thepupil

I would suggest BXMT as a good short to express your view. It’s a diversified pool of commercial mortgages approaching 1x book; 54% office , 17% hospitality The book is 100% performing and the loans attach around 65% LTV, but there’s back leverage and office buildings are dead so you should see some defaults. $18B loan book and like $4B of equity; the losses will get nice and big quickly if office is dead. Note, I am short in small size, but not really material in comparison to the longs. There’s a thread on it, but I didn’t do much work beyond what I wrote. As far as focusing on the macro vs the micro, I’ll repeat that the micro (the leases/tenants/debt) are very important in determining one’s view. The macro could be “NYC office rents are going to plunge by 40% in 2 years!” The micro could be “Alexander’s office NOI is contractually going to go from $68 million to $84 million over the next 9 years”. Both could be correct, but lead to different positioning. A highly negative 0-5 year outlook could have literally no effect on the fundamentals / cash flow of a company (in that unique case which is a big part of my office exposure) Given the unemployment rate and supply demand dynamics, I think everyone should be bearish of NYC office fundamentals. Given the valuations of the securities (particularly a few weeks back and at the March lows) it’s hard not to be Uber bulled up. Call it cognitive dissonance but I think that is warranted when the fundamentals of these buildings in many cases are locked in for a long time or change gradually. Investors can shy away from office and have been; that has little effect on the cash flows. I will say that with VNO’s big move up lately, it’s getting a little scary in that we haven’t heard about Farley Facebook in a while, since it was leaked they were trying to sign by Memorial Day weekend. If Facebook walks, I think VNO will go down a lot irrespective of valuation, feel free to place your bets!

I would encourage you to have a look at the numerous threads on office REITs and assess whether that is the case. PGRE derives <5% from retail, parking, theatre ALX has about half its NOI from retail, but that's because they own a lot of retail in Queens. For their main office asset (731 Lexington), the office is far more valuable. CUZ doesn't have much. Vornado is the most prominently "retail-y" pure office REIT (ALX has more, but its not an office REIT, it's a cash + bloomberg bond + Queens Retail + Queens multifamily + office residual REIT). Note that some of ALX's retail is rock solid, like Costco/Ikea etc. Some is not so good (Container Store). https://therealdeal.com/2019/04/18/vornado-sells-45-stake-in-prime-manhattan-retail-portfolio-valued-at-5-6b/ Vornado has about $1 billion of office NOI and $200mm of retail NOI at share, the bulk of which is derived from Upper 5th Avenue and Times Square (the stores that are being looted). As of the great 2019 retail de-risking event, Vornado's exposure is primarily through a joint venture with a wealthy family (Crown Acquisition's) whose patriarch died of coronavirus recently (RIP) and whose son is head of retail at Vornado (Haim Chera). The other JV partner in the common equity is the Qatari sovereign wealth fund. Vornado sold half its equity in the bulk of its retail last year at a sub 5 cap. In order to avoid transfer taxes / a big cap gains hit (or maybe to help get the sale done), Vornado provided seller financing in the form of a $1.8 billion preferred interest in the joint venture. This preferred is money good as long as the value of these properties doesn't fall to a very big degree (assuming the Qatari's wouldn't throw good money after bad to save their common equity investment). As far as what percent of value is in the retail, I'd direct you to VNO's 4Q2019 supplemental which gives a breakdown of how the company sees value. They think their NYC office portfolio is worth $18.8 billion (hilarious in the context of what's happened to the stock) and their retail portfolio is worth $4.8 billion. They have additional exposure throughout the $1.8 billion pref. So by the company's measure, about $6.6 billion of the $31 billion of assets are directly retail related. All of those values are decidedly "pre-covid" but unless you think high street retail and office have declined in a very different way, the relative percentages are the same. Page 22 https://s23.q4cdn.com/623119702/files/doc_financials/2019/q4/vno_4q_2019_supplemental.pdf Hope that helps. I am happy to be accused of focusing too much on the micro trees rather than the macro/big picture forest here, but I would encourage you all to look at the specific securities; there's lots of stuff out there put forth by me and a few others. Plenty of bull cases to attack!

