Announcer: Live from the Internet, it’s Tradestreaming Radio with your host, Tradestreaming.com’s own Zack Miller.Zack: Hey, this is Zack Miller, and you’re listening to Tradestreaming Radio, where investors learn directly from experts.
We’re continuing to look at investing in alternative asset classes, how one would do so, what the investment case is behind it. Today we’re going to look at an asset class that many of you may not have even registered and that’s taxi medallions. Yes, taxi medallions, those licenses that enable you to drive a taxicab. To do so, though, we’re continuing to plumb the minds of experts.
I identified Andrew Murstein, the president of Medallion Financial Company, which is a publicly-traded investment company. It trades on the NASDAQ as TAXI. His family is the largest shareholder. They originate loans that they take in deposits, as a bank, and then finance the purchase of medallions in six different cities around the U.S., including New York City.
He’s going to talk to us about the dynamics of the industry, why prices have risen 16% a year for the past 60 years with only just a couple down years. He’s going to talk to us about the business of driving a taxi and how an investor would come in and actually invest in the industry. I found it very interesting. I hope you do as well.
This is Tradestreaming Radio. I’m your host, Zack Miller. If you want to see our archives, you can find us on iTunes, as well as at my website, Tradestreaming.com. We’ll have show notes there. We’ll have links to all the important information as well. Come back to the website, sign up for the email list. We’re going to be launching, and continue to be launching, courses based upon some of the material that we’re doing here, hopefully helping you to become a better, smart investor with tips, tools, and technologies.
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Andrew: The history of taxi medallions is, in 1937, the City of New York sold 11,787 medallions for $10 each and then froze that amount for 60 years. It sold for $10 each back then. Now it sells for $925,000 each today. They’ve gone up 16% per year over the last 70-plus year period, outperforming almost, if not all, asset classes that we’ve ever looked at, the Dow, NASDAQ, gold, real estate. Nothing has compared to the history of medallion price appreciation.
Zack: Why do you think that this?
Andrew: I think it’s a combination of several things. One is the fixed supply. Obviously, the population of New York is greatly larger today than it was back in 1937.
Two is it’s such an integral part of the transportation system in New York. Not every city is perfect for a medallion system. For example, Los Angeles is not. It’s a great city, it’s a large city, but it’s spread out. People have their own cars.
Third is it’s a terrific entry-level position for an immigrant to come in, make their own hours, and own their own business. It’s one of the few jobs in life where success depends only upon how hard you work. If you’re willing to spend time driving behind the wheel, you’re almost guaranteed to do well.
Zack: Let’s take a step back. Who’s making money then? At $900,000 a piece, a million bucks a piece, the immigrant’s not the one who’s going to be the owner of the medallion at this point, right?
Andrew: They will, eventually. The pattern has been that every 20 years or so… It’s interesting. There’s a new class of immigrants that come into this industry and dominate it. When my grandfather started back in 1937, when he bought the first of his 500 medallions, it was mainly Jewish and Italian. Today, it’s mainly Indian and Pakistani.
The history is you’ll come into this country. Let’s say an Indian comes over. His cousin is probably in the cab industry. He’ll call him and say, “The streets are literally paved with gold here. Come to America. Here’s a great way to start.”
They’ll rent the taxi. They’ll pay a daily shift of $100 for a 12-hour shift. They’ll work six days a week, 12 hours a day. After several years, they’ll take their whole net worth, their whole life savings, everything that they made driving the cab, and they’ll put it down to own the medallion, as a down payment. That’s a way for them to them to get a piece of the American dream and own their own business, by buying these medallions.
Zack: Your firm finances these types of purchases. How much are they putting down towards the medallion?
Andrew: Correct. Medallion Financial is the largest lender in the taxi cab industry. We’ve been doing it, again, since 1937. We’ve actually lent over $3 billion to the industry with zero losses in the history of the company. When Medallion Financial went public, and our stock symbol is TAXI, this was a way for investors to invest in the industry, which was pretty much closed to outsiders for many years.
