thepupil

I agree, I don't see him trimming at all and would be surprised. Just commenting on how WB thinks about the relative value of something we know the market value off (5.7% of AAPL) and the private BNSF and providing some context on BNSF comps.

Without getting too in the weeds, at current KSU multiples, I get to an implied BNSF equity value of $120-$130B But a better comparable is probably already available in UNP which is very similarly sized and is at $117B equity value/ $145B EV I think rails are potentially overvalued given the macro backdrop, but lazily plug in UNP as a BNSF proxy and then apply a lazy 0-whatever I’m feeling % discount Note that Buffett has called Apple his third largest business in February 2020 and that’s worth $100B now, just one data point. I think he meant “3rd largest by value”. The insurance value includes all the others so by definition it’s the biggest. So I think Warren was saying “BNSF is worth more than 5.7% of AAPL” https://www.google.com/amp/s/www.cnbc.com/amp/2020/02/24/warren-buffett-says-apple-is-probably-the-best-business-i-know-in-the-world.html $100 bilsky’s ish is a nice simple market value for BNSF.

Naspers -700HK $32mm to $180B and the Louisiana Purchase are still kicking warrens ass but as far as $30B stock picks go, I’d agree. I, for one, one would be very okay with some tax inefficient trimming, but knowing WEB, that probably won’t happen.

Well 50% of EQR's NYC moveouts gave an out of state forwarding address. Be trigger warned of my overprivileged statements below, but just to give some anecdotal flavor I live in wealthy DC Burbs. Two software engineers from NYC just bought a $2mm+ house down the street from me. they aren't going back. the headwinds are real as it relates to the 30+ year old accelerating their moves to the burbs. EQR has also noted international students as an issue. My sister went to school in Boston and rented at an Archstone owned apartment (now owned by EQR). She rented a $2K / month apartment. to the extent college kids aren't going back (temporarily) that hurts. I know some investment banking graduates that are training remotely. There's a a big disruption coming. Will this be important in 3 years or 5 years, maybe not (I would wager not). But we should acknowledge the headwinds. The 30+ year olds are buying houses and the 23 year olds are at their parents' house.

No position here, but doesn't it seem like a 5-10% rent decline across the portfolio is already priced in at today's levels? Does anyone have a good sense for what kind of cap rate these assets would transact at in normal times on a stable rent base? If Mr. Market was given perfect foresight ans was told that rents would decline by 7.5% and nothing else would change, then the stock would probably go up. But that's really not the extent of the risk. I see EQR at a 5.8% cap rate right now with a high 6's cash on cash return to the equity. If I shock all rent down 10%, I get about a 5 cap. At 30%, I get a 3 cap. At 15% decrease in rent plus a 10% increase in opex / unit (from a 25% hike in property taxes for example), I get to a 4% cap. All of those are assuming current and high occupancy levels. For context, if I had to put one number on what cap rate high quality multi-family transacts, I'd say 4.5%; the lowest I've seen was 3.7% on national landing multi-family private deal after AMZN where the underwriting baked in big rent growth/redevelopment (shameless plug for JBGS here which trades FAR wider). Others can chime in. EQR generally prints 4-4.75 caps when they sell Search the Q's / K's for "disposition yield". This data says its above 5 though. https://www.nar.realtor/blogs/economists-outlook/2020-q1-nar-commercial-survey-shows-early-impact-of-coronavirus https://mf.freddiemac.com/docs/multifamily_2020_outlook.pdf If you start to tweak the cap rate up and bake in declines in rent/NOI, there's still plenty of downside that's not priced in. But I think it's also important to consider it all on a per unit basis and what that would imply. For example, if someone said "i think rent goes down 15%, opex goes up 30% and it should trade at a 7% cap rate, this would imply a value of $217K per unit (down from $370K now and $530K at peak price of $87). $217K per unit would represent an extreme value proposition for end users of highly amenitized well located modern apartments and the argument for EQR to start doing condo conversions would be compelling. Recall that EQR's tenants make $165K / year. Even if that drops, think how affordable such apartments would be with a 30 year mortgage at 3%. I guess what I'm saying is, one can very easily dream up negative scenarios that are not priced in; these aren't insanely cheap and one could easily argue fundamentals are only starting to come down, but I think the underlying pure real estate value starts to bail you out at those negative scenarios (assuming urban living is desirable again at some point).

