thepupil

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 [email protected]; 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.

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.