Given your conviction, which stocks should we sell/short? At what price would they be longs?

Forstmann Little appears to have lasted 37 years and about 10-15 years after it made poor investments in the late 90s (just did some googling). Doesn’t that illustrate the longevity of these firms? Anyways need to go make some calls on my DynaTAC, the Quotron doesn’t seem to be working right today... EDIT: By the way, clicked on a lot of American PE firms on this list and only found 3 that no longer exist (2 of which you mentioned). Wikipedia is not all encompassing, but again, it would seem to me the evidence suggests that PE firms last a long time and very rarely suddenly go out of business. https://en.m.wikipedia.org/wiki/List_of_private_equity_firms

We’ll have to agree to disagree on the usual longevity of PE firms. I’m actually not aware of a any large buyout firm “going bust”. I googled to try to find one but couldn’t. Using some arbitrary cut off like $2 billion of committed capital for last fund, can you name a PE firm that reached that and then folded/shut down? I’m not exactly a PE expert, but can’t think of one. HF’s have far shorter duration of capital, so I’ll agree with you there. There’s lots of talk of a PE bubble, but at the same time PE has $1.5 trillion of dry powder to invest to rescue their own overlevered companies or find new deals. Anyways, was just using New Mountain as an example of what i would consider to be a price insensitive tenant. Generally I think we are going into an office downturn and you want to own buildings with long term leases with price insensitive tenants. I agree that tech is a super important component of NYC office now; We’ll have to see how things shake out; as tech gets less aggressive in leasing space that will contribute to the supply demand imbalance. Just ten floors down from New Mountain for example is MongoDB. They are on the hook for their lease for another 10 years. Guess we’ll have to see in 2030 if they still want their NYC HQ or to go totally remote.

Not sure what you are saying. New Mountain is a private equity firm; they are in the market for their flagship PE fund; it is going to be $8billion+. PE firms charge 2% on committed capital, then the management fee steps down after 5-6 years (Or sometimes when they raise the next fund) to 1%-1.5% on invested capital. So New Mountain has the old fund assets (and debt funds) paying management fees; that goes down as its liquidated. Then they have the new fund management fees which will last for 10+ years. I would consider them a very good tenant of high credit quality as their committed capital is a liability of large institutional investors (pensions, endowments, etc) Are you saying that NMC is of poor credit quality and you wouldn’t consider their lease to be money good? That seems a stretch. They have 10+ years manamgent fees and assuming half decent performance, will be raising another fund in 5 years. In the article below about their recent fund raise it talks about a 4% GP commitment, so the GP is putting in $320mm of their money into the new fund. I like obligations of firms run by super wealthy people that have multi-year obligations from big institutions. Seems safe enough to me. You can’t fill 400mm square feet of NYC office with PE firms, but you can pre-lease 65% of One Vandy to them (plus some law firms and banks), for example. https://en.m.wikipedia.org/wiki/One_Vanderbilt https://www.buyoutsinsider.com/new-mountain-targets-8bn-on-new-flagship-750m-on-non-control-fund/ Real estate is a combination of a bond and a stock. The bond is the lease term and the stock is the residual; I think a lot of buildings are trading almost close to the value of the bond; there’s massive uncertainty on the residual/stock of course because of all this stuff. But in some cases the bond portion goes out 10 or even 15 years Like ALX’s Bloomberg lease where you get average of $75mm/year for 9 years; that’s a good bond to own. Now 2029 is difficult to underwrite of course