Pupil, what's your take on the offsetting effects of lower interest rates vs lower rent/occupancy? I feel like they wind up being a draw. Thoughts? I'm talking specifically multi-family. Heck, maybe we should hedge our MF exposure with some homebuilders as post 2009, there was a decade where young people moved into the city to work and fornicate. That huge demographics group now has kids and are likely looking to buy houses. I think rates are an important consideration. The most obvious would be in what EQR pays on its borrowing: EQR primarily issues in the unsecured IG bond market and its bonds have spreads ranging from 52-170 which at current rates leads to absolute yields of 0.5% - 2.6%. the actual coupons are higher (3.5% or so), so over time EQR's cost of interest should come down. But whether EQR pays 3.5% or 2.5% on its debt isn't really that important from an income statement perspective in that EQR only has about $105K of debt per unit. So on a unit level it's a question of whther you are paying $2.5K or $3.5K/year (which isn't really important or material). Considering that each unit commands about $33K of rent / year and has $11.8K of cash opex + g&a / year, changes in either rent or opex are far more important. A 10% decline in rent has 3x the impact of a 100 bp decline in interest expense AND EQR's interest expense is mostly locked in because a lot of the "high" coupons of say 4% are locked in for as long as 30 years; EQR would have to tender for bonds at a premium. Where low rates are important is simply supporting the whole market for high quality multi-family and helping control cap rate expansion. EQR operates with very low leverage, but obviously not all multifamily people do. As an example, we know that FRPH and MRP own Dock79 which has $295K / unit of debt ($90mm / 305 ) at 4.125% w/ 4 years of interest only. this is much more typical. As a former Agency CMBS trader, I can tell you that the vast majority of Fannie Mae DUS and Ginnie Mae project loans and Freddie K deals that I was buying for securitization / trading had DSCR's of 1.1-1.3x often with rosy occupancy assumptions. The availability of that extremely low cost and favorable debt supports the whole multi-family market (and single family market for that matter) and is the reason why EQR can exit its lower quality apartments at <5% cap rates. They're selling to a leverage junkies running 80%+ non recourse LTV who still is getting a decent cash flow/total return to equity because of the great financing. I do not look down on the leverage junkies; I am one myself with my personal residence. In sum, low rates are simply a market support for the value, but aren't important to the income statement, particularly for EQR. From a stock perspective, they also support the demand for yieldy REITs.

Berkshire does indeed "rely on an investment realizing its value primarily through dividends". How have the following investments been realized? Can we think of a single material winner that has been sold outright and realized tax? GEICO: bought common stock, then whole company BNSF bought common stock, then whole company, paid $35B of dividends to Berkshire last 10 years AAPL: paid dividends, hasn't sold material shares BE: no sales and no dividends, making BE an outlier, though has realized benefits of BE ownership via tax credits. NI $1.2B 10 years ago, $3B today, could always stop investing and pay divvies, was investing $2-3B / year 10 years ago, on pace for $7-$9B these days Bank of America: bought prefferred stock, got cheap warrants, exercised /converted warrant position to stock, bought more stock, has recieved dividends See's Candy: bought for $25mm, since paid $1.5B dividends to Berkshire Note that WFC is being sold down, but Berkshire has high cost lots that will probably make this a wash in terms of tax. Likewise Berkshire has realized losers like IBM and the airlines. In a world where Berkshire is "forced" to sell equities because of insurance obligations, there will have to be truly massive insurance losses that would offset the capital gains, plus they'd have to burn through a whole lot of excess cash and fixed income. I think we'll probably agree to disagree on this if you think accruing a countercyclical (gets smaller in bad times, bigger in good) 0% interest rate liability that can be deferred is substantially similar to paying that liability today. Even though the liability accrues, one still gets 100% of the dividends of the asset and also gets to use the assets to increase liability (financial/insurance float) bearing capacity. there's theory and then there's practice. the theory is that double taxation is bad and could be a reason for berkshire discount. the practice is that berkshire pays a significantly lower tax rate than many individuals and is extremely tax efficient. it rarely realizes material capital gains and pays a lower tax rate on dividends; it is a much more tax efficient investor than almost any non-index strategy. As an operating company, BNSF and BE have favorable tax dynamics. 2015-2019 =$130B of pre-tax income, $19B of cash taxes = 14.6% cash tax rate. again, I think we'll have to disagree on what matters. I do think that increasing corporate tax rates are likely and that Berkshire and all US companies will pay more taxes in the future, but I don't think that the framework of Berkshire as inefficent investment vehicle froma tax perspectice is correct. Berkshire has always been extremely conscious of tax (I'd argue to a fault).

