thepupil

I don't find it troubling. Berkshire doesn't really fit all that well with Akre's current investment strategy given its lack of very high returning re-investment opportunities. This was 75 (90 bps, forgot to look for A shares) bps of their 13-F in Q1 2018 (as far back as free version of Whalewisdom goes) and is now 10 20 bps. It hasn't been a top position for a very long time and may not even be in the fund (could have been held in an Akre managed SMA) but I didn't confirm that. Judge Berkshire and Akre separately, but I don't think this data point is worth anything. Is something going from 90 bps to 20 bps when the manager has like 70-80% top 10 name concentration important? this isn't news. https://www.akrecapital.com/investment-approach/ 3 legged stool criteria, I would argue that Berkshire scores poorly on a relative basis in what I've bolded / enlarged. It scores well on others and is far cheaper than a lot of what Akre owns, but Akre does not prioritize cheapness. BUSINESS Enduring, predictable high ROEs* and FCF** Identifiable, sustainable competitive advantages Pricing power in excess of costs, inflation protection Easy to understand Normally avoid return-regulated industries Strong balance sheets icon box image MANAGEMENT Management with exceptional skill, integrity, and passion Treat shareholders like partners Indifferent to Wall Street’s short-term focus Lean corporate culture fosters independence, accountability Compensation rationally determined icon box image REINVESTMENT Pattern of disciplined reinvestment Extensive opportunities to reinvest FCF organically or through acquisitions

just read the results and the call transcript. my thoughts on RESI are more or less unchanged. $216mm of revenues $43mm taxes, insurance, HOA $47mm of repair maintaince, turn $126mm of annualized 1Q NOI $61mm of interest (3.7% rate wgt average, pretty short in nature) $65mm to pay G&A / give to shareholders / de-lever, maintain the houses $25-$30mm of G&A $40-$45mm to maintain the houses / give to shareholders/de-lever. I mean that's kind of interesting when the equity is $370 million but they own 14.5 thousand homes that aren't in the most wonderful of neighborhoods, that are old and RESI's been a shit show for 7-8 years so I would imagine there's a bunch of deferred maintainance and roof replacements and blah blah blah on the horizon. $1000 / year per home on that is $14 million and that could be too low (potentially very low). It just doesn't feel like a lot of cash is left over to de-lever or true "owner earnings" just to throw out a bit of a strawman, Paramount Group owns 1633 Broadway which generates $190 million of rent and $120 million of NOI (63% NOI margin). One building in NYC generates the same amount of NOI as this entire collection of 14,000 homes. 1633 Broadway has a 10 year mortgage at 2.99% interest only maturing in 2029 with the bulk of its IG tenants leases extending well out. I'd rather rent to Allianz, Morgan Stanley, Warner Music Group, New Mountain Capital, etc. for 7,10, 15 year leases and only have to manage one building then have to deal with 14,500 lower to lower middle class renters in bunch of 40 year old homes that have either been NPL's or owned by this thing for a long time. I'd rather borrow for 10 years at 2.99% interest only with 50% (using bulled up LTV) then borrow in all these 70-80% levered securitizations/repo that mature over the next few years. Now its an unfair comparison because NYC (and particularly NYC office) is super scary right now, but I would be more scared of the RESI's tenants (who are all losing their jobs) than 1633's.

Tough to summarize all my thoughts on RESI. At the risk of carpet-bombing you with a bunch of stuff, I'm going to copy a string of e-mails from 2016 re RESI to provide background on my thoughts. For additional background (the prequel?), I suggest the AAMC thread. I'd focus on the leverage and the nature thereof, the money from Amherst may mitigate this and they may have already addressed it, but a decent portion of the assets are still funded with repo that needs to be rolled, right? Also, I think RESI's lower margins are structural and that the properties are lower quality because of the terribly misaligned structure throughout RESI's life where they were encouraged to grow very quickly to grow AAMC's fees. it's probably cheap, but I'd rather be buying other stuff (less leverage, higher quality, is this still seriously the same management?) January 15th 2016 January 20th 2016 January 20th 2016 January 28th 2016 February 11th 2016 May 11th 2016 (in response to shift in strategy) June 16th 2016 June 2016 December 2016 March 2017

well, I still couldn't bring myself to buy AMZN at any point...