I think the answer is a big giant “it depends”. And I think a big factor is tenant quality/profitability which will determine price sensitivity. As one extreme, New Mountain Capital leases the top 2 floors of 1633 Broadway as their headquarters, 108K square feet @ $85/foot = $9mm / year, the lease goes to 2035. New Mountain Capital manages $20B and is about to raise a new $8B PE fund on which they’ll charge 1.5-2% on committed capital. Assuming 2% on the $8B ($160mm management fee and 1% on the another Guesstimated $15B or capital, $150mm of management fee), NMC probably has about $300mm of management fees coming in. Not sure how many people work there, but they have 187 employees on LinkedIn, so I think they’re doing okay with that level of management fee which is not the only source of revenue (the deal by deal carry will certainly being in more revenue) Now is NMC going to try and save a lousy $9mm trying to weasel out of its lease or trying to move associates to the hinterland? No, of course not. If people that work there want to be in NYC on the top 2 floors of a big building, they’ll be there. If they lose one big LP for having a shitty office (do not put this past LP’s) or lose talent because some dude likes another PE firm’s office better and that guy’s very good, they haven’t saved any money at all. I’ve never met a 28 year old I banker who said “man I can’t wait to move to Westchester (or even Hawaii/Asheville/boulder, Jackson Hole” I have zero concerns about NMC not paying their rent for the next 15 years and I think the 25-35 yr olds who do all the work, want to live and work in the city On the other end of the spectrum, PGRE has a big tenant in McGraw Hill Education, an Apollo owned overlevered company in secular decline. They’ll file, reject the lease, and if the company continues to exist, they probably won’t lease 100K feet in midtown because some distressed debt fund or PE form that owns the post reorg will say “hmmm we can lease 50K feet in noweheresville for $30 instead of 100K feet in NYC for $60” and they’ll save $5mm or whatever and think that that’s important. I think supply/demand imbalance is inevitable (at least in NYC) and spot lease rates will endure significant declines for an extended period of time. I do think working in an office has appeal and that a decline in rents will increase demand and also decrease new supply formation, such that the fundamentals of the far out years are more likely to look like today (the peak) than the trough. If you think rents go down 30-40% and stay there, you don’t really want to own any offices (They are priced such that you probably won’t lose a ton of money, but you may not make any). If you think the potential for long term mean reversion (after the fall) and the NYC premium continuing exist to any degree, you want to own these. To mitigate risks and have staying power, focusing on tenant quality and lease duration is important, even better if there is non recourse interest only financing in place, or unlevered buildings, giving the equity full access to contracted NOI / cash flow, which again de-risks you. To use PGRE again, they do about $700mm or rent /$400mm NOI/$50mm g&A/$120mm interest/ $200mm ish free cash flow. 40% of leases expire in more than 10 years and the WAL is 7-8. Let’s say FCF glides to $100mm over 8 years and averages $150mm/year as tenants go bankrupt or space is renewed at lower rates. Over 8 years the equity would get $1.2B of FCF; the stock trades for $1.4B equity (market cap less net cash). There are some holes in this argument (not all their maturities are that long) but my point is that contracted cash flow de-risks you over time. They also own 2mm sf w/o a mortgage. I don’t think I’m going out on a limb and saying the share price implies almost no residual value for the buildings; I can’t tell you the future of remote work, only the present of low valuations a a collapse in implied value/foot / rapid rise in cap rates. https://www.google.com/amp/s/www.globest.com/2018/05/03/mcgraw-hill-moves-from-midtown-south-to-midtown/%3famp=1 https://www.google.com/amp/s/therealdeal.com/2019/02/05/asset-manager-new-mountain-capital-inks-100k-sf-lease-in-midtown/amp/

Hope everyone is well. Here's an example of a fast growing, young hip, tech company with little prior NYC footprint signing a 10 year, 232,000 sq feet, replacing Skadden (super high paying) tenant who is moving to Hudson Yards. TikTok wants to be in NYC. TikTok has about 400 US employees, most in Culver City, Calif. Its expansion into Manhattan, where it had only a small office, is a big step forward for the company. ByteDance is in the process of gradually moving its “center of power” away from China, Reuters reported this week. #confirmationbias #potcommitted #belowPMV #youngpeoplewantogetpaidandlaidinNYC

