Packer16

One way to invest here that for me has worked well so far is to buy solid NNN firms. These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases. You can get a combination of yield & built in increasing recurring revenue for over 10 years. The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types. Sort of like mature software without the software price tag. Some of the most interesting include STOR and Broadstone Net Lease. Packer

There is long term trend to lower real rates and if there is deflation, then negative nominal rates makes sense. Here are some references for LT trends in interest rates: 700 Years of Falling Interest Rates, 1310-2018 https://www.bogleheads.org/forum/viewtopic.php?t=278700 Packer

That is only the case if you assume inflation. In a deflationary world, an inverted yield curve is normal as your money is becoming worth more the longer you hold it. Packer

Depending on how you define cash flow (if it is EBITDA) & you annualize Q1 2019 Mail EBITDA you get 100m Euro. The net cash outside the bank is 72m Euro (so a smaller cash hoard). These are from the Q1 2019 segment results. Packer

The 100m Euro cash flow is from the cash flow statement (150m euro) less cap-ex for the business (28m euro). The cash/securities hoard on the balance sheet is almost 850m euro vs. a mkt cap of 316m Euro. This looks like a bricks & mortar version of customer aggregation (from postal customers) from which to sell other products & services. Packer

You are right about some of the dealers, you have to be selective. It is like retail, local economies of scale accrue to those who cluster. If you look at Asbury the RoE is in the 30s (ROIC in mid-teens) including intangibles. If you look at RoTE you are in the 70s Lithia has some lower numbers of RoEs in the 20s (ROIC in the low-teens) & RoTE in the 40s. Asbury is the only one with increasing margins of the group (IMO due to their focused cluster strategy). The new car GMs are not that high to begin with on new cars & thus most of the margin growth for Asbury has been increased service & parts GMs. The tailwind I was referring to is declining short-term rates which would lower FP financing. With new cars only 15% of GMs and declining, new cars sales should have a smaller impact going forward. The reason these are selling for the prices they do is the uncertain short-term catalysts but IMO I think the better players should be able to continue consolidate profitably. Packer

This an interesting area that I like due the ability to get high RoEs. There are local economies of scale. The best performing dealerships (I like Asbury) focus on specific local markets. In these markets, the dealer can get economies of scale in advertising, floor plan financing & local goodwill. Only 15% of Asbury's GMs are new cars so they have IMO better balanced revenue mix than most other US dealer groups. You can also see it in Asbury's high return on tangible assets & high inventory turns. The lowest margin part of auto dealers is new cars so inventory turns is important if this part of the business is to add to RoE. IMO the direct model will have a difficult time working. Tesla's model works because it sells folks $80k cars & that they can cater too & folks know what they want before the go to buy one. For a more normal priced car, the dealers deals with warranty & service the OEMs are not set up to do. The dealers also have to make show rooms nice per OEMs spec for no cost to the OEM. ecommerce is an interesting threat. I am not sure how this will work out in the end. I guess we can see it playout between CRVN (all online) & KMX (mixed model). From what I see it looks like KMX is eating CRVNs lunch. KMX has higher inventory turns & has a margin. This business is part of where there is coast/flyover divide. On the coasts alot of threats are showing up but in flyover country these threats do not exist. Ride sharing is a good example of this. Since most of the money management is done on the coasts, this IMO is effecting pricing. Look at CRVN vs. KMX or any other traditional auto dealer. Given the shape of the current yield curve (near to inversion), I would argue the lower floorplan financing could provide a tailwind. Packer

Thanks.

Hi Packer, the proxy for IV changes depend on the company in question. For Berkshire, I used Book value and also added 1% per year to make up for IV changing from 1->1.7 over the entire time period (per Buffett's comments this year). For KO/S&P I used earnings. For Giverny, I used his internal OE projections. (Dividends are added in all cases) Thanks. So for KO what did you use as your base value for IV? I am assuming book value would have some issues due to buybacks & earnings above the WACC. Packer

I think bond yields are reflecting inflation expectations as the upside to high growth is par & the downside with inflation is lower real value. Stocks are more complicated as they are driven by growth expectations and also inflation expectations. The future changes in each are driven by changes in inflation expectations (bonds) & inflation expectations & earnings growth (stocks). So a situation with low inflation expectations and declining earnings growth expectation will lead to higher bond prices and flat stocks prices (the lower earnings growth expectations offsetting the lower inflation expectations for stocks). Packer

Nice essay. Are your changes intrinsic value based upon changes in BV plus dividends or is there some modification for situations above BV? Packer

In interesting bear case for FB and GOOG & how their advertising based model have made users the product & advertisers the customers. It also described some of the negative side effects of these business models. IMO this is just the beginning of their issues. Packer

I think what Sanjeev did here is great. I provides an outlet for some folks & for the most part self-policing works. I like this better than some boards where a moderator says what is or is not politics or acceptable. Sanjeev has chased away the really bad offenders (who probably would cause most of the issues anyway). Packer

Some additional insights here. The control premium can be real if you have quantifiable cost synergies that can be realized. This is true in some business like broadcast TV & folks like Tom Murphy were able to realizes these synergies. In term of intangibles, all of them are amortized except FCC licenses, goodwill & IPR&D. These are tested annually for impairment. The models used to value intangibles are DCFs based upon projections provided by management that are tested by both a third-party appraiser (what I do) & the firm's auditor. For brands, a relief from royalty method is typically used. There are two main drivers for this approach projected revenue & royalty rate. The royalty rate is based upon third-party transaction and the profitability of the product that the name is associated with. The analysis also includes reconciling market data, reporting unit valuation & the value of the intangible. A trigger for impairment includes not meeting expected budget or a decline in the firm's stock price. Once the trigger is triggered, the impairment analysis is preformed. If you have further questions let me know. Packer

