Fairfax stock positions

[MMM20]

7 hours ago, glider3834 said:

Exco Resources - Chou Funds AR 2022

 

 

 

I’m never quite sure how meaningful “PV-10” is when I see it in oil/gas. Just means a 10% discount rate, right? 
 

I easily get to $2,000+ share PV-10 value for Fairfax itself, so we’ve got that going for us. 
 

Edited April 1, 2023 by MMM20

[petec]

On 3/31/2023 at 10:40 PM, Viking said:

Fairfax’s stake has increased in value over the past quarter to $570 million (March 31) from $400 million (Dec 31) - assuming the current share price is accurate.

 

Correct me if I am wrong, but GIC isn't included when FFH reports the difference between accounting and market value for investments, is it? 

 

(And IIRC FFH doesn't do this analysis on a look through basis for FIH, either?)

[Viking]

1 hour ago, petec said:

 

Correct me if I am wrong, but GIC isn't included when FFH reports the difference between accounting and market value for investments, is it? 

 

(And IIRC FFH doesn't do this analysis on a look through basis for FIH, either?)

My understanding is GIG is an Associate holding and it is equity accounted. I don’t think it is included in Fairfax’s ‘Investments in Associates’ on their balance sheet. Perhaps because it is an insurance holding? Or perhaps because the stock is so thinly held/traded. From my perspective, the increase in market value of GIG is interesting but has little relevance in terms of what Fairfax reports. It is on my spreadsheet but i don’t include it in any of my totals.
 

Fairfax India is similar to GIG. It is an Associate holding and it is equity accounted. I don’t think it is included in Fairfax’s ‘Investments in Associates’ on their balance sheet (it is broken out separately).

 

My tracker includes Fairfax India, but this is not consistent with how Fairfax reports things. Another anomaly are the remaining equity positions that were part of the Riverstone Europe sale. My tracker tries to capture everything that Fairfax ‘owns’… even the Riverstone Europe stuff… and i’m not sure exactly how Fairfax reports the changes in value of those holdings quarter to quarter.

 

There are also lots of holdings my tracker doesn’t cover (limited partnerships and other holdings) = $3.6 billion = 24% of total ‘equity’ holdings. 

 

Bottom line, my tracker is designed to capture directionally (and very roughly) what is going on with Fairfax’s equity portfolio each quarter. My estimates tend to be on the low side - to what is actually reported by Fairfax each quarter. 
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Of interest, with Allied being taken private, it will become more opaque in terms of market value. Same with Recipe and Grivalia Hospitality. These 3 holdings represent about 20% of Fairfax’s equity holdings. 

Edited April 5, 2023 by Viking

[glider3834]

8 hours ago, petec said:

 

Correct me if I am wrong, but GIC isn't included when FFH reports the difference between accounting and market value for investments, is it? 

 

(And IIRC FFH doesn't do this analysis on a look through basis for FIH, either?)

GIG is included in investments in associates - on B/S  in brackets Fairfax shows fair value of all associates 6772 vs 6091 carrying value - this includes both insurance associates and non-insurance associates.

 

The excess of fair value number that Fairfax reports is for non-insurance associates and non-insurance subs. So it appears to exclude insurance associates like GIG or Digit.

 

 

Edited April 5, 2023 by glider3834

[Viking]

On 9/15/2022 at 8:17 AM, Dazel said:

I think what is being missed is the fact that Fairfax has historically made capital gains in the bond portfolio over the last two decades rather than reach for yield and bring interest income. Because of this they were not looked at for the interest income that their size afforded (this is contrary to other insurance companies). Brian Bradstreet is the best bond guy in the world…in fact no one is close! I have said this repeatedly since 2003. In order to grow the insurance units they had to pay very close attention to capital levels. They defaulted to take the gain add capital=grow. Now that they have grown  premiums from 2015-$8b, 2018-$15b, $28b today! The size of investment portfolio is now $49b. They were holding at least 30% to 50% cash for most of the last two decades except when Bradstreet made big bets usually on long term treasuries and corporates which made ridiculous gains. 
Markets did not like the lumpy interest income because it did not fit their spread sheets. Now they are in position to buy 3 year treasuries and have 4% income with little to zero risk…the rest of the industry does not have the cash they are stuck in huge hole from bond losses mark to market. This discipline will separate Fairfax in this cycle. They have been waiting for this….

We are in a hard market so the Subs need all the capital they can get to take advantage of it…when it softens and premiums come down they will dividend cash to the holding company. 

This past post from @Dazel remains as relevant as ever. With their fixed income portfolio, Fairfax is a total return investor. Interest income + investment gains.
 

It really is amazing the wealth of information that can be found in the various Fairfax threads. Yes, they are long. But over the past 2 years pretty much every part of Fairfax’s business has been discussed and debated (sometimes vigorously).

Edited April 18, 2023 by Viking

[Viking]

@Dudley i am warming up to the purchase of Recipe. It WAS a terrible investment for minority shareholders forever. However, what investors in Fairfax care about today is how will the investment perform for Fairfax moving forward? How much free cash flow will Recipe be able to deliver each year moving forward? I think it will be able to get back to historical free cash flow levels of around C$130 million (US$95 million) per year to Fairfax (their 84% share). This earnings stream should also be pretty consistent year in year out, and should grow nicely over time. 
 

In the near term i am interested to see what Recipe does with their free cash flow. We now know US$100 million of the US$340 million purchase price was funded by an increase in debt at Recipe. So perhaps free cash flow at Recipe in the near term is used to pay down this additional debt. Longer term it will be interesting to see if Recipe uses free cash flow to expand (likely US) or if they pay it out to Fairfax - who then invests it. I am hoping it goes to Fairfax.
 

Recipe might be a great example of a company that needed to go private to reach its potential. Being a publicly traded company has its weaknesses. Recipe did so many major acquisitions over the past 10 years it likely has some work to do to get systems etc fully integrated and working seamlessly. Fairfax hinted as much as a reason for the take private deal. Recipe also has some hidden assets like real estate. Bottom line, Fairfax was likely very opportunistic with this purchase. 
 

