thepupil

so this makes intuitive sense, but in 2005 (Katrina Rita Wilma), the last really bad season, Berkshire was flat in terms of underwriting profit. I don't know about Louisiana, but it's my impression that Berkshire has all but left the Florida Wind reinsurance market given that this was priced down to levels that they deemed not interesting. With all due respect and sensitivity to those involved in this catastrophe, I doubt it will be a material use of cash for Berkshire. 2005 Annual Report

also i think it's veyr hard to pin down a "value per foot" for anything because this stuff is not fungible. the differences in quality/occupancy/term/etc. are pretty wide between an individual REITs own buildings and then between the various REITs, and then between cities and property types etc.

this is still how I feel about all this discussion. I agree with LearningMachine's point as it relates to the operating leverage in a building. There's a good chapter in Jim Grant's book "the trouble with prosperity" that outlines the history of a single building (40 Wall Street) from its construction right before Depression to when the Donald takes it over for basically nothing outlining the cyclicality in valuations/rents of this single asset over the years/decades. I recommend the book in general. https://en.wikipedia.org/wiki/40_Wall_Street I think it's very difficult to analyze the macro and have zero answers to the "what's the rent per foot / value per foot, 3 years out" as I don't think that's underwriteable and is a cause for the general puking of these stocks. Can only observe the present de-rating, the balance sheet/leases/liquidity/quality of individual companies and decide whether or not its a good risk reward. I think this is a very unsatisfying answer and makes one feel like a sucker. But i think any bull or bear who tells you occupancy/rent per foot / whatever with any degree of precision is probably kidding themselves. I think bifurcation and a flight to quality is also likely. I own a mix of truly trophy/high quality and more commoditized stuff. In some cases (PGRE) my bear case on the more commoditized stuff is about 2/3 lower than peak prices on an asset basis. I hate to always go back to the individual stocks, but it's the only way in my view to meaningfully frame the risk/reward or what may happen in certain scenarios. As an example, PGRE owns 1325 AoA. I'm marking this at $360mm ($450 / foot. 13.5% gross rental yield, ~7% cap rate before taking into account some known/likley moveouts/bk's) in my base case and at $180mm (an unscientific 50% haircut) in my bear case ($225 / foot). this building was marked at $595 million in PGRE's 2014 IPO. I do this for their 3 unlevered buildings and get 30-60% of the stock price (bear to base) and they have 20-23% in net cash), so from cash and unlevered buildings I get 50-83% of stock price. Then I value the two trophy assets at a 6 cap (1633 and One Market), which is a significant haircut to recent trades/refinances and get equity stakes worth 30-60% of the stock price. In my bear case on those I cut the equity in half on the 6 cap. For example, 1633 broadway in a bear case is at $1.675B (they sold a recent stake at $2.4B asset value) with $1.25B of debt = $375mm equity value ($337mm for PGRE's stake). the financing is in place for 9 years and the buildings is throwing off $80 mm of cash flow after w/ long lease terms, so 4x net cash flow for the equity it feels pretty bearish to me. All in before I get to the other 8 buildings, I'm at 80-150% of the stock price. In my bear case, I assume they give up every other building and the stock has 18% downside on value basis (but would surely go down even more). so I'd repeat that to me it feels like there are a ton of problems "priced in", and that the risk/reward is asymmetric to the upside. I could be wrong and shit could be worse than I expect. Maybe my bear case haircuts of 1/3 (asset level, 50% equity level trophy asset w/ long term financing in place) to 2/3 (commodity w/ known move-out / vacancy) aren't bearish enough. Maybe NYC will be driven into the ground by its leadership. Maybe not. who the hell knows. I sure don't. we'll just have to see how dumb this post looks in a few years.

https://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/i-hate-this-post/msg235122/#msg235122 There was an extensive argument / discussion about this in 2015. I was arguing along the lines of you and cited Brooklyninvestor’s work as evidence. Then Berkshire deployed a large chunk of its cash to buy PCP and continued to reiterate they had more cash to deploy and I revised my view that Berkshire held 100% of float in cash/short term fixed income (to something lower) Since then of course, cash and FI has built back up I think it’s fair to say that Berkshire can deploy a bunch of capital at once if there’s an opportunity, but that the steady state is excessively capitalized / about 100% of float (or more) in cash/FI. This creates some quasi permanent cash drag on steady state ROE, but also increases safety as I don’t think all of it is required by regulation or anything like that.

Eric, I think this is our way of saying we are of no help. That said I am impressed by your fundraising skills/connections and wish you luck!

I use interactive brokers to buy high quality real estate. Very low commissions regularly calls with off market deals.

