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Packer16

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  1. IMO there are 2 factors most forget when talking about debt. First, the debt is the first claim (via taxes) on the economy of the country. As long as the country is viable, the debt never has to be repaid but just serviced. Also, in the case of large domestic debt countries (incl US), the debt of a country is the lowest risk asset available to investors. These are the reasons why Japan will not explode until either there savings disappear and/or there economy (GDP) declines sharply & permanently. I am not saying changes in financial conditions will not effect the currency on the edges but in the currency game you are compared to the next best alternative & at this point all large alternative are worse. Packer
  2. I think it reflects the reality today. To expect the system to blow up is the pessimistic IMO. The government debt is different than credit card debt because someday the CC holder will die but not the US. If the US dies, then there will be bigger problems than all of our portfolios. The fear of the pessimistic case clearly is driving bitcoin & gold but there is a large opportunity cost to holding gold/bitcoin versus CF generating asset like stocks & real estate. Packer
  3. The exit is to pay down the debt over time. This will reduce growth over time. We have seen the government debt go up but personal debt go down. Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called. However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely. This is what is happening to Japan. Watch Japan for clues to how a large internally owned debt is dealt with. Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low. As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. Packer
  4. When you look at the US debt, the collateral for the US debt is the US economy not just the US government as the Federal gov't can tax to get revenue (so it has a first lien against all cash flows the US economy generates) We have less debt than either Japan or Europe. So they will be the test for high debt servicing. IMO we will not have any problems unless govt's decide to not pay debts which would imply that their first lien is impaired in some way. Debt reduces growth due to the cost of servicing the debt/repayment versus consumption. Given the low cost of debt (& the continued expectations of this as long as people repay the debt), the servicing cost is low. We will continue to have deflation as long a debt repayment occurs. Lacy Hunt/Irving Fisher have a good framework to examine debt crises historically. The podcast below outlines this framework along with Fisher's paper: https://ttmygh.podbean.com/e/teg_0006/ https://fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf As to innovation, innovation is the result of R&D & investment in intangible vs. tangible assets. This investment is a cost according to accounting versus an investment. The US investment in tangible & intangibles asset has increased from the low 20% of GDP in the late 70s to the mid 20% now. The mix has changed from 14% tangible/8% intangible to 10% tangible/16% intangible. So US investment is still robust. A big use of tangible assets going forward will be the rollout of a renewable energy infrastructure so tangible asset investment should go up going forward. Packer
  5. I am not sure the next FAANG will be from technology. If you look 10 years from 2000 many of the invincible tech names in the top 10 firms were gone. Why? Due to intense competition reducing share/profits. IMO there are rare profit pools that can last more than 10 years & to continue to grow into valuations requires entering new markets where incumbents know your game. IMO the international opportunities will disappoint also as online media & commerce will tilt towards local champions more easily taxed & can provide jobs for local governments. Packer
  6. Lt Lu has a pretty good historical view of China/US per Bill's comments above, here: https://uploads-ssl.webflow.com/5ef3c7300432b40ed865991a/5ef3c7300432b4f82e659975_Discussions%20About%20Modernization%20-%20A%20Look%20at%20the%20Future%20of%20Sino-US%20Relations.pdf His basic conclusion is China needs to determine if they want to be a part of the American Order (democratic order established & grown after WWII) or tread their own path with a smaller group of countries that will always be at a disadvantage to the much larger US/Europe/Japan democratic world. Packer
  7. Thanks for your contributions. Was the composition of your portfolio based upon interest/insight from your job or in a completely different field? Congrats on identifying some nice growth companies that the market underestimated. Packer
  8. I think it depends. There are some truly great tech based networking businesses but there are also many wannabe companies with much weaker models out there hoping to be great. IMO if the business does not have customer lock-in and high switching costs it is in a poor position. I went through Value Line the other day & was observing the large contrast in profitability between the networked giants & everyone else. Amazon has created the myth that a barely profitable business can turn into one of these networked giants but IMO Amazon is the exception not the rule. As with any great model there are limited places that it works well. Also there is the trend of the cloud based companies reaching the end of their take share from weaker players strategy as they dominate the market & for growth they need to take share from each other as described in Investing in the Cloud: From Gold Rush to Hunger Games. Packer