The minority shareholders were the ones left holding the bag. As a reminder, Fairfax paid C$20.73 for the shares in Recipe it did not own. Here are the capital raises done by CARA/Recipe over the years:

• 2015: CARA IPO C$230 million raised at C$23/share
• 2015: Phelon family sells $103 million at C$37.75/share
• 2016: capital raise to fund St Hubert: C$230 million at C$29.25
• 2018: capital raise to fund Keg: C$95 million at C$24.93

For those who want more history on Recipe, below is a post from last year. 

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Sept 5, 2022 (from the Recipe thread)
 

What follows is a very long post… everything you wanted to know about Recipe and Fairfax. On Sept 1, 2022 Recipe agreed to be taken private by Fairfax. Shareholder approval should come in Q4. The cost to Fairfax? C$465 million = US$354 million. Fairfax will own 84% and Cara Holdings (founding Phelan family) will own 16%.

 

Ownership after take private:

Cara Holdings (Phelan) =    9.4 million  

Fairfax currently =               27.0 million 

Fairfax to buy =                   22.4 million @ C$20.73 = C$465 million

Total shares outstanding = 58.8 million @ C$20.73 = C$1.22 billion market cap

Total net debt = C$340 million; Enterprise value = C$1.56billion

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Why is Fairfax doing this? Fairfax sees Recipe shares as being significantly undervalued at C$20.73.

 

Is Fairfax right? The problem is covid has wreaked havoc on results of restaurant operators in Canada since Q1, 2020, especially full service dine in restaurants (the largest portion of Recipe’s restaurant count). Repeatedly locking down an economy is not good for business, especially for restaurants. So looking at Recipe’s financial results the past 10 quarters is not very helpful. 

 

What about going back 2017 to 2019? Free cash flow (before growth capex, dividends, and NCIB) at Recipe was:

2017 = C$144 million

2018 = C$164 million

2019 = C$156 million

 

Clearly, Fairfax expects Recipe in the coming year or two to get back to a run rate of around C$150 million in free cash flow. If this happens then this will become a very good purchase for Fairfax shareholders. The earnings from Recipe, while cyclical, should also be relatively consistent year to year providing some stability and important diversification from Fairfax’s other large portfolio holdings. 

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What is Fairfax’s total lifetime cost for 84% of Recipe? 

My guess is US$354 + $348 = $702 million (my guess)

 

I base my above estimate on two data points:

1.) cost to Fairfax to take out minority shareholders of US$354 = 22.4 million @ C$20.73 = C$465 million

2.) total $ amount Fairfax invested in Prime/Cara/Recipe from 2011 to present to establish their current ownership stake of 46%. At the time of The Keg merger with Cara/Recipe in 2018 Fairfax said they had invested a total of $348 million over the years. My guess is Fairfax did not put any more money into Recipe after 2018.

 

Recipe did pay a quarterly dividend from after the IPO in 2015 until early 2020. It Started at C$0.0917/quarter and finished at C$0.1177

 

Because Recipe received wage benefits from the government during the pandemic it is not able to pay a dividend until 2023 (if it did it might have to pay back the benefits received from the government during covid). If not for the government restriction i think it is likely Recipe would have reinstated the dividend when Q2 results were released. Instead Recipe has been using free cash flow to pay down its long term debt. At Dec 31, 2019 net debt was C$440 million. Q2-2022 net debt was down to C$340 million. I wonder if Fairfax will have Recipe increase long term debt to help fund part of the C$465 million in cash needed in the take private transaction. 

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Fairfax has been investing in Canadian restaurant stocks since 2011. The Prime Restaurants purchase was the start of a massive consolidation by Fairfax of the full service restaurant industry in Canada that would culminate in 2018 with the merger of Cara with the Keg (the last large purchase) and the rebranding of the company from Cara to Recipe. Bill Gregson (formerly the CEO of The Brick, a former Fairfax holding), who had lead the massive roll up of full service restaurant banners, retired in 2018 and was replaced by Frank Hennessey, who remains CEO today. Frank’s job the past 4 years has been one of digesting all of the large acquisitions made the previous years. More recently, we have seen Recipe shedding non-core brands like Milestone’s, shedding underperforming locations/franchisees and paying down long term debt. Today Recipe has more than 1,200 restaurants and is the largest full service restaurant operator in Canada. The bottom line is Fairfax understands Recipe and the restaurant industry in Canada exceptionally well. Clearly, Fairfax sees a significant value opportunity in taking Recipe private at C$20.73/share.

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Much can be learned about Fairfax by looking at its involvement the past 11 years in Prime/Cara/Recipe. Long term focus (a vision to consolidate the restaurant business in Canada). Build long term relationship with equity partner (the Phelon family since 2013 and continuing post take private). Mis-steps (Cara overpays on acquisitions). Persistence (multiple, large acquisitions over more than a decade). Adversity (covid from 2020 to 2022). Very opportunistic - minority shareholders beware (take private Sept 2022).

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Fairfax began investing in Canadian restaurant stocks in 2011 with two separate purchases. 

 

In Dec 2011 Fairfax invested US$10 million in Imvescor Restaurant Group’s recapitalization. Imvescor banners: Baton Rouge, Pizza Delight, Scores, Toujours Mikes, Ben & Florentine. Fairfax added to their position in Nov 2012 ($1 million) and then sold their entire position to GMP Securities in April 2013  for proceeds of $26 million. 

 

The second purchase was the start of an 11 year journey with many twists and turns that is now culminating in Fairfax’s C$1.2 billion take private offer for Recipe.

1.) Initial purchase: In Nov 2011, Fairfax outbid Cara (oh, the irony) and purchased 81.7% of Prime Restaurants (East Side Mario’s, Casey’s, Prime Pubs and Bier Markt) for US$69 million.

2.) Cara merger: Oct 2013 Prime was merged with Cara Operations (Swiss Chalet, Harvey’s, Milestones, Montana’s and Kelsey’s). Bill Gregson named CEO. Fairfax invested a total of US$157 million (including its stake in Prime) and owned 49% of Cara which was privately held at the time (Phelan family owned 51%). “Cara has solidified its position as Canada's largest full service restaurant company with iconic brands that deliver unique dining experiences for Canadians coast to coast. This combined family of restaurants significantly increases Cara's scale, strengthens its market position and provides opportunities for growth and acquisitions.”