http://investors.equityapartments.com/Cache/IRCache/e03b3c04-78b4-8606-37bf-384a94da468a.PDF?O=PDF&T=&Y=&D=&FID=e03b3c04-78b4-8606-37bf-384a94da468a&iid=103054 looks okay to me. i mean definitely some impact, but the apocalypse is at least on the come rather than here. rents are dropping though. see slide 15 with the same store rent changes. -5% to -10%. that's how they're maintaining occupancy.

The man who does rich, dies disgraced. I’d therefore put it in Hussman Strategic Growth

fair point, aryadhana's criticism is more relevant to T&T's higher turnover investment approach, thought the buffett positions still dominate the portfolio of course.

I’d do the opposite and buy duration via the 30 year zero. 30 year zero’s are at $67-$68 and yield 1.2% offering 47% upside to zero yield (and more to a negative yield) If you think long rates should be at say 3% instead, they’d fall to $41 (-40%). That’s the beauty of convexity. -1.2% change in yield is more upside than the downside from +1.8%. Japan is at 60 bps for 40y and Germany is negative at 30y. Buying bonds to hedge japanofication/deflation Etc is much more attractive to me than shorting them to bet on “normalization”. Normalization means capital will return more and that’s not a risk I’m worried about. That short will potentially work against you while your stocks are going down. On the personal front, I'm also already short a boat load of bonds via my 95% LTV mortgage. if we get inflation / rate increases that kills the value of long term liabilities, that short will be great to have on. Deflation is much scarier. If a normal Joe Shmoe has 30% in bond index at a 7 Or 8 duration, his whole portfolio has about 2 points of duration (30*.07). Why not instead have 5-10% in ultra long duration and achieve similar or even higher durationas jo Schmoe with greater convexity? The reason to not do this is most would advise to diversify duration risk across the yield curve, so that you aren’t making a curve bet. I say phooey to that. Go long volatility and convexity with a barbell and buy super long duration (in small size) and don’t bother with the rest of the bond market. If you want to make it even spicier, TLT call options or long 30y futures options would allow you to risk even less capital and get more duration /convexity

i think we are all in agreement, I'm just saying i'm not going to be super aggressive on the average down; that may have more to do with the state of the rest of my portfolio and inflows more than the merit of the idea! ;D

there it is. thanks gfp! So Berkshire pays an equal to (and in many cases lower) tax rate on dividends as individuals, and has historically done a wondrous job of deferring realization of capital gains. Biden wants to make capital gains and dividends taxable at the ordinary income rate, and to increase the top federal rate to 39%. this means for californians, marylanders, new yorkers, etc. that one could pay an effective income tax rate on divvies/cap gains of over 50% (39%+13% for a wealthy californian). Holding low turnover equities through an insurance company that retains all earnings can be much more tax efficient than holding directly in a taxable account, particularly for high income blue staters. So again, I don't think tax inefficiency is a reason for a berkshire discount. if anything, some people seek out berkshire for its tax efficiency. I know I like it for that (in planning out my family's tax situation, i can count on Berkshire not generating income). whether you own $10 or $10mm of berkshire, the tax bill is the same: $0 (as long as a wealth tax is not enacted, which we did just see AOC propose a tax on unrealized gains for billionaire NYers and have seen wealth taxes proposed by democrats, mostly on very very wealthy) Recall that 97%+ of shareholders voted against a dividend. there's a reason for that. trust in the capital allocation, but also fear of generating taxable income for berkshire's wealthy shareholders. https://www.sandiegouniontribune.com/sdut-berkshire-hathaway-shareholders-reject-dividend-2014may03-story.html also aryadhana, Berkshire can't buy American Express, because then Berkshire would become a bank holding company which would have lots of regulatory consequences. the have had to seek exceptions to own >10% of Bank of America and have had to pledge to be a passive holder of AXP of which they own 18% through holding the stock forever as AXP has eaten up its share count. https://www.pymnts.com/news/2017/buffett-wants-to-hold-tight-on-amex-stake/