it is less of a debate than it once was, but some others may recall the discussion about whether or not Amazon's additions to negative net working capital should be part of their free cash flow calculation or not. I remember this being a big deal as late as maybe 2011/2012 in terms of discussions about Amazon's earnings power / valuation / growth etc. There was a blogger / seeking alpha author named Henry Schact / Lonely Value Investor. He wrote an article where the crux of the thesis was that AMZN was overvalued and that ultimately GAAP earnings equaled earnings power because he treated the additions to negative net working capital (or subtractions in some sense....the ever growing negative net working capital) as a loan that would "one day" come due. as a young whippersnapper who'd read Graham and Buffett and was an impressionable young fellow coming out of college, I largely agreed with him. I never shorted AMZN, but I didn't buy it because...you know it's expensive and once growth slows their true earnings power will show that it's really overvalued. https://seekingalpha.com/article/200612-the-amazon-tulip-bulb the stock is up 17X since that article. Some comments from that article by Mr. Schact: LOL. In answer to your question, I think they do it because they can. Whether it's AAPL or AMZN, isn't it the supplier who is bearing the increased costs? if someone give you an ever growing interest free loan or negative interest loan, you take it. Am I missing something?

I guess I just took the phrase “perpetrated on the American taxpayer” too literally. My understanding was they were buying IG bonds and stuff so I’d expect them to make a tiny amount of money on their purchase so the “direct cost” would likely be minimal unless you think the IG default rate will be very high. And even if they lost 10% it’d be a meager $75 billion, which in the context of government spending is a drop in the ocean. To some extent, whether they make or lose money (over the long term, as in are the spreads at which they are purchasing compensating for what will be the realized defaults / recoveries) is a measure of the degree of “subsidization” of these moves. For example Fannie/Freddie has been very profitable, so I’d argue the taxpayer was not “screwed” in that case. Others may have been, but the taxpayer seems to be doing okay on that deal. I don’t want the Fed to go full Japan and buy equity ETF’s either m.

I’m not saying that I approve (or disapprove) I’m just not sure that this will be as costly as implied. They’re mostly buying IG, right? I read they may buy some junk ETF’s and fallen angels and would expect them to lose a little dough on a few IG defaults, but it’s not like the Fed is buying CLO equity and California Resources unsecureds, right?

How much money do you expect the taxpayers to lose via this program?

haven't high quality companies in Europe and Japan traded at nice multiples throughout the low rates and low growth? I can't find data over time, but I'd point out that "quality" companies in these parts do trade at a healthy 19x earnings. They don't trade at 40x instead of 20x because rates are zero instead of 1 or 2%, but it's not like they trade at 10x or 13x either. I mostly agree about your point about banks. I think low rates/growth are an argument for multiples of high quality super long duration assets holding up, not necessarily banks trading at high earnings multiples. japanification/europification will not be kind to banks (though I think American banks are in much better shape) MSCI Japan Quality is at 19x versus MSCI Japan at 13x https://www.msci.com/documents/10199/83875536-eccc-410e-ac69-0e56010de620 MSCI Europe Quality is at 19x versus MSCI Europe at 13x https://www.msci.com/documents/10199/3bc1a893-9602-45da-ba28-24220cec261f MSCI EM Quality is at 18x versus MSCI EM at 13x https://www.msci.com/documents/10199/a032d7c7-e72a-4f02-b95a-6aaa77fcd152

if we can count BDC's I'd say Oaktree Specialty Lending is under-levered relative to competition and could be considered more ready than others to pounce, but deciding who gets the best opportunities amongst the OAK/BAM tree may be difficult. Obviously tons of PE / Credit firms have a lot of uncalled commitments, but that's not what you are referring to. I'd be careful with EQC at these prices, particularly in a taxable account. it's at $4.1-2 billion w/ $3.3 billion of cash and ~$700 million (at full valuations) of buildings, so it's about 105% of NAV, but you have big special divvies due to shareholders because of big taxable gains this year on sales. So about $400 million (I believe and possibly more if the remaining buildings are liquidated) needs to make it to shareholders pockets before January 2021 (per the most recent call). So you want to own EQC in a tax-advantaged account and you want to be mindful that it's a partial forced tax related liquidation. at 90% of NAV (it got to like 85% in the most recent turmoil, offering great risk adjusted returns, but high opportunity costs given the state of other securities at the time) that's great. At 105% of NAV, that can bite you in the ass a little and increase your effective multiple paid for the call option on Sam Zell and team's brain. Buying EQC is like buying a distressed fund where they call all your capital upfront and then may or may not do anything with it. I owned it for 6-7 years (as chronicled in the thread) and made a safe mid-high single digit compounded, but I think you have to be very price sensitive about it given the tight NAV range. Of course if they do an awesome deal, it won't matter whether you paid 95% or 105% of NAV. But that would imply that the market will immediately give them credit for the deal's awesomeness. you may have time to buy w/o paying much more [maybe even less] after deal announce or you may not.

it depends where he works, but in most cases he would be taking more career risk arguing to do nothing.