3.) Dec 2014: Cara buys majority ownership (55%) in Landing Group, Southern Ontario based, high-volume, upscale casual restaurant concept. Remaining 45% ownership was purchased June 2015.

4.) Cara IPO: April 2015, Cara went public. Post IPO, Fairfax owned 40.7% (53.2% voting control) and Cara was debt free. IPO raised raised C$230.1 million (US$180) = 10 million shares @ C$23/share (including over-allotment). I think this is when Fairfax obtained voting control of Cara from the founding Phelon family. Fairfax would be driving the strategic direction of Cara from this point forward. 

5.) Aug 31, 2015: Cara purchases New York Fries. “With 120 locations in Canada and another 36 abroad, New York Fries is one of Canada's most successful QSR concepts.” “Cara is acquiring New York Fries for cash consideration which will be funded through Cara's existing credit facilities. The acquisition is accretive for Cara shareholders. The addition of New York Fries also helps diversify Cara's portfolio of stores into shopping centers where Cara's existing 10 brands currently have limited presence.”

6.) Dec 2, 2015: Phelan family sells 3 million Cara shares @ $34.75/share (in secondary offering) for C$104 million. Fairfax continues to own 40.5% of shares and now has 57% of voting rights.

7.) Quebec expansion: March 31, 2016 Cara purchases St-Hubert for C$537 million (US$406). "The acquisition provides Cara with a restaurant chain that resonates with guests in Québec as well as with a food retail solution for the Cara brands – these are two areas of Cara's existing business where we have tremendous opportunities. It also provides Cara with a head office in Québec, manufacturing facilities, and a skilled management team that will grow and manage the Cara Québec restaurant expansion and national retail food initiative." Includes a valuable real estate portfolio consisting of 28 owned properties including 2 manufacturing plants. St-Hubert generated approximately $620 million in System Sales, including the food operations division, and approximately $44.8 million in Operating EBITDA. 

8.) To fund St-Hubert acquisition, Cara raises C$230 million (US$174 million) = C$29.25 x 7.86 million shares. Fairfax purchases 3.487 million shares for C$102 million (44% of newly issued shares).

9.) West expansion: Sept 1, 2016: Cara purchases Original Joe's  for C$93 million (US $70) - Original Joe's Restaurant & Bar, State & Main Kitchen Bar and Elephant & Castle Pub and Restaurant. “With its proven restaurant-pub concepts and its understanding of the casual, full-service foodservice space, Original Joe's is a natural fit for Cara.  The majority of Original Joe's restaurants are located in Western Canada, an area where Cara is currently under-represented." “Original Joe's 99 restaurants generate approximately $250 million in annual System Sales and approximately $14.7 million in Normalized Operating EBITDA before synergies.”

10.) Last big acquisition: Feb 2018 The Keg merged with Cara. Cara pays C$200 million (US$154) = C$105 million in cash and C$95 million in shares = 3.8 million new shares issued at @ C$24.93. Cara changes name to Recipe

- Fairfax 51% interest in Keg sold to Recipe for $7.9 million + 3.4 million Recipe shares (Fairfax ownership of Recipe = 43.2%)

- Total Fairfax investment to date in Cara = $348 million

11.) April 30, 2018: Frank Hennessey appointed CEO of Cara. Bill Gregson steps down as CEO to become Executive Chairman of the Board.

12.) Oct 24, 2019: after additional C$4 million purchase, Recipe owns a total of 29.15% of units in Keg Royalties Income Fund (traded on TSX)

13.) Dec 10, 2019: Bill Gregson retires as Executive Chairman of the Board of Recipe Unlimited. Paul Rivett, President of Fairfax Financial Holdings Limited, will assume the role as Chairman of the Board of Recipe Unlimited. Mr. Gregson commented, "Thanks to the hard work of all our amazing teammates and franchisees, we have built a business that today generates $3.5 billion in system sales and over $200 million in EBITDA.  Today, the company has a strong balance sheet and a solid business process foundation.  Now with the CEO transition to Frank Hennessey complete, the company is planning its next evolution to prosper in an ever changing world.

14.) May 6, 2021: Recipe completed the acquisition of  Crave It Restaurant Group's ("Crave It") ownership interest in both The Burger's Priest and the 'Fresh – Crave It – Recipe' joint venture for new market growth of Fresh Plant Powered ("Fresh Restaurants"). “Both The Burgers Priest and Fresh Restaurants are dynamic omni-channel brands that have very loyal customer followings.  Recipe is excited about the future potential of these dynamic brands.”

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About Recipe

Founded in 1883, Recipe Unlimited Corporation (formerly Cara Operations) is Canada's oldest and largest full-service restaurant company. The Company franchises and/or operates some of the most recognized brands in the country including Swiss Chalet, Harvey's, St-Hubert, The Keg, Milestones, Montana's, Kelsey's, East Side Mario's, New York Fries, Prime Pubs, Bier Markt, Landing, Original Joe's, State & Main, Elephant & Castle, The Burger's Priest, The Pickle Barrel, Marigolds & Onions, and 1909 Taverne Moderne. 

Edited April 18, 2023 by Viking

[petec]

16 hours ago, Viking said:

@Dudley i am warming up to the purchase of Recipe. It WAS a terrible investment for minority shareholders forever. However, what investors in Fairfax care about today is how will the investment perform for Fairfax moving forward? How much free cash flow will Recipe be able to deliver each year moving forward? I think it will be able to get back to historical free cash flow levels of around C$130 million (US$95 million) per year to Fairfax (their 84% share). This earnings stream should also be pretty consistent year in year out, and should grow nicely over time. 
 

In the near term i am interested to see what Recipe does with their free cash flow. We now know US$100 million of the US$340 million purchase price was funded by an increase in debt at Recipe. So perhaps free cash flow at Recipe in the near term is used to pay down this additional debt. Longer term it will be interesting to see if Recipe uses free cash flow to expand (likely US) or if they pay it out to Fairfax - who then invests it. I am hoping it goes to Fairfax.