Hey guys, As I've alluded to in a few posts, I've been on garden leave for the past month or so while normal garden leave activities of world travel and the like have been banned. I've used this to exercise, hang out with my wife and dog, and mostly research and punt around real estate and other asset-oriented securities. The time for doing this all day and night and writing about it has come to an end, as I need to prep for a new job that requires me to learn about another asset class outside my existing knowledge base and will certainly take up all of my time for the foreseeable future. I also have been a bit...obsessive over these past few weeks given what I see as a once in a long time [i won't say a lifetime] opportunity set where commercial real estate has experienced a broad based de-rating and securities more generally have exhibited a lot of wacky volatile trading where one could buy even some very nice non RE businesses quite cheaply, then sell/trim them as they sharply re-rated. I could be wrong and the Depression 2.0 crowd can point out Pupil in the soup line when he loses his job and his RE investments go to zero, and use my posts as an example/case studies in the future. I think this will go down as one of the best opportunities to have purchased high quality bricks and sticks [though am by no means calling a bottom] so we'll see how all those things work out in 1,2,5 years. I've avoided all out disaster thus far, but make no mistake, I'm down a large but not entirely crippling 25% or so this year after underperforming a little last year, so you all can feel free to point out "hey that guy pupil disappeared after some of his names blew up...classic". Being good at my job is important to maintain inflows into the portfolio, which i think is well set up for the future after using this sell-off and volatility to diversify/upgrade/etc. To continue to be obsessive with PA investment and COBF posting while ramping up a new job will have an undue negative impact on the other things in my life (health/family/etc.). Simply not enough hours and I owe it to the new folks who hired me to focus on that. I like it here a little too much for my career's and wife's own good and my income statement and career trajectory remains far more important than my balance sheet and personal enjoyment from shooting the shit with you all. I've really enjoyed COBF over the past 9 years and will continue to have a presence, albeit much reduced. It is possible, but not confirmed at this time that I will not be able to post at all for compliance reasons. I hope you all have found the flurry of posts over this time (and back further) helpful; I have learned a lot from all of you. I'll check PM's occasionally and my anonymous email is thefinancepupil@gmail.com; I'm in the DC area for beers and investing talks if/when normalcy returns. It is self important to pen a goodbye letter of sorts, but I'm a self important guy!

I am obviously #teamoffice. Recognizing not everyone is a bond trader, I can’t imagine my experience working as a trader for a big bank from home. Now at 31/married/with established network and significantly decreased social energy, sure, I can do what I do from home for a couple days a week. But it would be very tough to do a day of meetings face to face without being able to go to NYC and meet a bunch of people on one day. - You can’t get hazed / learn how to fill orders without getting coffee and lunches for the whole desk in a home office -you can’t watch and learn how your MD handles various relationships on Zoom - you can’t walk a few blocks to a steakhouse and entertain clients, then walk a few more blocks to meet your college friends for dinner then take a cab to the late night bar / club - you can’t go grab drinks with a sales guy/gal that you butt heads with or grab drinks with your fellow analyst or meet up with the VP who went your school and wants to give you some mentorship, or catch a glimpse of Jamie Dimon walking the halls or - you can’t hit on other interns/analysts from a home office - and you can’t trade bonds from a 2 bedroom that you have converted to a 3 bedroom to accomomadate your investment banker and equity research guy roommates. These all seem trivial, but they are life for a young Wall Street type and I’m sure many other professions. Not to mention the entire ecosystem of bartenders, baristas, shoe shine glguys, seamless delivery people, caterers, restaurants, security, cleaners, front desk people, dry cleaners, Uber drivers,Whose jobs depend on people going to the office. Oh and property taxes. What percent of muni budgets are from office buildings?

I find this "work from home forever" concept to be an all out assault on the precious way of life of the high achieving finance/law/tech bro trying to get laid and paid in the pulsating masses of human flesh and concrete that are our great american cities. is the era of the city as a glorious playground of the young and moneyed (or simply wannabe moneyed) over? #savethefinancebros