Speaking of Sam Zell... EQR reported yesterday. I think it illustrates what's good/bad about these things generally. what's good is that nothing looks dire and they are keeping the buildings relatively full, NOI flat-ish, the exodus from the $2,800 / month (EQR's average) apartments hasn't started just yet. they sold $370mm of apartments at good cap rates (4.5-5.0%) of course that's 1% of their asset base and printed a nice $450mm secured loan at 2.6% interest only for 10 years (that's 4-5% of their debt). this was a lower conviction basket for me that has already been sized down significantly (AVB is gone, CPT/ESS are trimmed, and EQR has not been touched). I think these guys have a big cost of capital advantage and are well positioned to step in and buy assets if things get worse, but don't see them as super "cheap" at this time (18x annualized 1Q FFO with guidance withdrawn) my thoughts remain unchanged. Using EQR as a proxy, the sharp move from $90 to $50 was an opportunity (really it was a REIT-wide opportunity as IYR gave up 9 years of price appreciation as of March 23rd) even the darling-est of darlings (industrial bellwether PLD) went down a lot. it still wasn't all that cheap on an absolute basis given multifamily has been a darling for a decade, but if you don't buy anything when prices go down by an almost unlevered 35%, I don't think you'll buy if/when they're down 50% (if you think that they're going down 80%, well you can look at me in pity while I'm in the soup line). the move from $50 to $70 was adjusting to a more appropriate move down (in my humble opinion). I think they're kind of myeh and will wait for more clarity on fundamentals and / or lower prices. i think they are far superior to investment in private residential real estate. insert folksy metaphor about a manic depressive neighboring farmer offering to buy your farm for wildly different prices here. Collections were good, but even EQR's affluent tenants have had some issues with delinquency going to 5.4% (up from 2.5% last year) Sold $478 million of property weighted toward San Francisco at 4.5% - 5.0% cap rates (prices agreed to pre-covid I assume) Borrowed at 2.6% interest only 10 years....as The Mask would say...Smoooookin! $2 bilsky's of revolver and de minims maturities/development commitments..though given where rates are you'd want more maturities.

I had been under the impression that he has generated sizeable alpha for his clients over many years. I also like what he says when he's on TV, makes a lot of sense to me. I don't know anything about the "Fairfax affair" As discussed above, Institutional Investor claims to have seen fund documents which state his fund that combines "mostly passive" long exposure and a highly alpha generative short book has made 28% / year up until 2017 (the time of the article) for decades. The same article claimed the short biased (maybe short only) Ursus Fund has only lost 0.7% / year for decades. Both track records are ludicrously good. Anyone is free to dislike Chanos for the above anecdote about Fairfax or whatever. But all evidence and data that I've seen (which is generally years apart and a fact sheet or two or the II article) indicate he's a spectacular investor. To the extent that he has 50-80 positions AND generates the alpha that the II article claimed and the original fact sheet provided at the beginning of this thread also corroborates, I would argue that makes his track record even more impressive; he isn't a one-hit wonder and has arguably taken lower risk by diversifying. this may also explain his longevity relative to other L/S managers. Passive longs (sticking to what one is good at) and a humbly diversified alpha generative short book appears to be a formula that has worked very well for him. #teamchanos (can one be on #teamchanos and #teamackman at the same time?) I am repeating what i have posted before because there still seems to be some murkiness about his track record. The II article is the best data we have, unless someone else has other data.

Also I’m really stretching here, but he did get long about $14 billion of index as his short puts got into the money (on a notional basis, less so on a delta basis)

Agree completely. And just because he’s not doing much, doesn’t mean we shouldn’t be. It’s a data point, but surely everyone’s 6-7 figure (maybe some 8’s) balance sheet and capital structure and mandate may be different than a $700B asset insurance/holding company. I own Berkshire. I’m fine with him piling cash. I own Pershing Square, I’m fine with him doubling down on his restaurants and hotels in March. I own Vornado; I’m fine with them investing 1/3 of their market cap in mult-decadal commercial development atop one of the most dense transport hubs in the world (the ultimate covid fade) Let people do what makes sense for their business and do what makes sense for you. I have little cash. My retired parents have a lot of cash and fixed income. There’s no one truth or absolute or right thing to do for every actor. Maybe that’s just me saying “I’m entitled to have no opinion and just blindly buy discounts and have no real philosophy or conviction.”

