and springs.

[embedded content]

His latest single, “Entropy,” features a new suite of instruments. A “futuristic kalimba” riffs on the African instrument, made with a circuit board, five metal tongs, and a piezo contact microphone controlled with a Midi keyboard. A “pneumatic hi-hat” blows air into cylinders filled with small styrofoam balls to create a soft percussive noise. Rescued hard drives make a clicking sound, similar to a snare. There’s also a “drone guitar,” built by attaching a motor to an electric guitar, and an instrument Geist describes as “crazy psychedelic glasses,” which uses a motorized arm to clink on beer glasses filled with different amounts of water so they’re tuned to various pitches.

For Geist, the instruments represent not just a new way to make music, but a new way to experience it. The instruments each have a visual component, which makes it possible to watch the sounds as Geist creates them. “A lot of electronic laptop compositions, they don’t have a body,” he says. “I’m trying to give this body back to electronic music.”

Watching him play “Entropy,” you see styrofoam balls float up on puffs of air, while LED lights blink on the futuristic kalimba. The motor fingers the guitar strings like a disembodied hand. Sure, the requisite electro-techno strobe lights and bass-heavy beats feel familiar. But with his sonic robots, Geist manages to do something increasingly rare in electronic music. When he plays, he keeps all eyes locked on the stage.


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Meet the Transhumanists Turning Themselves Into Cyborgs

A woman tries on a virtual reality headset at a neuroscience lab in Geneva, Switzerland.

This exoskeleton can be used to treat physical handicaps or to augment the wearer’s motor skills. The Defense Advanced Research Projects Agency (DARPa) is working on a similar prototype that would could turn soldiers into war machines.

Neil Harbisson, who is color blind, implanted a prosthesis into his skull that converts colors into sound waves. He considers himself a cyborg.

The dietary supplement Elysium contains nicotinamide riboside, which has been shown to promote cell regeneration in mice. The drug’s long-term effect on humans is unknown.

Julien Deceroi implanted a magnet into his middle finger. He’s an example of a “grinder,” biohackers who operate on their own bodies.

The size of a grain of rice, the NFC/RFID microchip can be implanted under the skin by a tattoo artist. The chip can be used to store data or interface with electronic devices.

This anti-aging light therapy mask is meant to be worn for five minutes a day and promises to make the user look younger.

The Mailpan—an implant filled with stem cells that secrete insulin—is an artificial pancreas that could potentially transform the lives of diabetics.

Marie-Claude Baillif has suffered from myopathy since adolescence. Without her respirator, she would have died thirty years ago.

“Nootropics,” aka smart drugs, are a class of substances supposed to improve cognitive function, memory, creativity, or motivation.

The body modification artist Lukas Zpira is the author of the “Body Hacktivism Manifesto,” which advocates “taking control of our destinies by perpetually reinventing the self.”

Professor Grégoire Courtine of the École Polytechnique Fédérale de Lausanne implants electrodes into a paralyzed rat’s spinal cord to help it learn to walk again.

Photographer Matthieu Gafsou says transhumanism encompasses a wide array of techniques and philosophies.

One of the biggest misconceptions about transhumanism is the belief that it’s a new phenomenon. “We have been intimately involved with technology for a very long time,” Gafsou says.

In many ways, all of us are transhumanists based on our extensive use of technologies like the smartphone, the artificial hip, and the pacemaker.

Tesla: Shorts Are Now In Charge

Despite finally dipping my toe into Tesla (TSLA) on the short side earlier this year, I’ve largely stayed out of the debate on Seeking Alpha. Actually, making this bet is a change of pace for me. I’ve often fielded questions, as a long/short investor focused on cash flows, on why I did not short this company from 2014-2017. The problem with shorting Tesla – and something numbers-focused short sellers have repeatedly glossed over – has been Elon Musk. Savvy investors realize that. Cash burn just did not matter so as long as Elon Musk could continue to convince institutional investors to cough up billions of dollars to fund his vision.