Hmmm, 1) bank’s de-levered and de risked over the past decade. 2) large cap tech is extremely cash rich (GOOG, FB,MSFT, AAPL) and did not really lever up (though some did issue bonds) and these are the drivers of the index’s sales growth and stock price return (unsure on EPS) 3. Most of the S&P 500 has what I’d regard to be low debt to EBITDA Can you point me to some S&P 500 specific data that indicates they levered up? And what % of the S&P the guilty parties conprise? The corporate / US wide includes PE owned and small companies which are a different and far more levered story I have looked at this before and always conclude that large cap blue chip stocks have little balance sheet risk. My posts on this (and counters to it are in an old thread I can’t find at this time)

and just big picture, GOOG went from $30 bilskys to $166 bilsky's of revenue over that time frame. i make this point often enough, but I'll just say that one can own both Berkshire and large cap tech. I think Berkshire's grown its intrinsic value per share over the last decade at a very nice rate that has preserved and grown shareholder purchasing power. Regardless of whether they are currently "expensive"* large cap tech has done that to a far greater degree and created gobs more value. This doesn't invalidate Berkshire ownership and you are still allowed at the Berkshire meetings if you admit you own tech stocks. Even dear Uncle Warren has made one of the FAAMG's his third largest subsidiary (1. Insurance 2. Railroad 3. Apple). you don't have to choose between the two. *I think they are and I think Berkshire is "cheap"...anti-berkshire sentiment is high and love for FAAMG seems to know no bounds, but we shouldn't kid ourselves and pretend that Berkshire has grown in value in the same way these cash spewing colossi of capitalism have over the past decade.

that's correct. people put them in the "absolute return" allocation. I just googled "baupost" and "absolute return" and found this: https://finance.uw.edu/treasury/investment-managers-as-of-June-30-2009 It's old, but its consistent with the idea of them being much more of a "other stuff" manager than a pure equity manager when you look at how a Baupost investor categorizes them and their peers. Again, I think most know that, but (perhaps unnecessarily) providing context.

Yes, it is true of all his stock picks. I just felt the need to contextualize it (perhaps unnecessarily). he probably bought GOOG/FB in the face of collapsing ad spend because the EV of those companies also collapsed and maybe an analyst there does some of the usual ex Waymo ex YouTube ex Cash ex other bets math that folks do to get to very fair prices for world class business. I added to my GOOG/FB on the way down even threw in some CRM in minuscule size. I’ve really struggled to hold onto them though. Fundamentals are just as bad and the EV went right back up

I think you all are making too Much of 1-1.5% positions (Baupost $20-$30B AUM with these at $350mm or so) in cash rich companies whose enterprise values fell by 30-35% in the Q in which these showed up on the 13-F Alphabet and FB together are about 5% of SPY; they are about 10% of Baupost disclosed US equity portfolio ($600/$6B-$7Bish) and a 1-1.5% position of total AUM.

Quitting a stable job at the start of a global recession/depression does help one post a lot You all have me for 4 more weeks...then my days belong to my new employer! I’m going out with a bang, so many worthless buildings to buy before then! Thepupil, Can you update us on what you are doing job wise? I remember you mentioning it in a few of your posts. I hope you'll be able to post as freely in 4 more weeks. Would hate to lose your awesome high octane posts!! Just want to add that Pupil's post along exhibits power law dynamics that makes this forum much more valuable since Covid. thanks, I feel that I've provided excellent alpha shorts to the board. I disguise them as longs/starter positions.

Quitting a stable job at the start of a global recession/depression does help one post a lot You all have me for 4 more weeks...then my days belong to my new employer! I’m going out with a bang, so many worthless buildings to buy before then!

sorry what does that have to do with Prosus/700HK? do you mean the performance/resilience of big cap tech is scaring the shit out of you or do you mean the dip buying in WFC is? or both?

sold Prosus, purchased on 3/24 mostly, for a 40% gain. still "cheap" to 700HK/NAV but this is my way of sizing down the big cap tech exposure, selling out the chinese one. holding onto the other ones is hard given the absolute/relative valuations, but I'm doing it.

