thepupil

my berkshire's in my taxable account. I'd pay about a 9% of MV to the tax man if i sold. Berkshire trades at 1.4x book, so my realized proceeds would be about 1.25X book. 1.25x book for a diversified, well run, conglomerate seems more than reasonable to me.. I know the company well, it's very diversified, it should probably do okay over time and has low risk of permanent impairment of capital. It's not clear to me that I should sell it even if there are higher returning opportunities. I don't really manage my portfolio to maximize return. My portfolio has enough stuff with lower quality than Berkshire;. I haven't added to it in a while and may dilute its ~10% sizing over time with additions to other stuff. It's not perfect (PCP, GEICO issues, etc), but 10 yr BVPS CAGR is 11%/yr, not terrible by any means. Berkshire is one of the few stocks that I'm actually truly long term about. Other stocks I've had have got taken out, have seen my conviction waiver for whatever reason, etc. It's a lightly and favorably leveraged portfolio of high quality businesses and a decent tool to preserve and grow one's purchasing power. I haven't done the work to prove this, but I think my IRR > TWR with Berkshire given some sizing up/down on the margin. Probably low teens IRR over my ownership, which would techniclally have been a drag on performance, but in my view a very high return per unit of risk and per unit of stress. I don't think anyone should have too lofty expectations of Berkshire (or the market generally).

Interesting perspective. I've owned Berkshire since 2010/11 and been quite pleased. Here are the rolling 5 yr CAGRs for 5 yr periods ending in 2016 and later. Average is 12% with several 5 yr periods in the mid teens. What is true is that it hasn't consistently OP'd S&P500 given very very strong market returns. I'd be happy if it did 8-10% for next 10 years. surprised if <6% or >12% I agree with you on Geico. I'm not quite sure about BNSF. I think BNSF may just be structurally less profitable than UNP and BNSF has been slower to adopt PSR. I am unsure if that's a good or bad thing.

just preparing myself to lose tons of money as the apartment glut becomes ever clearer....

so having consulted the twitter hive mind, it's fair to say that CPT is not exactly at a 6.8% cap rate. It is cheaper than private market value, but the 6.8% number overstates that. You can see thread here. So what I was doing was $1000/$14,700. Some corrections. CPT owns 93% of OP so effective SO is more like 117mm, so market cap is more like $11.7B, not $10.6B. Unadjusted for developments in progress EV is $15.3 billion,. People can decide what to do with the $500mm ish of devs in progress. You then have headline NOI of $1B or so (4Q annualized and 2023E for the sell side). CPT adds back $30mm of porperty mgt expense in calc of NOI. I think that's dumb because someone has to manage them. So $970mm. There's then a number of expenses where people can choose/not choose to deduct them. $60mm of G&A (Matt/owner of 26K units deducts this, though I'm not aware of any other private market operator doing so) . Some amount of "operating capital" and if you want to really compare it to private market you potentially adjust for increase in property taxes upon sale. I frankly don't know precisely how to do this but some PE RE guys insist it's the right way to do for comparability to reported private market cap rates. The bottom line is that CPT is somewhere between 5.6% cap rate and 6.5% cap rate. And the private market is definitely lower. Same guy who said my 6.8% was totally wrong and it was more like 5.6% threw out $300K/unit as reasonable (which is $122/share). Green Street/sell side seems closer to $140. But the point is it's not like $160 or $200 and not high 6's (which was a bit too good to be true). As i said there, he is CEO of a company that owns/manages 26K units. so his view has MUCH more weight than mine. What I can't really reconcile with all this (which is effectively that REIT reported NOI is materially different from private market) is that when REITs do interact with private market they report buys/sales at cap rates consistent with my more dummy/simplified way of looking at things.