 

Certainly, if they can get back to past FCF levels, the yield on the price paid is attractive. I am inclined to think it can. 

 

What would be transformative is if they can find an attractive format for expansion in India.

Edited April 19, 2023 by petec

[Viking]

On 3/31/2023 at 5:40 PM, Viking said:

 

Gulf Insurance Group (GIG) just finished an outstanding year in 2022. @glider3834 thanks for the 'heads up'. GIG's acquisition of AXA Gulf operations in 2021 is looking like a very good purchase (cheap price, quality businesses, solid strategic fit).

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But before we dig in a little on GIG, let’s take a step back. One thing that makes Fairfax very different from many of its P&C insurance peers is the scale and size of its international insurance operations. Why go international? One of Prem’s early mentors was John Templeton. Templeton was an investor in Fairfax and he and Prem had a close relationship. John’s great niece, Lauren Templeton, sits on Fairfax’s board today.

• https://www.brokenleginvesting.com/ultimate-guide-john-templeton-investing/

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In 2010, Fairfax invested $217 million for a 41.3% interest in Gulf Insurance. Fairfax partnered with KIPCO (Kuwait), the controlling shareholder of Gulf Insurance. Who is KIPCO? 

• Kuwait Projects Company (Holding) – KIPCO – is a holding company that focuses on investments in the Middle East and North Africa. It’s strategy of acquiring, building, scaling and selling companies in the MENA region has worked successfully for over 30 years.
• https://kipco.com

GIG became the vehicle for Fairfax to grow its insurance business in the MENA region (Middle East North Africa). The growth for the next 10 years was largely organic. Late in 2020, as the world was struggling with covid, GIG opportunistically agreed to purchase the insurance operations of AXA Gulf & Yusuf Bin Ahmed Kanoo for $475 million. This purchase almost doubled the size of GIG (it was a big, bold move). Parent AXA was looking to re-build its capital levels due to losses experienced from covid. The purchase closed in Sept of 2021. Fairfax did invest new money in GIG (as did KIPCO) in 2021 to keep its ownership in GIG steady at 43.7% (not sure exactly how much they spent).

 

2022 was the first full year of results for GIG post acquisition. How did they do? Very well.

• net profit = US$125 million (Fairfax’s share = $55 million)
• net profit increased $48.4 million from 2021, due to improvement in underwriting and investments performance results
• gross written premiums = $2.7 billion = +52% vs PY
• dividend = 54 fils/share = US$0.175/share (up from 40 fils paid in 2021?)
• https://www.gulfinsgroup.com/Renderers/Showmedia.ashx?Id=72136334-9e40-4a0b-829f-5ba8afaad28e&download=false

The shares of GIG are publicly traded. However, they are thinly traded, with Kipco and Fairfax owning together something like 95%(?). Shares recently increased in price from  105 fils to 142 fils, which puts total market cap of GIG at $1.3 billion at March 31. Seems reasonable for a growing business that is earning $125 million/year.

• Fairfax’s stake has increased in value over the past quarter to $570 million (March 31) from $400 million (Dec 31) - assuming the current share price is accurate.
• Fairfax has a carrying value for GIG of $403.4 million (Dec 31, 2022) versus $380 million (Dec 31, 2021).
• Dividend payment to Fairfax in 2023 will be = $0.175/share x 123 million = $21.5 million

It appears GIG has become a permanent holding for Fairfax.

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Prem’s Letters in Past Annual Reports

 

2022

 

Gulf Insurance Group had another excellent year led by CEO Khaled Saoud Al-Hasan and GIG Gulf CEO Paul Adamson. 2022, the first full year with GIG Gulf results, produced gross premiums of over $2.5 billion and a combined ratio of approximately 92%. We have a wonderful partnership with Kipco, led by CEO Sheikha Dana, in the ownership of Gulf Insurance.

 

Bijan (Khosrowshahi), along with Jean Cloutier, have been deeply involved with Gulf Insurance Group in the Middle East as well. After the acquisition of AXA Gulf (now GIG Gulf) in 2021, Gulf Insurance is one of the most prominent players in the region. Led by Khaled Al-Hasan, with Paul Adamson running GIG Gulf as a standalone unit, Gulf Insurance will be an increasingly important contributor to Fairfax.

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2021

 

I mentioned this to you in last year’s annual report but it bears repeating. We have had a wonderful partnership with Kipco in the ownership of Gulf Insurance Group (GIG) in Kuwait. GIG is run by Khaled Saoud Al- Hasan, until just recently under the chairmanship of Faisal Al-Ayyar, the CEO of Kipco. GIG had $1.8 billion (including four months of AXA Gulf) in premiums in 2021, more than 3 times the premiums in 2010 when we became a partner (our interest is 44%). Khaled has an outstanding track record with an average combined ratio of 95%, with excellent reserving. As mentioned last year, GIG acquired AXA Gulf (now GIG Gulf) on September 7, 2021, which had $1 billion in premiums in 2021 and a combined ratio of 93%. The new GIG, operating in 13 countries with $2.6 billion in gross premiums, will be a force to be reckoned with. Paul Adamson and his team have done an outstanding job at AXA Gulf. From Fairfax, Bijan Khosrowshahi, Jean Cloutier and Quinn McLean have been very involved in the success of our partnership with GIG. It is with great regret that I have to announce that our partner, Faisal Al-Ayyar, has recently retired after a stellar 30+ year career with Kipco. He has been a wonderful friend and partner to Fairfax and myself and we will miss him greatly. We wish Faisal and his family much happiness and good health in his retirement. Sheikha Dana is the new CEO of Kipco and our partner at GIG. We look forward to working with her in the years to come.

 

Working closely with Fairfax Latam and Colonnade, Bijan Khosrowshahi has provided valuable experience and insights that have been a significant factor in the success of these operations. Bijan, along with Jean Cloutier, has also been intimately involved with GIG in the Middle East. We own 44% of GIG, alongside Kipco. In 2021, GIG completed the acquisition of AXA Gulf, vaulting the combined operations well over the $2.5 billion gross premium mark. AXA Gulf (now GIG Gulf ) will operate on a decentralized basis within GIG, and will continue to be managed by Paul Adamson. We are thrilled to welcome Paul and his colleagues into the greater Fairfax family.