This is changing. The situation in 2018, particularly in recent months, has called his ability to do that into question. With significant pressure on his company, recent well-publicized news items (“Funding Secured”, senior management turnover, Joe Rogan interview) have begun to weigh on many investors, large and small. While many have wondered why the Board of Directors has not taken action, I think the answer to that is obvious. They simply cannot kick Elon Musk to the curb; the Board knows that without Musk there is no Tesla and the debt-funded growth story folds in on itself. Longs have to think long and hard on whether raising capital will be as easy as it has been in recent years, especially as the 2018 and 2019 Convertible Senior notes now look like they will have to be rolled over with cash instead of stock. The short side, years early on betting against the firm, finally will have its time in the sun. While calls for bankruptcy are way too early, in my opinion, there is still money to be made betting on lower equity pricing.

Laying Out The Framework, Broad Short Case Review

Tesla has had absolutely no problem raising nearly $3,000mm from secondary stock offerings since 2015. The company raised billions more in hybrid debt alongside that on very attractive terms. However, perhaps nothing is more indicative of Tesla’s access to capital than their recent pure bond offering. In my opinion, the $1,800mm raised by the 5.3% Senior Notes due 2025 was a watershed moment that highlighted Elon Musk’s continued ability to sell the future. Any impartial bond analyst that looked at the financials and lack of bond protections took a very cautious outlook. This pessimism was something that could be seen in Moody’s initial bond rating of B3, well into junk territory. These analysts took a very bleak outlook on Tesla’s future, its execution risk, and its cash needs.

As a result of the rapid ramp up in Model 3 production and the significant increase in capital expenditures required under the production plan, we expect that Tesla will remain free cash flow negative into 2019. Given this negative free cash flow outlook, the uncertainties associated with the launch of the Model 3, and the potential cash requirements necessary to cover the maturities of its convertible debt, Tesla will face large cash requirements through 2018.

This does not even factor in the usual protections built into debt rated this far into junk. As a reminder, the sole guarantor on these notes is Solar City. The Gigafactory, a core component of the Tesla story, is not collateral and can be levered up itself. There are none of the usual covenant restrictions on further debt issuance, selling assets, or on capital spending. Nonetheless, Goldman managed to find buyers at a 5.3% coupon – a rate 200bps below where typical bonds of this credit quality would be priced. After the recent downgrade to Caa1, it is easy to forget that Tesla is in the company of distressed stories like Windstream (WIN) and Revlon Consumer Products. These issuers are seeing double-digit yields to maturity on their debt. Even after the recent collapse in the Tesla 2025 bonds (now worth 84 cents on the dollar), the yield to maturity is still 8.3%. That is lofty, all things considered.

However, can Tesla roll over the debt at attractive terms going forward? Remember what is coming due shortly:

  • $920mm in 0.25% Convertible Senior Notes (March 2019)
  • $230mm in 2.75% Convertible Senior Notes Due 2018 (November 2018)
  • $185mm on the Term Loan (December 2018)

With shares now down meaningfully from the $420.00/share Privatization Rally, rolling over into fresh Converts becomes more and more dilutive to shareholders with every passing day. The downturn in the 2025 Senior Notes shows that demanded interest rates will be in the high single digits. I think it is clear that this time next year, Tesla will, at the minimum, be dealing with $100mm+ in additional annual interest expense or shareholders will be facing significantly more dilution down the line.

*Did he inhale or not inhale? “420” per share indeed.

All of this will weigh heavily on the mind of Elon Musk and Tesla management heading into Q3 and Q4. Cash burn, which in the past did not matter, now does. Big institutional investors and lenders, which Tesla has relied on to finance its capital structure, are going to focus heavily on reported results. Tesla is going to have to borrow more capital to boost production at some point; investors will want to see a somewhat sustainable business model while operating under that 5k/week Model 3 run rate. While there have been many “make or break” calls on Tesla over the past several years, I believe that the second half of 2018 is where this will finally be true. Remember this statement from the most recent conference call:

I feel comfortable achieving a GAAP income positive and cash flow positive quarter every quarter from here on out.