To jump in here, Aryadana is correct that a C Corp isn’t the “right place” to hold an equity portfolio. Put yourself in the position of a non-taxed entity like an IRA / pension/ endowment etc. would you rather hold Coke purchased in the 90s directly or through Berkshire? Directly, because KO pays taxes, then you receive KO divvies and are not taxed on them. There’s a purity to owning businesses or assets in via pass through entities or directly rather than through a corporation that has another layer of taxation But, Berkshire has historically nevertheless been extremely tax efficient and made the absolute best of a “suboptimal” situation. Berkshire is not an actively traded equity portfolio. They don’t need to sell to make new investments and have deferred like $30B of stock related taxes and $30B+ of taxes as it relates to BNSF and BE, so Berkshire in practice pays a very low cash tax rate and has had more than adequate capital to make new investments without having to sell highly appreciated stock. As noted by others, Berkshire has found ways to convert highly appreciated stock to wholly owned businesses (Duracell, Phillips, Washington Post) For better and worse, Berkshire doesn’t really sell winners, so it’s not that big of a problem, and the DTL (as pointed out by the chairman himself) has very low present value; it’s an interest free loan. Furthermore, by retaining all capital Berkshire is very tax efficient vehicle for holding outside of a tax advantaged retirement account , particularly for those of us who have state taxes to pay on gains/ dividends and partocularly if Biden gets rid of the advantage of long term cap gains for high earners. Also I believe insurance companies do pay lower rates on dividends; I have read this in the past but can’t find a source now. In sum, I don’t think Berkshire trades at a discount because of deferred tax related to equities. I don’t think that’s “the problem”.

I think you need to clearly define what you are looking for. If you are looking for equity like returns by buying performing credit with some risk, I’d opine that the Fed took that away. If you are looking for multibagger distressed opportunities, I’d opine that it’s tough to do so in that you’ll likely get primed by distressed debt funds and those who can invest in leveraged loans/new money/ etc. If you are looking to invest in bonds as a source of duration risk and carry as a diversifier but have very low return expectations and can stomach volatility, then I think there are some things out there. I posted on some Goldman Sachs backed munis that I like at $120/3.5%. They are now $140/2.2% and closer to fair value perhaps, but 2.2% triple tax free isn’t bad. Could see these tighten with tax rate increases perhaps. https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/531127ac2-liberty-ny-dev-corprev-goldman-hq-05-25-10012035/msg411747/#msg411747 I still like my world class university debt ultra longs for their convexity and duration. https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/going-looooooooong-with-world-class-university-debt/msg404545/#msg404545

My original idea was based on a few things 1. Yuppie High income renters were good credit risk and would mostly keep their jobs and pay their contractual rent. I think this was valid and played out in the results.Collections have been good. 2. Multi-family is the one of the most finance-able CRE classes out there and these REITs have access to very cheap, bank, bond, and agency financing I think this was and is valid and will continue for the foreseeable future. Their bonds trade at very low yields and others have accessed the agency market successfully (see recent JBGS press release re non recourse Freddie K loans at L+275 w/ 5 year IO. 3. High quality yuppie apartment have high NOI margins and use dynamic pricing to keep the buildings full; leading to less volatile NOI in the face of decreasing rents / increasing concessions. NOI will go down and there will be disruption, but it will be manageable. I think this has been somewhat proved out in the short term numbers but I have less conviction on this going forward based on anecdote and intuition. Summer, is the primary leasing / re-leasing season and I think that this summer is going to prove pretty bad for these guys as your older yuppie scum have been catalyzed to buy burbs houses a little earlier than they otherwise would and your younger yuppie scum are working remotely from their parents homes/second homes. I am a 31 year old member of the yuppie scum class. My wealthiest of friends have kept their apartments in SF/NYC but are living with their parents or renting Airbnb’s in less dense places. Others have let their leases lapse or paid a contractual break fee. And the throngs of new employees that move into cities are also at home with their jobs either remote or deferred. I probably expect more disruption to demand than I did a few months ago, and unlike office, the leases here are all 1 year. Office is more scary from a secular perspective, but I actually think urban multi family may see more short term fundamental issues. I haven’t bought any more multi family since my initial slug and used the rally to de risk substantially. I will probably catch the falling knife to keep it at similar size, but am not aggressively buying. Very long term, I love the idea of buying REITs with the lowest cost of capital, low leverage at cheaper than PMV and I think they fit this description.