I have invested in i-bonds before and looked into EE bonds. The payoff structure is such that I’d rather just buy a whole life policy (which are also very low returning, tax efficient, and take a super long time to break even). Probably similar IRR at year 20 and you get a death benny

i don't think a bumpy 3-4% / year ($15-$20B) is a crazy guess. If they don't do a big acquisition/net stock purchases, they need to buy like 25 yards/yr or so just to stay cash neutral. I agree that Berkshire is price sensitive, maybe some years its 1% or some years its 5%. But to see them actually executing at about max volume is a positive foil to the strawman that Berkshire will forever accumulate excess captital. We're moving in the right direction 2018: $1.3B 2019: $4.8B 2020: $9.5B+ If 3-4% then that's about the same as S&P 500's net buyback + divvy yield, not that that matters.

https://www.google.com/amp/s/therealdeal.com/2020/08/07/kkr-teams-up-with-dalan-on-big-brooklyn-multifamily-buy/amp/ KKR buying shiny new Brooklyn portfoli for $675K/ unit. It was rumored to be in talks originally at $980K/ unit. It didn’t mention average rent/unit. Just a data point / context for EQR at $370K EV / unit and the type of haircut people are taking. Of course only 9000 of EQR’s 78K are in NYC they are at average $3900/month versus total EQR of $2800. I’m not saying all of EQR is “worth” $675K just pointing out that there’s a real post COVID trade at that level.

This could be wacky and I have no position in BAC or WFC ( I outsource that to Berkshire) but is there any thought that there was a gentle nudge from regulators that in exchange for going up to 25% on BAC, he should not be the top shareholder of other mega banks for systemic reasons. I assume he just wants to blow out of WFC and that’s that, but just throwing it out there

bloomberg tracks historical ownership. Berkshire share ownership of WFC for select dates: 1999: 57mm 2000: 15mm (it went down?) 2001-2005: 100-110mm 2005: goes down then goes up to 190mm 300mm by 2007/8, peaks at 495mm in 2015 then down to 345mm at last disclosure. I have no idea as to the accuracy of that or if WFC ever split stock or did stuff that distorted those figures. Bloomberg estimates that the total current position has a cost basis of $21-$25/share, which is great in that Berkshire is likely for the most part realizing losses as it sells (as with the airlines) and has realized $7.5B of losses through Q2. I wonder if this sparks any further actions in the stock portfolio with highly appreciated / stagnant positions.

I think we are starting to see a ceiling put on excess capital. I (and everyone) expected this Pre-covid when they announced fully discretionary repurchase and then covid delayed it; but it seems like excess capital build has plateaued and 4-5%/year share count reduction should be a reasonable base case assuming share price cooperates

obviously won't happen, but I think it would be legendary for Berkshire to just unload all it's AAPL stake and be like "yea we're still bearish, 260 yards of cash seems right, haterz gonna hate" at 15% of volume assuming no block trades, it would only take 40-50 trading days.

well he is about $50B pre-tax of AAPL wealthier. needs to buy everything else to rebalance. A whole lot has changed for the better since March.

https://www.wsj.com/articles/why-your-house-could-be-your-best-performing-asset-class-11596629101?mod=hp_featst_pos4 it's all kind of particularly funny for me, because I've always been the "don't buy a house, buy stocks" guy amongst my friends/acquaintances, but then Federal Realty Trust tried to raise my rent from $3,100 -->$3,500 and the personal circumstances allowed for a house purchase and I begrudgingly bought in a bidding war and that's done much better than any other pre-covid investment. Anyways, I thought America (and to a much greater extent Canada, Australia, certain parts of Europe) were WAY too crazy about housing and I feel like covid has put steroids into that mentality, not to mention record low rates. there's massive unemployment, but for the well-off/employed, I feel like SFH is going to be ridiculously well bid. Obviously that's already playing out, but what I mean is that covid is going to reinforce the american (and world) psyche of being obsessed with allocating too much $ to their houses. I bought my house for a 2% cap rate, so it's a double with only 100 bps of cap rate compression ;D

I thought the same, but then covid happened and my diversified liquid real estate stocks went down 30-50% and my illiquid levered and concentrated suburban single family home went up in value by 5-10%, so what the hell do i know?

Flood insurance is not bad in my experience, but wind can be really bad. My parents house is worth 2x mine and is 3x the size, but their home insurance is 25x in cost (that’s not a typo).

Agreed that there will be blood in office; we also don’t know if this is to replace their existing footage at 770 Broadway or in addition and the terms/ price. I do think it really helps the overall tone in terms of keeping office space (and high paying jobs in the glorious yuppie playgrounds that are NYC/SF/LA/DC etc) as a weapon in the war for young talent at tech/finance etc.

I promised myself I'd bump this thread when Facebook leased at Farley. of course my office stock picks are still underperforming stinkers. this is not a gloat. but I would say that leasing in general has been "wait and see, if up for renewal, renew" with a few big new leases like TikTok in NYC at 4 times square, Facebook at Farley Post office, etc.

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.