Zack: When did you go public?
Andrew: In 1996. Today, if somebody’s buying a taxi medallion, we’ll require a 25% down payment and we’ll lend 75% towards the purchase price.
Zack: How does that lease work? It’s essentially a lease or it’s an outright loan?
Andrew: It’s a straight loan, same as if you were buying a piece of real estate or you wanted a mortgage on your house. Except unlike mortgage lenders who have been having a real hard time for several reasons. One is a house requires money to be put in, maintenance, real estate taxes. Taxis are little cash cows. They’re spitting out money constantly when they’re being put to work, so you have a very nice income stream available to pay your mortgage.
The second thing that’s very interesting about taxi medallions is you can actually write them off over 15 years. When you buy a medallion, let’s say, for $1 million, you’ll write off one- fifteenth of that, which is about $85,000 per year, over the life of the loan and therefore not pay significant taxes on your income because you’re using this as a tax shelter.
Zack: Similar to a real estate investment.
Zack: They’re borrowing $750,000 from you. Can you talk about, typically, how they’re structuring their payments? They’re driving the taxi, what, 24 hours a day whether it’s them or somebody else? They’re trying to max out income to be able to pay that down? I’m trying to get the economics for the taxi driver specifically.
Andrew: Let’s say somebody buys a medallion, just to make it easy, for $1 million and they borrow $750,000, let’s say, at an interest rate of 5%, just for an example. They’re paying $37,500 per year, if I did my math correctly, of interest.
They will drive the car 12 hours per day. They’ll lease it out to somebody else for the other 12 hours a day. When it’s all said and done, at the end of the day, after making our mortgage payments and paying all the other operating expenses, they’re probably about $60,000 per year driving the cab.
Now, what they have is the ability for tremendous price appreciation. Just as I said, it’s gone up 16% per year, for 70 years. Let’s say it only goes up half that next year. That million dollar value will be going up by $80,000. On top of the $60,000 driving, they have the potential to make $140,000 a year when you add in the price appreciation.
Zack: What’s the actual yield on the investment given their cost for borrowing and what you’re charging them?
Andrew: If a passive investor comes into this market and doesn’t drive the cab, he just buys the medallion and gives it to someone to operate for him, they’ll get about a 5% tax-free return today. Every city, more or less, is similar. Some it’s as little as 3%, some it’s about 7%, depending upon the city, but the average return for a passive investor is 5% tax free, which in this environment is a very good investment.
Zack: Is that assuming they’re coming in 100% cash or are they also borrowing?
Andrew: That’s assuming 100% cash. That’s a cash-on-cash return.
Zack: They’ve got a nominal return in the mid-single digits. Most of the returns, it sounds like, are coming just from appreciation over the years.
Zack: There’s this chart going around, New York City taxi medallions versus S&P. Is that a fair comparison?
Andrew: I think it is. There’s difference in certain ways, similarities in others, but if you want to compare it to stocks, it’s been a much better performer than the S&P.
Zack: How does an individual come in, be it a taxi driver or a passive investor, and actually buy a medallion? There’s a pretty robust secondary market. You go to a broker?
Andrew: Yes. It’s a very liquid and thorough market. I think people don’t realize how organized it is. The City of New York, more or less, is our partner because they want to see prices go as high as possible. They’re receiving a transfer fee of 5% every time a medallion is bought and sold. It’s a great income stream for the city also. That’s one of the reasons that they protect the market so well and regulate it because, again, they’re our partner and they’re getting 5% of the sale price.
They record every buyer and seller, who the buyer is, who the seller is, personal financial statements, driver’s license information, background checks, everything. Those records are all kept by the city. The sale price is available for public information. Every month, the City of New York gives us, and anybody else who’s interested in reading it, data showing how many medallions were sold and what the average price was.
Zack: Interesting. First question, what about the supply side? Is the city releasing new medallions yearly? How does that work?