https://www.google.com/amp/s/judgmentalmaps.com/post/115859415065/washingtondc/amp Will post more when have the time. I’m by no means a native and live about ~100 yards from the border so not an official DC resident but close.

I disagree. dissenting opinions on the true quality of management, on the decision to not sell assets immediately and grow the company, and on the right value of the stock, and on the sustainability of extremely tight cap rates in industrial have been voiced throughout that thread.

The Investment Ideas section is an investment board. Generally people respond to posts on ideas in that thread. I've always found people willing to engage in discussion of ideas that I and others post. I actually think there's a good diversity of types of ideas. There is the problem that only a few people may be interested in a type of idea, so occasionally a thread might become an echo chamber of thepupil and BG2008 pondering how wide some NAV discount could get on some doomed property company, but generally there is good and additive discussion in the investment ideas section. Or sometimes people want to talk a lot about SHLD or shorting TSLA or whatever (I myself sacrificed 200 bps to Mr. Musk in 2013, admitted defeat and moved on). I absolutely don't mean this as a personal attack deadspace, but I read your post and was thinking "I don't know who deadspace is, I wonder what companies he/she's posted about over these years that haven't got any love, so I clicked on the old "show posts" by deadspace. I found an extremely prescient call on SHOP, a bearish call on AAPL, some love for Guns Germs and Steel, then it got to Fannie Freddie / and 2017 or older and I stopped. That's a long way of saying, if you want more posts about investing in companies, maybe post about investing in companies. You had some 5 bagger+ insight into SHOP in May 2019. Kudos to you. that's freaking awesome; my posts have offered no such insight. Next time you have an insight that you feel is 5 bagger potential (hell I'll take a 2 bagger or a 1.5 bagger), post more than 2 sentences about it. This may engender further discussion of the company/idea, and improve the quality of the board. Be the change you wish to see on COBF (is channeling Dr King Ghandi (oops) too political?)

Gregmal, when ESRT trades to NAV, maybe you can start buying some more expensive and healthier fresh foods! Whole Foods, Farmers Market,fishmonger, butcher, Topo Chico, Craft Beers, Aperol Spritzes Been spending most my life, livin in yuppie elitist scum paradise! What are dividends for, if not to spend gobs of money on fine food?

Yea we have lots of those here but too many developers had the same idea and supply>demand for now. Perhaps an opportunity for the far-sighted. You can build/density with condo’s/apartments, but you can’t create any more SFH lot within reasonable distance to the city https://bethesdamagazine.com/bethesda-beat/real-estate/lauren-condominiums-sold-at-foreclosure-auction/ The Lauren, promoted as some of the most luxurious – and expensive – condominiums in the Washington region, opened in 2016 with 29 units ranging from 1,444- to -3,500-square-feet, priced between $1 million and $5 million. The seven-story building on Hampden Lane also includes a 7,300-square-foot, $10.5 million penthouse. NIH/ NIMH_ROS_MR_9.1.19 Some units include maid suites, private elevators, salons and private terraces . The target buyers were “well-traveled 50+ year old couples” according to a post on one of the developers’ websites The business plan for the development of the Lauren was predicated upon a significant recovery of the Potomac and Bethesda upper end housing market with strong buyer demand for urban, close-in luxury condominium residences which hasn’t occurred in the time frame expected,” a publicist for Lauren developers said in a statement issued Thursday. “The Potomac and Bethesda residential markets have underperformed over the past several years and maintain extremely depressed pricing relative to where housing prices were prior to the last recession resulting in limited absorption for all new condominium projects in these markets.”