There is little margin for error. Despite the share price collapse, analyst estimates for Q3 and Q4 have come up meaningfully over the past weeks and months. If Tesla reports continued cash burn heading into this major refinancing activity, there is substantial downside potential for the common equity. This will be pivotal. Fasten your seatbelts.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Hackers Can Steal a Tesla Model S in Seconds by Cloning Its Key Fob

Tesla has taken plenty of innovative steps to protect the driving systems of its kitted-out cars against digital attacks. It’s hired top-notch security engineers, pushed over-the-internet software updates, and added code integrity checks. But one team of academic hackers has now found that Tesla left its Model S cars open to a far more straightforward form of hacking: stealthily cloning the car’s key fob in seconds, opening the car door, and driving away.

A team of researchers at the KU Leuven university in Belgium on Monday plan to present a paper at the Cryptographic Hardware and Embedded Systems conference in Amsterdam, revealing a technique for defeating the encryption used in the wireless key fobs of Tesla’s Model S luxury sedans. With about $600 in radio and computing equipment, they can wirelessly read signals from a nearby Tesla owner’s fob. Less than two seconds of computation yields the fob’s cryptographic key, allowing them to steal the associated car without a trace. “Today it’s very easy for us to clone these key fobs in a matter of seconds,” says Lennert Wouters, one of the KU Leuven researchers. “We can completely impersonate the key fob and open and drive the vehicle.”

Just two weeks ago, Tesla rolled out new antitheft features for the Model S that include the ability to set a PIN code that someone must enter on the dashboard display to drive the car. Tesla also says that Model S units sold after June of this year aren’t vulnerable to the attack, due to upgraded key fob encryption that it implemented in response to the KU Leuven research. But if owners of a Model S manufactured before then don’t turn on that PIN—or don’t pay to replace their key fob with the more strongly encrypted version—the researchers say they’re still vulnerable to their key-cloning method.

Keys to the Kingdom

Like most automotive keyless entry systems, Tesla Model S key fobs send an encrypted code, based on a secret cryptographic key, to a car’s radios to trigger it to unlock and disable its immobilizer, allowing the car’s engine to start. After nine months of on-and-off reverse engineering work, the KU Leuven team discovered in the summer of 2017 that the Tesla Model S keyless entry system, built by a manufacturer called Pektron, used only a weak 40-bit cipher to encrypt those key fob codes.

The researchers found that once they gained two codes from any given key fob, they could simply try every possible cryptographic key until they found the one that unlocked the car. They then computed all the possible keys for any combination of code pairs to create a massive, 6-terabyte table of pre-computed keys. With that table and those two codes, the hackers say they can look up the correct cryptographic key to spoof any key fob in just 1.6 seconds.

In their proof-of-concept attack, which they show in the video below, the researchers demonstrate their keyless-entry-system hacking technique with a hardware kit comprising just a Yard Stick One radio, a Proxmark radio, a Raspberry Pi minicomputer, their pre-computed table of keys on a portable hard drive, and some batteries.

First, they use the Proxmark radio to pick up the radio ID of a target Tesla’s locking system, which the car broadcasts at all times. Then the hacker swipes that radio within about 3 feet of a victim’s key fob, using the car’s ID to spoof a “challenge” to the fob. They do this twice in rapid succession, tricking the key fob into answering with response codes that the researchers then record. They can then run that pair of codes through their hard drive’s table to find the underlying secret key—which lets them spoof a radio signal that unlocks the car, then starts the engine.

[embedded content]

That whole attack chain, the researchers say, is possible thanks to the Pektron key fob system’s relatively weak encryption. “It was a very foolish decision,” says KU Leuven researcher Tomer Ashur. “Someone screwed up. Epically.”