Andrew: They have issued none from 1937 to 1997. Then they did 1,500 new ones over the following seven or so years. Now they’re talking about doing another auction of 1,500 medallions in 2012. If that goes through, it’s a very good opportunity for Medallion Financial to go into the market and finance many of those winning bidders. In the past, when that’s happened, our stock price has appreciated.
Zack: Have you seen, to date, a lot industry outsiders come in to invest?
Andrew: There are always different groups looking to buy the medallions. What’s nice from TAXI shareholders’ point of view is there are very few people looking to finance them because it’s such a specialized industry.
Our company motto has always been “In Niches There Are Riches.” We try to identify niche markets and be the dominant provider of financial services in those markets. That’s what you have in the taxi cab market. Banks never really grasped it, they never really understood it, and they never got active in lending in the market.
Zack: How do your economics work? You’re structured as a bank. You take in deposits?
Andrew: Correct. We take in deposits. Our cost of money these days is as low as 0.35% on 90-day deposits. Then we lend it out. Our average loan in the taxi medallion industry today is probably about 5.5%, so it’s a very wide margin that we have.
Zack: Your business is totally reliant upon keeping that spread or expanding that spread.
Andrew: That’s one of our business lines. We have several other business lines also. The taxis are the ones that have proven to be the safest credit quality, again, with zero losses in 70 years.
Zack: How do you get away with zero losses? How does that happen?
Andrew: Well, for one thing, it’s a great asset to be able to repossess, if you have to. A lender makes a real estate loan and it could be three years before they get their money back. The lawyers get involved. It goes to foreclosure. It has to get auctioned off. It’s a whole process.
If somebody doesn’t pay a taxi medallion loan, a medallion is just a license plate on the hood of the car. Most people, even New Yorkers, don’t realize that. They see them every day, but they never picked up on it. On the right front hood of the car is the license plate, the medallion. If a borrower doesn’t pay, we send out somebody. Literally, they can pop the medallion off the hood of the car and bring it back to our office and, bingo, the guy is out of work. Very few other types of lending are like that.
When you shut somebody’s business down, they have to come running in, making their loan current. Then you give them their medallion back, they put it back on their hood, and they go back to work. That rarely happens, however. On 3,000 loans, we probably do it once or twice per year.
Zack: That must mean there’s a lot of policing going on to make sure people aren’t driving without them or fake ones.
Andrew: Sure. The City of New York has a special task force. It’s called the Taxi and Limousine Commission. They only focus on this industry. There are almost never cases of fraud because, if you think about it, taxis want to go where the people are, to the main hubs, airports, Times Square, Penn Station, and that’s where they have their police force looking and making sure the medallions are real and legitimate.
Zack: What could go wrong in investing in a medallion? It sounds like there’s a confluence of forces pushing these things upwards. Demand is strong, supply is tight, and it’s good business. What could go wrong?
Andrew: Basically, little has. If you look back over the last 70 years, medallion prices have only dropped significantly twice and that was only 10% drops. It happened in the 1970s, when you had an oil embargo, and it happened right after 9/11. The medallion price dropped from $250,000 to about $210,000. Again, today it’s up to $900,000 plus, so it’s bounced back pretty quickly after that.
Zack: Any future trends in the industry that you could point to that would be interesting for investors interested in this type of business?
Andrew: I think taxis are doing very well these days. As you said, it’s really a perfect storm. Everything’s heading in the right direction for the industry.
One is technology wise. Credit cards are now used in every cab in New York City. More people are using cabs. They’re charging it to their business. They’re able to keep receipts more orderly because it’s on their corporate AmEx bills. That’s helped the ridership.
Two is the lower interest rate environment. They announced yesterday they think it’s going to stay pretty low for the next several years. That’s a big plus for our bank. Therefore, the borrowing costs are going to remain pretty low and the margin’s pretty wide for us.
Three is that even though the business does well in good times and bad times, you really get an extra push in bad times. When people are out of work, a lot of them from lower positions drive cabs part time until they get other jobs. There’s a surge of manpower in this industry right now.