 

During 2021 the company exercised judgment in determining it had significant influence over Gulf Insurance pursuant to arrangements related to its sale of RiverStone Barbados as described in note 6.

 

On February 8, 2021 the company entered into an arrangement to purchase (unless sold earlier) certain portfolio investments owned by RiverStone Barbados as described in note 23 and subsequently commenced applying the equity method of accounting to its interest in Gulf Insurance pursuant to that arrangement.

 

Investing activities for the year ended December 31, 2021

Purchases of investments in associates of $175.4 primarily related to increased investments in Gulf Insurance, HFP and a Fairfax India associate.

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2020

 

Last year, I discussed our wonderful partnership which we entered into in 2010 with Kipco in Kuwait through its Vice Chairman Faisal Al-Ayyar. The performance of Gulf Insurance Group (‘‘GIG’’), run by Khaled Saoud Al Hasan, has been excellent, tripling gross premiums to $1.4 billion with a combined ratio of 95% since 2010. On November 30, 2020, the company announced the acquisition of AXA’s operations in the Gulf region. This will add over $900 million in gross premiums written with a combined ratio running below 95%, providing GIG access to new markets in Oman and Qatar and increasing its operations in Saudi Arabia, Bahrain and the UAE. We are very excited about the tremendous long term opportunity this presents for GIG. We welcome Paul Adamson and the AXA Gulf Group employees to our partnership with Kipco.

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2019

 

Gulf Insurance Group (‘‘GIG’’) is a wonderful partnership we entered into in 2010 with Kipco in Kuwait through its Chairman, Faisal Al-Ayyar. GIG, run by Khaled Saoud Al-Hasan, operates in 11 countries in the Middle East. In 2019 it wrote $1.3 billion in gross premiums and had a combined ratio of 95%. Since we acquired our interest, Gulf has had an average combined ratio of 95% and gross premiums have almost tripled.

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2010

Gulf Insurance consolidates our interests in the Middle East

 

In 2008 we mentioned to you that we had purchased approximately a 20% interest in Arab Orient run excellently by Isam Abdelkhaliq and controlled by Karim Kabariti (Chairman of Jordan Kuwait Bank). Through Karim we met Faisal Al Ayyar, Vice Chairman of Kipco, the controlling shareholder of Gulf Insurance and Jordan Kuwait Bank and the ultimate controller of Arab Orient. Under Faisal’s leadership, Kipco has had an outstanding track record over the past 20 years, increasing shareholder value by building businesses with an Arab world focus. Kipco’s book value per share has compounded by 16% per year over the past 13 years and the stock price has followed suit. We paid $217.1 million for a 41% interest in Gulf Insurance, with Kipco having a 43% interest, and Gulf Insurance purchased our shares of Arab Orient at our cost of $11.2 million to increase Gulf’s ownership of Arab Orient to 89%. Gulf Insurance, which has been in business since 1962, operates in seven countries in the Middle East and North Africa and is the premier property and casualty company in the region. In 2010, Gulf Insurance wrote $417.6 million in gross premiums and earned $33.2 million, with a consolidated investment portfolio of $552.0 million; its combined ratio has averaged 94% over the past ten years. We are excited to be partners with Faisal and his management team at Kipco and our team of Bijan Khosrowshahi, Jean Cloutier and Steve Ridgeway look forward to working with Khaled Saoud Al-Hasan, the CEO of Gulf Insurance, and the presidents of the seven insurance companies belonging to Gulf Insurance. We continue to separately own a 20% interest in Alliance Insurance Company in Dubai, led by Wisam Al Haimus. Wisam had another outstanding year with a combined ratio of approximately 74% in 2010.

 

Investment in Gulf Insurance

On September 28, 2010, the company completed the acquisition of a 41.3% interest in Gulf Insurance Company (“Gulf Insurance”) for cash consideration of $217.1 (61.9 million Kuwaiti dinar) inclusive of a 2.1% interest in Gulf Insurance which the company had previously acquired for cash consideration of $8.5 (2.0 million Kuwaiti dinar). Subsequent to making its investment, the company determined that it had obtained significant influence over Gulf Insurance and commenced recording its 41.3% interest in Gulf Insurance using the equity method of accounting. The equity accounted investment in Gulf Insurance was reported in the corporate and other reporting segment. Following the closing of this transaction, the company sold its ownership interest in Arab Orient Insurance Company (“Arab Orient”) to Gulf Insurance for proceeds equal to the original cost paid to acquire this investment. Gulf Insurance is headquartered in Kuwait and underwrites a full range of primary property and casualty and life and health insurance products in the Middle East and North Africa.

 

==========

 

Acquisition of AXA Gulf & Yusuf Bin Ahmed Kanoo

 

Gulf Insurance Group CEO Khaled Saud Al-Hassan said in an interview with “Al Arabiya” today, Tuesday, that the acquisition of the entire stake in “AXA Gulf” by Gulf Insurance is part of the group’s strategy to increase revenue and its presence in the Arab region.

He added that Gulf Insurance is currently present in 11 countries and its revenues totaled $ 1.5 billion in 2020, and the acquisition is part of the board’s policy for regional expansion and leadership in Arab insurance markets. operations and net profit.

 

Gulf Insurance Group CEO explained that Gulf Insurance Group is present in countries including Egypt, Algeria and Turkey, as well as other Arab markets, and these countries account for 50% of the group’s total revenues and Kuwait accounts for the remaining percentage.

 

Khaled Saud Al-Hassan indicated that the acquisition of AXA Gulf will increase the group’s revenues to $ 2.5 billion, making it the largest player in the Arab insurance market and is present in 13 countries, adding Qatar, Oman and Abu Dhabi after the acquisition, in in order to serve customers and shareholders.

- https://asumetech.com/gulf-insurance-in-al-arabiya-the-acquisition-of-axa-brings-revenues-to-2-5-billion-dollars/

—————

 

Here is a little more information on GIG. Fairfax continues to take out partners. This is an asset they understand exceptionally well. I have been wondering what the end game of their investment in GIG was… i was thinking Fairfax might be a seller. Wrong. I like the move. Fairfax has an enormous amount of cash coming in this year and next. I will be very happy if they use the cash on purchases like these (low risk solid return).