1% months of purchase price per month in rent. It’s used by Bigger Pockets types as rule of thumb. $CPT is like 0.85% using last Q.

to steal from @realassetsvalue who just posted a comp sheet on twitter (pasted below), I'm liking CPT because it's approaching a 7 cap making it one of the highest cap rate with the lowest leverage. I like basically all of these. 7 cap for blue chip multifamily in my opinion prices in a lot going wrong. NOI disappointing or cap rates expanding substantially. You have to pick your poison. You can invest in california (ESS, EQR/AVB to lesser extent, but also 7% of CPT too) and have no supply growth but deal with stormclouds of tech layoffs and blue state outmigration and all that stuff...but no supply growth...Or you can invest in "sunbelt" and have a rosier economic/demographic picture but with more supply growth. don't really have a SUPER strong view and am open to all of them, I started w/ ESS in 4Q2022 because it fell a lot for obvious reasons and am now adding sunbelt. I'll add urban coastal (EQR/AVB) too if things keep going down. the problem w/ EQR / AVB is if you already have ESS, it just becomes a big california bet. I have NEN (Boston workforce), FRPH (DC riverfront / developer), the MF side of JBGS (DC). I'm an all you can eat apartment buyer at the right price. If you want to wait for 10 caps, you are welcome to do so. I'm buying right now. I may be early, I may be wrong. But I prefer to buy things in the real world and not some apocalyptic fantasy scenario. I'm a permabull at heart.

Just to continue on the CPT train. You can currently buy CPT for what looks to me to be a $240-$250K / unit (depending on how you count the development pipeline. CPT has been consistently upgrading portfolio over last decade and has been buying apartments in >$200K / unit since 2013 (and shedding lower value properties) and has been delivering new units to the market at >$250K for a decade. The going rate for shiny CPT units that they are developing is $400K/unit. this is why when you look at a chart like this below and see that the EV/unit has come down from $350K to $245K but also note that it was $110K/unit in 2012, you have to be careful because they've been consistently upgrading the quality of the portfolio. if you look at their acquisitions and dispositions by year, generally they've been selling old stuff and buying new stuff and obviously any development they've been doing is new stuff. In 2012, the typical CPT apartment was renting for $1000/month, now its $2,200/month. that's a combo of same stor growth, but also the massive amount of change the portfolio has undergone over that time frame. they do the work for you and note that since 2011 they sold $3.4B of assets w/ average oge of 20+ years, developed $4B of assets w/ average age of 6 years and bvought $2.7B w/ avg age of 4 years. CPT almost meets the "1% rule" which I associate w/ low quality, subscale non institutional real estate and has not been available for this type of asset in a long time.

yep, i've found some at what I'd call borderline attractive levels after a 17 year de-rating (plot some of the older building DC condo prices against the median american home over time and you'll see that on average a tired condo on Connecticut used to trade for MORE than typical home and now trades for less, in some cases much less). But I just don't want to deal with that and would rather just buy the stocks on this thread.

my zip has an interesting bifurcation going on. the moribund condo market seems pretty bad (because of folks like JBGS who constantly build nice new buildings which hurts the 1960's / 1970's buildings the most. still have a few more years of working through this, high short term rates and decreasing return on development will allay the supply. single family on the other hand. you'll pry the good inventory from everyone's cold dead hands. Transactions down 43% LOL.

he is saying the market is much tighter than posted. he is a credible person who owns 26K units (or runs a company that has investors which own 26K units more accurately). I'm not sure who you are referring to.

Anyways back to MF. for those who didn’t see this, large landlord (CEO of 26K unit owner) tweeted this today and said the posted cap rates were not representative of the market and were unrealistically HIGH. while we sit here and wonder if 6.5% is going to 8%, private market still in the 4’s and 5’s, with maybe even high 3 handle here and there. that’s basically the opportunity/disconnect. https://twitter.com/MRossG199/status/1640338388459876352?s=20

everyone has their own way of doing things. I look at numerous ways of valuing something like CPT. 1) what would a sovereign, Blackstone, MAA, EQR pay? NAV today. how fast is NAV growing, how does that NAV and NAV discount change in numerous environments. 2) Perpetual constant multiple going concern metrics (dividend + growth, AFFO yield) etc there are numerous folks who calculate NAV. Consensus NAV is $140 ish at a low 5's cap. stock is at $100. so that's a good start. Now how reasonable is the low 5's? How levered is the NAV? has this mgt team historically created value? what if cap rates go to 4%? what if they go to 7%? what does that all look like. What if NOI is 20% lower in 3 years because of recession / too much supply? etc. I won't claim to have modelled everything out precisely. I kind of think of something like CPT as having a mid to HSD perpetual return (call it 7-9% / yr, 4% divvy +3-5% growth) which for 25% levered RE seems pretty damn good to me. Or you could say "at some point in 10 years, someone will pay me NAV, I think NAV is $140 because I agree with the consensus assumptions and I think NAV will grow 3% / yr), so if I get paid NAV in 10 years, I'll make a little more than 10.5%/yr ($188 NAV 4% divvy) or if I get paid NAV in 5 years, I'll make 15%/yr ($162 NAV + divvy)...or If NAV doesn't grow for 10 years because of some combo of bad stuff and it still trades at same discount I'll clip the divvy (4%/yr) or any number of permutations.