I ask because I occasionally troll Loopnet for anecdotal perspective on CRE prices and I have never seen a single property that one would describe as "attractively priced" and sometimes I feel like the brokers / sellers are taking crazy pills. For example, this just showed up in my COBF banner ad. https://www.loopnet.com/listing/plaza-del-mar-at-fort-lauderdale/18677603/?utm_source=criteo&utm_medium=banner&utm_campaign=costardiamondad2020 This is at $470/foot. At that price, KIM (an owner of shopping centers) would be worth $32 billion. it trades for ~$10 billion enterprise value with a $4 billion market cap. KIM could be cheap [i think it was much better risk reward when it traded in the low teens in 2018 than at $9.5 now, much has changed), but I very much doubt that KIM is a 6.5 bagger (or worth 2x its 2016 post GFC high). KIM trades for $138 / foot on an EV basis. ($10 billion / 72 million) Is this property 3.4x better in quality than KIM's? No, of course not. I mean...as exciting as being anchored by Joe Picasso's, a pottery party studio? is... Now obviously any real estate listing is "aspirational". Other than idiots like me operating in residential bidding wars (I bid on a house within 3 days of listing because that's what everyone does around here), no one calls the broker and says "ya I'll pay full price". But how far off are these listings? Are schmucks on Loopnet listing $15mm properties at 3x their value? Because that helps no one. It tells a buyer that the seller is completely unrealistic/irrational and no one makes any money [namely the brokers] because transaction doesn't occur.

Akre is a super rich, super successful dude who follows a consistent investment process. I imagine he is tax sensitive and find the series of events discussed here to be consistent with all of that. the dude has like 3-10% turnover and doesn't trade much and has been growing in value and receiving net inflows, and has a lot of highly appreciated stock, and manages a RIC that passes on realized gains to his clients (who get annoyed by that). put yourself in his position and think how he operates as a PM. when your AUM/fund size is going up and if you aren't buying more stock (as in Markel), you are selling the position and vice versa. you are making the company a smaller determinant of your absolute and relative performance by which you are judged and by which you receive inflows which determine your wealth (in addition to your own balance sheet investment in the fund compounding). I think there are many reasons to own or not own Berkshire that are completely independent of Chuck's tax management/portfolio clean-up / whatever is going on here. I doubt anyone owned Berkshire because of Chuck's ringing endorsement via his 40 bp position, that is now sized down.

As of July 31st 2019, the Akre Focus Fund owned 200,000 B shares, a 0.4% position https://www.akrefund.com/wp-content/uploads/2019/09/Akre-Focus-Fund-7.31.19-Annual-Report.pdf As of January 2020, the Akre Focus Fund owned 200,000 B shares, a 0.3% position. https://www.akrefund.com/wp-content/uploads/2020/04/Akre-Focus-Fund-Semiannual-Final-1.31.20.pdf they could have just realized a loss and are using the opportunity to sell some highly appreciated shares. For example, they sold 1/2 their Primo Water shares. No idea when they bought but maybe they are realizing a loss (based on the stock price) and used that loss to offset the gain on sale of the berkshire (which I assume has been held forever)

I agree with you that BRK > MKL. I would also point out that again using the Q1 2018 13-F's and the Q1 2020 13-F's, Akre has gone from owning 3.7% to 3.6% of MKL and it has declined from 8%+ to a ~4% position. Akre has been "selling" MKL in a tax efficient manner via dilution with inflows and letting other positions get bigger.

I consider Berkshire highly regulated because it has ~$100 billion of accounting equity (more by market value) in utilities and railroads. While railroads are less regulated than in the past, the history of the industry is one of very high regulation and Buffett's letters include the railroad in discussions of the partnership with regulators/government/constituents IIRC. Berkshire is the 4th or 5th largest bank by look-through owned deposit share. Berkshire is a large insurance company. Berkshire has not demonstrated ability to re-invest the bulk of its free cash flow in high returning acquisitions or organically over the past few years. Instead it has piled up excess capital (as discussed throughout the board). Berkshire is my family's largest position, but I just don't think it meets Chuck and team's criteria and I once spoke to Tom Saberhagen when he was there and asked him why they owned Berkshire and he described it as a legacy position that didn't really meet their criteria because of its size/stodginess/relatively low rate of intrinsic value compounding.