Edited April 19, 2023 by Viking

[glider3834]

https://www.theglobeandmail.com/business/article-blackberry-exploring-potential-breakup-of-company/

[Viking]

1 hour ago, glider3834 said:

https://www.theglobeandmail.com/business/article-blackberry-exploring-potential-breakup-of-company/

Love it. Fairfax has learned they are not a private equity turn-around shop. It appears much more work needs to be done at Blackberry. An exit of Blackberry at a fair price would let Fairfax shift the proceeds into other opportunities with better risk/reward/management. It would be an opportunity to further improve the quality of the equity portfolio. 
—————

Blackberry is a great example of ‘old Fairfax’: buy a declining business that was poorly managed that needed lots of strategic help from Fairfax to right the ship. Result? Loads of work. And a decade of very poor performance. As a result, this investment caused significant reputational damage to Fairfax (it was such a large position for years).

—————

And, of course, there is also the psychological benefit of exiting Blackberry. For long-term shareholders. 

 

Edited May 2, 2023 by Viking

[nwoodman]

2 hours ago, glider3834 said:

https://www.theglobeandmail.com/business/article-blackberry-exploring-potential-breakup-of-company/

Please let it be so.  This would go a long way to remove the taint of past misdemeanours

[Crip1]

15 hours ago, glider3834 said:

https://www.theglobeandmail.com/business/article-blackberry-exploring-potential-breakup-of-company/

Two separate and disparate thoughts on this:
•    As a long-time shareholder who has seen BB negatively impact my net worth, I don’t have any psychological need to get rid of it. The losses on this are in the past, and nothing can change it.
•    BB has always been in my “too hard” pile so I have no idea if the true value of this company is the current share price or somewhere north or south of current share price. 

So, bottom line, if this can “unlock” some of the value, so be it. If it can be sold with the capital being redeployed into buying back shares, buying out minority interests or better investments, so be it. I’d rather not sell just because it’s adversely impacted the company.

 

-Crip

P. S. That said, like most all of us, I really wanted them to sell when it was a meme stock back in 2021.
 

[MMM20]

18 hours ago, Crip1 said:

P. S. That said, like most all of us, I really wanted them to sell when it was a meme stock back in 2021.

 

It's pretty incredible that they missed selling BB at ~$25 b/c they were locked up at exactly the worst time - and oh BTW also took off their shorts at basically exactly the peak of all the insanity - and still sit here today with FFH having ~2x'd and still trading at like 6x earnings and seemingly on a clear path to 2-3x'ing over the next few years with just decent execution. Epitome of how a few big good decisions can far outweigh mistakes and bad luck.

 

Edited May 3, 2023 by MMM20

[bluedevil]

It seems this is probably due to the bonds maturing in six months - mostly held by Fairfax, and at a very low interest rate.  My bet is Fairfax said it was not interested in rolling the debt again.

[nwoodman]

38 minutes ago, bluedevil said:

It seems this is probably due to the bonds maturing in six months - mostly held by Fairfax, and at a very low interest rate.  My bet is Fairfax said it was not interested in rolling the debt again.

Should unlock some decent tax losses too

[Viking]

Over the past 2 years Kennedy Wilson has become a much more important part of Fairfax’s investment portfolio. A very successful real estate investment partnership has blossomed to now include a significant real estate debt platform. Since 2010 the real estate investment partnership has delivered gains of about $470 million (annual return of 22% on completed projects since 2010). Started two short years ago, the real estate debt platform is on track to deliver (much more?) than $190 million in interest income in 2023 ($2.4 billion invested at a 7.9% floating rate at Dec 31, 2022).

 

The real estate debt platform increased from $1.44 billion (average yield 4.7% = interest income of $68 million) at Dec 31, 2021 to $2.4 billion (average yield 7.9% = interest income $190 million) at Dec 31, 2022. At the same level of growth this platform could increase to $3.5 billion in 2023 and at 7.9% yield = $277 million in interest income. This will be something to monitor when Fairfax reports quarterly results during 2023.

 

The expansion of the relationship with Kennedy Wilson provides another good example of how Fairfax over the last 5 years has been:

1.) leveraging and expanding existing, successful, long term partnerships

2.) methodically diversifying their investment portfolio - in this case the fixed income part

 

The result is yet another new, growing, significant and steady stream of earnings for Fairfax.

—————

What is the timeline of Fairfax’s various investments in/with Kennedy Wilson?

 

Started in 2010

• Kennedy Wilson stock (KW)
  • initial equity investment was US$100 million (9% of company)
  • today position is worth $200 million (13.3 million shares x $14.98/share)
  • current annual dividend of $0.96 = 6.4% yield = $12.8 million in interest income per year
  • Wade Burton is on the board (along with Stanley Zax, who sold Zenith to Fairfax in 2010)
• investment partnership:
  • started with $278 million in 2010
  • Prem’s 2022 letter: “we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%.”

Expanded in 2020

• Real estate debt platform: to pursue first mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K.
  • 2020 = initial amount of $2 billion
  • 2022 = increased to $5 billion
    • Prem’s 2022 letter: “$2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%)” = $190 million in interest income.

Expanded further in 2022

• 2022: Perpetual preferred equity investment = $300 million
  • pays an annual dividend of 4.75% = $14.25 million
  • includes 7-Year warrants for 13 million shares at strike price of $23/share.

What does Fairfax see in Kennedy Wilson?

 

Prem’s comment from the 2022 press release from Kennedy Wilson: “We are pleased to make this new investment in Kennedy Wilson and to build on our outstanding partnership that dates back to 2010,” said Prem Watsa, Chairman and CEO of Fairfax. “We believe in their global business model, the strength of their high-quality, income-generating assets, and their best-in-class management team.”