I built it using their capital structure. I assumed that at maturity debt gets refi'd at x% (in this case 10%) and then that calculates a pro-forma total interest expense. Just a very simple excel exercise. NOI and FFO and CFO, EBITDA, etc. are not at all the same thing. NOI is Revenue - Property operating expenses. It does not include G&A, interest, mcapex, etc. FFO subtracts g&a and interest, but does not include maintenance capex, CFO is cash from operating activities and may include many different other things. there are many different metrics or ways of looking at things. For example for 2023, using JPM estimates, CPT's estimated NOI is $1B its, its FFO $6.9 / share ($760mm) and AFFO $6 / share ($660mm). the delta between NOI and FFO is $60mm ish of g&A and $135mm ish of of interest and some "other expense plug that I honestly don'd know what that is. then there's an implied $100mm of mcapex ($1,600/unit/yr). However you want to look at things, the general principle is that if rent and whatever expense line item is growing at same rate, then whatever you're looking at will grow a that rate. If something is growing faster (and it's on the expense side) that's a problem. If CPT had to refi at 10%, all else equal their interest expense would grow about 12%/yr over the next 7 years. if you want to make a case that all expenses and capex will rise more quickly than rents (causing NOI/FFO/AFFO growth to lag inflation), AND we'll see cap rate expansion then you can make that case, but rising interest rates alone are unlikely to be a problem for a REIT with such low leverage and well staggered maturities. CPT's maturity profile is very typical for blue chip REITs (7.5 years appears to be the market average). Some REITs are longer like PLD and KIM IIRC. Some are shorter. you can read more about it here https://www.reit.com/news/blog/market-commentary/solid-balance-sheets-prepare-reits-rising-interest-rates

if rent and expenses grew by 10%/yr, NOI would grow by 10%/yr. (NOI - Interest) would grow at roughly the same rate. Under this scenario, the additional rent would by no means be eaten up by additional interest. there is $1B of additional NOI and $183mm of additional interest. Under this scenario Interest goes from 15% of NOI to 17% of NOI over 7 years. Does that surprise you? What matters is the relative growth between rent and operating expenses (or interest or maint capex etc). For example, if rents grew 7% but all other expenses grew 10%, then NOI would only grow 4%/yr over a 10 year period and margins would be declining (and your mcapex as % of NOI is probably increasing too). if the opposite (10% rents, 7% expense growth, then you get 12% NOI growth. What will happen will probably be like 4 and 3 or 3 and 4. (2-5%) but just entertaining the crazy high numbers for your benefit.

He’s not, $215mm is the incremental interest expense at his 10% refi rate (which I think is absurd, but likes of MAA/CPT could handle)

So I kind of loaded up today and ended up with 7% each in MAA/CPT. Sold my 29 year TIP at 1.6% real, CLO AAA at 6 and change yield to buy these pups at 6.5% CR and like a 6% AFFO yield, in conjunction with my ESS/NEN/CLPR/parts of JBGSFRPH got like low 20’s in multi family which seems reasonable to me. Lots of supply but starting with well below pvt mkt basis and leverage will (hopefully) help.

I'd think that dramatic of a move in rates zombie-fies the whole banking system given that the move to date basically killed 80-90% of capital. now the system collectively doesn't have to "mark to market", but I don't think i'd love being invested in banks if they went to like 4x their equity into theoretical insolvency, nor do i think capital return would be happening. I'm not a bank doomer; in fact I don't think there's evidence we are in a "crisis" that is widespread or important.. But I'd be a bank doomer if I thought rates went to 7-10% quickly. as for energy, I don't know. I own some. no idea where prices going. Sort of in line with what @Gregmal was saying, being so concerned w/ rise in cost of capital does push you into lower multiple sectors that have other different risks. Time will tell. But for the record, I think a 2 handle 10 year is more likely than a 7 handle . And a 1 handle more likely than a 9. given we're at 3.5%, I think most would agree. doesn't make it right of course.