  9. Thanks for ideas. I looked at Oaktree also but had the same conclusion as you - how do I know they will get the best of fair deals? They also have a relatively high expenses (48% of NII) vs 35% for TSLX & TSLX has first dibs on any deal originated by 6th Streets US Debt origination group. TCP was also interesting due to its lower costs & decent historic track record. There range of products appears to be narrower than TSLX (which has made retail ABR loans, DIP loans & tech loans) Packer
  10. Does anyone have any ideas of distressed/spec sit investors with alot of dry powder & public vehicles to invest in? The two I can think of are Equity Commonwealth (Zell) w $3.3 billion cash & TSLX w $1.0 billion dry powder. Packer
  11. Great interview. I heard an interesting framework on the TSLX conf call this morning, namely crises have 2 phase liquidity phases & "work out' phases. For now the liquidity phase is done and peaked in March. The much longer & far reaching "work out" phase now begins. This will be where the restructuring folks will do their magic. Two differences between now & the past lower interest rates & an abundance of rescue capital. I think folks will get a decent return here but what folks were used to in the past. Packer
  12. IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense. Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter. If there was a large country with a better place for savings/investing I would be concerned but there is not. Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed? Not much IMO. Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency. That is why places like Japan have not seen much depreciation/inflation. Packer
  13. Thanks. That explains the movements last week probably a good time to buy given you had forced sellers. Does anyone know how many of these funds that auto liquidate are out there for BDCs, REITs & mREITs? Packer
  14. What are folks thoughts on contagion or fear of contagion is specifically real estate & other fixed income. There has been some wild gyrations in real estate fixed income the past few weeks (LADR & NLY) being to examples. Treasuries being used as collateral (increasing demand) is another effect. It has spread to real estate finance companies like STOR & high quality first lien lenders like TSLX. Does anyone have any insights to what has caused this. I have heard rumors of margin calls & I know they can cause some contagion effects. Packer
  15. The problem with this line of thinking is it all time dependent & we do not as investors have big globs of money to invest this way. Most of us have money to invest over time. If you look at the DCA results, I think you will get a more realistic expectation of how people invest not theoretically what we could have made if we timed the markets correctly. Packer
  16. There are 3 publicly traded mobile home REITs (ELS, SUI & UMH). These are all trading a pretty high AFFO multiples and their favorable economics is reflected in the AFFO multiples. Packer
  17. The B-mall comparison may be misleading as B-mall properties are in decline and AM and ETRN producers are not in decline but in a severe downturn. IMO both AR and EQT are viable growing firms that may have too much debt but the underlying business are fine. If businesses are in trouble long-term IMO, the interstate pipelines will also not be a good place to be. One way to manage the risk here is position sizing. We will see. Packer
  18. I disagree with your comparison. You are comparing cash flows with bond-like characteristics that grow over time (the cash flow from the leases) to a real estate developer. From your description CTO is developer not an investor. No one is going to buy there NNN portfolio anywhere near the estimated NAV given the risk. The derisking would include getting lease renewals and being less dependent upon a few tenants and geographies. If you want to invest in a developer that is fine & they can be good businesses but assuming that what CTO can be sold to an investor assuming 6.5% cap rate is dreaming given that it sounds like a good portion of the portfolio has the development risk versus tenant risk. CTO sounds closer to Seritage than the NNN comps management throws around. I do not like your average REIT either but NNN REITs if they are underwritten properly are inflation adjusted bonds selling for high single digit yields with mid single digit growth in coupons. The key IMO is tenant underwriting. CTO clearly has a redevelopment aspect to their underwriting which makes it a different animal than the other NNN leasors. I am also concerned that the portfolio is so dispersed & how can CTO have re-development expertise in so many markets? Packer