• https://ir.kennedywilson.com
• Q4 2022 InvestorPresentation: https://ir.kennedywilson.com/~/media/Files/K/Kennedy-Wilson-IR-V2/reports-and-presentations/presentations/q4-2022-investors-presentation.pdf

—————

Interesting trivia point: Bill McMorrow (CEO and Chairman of KW) was the genesis behind Fairfax's investment in Bank of Ireland in 2011. I think Fairfax made over $1 billion from that one investment. Thank you Bill! (see Prem's comments below from 2011AR)

==========

2020: Kennedy Wilson and Fairfax Launch New $2 Billion Real Estate Debt Platform

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2020/05-14-2020-105955816

“Kennedy Wilson and Fairfax first invested together in 2010 when the two companies acquired $250 million of real estate assets, including real estate secured loans and real property. Over the past decade, the companies have partnered on $7 billion in aggregate acquisitions, including over $3 billion of real estate related debt investments. In addition, Fairfax currently has an equity ownership interest in Kennedy Wilson of approximately 9%.”

—————

2022: Kennedy Wilson Announces $300 Million Perpetual Preferred Equity Investment From Fairfax Financial

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2022/02-23-2022-211613501

“Kennedy Wilson and Fairfax began their relationship in 2010 when Fairfax made a $100 million equity investment in Kennedy Wilson. Over the past decade, the companies have partnered on $8 billion in aggregate acquisitions, including approximately $5 billion of real estate related debt investments. Fairfax currently has an equity ownership interest in Kennedy Wilson of approximately 9%.”

==========

Kennedy Wilson 2010AR: In 2010, Kennedy Wilson formed a $278 million investment partnership with Fairfax Financial, and the venture’s first major transaction was the purchase of a 65% interest in the Japanese apartment company. Kennedy Wilson previously owned 35% of the company.

• The added bonus of our Fairfax partnership was the addition of Stanley Zax to our Board of Directors. Stanley’s counsel and insights have been invaluable to our success in 2010 and 2011.

==========

2022AR Prem: Since we met Bill McMorrow and Kennedy Wilson in 2010, we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%. We also own 10% of the company. More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high quality real estate in the western United States, Ireland and the United Kingdom with a loan-to-value ratio of 60% on average. At the end of 2022, we had invested in $2.0 billion of mortgage loans in the U.S. at an average yield of 8.1% and an average maturity of 1.7 years, and in approximately $350 million of mortgage loans in the U.K. and Europe at an average yield of 6.0% and an average maturity of 2.5 years.

• The combination of interest and dividends and profit from associates accounted for a 3.7% return on our portfolio in 2022, the highest return in the last five years (average 2.5%). We expect to earn these returns in 2023 as well, partly because we have $2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%).

——————

2021AR Prem: We have an outstanding partnership with Kennedy Wilson, led by its founder and CEO Bill McMorrow and Bill’s partners, Mary Ricks and Matt Windisch. Since we met them in 2010, we have invested $1,150 million in real estate, received cash proceeds of $1,070 million and still have real estate worth about $542 million. Our average annual realized return on completed projects is approximately 20%. We also own 9% of the company.

 

More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high quality real estate in the western United States, Ireland and the United Kingdom with a loan to value ratio of 60% on average. At the end of 2021, we had committed to mortgage loans of $1.44 billion in the U.S. at an average yield of 4.7% and an average maturity of 1.9 years. We had also committed to approximately $500 million of mortgage loans in the U.K. and Europe at an average yield of 3.8% and an average maturity of 1.7 years. We are truly grateful to Bill and his team, and Wade Burton on our side, for a very profitable and enjoyable relationship. In February 2022, we committed to invest $300 million in a 4.75% perpetual preferred in Kennedy Wilson, with seven-year warrants exercisable at $23 per share.

—————

2020AR Prem: We have an outstanding partnership with Kennedy Wilson, led by its founder and CEO Bill McMorrow and Bill’s partners, Mary Ricks and Matt Windisch. Since we met them in 2010 we have invested $1,130 million in real estate, received cash proceeds of $1,054 million and still have real estate worth about $582 million. Our average annual realized return on completed projects is approximately 20%. We also own 9% of the company.

 

More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high-quality real estate in the western United States, Ireland and the United Kingdom with a loan to value ratio of less than 60%. At the end of 2020 we had committed to mortgage loans of approximately $1.5 billion at an average yield of 5% and an average maturity of four years. We are very grateful to Bill and his team for a very profitable and enjoyable relationship.

——————

2019AR Prem: no special mention in his lette

• During 2019 the company recorded share of profit of a KWF LP of $57.0 (A53.6) related to the sale of investment property in Dublin, Ireland. The KWF LP was subsequently liquidated and its carrying value reduced to nil when the company received final cash distributions of $169.4 (A150.0).

—————

2018AR Prem: Kennedy Wilson. We have had an excellent relationship with Kennedy Wilson, its CEO Bill McMorrow and Bill’s partners, Mary Ricks and Matt Windisch, since we met them in 2010. We own 9.2% of the company. In 2018, Kennedy Wilson sold three of our joint venture properties in Dublin for a gain of $74 million, an average annual return of 21% on our original investment, and returned $107 million of the proceeds to Fairfax. Since inception in 2010, we have invested $855 million with Kennedy Wilson, received cash proceeds of $858 million and still have real estate worth about $351 million. Our average annual realized return since inception was 21%. We continue to acquire properties through Bill, Mary and Matt with the purchase of one office building on 26 acres in Denver, Colorado for $85 million with a cash on cash yield of 6.7%; three office buildings outside Portland, Oregon for $29 million with a cash on cash yield of 6.2%; and nine office buildings on 67 acres outside Los Angeles, California for $163 million with a cash on cash yield of 7.5%. These Class A office buildings are anchored by investment grade tenants in strong and growing markets and were available at quite significant discounts to replacement cost.

• During 2018 three KWF LPs sold investment property in Dublin, Ireland. The company recognized its share of profit of $73.6 (A64.2) from those sales in share of profit of associates in the consolidated statement of earnings. The three KWF LPs were subsequently liquidated and their carrying values reduced to nil when the company received final net distributions of $107.3 (A91.9).