Thanks for posting these. I think Gates is onto the key behind this whole climate debate. If focus is made on developing new technologies that will make fossil fuels less economic versus newer products then the issue of change by government fiat (which IMO is one of the largest objections to the whole climate issue in the US) will be overcome by events. It is too bad politicians are focused on imposing gov't fiats versus funding/encouraging with tax credits some of the more feasible solutions (like Gates is pursuing). I guess these guys lack patients & have to come up with doomsday scenarios to sell there ideas. What a waste of resources. Packer

My concern is focus. Why spend money on something we do not know will result in the desired change? The climate scientists have been wrong many times before so I think to call the science is a misnomer. Science is when you can repeat an result so many times you know what will happen. It may be educated guessing but lets call it what it is. We can spend dollars on real changes that will improve folks lives like providing clean water & mosquito nets or opiod treatments versus spending money on speculative guesses on climate. Once the predictions become more accurate then it may be time to spend resources. The politics & money on both sides of this issue have led to hyperbole all over the place. IMO we should focus our politicians on problems that we know what the results will be versus this climate speculation. A real question is how many folks died in the opiod crisis because we gave some rich dude a subsidy to buy a Tesla because we wanted to be friendly to the environment? These IMO are the real questions we should be dealing with versus trying to scare folks about a climate extrapolation. Packer

SRC has reported rent increases in the latest earnings call. It was 1.7% which is in line with STOR. (Earnings call slide page 17). The investment grade percentage you reference for STOR is from their own credit rating, i don`t think that is comparable. (Look at the footnotes in their presentation, the "real" investment grade tenants just make up 25%). Realty income has ~50% from "real" investment grade tenants, i don`t think there is a material disconnect between all of them because all 3 have a pretty wide diversification now. The current management of SRC is fresh and spun off the Shopko assets right before bankruptcy with lots of debt and bought back stock at very cheap prices. (10%, which i have never seen on a REIT before). STOR can currently grow faster because its stock price is higher and therefore its cost of capital is lower. But i think that is a bad argument to argue that SRC`s value should be lower. Thanks for rent increase information. This does add about 170bp to SRCs relative yield. If you look at SRCs disclosure their IG clients (not including "implied IG clients") is 25% also. The reason why I am comfortable with a higher IG number for STOR is they perform & report store level metrics, they are the only NNN I have seen this done for. The reason this is important is when you are NNN leasing real estate the location & its cash flow can be as important as the corporate credit rating. The STOR methodology includes this level of detail, as far as I can tell others do not. Also if you look at incremental RoI for both STOR & SRC, STOR is about 100bp ahead (11.5% vs. 10.5%). Finally, there is the management differences. STOR & its team have 20 years+ experience in net lease financing founded 3 REITs & sold at opportune times but the Spirit team is new. The SRC CEO is an investment banker & the ops head worked for GE Capital (not a plus for me) & a REIT advisory. I am not saying SRC has a poor management team just not as experienced as STOR. As a side note, based upon my calcs, STOR management has been able to add about 200bp in RoE above the rent increase & re-investment over the past few years. If you look at the yield plus rent growth differences the total is about 200bp based upon current prices. STOR will gain some difference in the 100bp difference in incremental RoE (re-investment potential), longer avg lease terms (14 yrs. vs. 10 yrs. for SRC), high quality investment portfolio (more IG clients) & experienced management team. Both will do well but I think the difference in price is justified. Packer

The primary difference between STOR and SRC is the STOR portfolio has about 75% investment grade credits while SRC has about 42% & SRC does not report rent increases. They have about the same payout ratio & if you assume SRC has 0% rent increase you net get about the same yield (4.3% yield + 1.8% growth = 6.1%) vs. (6.5% yield plus TBD growth). At this point in the credit cycle I am more comfortable with 75% IG vs. 42% and getting 40bp less in return. A portion of SRCs asset base was put together by the STOR management over 10 years & has changed under new management which led to the issues with Shopko & the heavy retail exposure. Packer

For those who are interested, Steve Kiel (manger of the Arquitos Fund) & I gave presentations at a Manual of Ideas conference that are available here for you viewing pleasure: https://medium.com/@WOAM/willow-oak-asset-management-is-proud-to-announce-that-two-of-our-fund-partners-were-recently-df74f868cdf3 Packer

Merry Christmas to all. Thanks to all for your contributions, even to the politics thread & to Sanjeev for maintaining this board. Packer

Tech is such a broad title that it has little meaning for me. There are some commodity tech areas (memory chips, computer hardware) and some more moated areas (software, networked communities, transaction processors). The former are what folks traditionally think of tech as & IMO are not very good LT value enhancers, the later are more of what I would consider growing value enhancers. I think this is along the lines of Buffets thoughts also. Packer

When you read Micheal Lewis about Trump you have to realize that Lewis is a Trump hater & may also have TDS. I was surprised at his podcast (https://www.acast.com/yahoofinancesportsbook/michaellewisonsportsin2018) about golf where Lewis' true colors come out (where he talks more about Trump than sports), he has as much hatred as I have seen in a journalist, a real surprise as in most of his books to date have been pretty objective. Packer

I agree with longlake. IMO, any new ideas should go to the fund first, you have an obligation to your shareholders before yourself, then if after you have a full position for them, there is some available for your personal account then you can buy some. Packer

Alot of it has to do with body language & missing the social cues from that language. If you have met someone face to face you & know them you have more compassion & empathy. It much more difficult to have empathy online than in person as your imagination can go wild with no visual or emotional feedback. Packer

Had a question for our insurance gurus. I have heard from some folks that investing in quota share can prevent some return erosion that may occur in investing in CAT bonds? Is this true? TIA. Packer