  19. IMO, the big risk of CTO's NNN lease portfolio is 25% of its NOI is going to expire in the next about 5 years. In these cases the value of NNN lease is closer to the value of the RE vs a premium due to the leases. Comparing this to other NNN lease portfolios is like comparing apples to oranges. Given the short duration, the market will not give these lease any value (which is assumed in the NAV) until the leases are renewed. Also, the top 5 leases are like 38% of NOI vs. 12-15% for other NNN lease firms. Also, the non-standard metrics makes me feel like these guys tried to put something together that "looked like" NNN lease firms that when you drill down is much more risky than NNN lease firms. What also makes me feel uneasy is that many of the properties are not in in their core markets (26% in Florida). The top tenants slide also is misleading as CTO has both location & tenant risk vs. the other NNN lease firms who typically have limited location risk because they have multiple locations around the country vs. CTO which has few or one location for each tenant. Also, the reported average lease term excludes multiple lease firms, although not big by itself, in combination with other "non-standard" disclosures makes me uneasy the estimated NAV will ever be reached. Packer
  20. Taking a quick look at CTO, I am not impressed at least by the disclosure. They imply a net cap rate for NNN based upon land values? This is misleading at best. You are comparing apples to oranges. If you look at the leases, it looks like many of them have no escalation clauses and many of the largest leases will be gone in 5 to 6 years. The metrics they report is not even the industry standard, AFFO (which adjusted for long-term lease payments) so how can you compare to other NNN companies. They also do not disclose the WA escalation rates. Do these guys have a credit analysis background? NNN investing is as much credit analysis of tenants as real estate investing IMO. My question would be are they going to distribute the cash flows or use them to develop the land & buy more properties. If it is the later, your investment is more dependant upon how good the investment in the land/properties will be vs. the income the properties provide. Just some observations. Packer
  21. Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right? Mortgage REITs are capped like bonds/loans & thus the yield you get is all the upside you get. You may actually have a loss due to loan losses. Mortgage REITs like you say are debt funds so the value is in the underwriting or lack thereof the manager. Packer
  22. I think the change to many industries from on-line businesses is real. The end state will be close to what the disrupters describe but there are many ways to get there and the timing is uncertain. In some industries, the new disrupter will win however for many of the incumbents will adopt the innovation and either defeat the disrupters or delay the time of disruption to long into the future. Given the uncertainty here you have IMO many smart marketers that can raise money for businesses that either in the end will not disrupt, become a less advantaged competitor (despite a high multiple today) or the timing for the disruption is so long they will run out of money. The current low interest rate environment has led to a proliferation of these types of firms IMO. This IMO leads value investors to dig deep & estimate the growth of their businesses going forward. The should lead to a discussion of the growth implied in the share price versus what the value investor thinks the growth rate should be. The growth rate debate is one place where IMO value investors will make their money going forward. One interesting observation is that as interest rates decline the "premium" for growth increases. One way to quantify this is via Grahams 8.5 + 2g. What this formula implies is 0 growth is equal to an 8.5 multiple and the growth multiplier is 2. LT interest rates has declined by 1/3rd since this formula was derived, so, the current 0 growth multiple is 13 (7.7% yield) & the growth multiplier is 3. Packer
  23. I am having breakfast with Morgan next Monday. Let me know if you have any questions you would like answered. Packer
  24. Thanks for the recommendations - have you been able to review the performance of these NNNs under stressed market conditions? How do you view tenant mix and location mix, particularly in terms of correlated risk? If AFFO is the main driver of returns and valuation, the question is what drives AFFO. As you mention the two methods to grow AFFO are rent increases, and acquisitions - but really this means tenant and location mix (i.e. what you acquire and where). The real question is how that tenant mix behaves under stress. In such situations, do you know if REITs typically modify lease terms to work with tenants (and maintain occupancy)? My concern is large exposure to small and middle market businesses which may perform worse in a recession - and while the tenant mix may appear diversified, will it actually behave like a hedge during a recession? One of the positives are the good underwritten NNN that were around in 2008 did well look at O, NNN. They acted more like bonds (which in part they are) & if the underwriting is done correctly you get first claim on many of these businesses as they pay their rent before their creditors where location is important. STOR has some examples were they have found new tenants when lease was in default. They key is property location which many of these REITs focus on. Broadstone has broader customer with about 40% industrial. Packer
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