You go to the taxi garages. I was there at 5:30 this morning talking to one of our customers. He has 100 taxis. He had 130 people online looking to rent out those cabs. In 1999, it was a very different story. Of those 100 cabs, he probably only had 85 people online looking to get those cabs. The occupancy rate today is at about 100%.
Zack: One question I skipped over. How much typically does a broker take in this business?
Andrew: Brokers are pretty reasonable. They, many times, are former cab drivers that have now changed their business to be a broker because they don’t want to drive anymore. Therefore, they’re reasonable with their fees. They help find buyers and sellers and they also bring us business for loans. Unlike the mortgage business, where brokers were abundant and taking huge fees, a broker will probably charge about $500, which is less than 1%, to help somebody selling or buying a medallion.
Zack: Interesting. There’s been a lot of talk with the chaos in the markets, this move towards local investing, community banking, and stuff like that. You must really know your borrowers. Like you said, you’re at the depot. You’re out meeting these people. You know these people pretty well, right?
Andrew: Yes. We actually meet, face to face, with every single borrower. Banks are probably the opposite. They know customers by their numbers, not by their faces. We have a nice business. We’re not Citibank by any stretch of the imagination.
Zack: That may be a good thing.
Andrew: You’re right. We have a couple of thousand customers. It’s not too many to know them personally.
Zack: Are you focused only on the New York City market?
Andrew: We’re actually in about six markets. Every city in the U.S. is similar in there’s a fixed amount of medallions frozen by law. The only difference is how many medallions there are and what they sell for. For example, we have an office in Chicago. There, there are 7,000 medallions. They sell for about $250,000 each. We have an office in Boston. There, they have about 2,000 medallions and they’re selling for about $400,000 each.
Zack: Has any other city seen their appreciation on a percentage basis that New York has?
Andrew: Yes. Actually Chicago’s been a great market. The last 10 years, medallions have gone up 20% per year in Chicago, so it’s actually been a little bit more than New York. Now, other cities are looking to jump on the bandwagon because it’s a great way for them to raise money.
One of the only cities that doesn’t have a medallion system is actually Washington, D.C. We spoke to the mayor last month. We told him that he’s giving away money because he gives these medallions away for free each year. Anybody that wants one gets one for free. There’s no reason for them to do that anymore. They should now start selling these medallions. I told him within 90 days he could raise a billion dollars without raising people’s taxes. Just go the 10,000 medallion holders that are out there today, sell them for $100,000 each, and the District of Columbia will raise $1 billion.
Zack: If I’m an individual investor, obviously I have the option of investing in TAXI, your firm, or going out and buying an individual asset. If I’m looking at geographies, is there any word of advice you would give there? You said Los Angeles is a bad environment just because there’s a lot of room in between places and people take their own cars typically. You would need a city locus and people used to taking taxies in that neighborhood?
Andrew: I think it’s a much easier opportunity for someone to just buy TAXI stock. I mentioned before that it’s a 5% yield. If you go out, it’ll take you three months to close a deal, hire lawyers, do some due diligence, and get the licensing approved. You’ll own a medallion, you’ll give it to someone to run, and you’ll get a 5% return.
Our stock is actually over a 7% yield for some reason now, so it’s much more preferable for an investor. Within three minutes, you can pick up the phone, call a broker, and own a piece of the industry by owning our stock. Plus, it’s a much more diversified holding. Again, we have lending offices in many medallion markets around the country. Rather than somebody just going out and buying a New York or Chicago medallion, it gives you more diversity to buy TAXI stock.
Zack: Do you have investor materials on your website that people could come to learn more about the industry and your company in particular, like a PowerPoint presentation or something you’ve used previously?
Andrew: We have some good information on there like annual reports, articles about the company. We’re also, again, a small enough company where we’d encourage shareholders to contact us directly. My email address is firstname.lastname@example.org. Shareholders can always email the president of the company, at least in our case, directly and learn more about the business.
Zack: That’s amazing access. Andrew, I appreciate your time. This has been very worthwhile for me in terms of learning about the industry.
Andrew: Thank you.