It's not clear to me that there are securities that wouldn't be drastically lower in price under LMPTRHCOC. So if you use LMPTRHCOC as a base/reasonably probably downside case, I'm not sure what you could own. If there are some, I'm very interested. I think maybe my royalty trusts (unlevered and hydrocarbon cost linked) may do okay, but who knows. their success will depend on hydrocarbon px and volume of production on their land.

I don't know. that's a lot of rhetoricals and not a lot of tickers. what companies under what I'll term the Learning Machine Pet Theory Radically Higher Cost of Capital (LMPTRHCOC) scenario do you like at today's prices? what's the LMPTRHCOC Portfolio look like?

well sure, I'd like a stock like that, but that doesn't exist. If you think it does, I'm all ears. What stocks do you think fit that criteria? Of course, stocks collapsing would increase the return on redeployment, but I can assure you if risk free rates go to 7-10% and PE's go to 7x, I and everyone else is going to lose a shit ton of money and not be happy. CPT has been around since 1993. According to bloomberg, In 1994 it had 9.1mm shares. Today it has 106mm. In 2013 it had 84mm. Despite all that share issuance and "dilution", after a 44% drawdown from peak, CPT has returned 9.4%/yr over the last 10 yrs (behind S&P 500's 11.9%/yr and ahead of broad RE 6.3%/yr) and 11.4%/yr for the last 30 or so years (ahead of S&P500's 9.8%/yr and REIS 9.5%/yr. What you call "dilution", I would describe as "value accretive issuance"

this scenario contemplates high quality apartments trading to 9-11% cap rates and $150K / unit - $190K / unit on today's NOI. I can only find data to 1986, but the absolute peak CR on multifamily was in early 90's at around 9% according to what i can find. and that's before the institutionalization of the asset class. Said differently, this scenario contemplates apartments trading to 1.5-2.0x it's tenants' income and like 1/2 replacement costs (which would theoretically be increasing at inflation as well). In such a scenario, no apartment will get build (few are being approved now at current prohibitive short term financing rates). ALL risk assets will decline significantly if the risk free rate goes up by 350 - 650 bps. it's kind of like saying "what if stocks PE goes to 7x?". It's like "yea, then I'll lose a lot of money".

The 1% / year comment is in reference to incremental interest expense if they have to refi their 3.9% get average debt at 6%. It increases interest expense by cumulative $75mm over 10 years which was about 10.5% cumulatively, which was about 1%. it’s higher at 10%. The 30% of AFFO comment. there are 2 tables in the post which show how the wgt average rate changes at 10% and 6%.

I added MAA and CPT to my existing ESS today. I was a touch aggressive in buying 5.0% ers in each given the low leverage of these bad boys. For learning machine's sake CPT has $1B of 2023E NOI. and $3.6B of debt paying 4.0%. Here's how the WA rate changes with no paydown if they had to refi everything at 10%. It would add about $215mm of interest and decrease AFFO by 30% over the next decade or so. In the real world, CPT's debt yields 4.8-6.0%. If they renew at 6% over next decade about 10% of today's AFFO goes away over a decade (so a 1% / yr each headwind, assuming no offsetting increase). Note that if they have to renew at 6%, you're still at 5.1% wgt average rate in 2029. the flip side of this is the returns on these bad boys (absent m&a which MAA is too big for) can't be all that great because there's just so little leverage relative to private market, but think they're good r/r down here and very average down-able in the event of an extended downturn (which we may be entering). if they renew at 6%

The whole world breaks at those govvy rates. it’s a pet theory of yours that’s probably my priced at a sub 1% probability. You should just roll options on futures because you’ll make like bajillion dollars if that comes to pass. and l these REITs are 30-40% LTV and 4-6x ND/EVITDa when the private market is 1.5-2.0x more levered and sometimes with floaters