Question re rent: $3500-$4000; house prices are high relative to rents, but rental SFH’s are very low in supply so it’s difficult to benchmark (I actually think this underlies the demand to buy. If you want to live in a single family home, there’s more options to buy than to rent, even if you think buying isn’t a great investment) Info: we were buyers about a year ago, in Kensington/Bethesda/cheaper parts of Chevy Chase. With its poor fiscal state, high property taxes, and low job growth, Montgomery County isn’t as hot as DC or NoVa, but we still have “good schools” and proximity to DC. 1-2% appreciation, high liquidity / supply demand imbalance for <$1mm 4BR, 2+ full bath, updated kitchen type of properties. We put offers in on 3 houses and it took a no contingency (except financing) offer that escalated to a couple percent above ask to get it. Generally 3 or more offers on each house but definitely nothing like 17!!! In our part, the $850-$1.2mm range with no work required is very liquid.you have demand from downsizers (people with McMansions in Potomac moving closer to DC after the kids went to college; these people suck because they are cash buyers and tough to compete with), builders (also cash) and Yuppie apartment dwellers who now want a yard/SFH but don’t need/ can’t afford huge house. Generally 3+ offers the Tuesday after list for appropriately priced ones in good superficial condition. Anecdotally, it’s a different market as you go past $1.3mm, more demanding buyers, less demand, and no bidding wars But you can get stuff that sits forever if someone doesn’t price appropriately or it requires work (we millennials are a lazy generation, myself included with respect to major projects so I give you credit, based in your other thread) Despite the liquidity and apparent high demand, prices don’t actually go up that much here in MoCo. We bought out house up <2% / year 2010-2019 and a $30-$40K kitchen remodel was done. I speculate that’s because DC proper has become increasingly relatively desirable with the continued gentrification (to put it politically incorrectly: people realized they didn’t have to only buy houses/go to school in the white neighborhoods, there are more places to live and raise a family than than Bethesda and that’s a good thing). Pricing is about flat since ‘07 and with rates down, it’s much more affordable, so in that weird way, I’d say prices have decreased over the 14 years since ‘06/7 I agree; thus far, market seems immune.

Since I know you all crave anecdotal data from the close-in DC metro burbs....house close to me, 3/2.5, 2500 sq feet, built I. 50’s...went pending / contingent on the day of listing @ <$900K; exhibiting the extreme liquidity at the lower end of this market.

Got involved in low mid teens, very involved in high single digits company was bid@ $14/5, sold most around there, eventually went for $17 and change to DR Horton but not for all of the company. Stock got as high as $20’s and is now $16 again (ticker FOR) as a land company for DR Horton Forestar had incompetent management and activist got them out / to change / sell company. I wouldn’t call them bad actors. There’s a long thread on it. It’s pure 100% pure pupil (hodge lodge real estate, starter position “hey there could be some value here, 30-50% drawdown, “well that escalated quickly”, but I think there’s still value here, and value was realized at slight premium to initial entry but high premium to average cost)...I think I should just short my starter positions, then go long. Bad management, not bad actors in the criminal or extremely parasitic sense though and they eventually got what small crap value activist target managements get: paid off and laid off.

House on my daily dog walk route went up for sale recently (listed May 6th), older (70-80 years) but updated nicely, not a huge yard, pretty big (almost 3K, 4 bedrooms, 3 full baths). Listed at $1.275mm and took a full 3 weeks to go pending and it’s on Zillow as “contingency”. The fact that it took three weeks to sell and has a contingency indicates it likely went below list and was not subject to a bidding war (I thought it was priced too high for that). A year ago, a house in this range selling with contingencies would not be the norm. No contingency bidding war instead. Perhaps, banks are being less aggressive with the pre-approval letters or buyers are in a better position to take some time/take less risk. Same house sold in less than a week for $1.18mm in 2018, was listed for $1.075mm, sold for $1.2mm in 2007 (little appreciation in 13 years) This is consistent with what I’m hearing; market’s moving a little more slowly, and things are perhaps a bit less frenzied, but pricing is not down year over year. The local realtors send a little mailer around with recent sales data. Same thing: pricing up but volume down. Some bidding wars on the lower /more affordable end. Nothing is moving in the $1.7-$2mm+ range. Some houses sitting for months, mostly tear downs built on spec.