Just say you are a ron-tee-ay (rentier). Most will look at you puzzlingly and not ask further questions. Fellow rentiers will be impressed.

You are a boutique investment manager that is very selective with respect to taking on any new clients.

I see that he purchased $4billion and sold $2.1 billion. Where do you see he trimmed $4-$6B? By the way, the realized gains are a large percentage of the sales proceeds. He is selling very profitable lots, maybe KO or 1990’s WFC? Bloomberg: Buffett Stays on Sidelines With Cash Pile Rising to $137 Billion Saturday, May 2, 2020 08:11 AM By Katherine Chiglinsky (Bloomberg) --Warren Buffett’s Berkshire Hathaway Inc. spent the first quarter building up cash as the coronavirus slowdown started to grip the U.S. Berkshire ended the period with $137 billion of cash, a record for the conglomerate. That was up almost $10 billion from the end of 2019, while the famed investor spent just a net $3.5 billion buying shares of his and other companies. Key Insights Buffett, Berkshire’s chairman and chief executive officer, has been on the hunt for higher-returning investments such as acquisitions or stock purchases for years, but has struggled amid what he called “sky-high” prices. Buffett will host Berkshire’s annual meeting virtually on Saturday, starting at 3:45 p.m. in Omaha with key deputy Greg Abel by his side. Buffett’s longtime business partner, Charlie Munger, won’t be in attendance. Follow the TopLive blog here. Berkshire’s first-quarter net income plunged to a loss of $49.7 billion, driven by unrealized losses in the massive stock portfolio. Berkshire bought $1.8 billion of stocks on a net basis in the period as the market plunged amid widespread fallout from Covid-19. Berkshire took a more cautious approach to stock buybacks in the first quarter, repurchasing just $1.7 billion. It spent a record $2.2 billion on buybacks during the last three months of 2019. Market Reaction Berkshire’s Class A shares have dropped about 19% this year through Friday’s close, worse than the 12% decline in the S&P 500 over the same time period.

my goals with energy are a) own more than 0% in it b) position myself in securities that I don't think will be massively diluted or PRIMED. I think any OXY debt instrument has the potential to be primed by Berkshire or anyone else* c) not be dependent on any one basin or geography I know very little about energy. I own BSM,XOM, and MMP (though my MMP is temporarily swapped into ATMP and some XOM is temporarily swapped into PEO (both for tax loss generation purposes). *EDIT: this may seem odd given that Berkshire is in the pref/common, but it would not be without precedent. For example, Loews owns 51% of Diamond Offshore and has a ton of cash and a good credit rating. they could have bailed out DO, but they just let DO file and the unsecured's are at 9.5 cents. So I think depending on the fact that you have an overcapitalized sponsor in a more junior instrument is not necessarily a good idea. Loews could continue to control DO but it may not necessarily be through the equity (they could be the DIP or something) or not necassilry in a way that benefits unsecured creditors. I don't like the idea of owning any credit in this environment of any issuer that may go through BK. I don't have the ability to buy loans/participate in DIPs or bankruptcy processes (if I did, I'd be 144A/QIB and be much more important than I am), so I'm very scared of getting screwed by distressed guys with more knowledge and capability. I think any thesis that involves retail schmucks buying debt to "create companies at X attractive price" is prone to bankruptcy/process risk, so to buy a bond you have to think company won't file and I think OXY [and MANY others] potentially needs to file or otherwise restructure its capital structure.

what is the source of your $60 breakeven? I think that number is the revised (lower) breakeven at which they can maintain their dividend and invest aggressively without borrowing, not their breakeven on profitability/earnings. I think you're misinterpreting a quote from the recent bloomberg article. XOM is potentially overvalued (depending on one's view of long-term oil/gas prices, refining margins, and chemical demand/margins), but I think they will survive. they have ~$50 billion of debt at very low cost and very termed out. they may get downgraded, have to cut the divvy, or invest less aggressively, but I struggle to see them not surviving. I'd also point out that XTO (the gas portions of XTO in Pennsylvania/Arkansas etc, not the permian oil/associated gas) should start earning a little more now, but I'm not super hopeful on that until we get a clearer picture of gas demand. Supply is obviously heading in that right direction if/when Permian production starts to really go down

I kind of hate the "well if he didn't buy this then..." analysis, but Akre has made his career buying/holding AMT (not unlike many great investors such as Graham (GEICO), Sleep Zakaria (AMZN/COST), etc. I am not saying that he/they are bad investors (they have absolutely kicked my ass and outperformed the S&P over the course of a great bull market). I just think that before you buy Akre, you have to have an opinion on the 12/3% position in AMT. they won't ever sell and it's an extremely "expensive" stock at $136 billion EV, which is 5x the gross value of its property, over half of which has been bought/built since 2012, 16x EV / 2021 Sales, 26x EBITDA, 24x FFO. I am just a bitter / jealous real estate oriented value guy whose index has AMT in it, so take my analysis as the sour grapes that it is. I have thus far resisted the temptation to short it as it's just one of these "inevitables/teflon" stocks. You can buy a lot of property for $136 billion.