The KU Leuven researchers say they told Tesla about their findings in August 2017. Tesla acknowledged their research, thanked them, and paid them a $10,000 “bug bounty” for their work, the researchers say, but it didn’t fix the encryption issue until its June encryption upgrade and more recent PIN code addition.

In a statement to WIRED, Tesla said those fixes were rolled out as quickly as possible given the time needed to confirm the researchers’ work, test a fix, and integrate it into their manufacturing processes. “Due to the growing number of methods that can be used to steal many kinds of cars with passive entry systems, not just Teslas, we’ve rolled out a number of security enhancements to help our customers decrease the likelihood of unauthorized use of their vehicles,” a Tesla spokesperson wrote to WIRED. “Based on the research presented by this group, we worked with our supplier to make our key fobs more secure by introducing more robust cryptography for Model S in June 2018. A corresponding software update for all Model S vehicles allows customers with cars built prior to June to switch to the new key fobs if they wish.” The company also noted that you can trace a Tesla on your phone, which should make it relatively easy to locate a stolen vehicle.

The researchers believe their attack might also work against cars sold by McLaren and Karma and motorcycles sold by Triumph, which also use Pektron’s key fob system. But they weren’t able to get their hands on those vehicles to test them. Neither Karma nor Triumph responded to WIRED’s request for comment, nor did Pektron itself. McLaren says it’s still investigating the issue but is alerting its customers to the potential theft risk and offering them free “signal-blocking pouches” that block radio communications to their key fobs when they’re not in use. “While this potential method has not been proven to affect our cars and is considered to be a low risk, plus we have no knowledge of any McLaren vehicle being stolen by this or the previously reported ‘relay attack’ method, nevertheless we take the security of our vehicles and the concerns of our customers extremely seriously,” a McLaren spokesperson writes.

If those other manufacturers are indeed affected, beyond putting keys in those “signal-blocking pouches”—Faraday bags that block radio communications—just how all of them might definitively fix the problem is far from clear. The researchers say that the companies would likely have to replace every vulnerable key fob, as well as push out a software update to affected vehicles. Unlike Tesla, whose cars receive over-the-air updates, that might not be possible for other manufacturers’ vehicles.

Warning Sign

Despite the questions surrounding how to prevent the attack, KU Leuven’s Ashur argues that revealing the vulnerability is necessary to pressure Tesla and other carmakers to protect their customers from theft. Now that Tesla has added a PIN feature, it also serves as a warning that Tesla owners should turn on that feature to protect against a surprisingly easy method of grand theft auto. Aside from the PIN, Tesla also allows Model S owners to disable passive entry for its key fobs, meaning drivers would have to push a button on the fob to unlock the car. That would also stymie the KU Leuven attack. “This attack is out there, and we’re not the only people in the world capable of coming up with it,” Ashur says.

For years, hackers have demonstrated that it’s possible to perform so-called relay attacks against keyless entry systems, spoofing a car’s radio signals to elicit a response from its key fob and then replaying that signal in real time to the car’s locking system. In some cases, hackers have pulled off those attacks by amplifying the key’s radio signal, or by bridging the distance between the car and the victim’s key fob by holding one radio device close to each. Those relay attacks have been used to pull off very real car thefts, though it’s never been clear how many, given the lack of evidence left behind. Relay attack thefts are no doubt part of Tesla’s motivation for adding its PIN precaution, regardless of the KU Leuven research.

But even those relay attacks still only allow a car thief to spoof a victim’s key once. Even if they manage to drive the car away, they’re unable to unlock or start it again. The KU Leuven attack, by contrast, allows a thief to permanently clone the victim’s key, so that they can unlock and drive the car in perpetuity. “Basically, we can do everything a relay attack can do and more,” says Wouters.

With that dangerous key-cloning method now in the open, anyone who owns a vulnerable Model S would be wise to turn on Tesla’s newly added PIN feature or disable passive entry. Punching four numbers into the car’s dash or a button on its key fob before starting it up may be an annoyance, but it beats returning to a empty parking spot.


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