Pershing Square buys the most it can every day, easy to do when your assets are liquid, you have permanent capital and you trade at a 30% discount despite NAV and price being at all time highs Tetragon is tendering for 3% Of the fund. FRPH is/was buying, cash rich EQC has been, cash box Big cap tech GOOG and AAPL SoftBank was available at a 60% discount to mark to market NAV after they announced the biggest buyback in their history along with asset sales (need to update math on this for today as am unsure) I bet Berkshire bought some but not a ton As mentioned above PGRE bought 5% in a quarter but is potentially on hold according to their call until some asset sales close. Naspers was doing some selling of Prosus at a huge discount to buy Naspers at an even bigger one. In general, Prosus got extremely cheap during the sell-off 50% diisocunt to 700HK holding alone. Need to check if this is the same now

Not in my opinion. I have owned those successfully in the past and don't think they are bad pieces of paper, but they are preferred stocks and not AAA/AA rated bonds. Both rating and instrument type matter in the world of insurance/pension investing (the natural buyers of super long duration, I presume). for the type of environment these things really go up on, bank spreads on junior instruments will be widening, not tightening. I don't know but are Unicredit or SocGen junior bonds at super low yields? probably yield more than LVMH or Nestle or sovereigns (or Berkshire's 0% JPY / Euro issues) For the type of trade I'm proposing, you want something that is sovereign or quasi sovereign, something that is unquestionable. If Nestle or JNJ had 100 year paper yielding 3.5-4% in USD, I'd do the same, but Cal Tech or MIT works too. I recall people telling me about their super cool Austrian 50-100 year bond shorts at 2%. Well the Republic of Austria 2.1% of 2117 are at 200 percent of par and up 100% since then while european equities are probably down since I had that convo. Before being accused of subscribing to greater fool theory and not being a real value investor for not reading my Jim Grant and thinking that to lend at these rates is incredibly dumb, I remind you that this is a small part of a cash/fixed income pile that's mostly cash, the portfolio's total duration is less than AGG. On balance, I don't love to lend for nothing. the hole in this argument is that these issues may be too small and illiquid to really get into the stratosphere. if that's the case, then my parents will just clip the 3.5-4% in their IRA's which covers the portfolio's withdrawal rate. if rates go up (particularly real rates) that would be a welcome relief after a decade of financial repression and poor low-risk compensation for savings and these will collapse in value. that would be great, but i have no reason to believe that will occur.

The very basic google search result is for lower LTV (35-50% down payments) first lien loans on investment properties owned inside an IRA. This is because you can’t own levered real estate in an IRA with a recourse guaranty because that would represent self - dealing between the IRA and owner of the IRA. There are very strict rules when you own real estate in an IRA. You can’t work on the property yourself for example and must outsource everything. https://www.theentrustgroup.com/investments/real-estate/strategies/non-recourse-loans I maintain the vast majority of residential mortgages taken out by small time folks, particularly for primary residences are recourse to the borrower. Show me where I can refi my 98% LTV primary residence mortgages to a non recourse one and I’ll send you a big thank you note and a fruit basket.

For those who don't like very long duration, but want to make safe tax advantaged yield from Princeton University. https://finance.princeton.edu/sites/g/files/toruqf151/files/2019-09/Princeton.OS_.5.5.15.pdf I have been buying various tenors of these issues. I don't love the longer one's because they are callable starting in 2025, and trade at pretty big premiums to par, creating what in the bond world we call "negative convexity" like resi MBS (rates go down, you get called and your bond is short, rates go up, you get extended and are lending long when you don't want to be). So I have been a provider of liquidity in the 2023-2030 range at 1-2.5% yield to worst, federal and new jersey tax free. you can view the whole curve easily by going on Fido and looking at the New Jersey Education issuer and sorting by rating. Princeton is at the top of the rating heap. It may have something to do with their $26 billion endowment, extremely wealthy donor base, high value proposition to customers, global brand, etc. Go Tigers!