—————

2017AR: no mention of significance

—————

2016AR Prem: We have invested $692 million in real estate investments with Kennedy Wilson over the last seven years. Through sales of real estate and mortgage loans, as well as refinancings, we have received distributions of $645 million. Our total net cash investment in real estate investments with Kennedy Wilson is therefore now $47 million, and that investment is probably worth about $284 million. Annual net investment income from these real estate investments amounts to $12 million. Also, we continue to own 10.7% of Kennedy Wilson (12.3 million shares): our cost was $11.10 per share, and the shares are currently trading at about $22. A big thank you to Bill McMorrow and his team at Kennedy Wilson.

—————

2015AR Prem: We have invested $645 million in real estate investments with Kennedy Wilson over the last six years. Through sales of real estate and mortgage loans, as well as refinancings, we have received distributions of $625 million. Our total net cash investment in real estate investments with Kennedy Wilson is therefore now $20 million, and that investment is probably worth about $237 million. In 2015 Kennedy Wilson sold its Japanese real estate for a gain of $78 million, a return of 45% on our original investment, and returned $125 million of the proceeds to Fairfax. Also, we continue to own 10.4% of Kennedy Wilson (12.2 million shares): our cost was $11.37 per share, and the shares are currently trading at about $20. A big thank you to Bill McMorrow and his team at Kennedy Wilson.

————

2014AR Prem: We have invested $629 million in real estate investments with Kennedy Wilson over the last five years. Through refinancings, sale of some loan portfolios and gains on hedging contracts on Japanese yen, we have received distributions of $465 million. Our total net cash investment in real estate investments with Kennedy Wilson is therefore now $164 million, and that investment is probably worth about $350 million. We have yet to sell though, while our cash flow return of 11.2% is very acceptable. Also, we continue to own 10.7% of Kennedy Wilson (11.5 million shares): our cost was $11.90 per share, and the shares are currently trading at $26.19.

• During 2014 the company sold its holdings in two KWF LPs and recognized net gains of $21.5 and $9.9 respectively.

—————

2013AR Prem: We continued to invest with Bill McMorrow from Kennedy Wilson in 2013. We invested in the Clancy Quay apartments and some well-leased office buildings in Dublin and we also invested in a U.K. loan pool. We have invested a net cumulative $305 million in real estate deals with Kennedy Wilson in California, Japan, the U.K. and Ireland – deals at significant discounts to replacement costs and with excellent unlevered cash on cash returns, in which Kennedy Wilson is the managing partner and an investor. Also, we continue to own a fully diluted 10.9% interest (11.5 million shares) in Kennedy Wilson.

• The KWF LPs are partnerships formed between the company and Kennedy-Wilson, Inc. and its affiliates (‘‘Kennedy-Wilson’’) to invest in U.S. and international real estate properties. The company participates as a limited partner in the KWF LPs, with limited partnership interests ranging from 50% to 90%. Kennedy-Wilson holds the remaining limited partnership interests in each of the KWF LPs and is also the General Partner. For the KWF LPs where the company may exercise veto rights over one or more key activities, those partnerships are considered joint ventures under IFRS 11. Where the company has no veto rights over key activities, the company is considered to have significant influence under IAS 28. The equity method of accounting is applied to all of the KWF LPs.

—————

2012AR Prem: We continued to purchase commercial real estate investments with Bill McMorrow and his team at Kennedy Wilson, as discussed in last year’s Annual Report. For example, we purchased, 50/50 with Kennedy Wilson, perhaps the finest office building in Dublin, built in 2009 and 100% leased to State Street Bank for 25 years, for one- third of its construction cost with an unleveraged yield of approximately 8.5%. We also own, with Kennedy Wilson, some of the finest apartment buildings in Dublin with similar return characteristics. Rest assured we return Bill’s calls very promptly!

—————

2011AR Prem: I have attended the Berkshire Hathaway shareholders’ meeting since there were only 200 shareholders in attendance about 30 years ago. I still find I learn something each year from Warren and Charlie. At the meeting in 2010, I met Bill McMorrow through Alan Parsow, who is a money manager based in Omaha and a great friend. Bill founded Kennedy Wilson, a real estate services and investment company, in 1988, and he now owns 26% of the company. As a result of this meeting, we invested $100 million in a Kennedy Wilson 6% preferred convertible at $12.41 per share, and later purchased $32.5 million of a 6.45% preferred convertible at $10.70 per share and 400,000 common shares at $10.70 per share. Fully diluted we own 18.5% of the company. In 2010 and 2011, we also invested $290 million in several real estate deals with Kennedy Wilson in California, Japan and the U.K. – deals at significant discounts to replacement cost and with excellent unlevered cash on cash returns, in which Kennedy Wilson is the managing partner and a minority investor. We are thrilled to be partners with Bill and his team, who always focus on the downside and have the expertise to manage these investments and finally harvest them. You never know what you will find at a Berkshire meeting!!

 

And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million).

[MMM20]

6 hours ago, Viking said:

loan-to-value ratio of 60% on average

This (plus the whole floating rate thing) is a critical point in today’s world. Many loans up to 80-90% LTV could be permanently impaired now. Cap rates and attachment points got way too tight and high in retrospect. 
 

To Buffetts point yesterday, commercial real estate valuations are essentially driven by how much lenders will lend to a sponsor without requiring recourse to the parent. In my experience there are probably more bull market geniuses in real estate than any other market. A guy like Tom Barrack is the poster child but there are dozens of others… all prob still holding out hope that the day of reckoning will never come and they’ll never have to mark stuff down. 

 

Another example of FFH managing their affairs prudently over the past few years and coming out smelling like roses.

 

Edited May 7, 2023 by MMM20

[This2ShallPass]

5 hours ago, MMM20 said:

loan-to-value ratio of 60% on average

60% on average suggests there are loans much below and some that are higher. For example, I'm sure the LTV on my mortgage is much much lower. Even if they have 20% loans at 80% LTV isn't that risky? 

 

7.9% floating rate scares me to be honest, this is how we got the housing crisis in the first place...ppl taking floating rates and paying sky high prices for homes.

 

 

[MMM20]

3 hours ago, This2ShallPass said:

60% on average suggests there are loans much below and some that are higher. For example, I'm sure the LTV on my mortgage is much much lower. Even if they have 20% loans at 80% LTV isn't that risky? 

 

7.9% floating rate scares me to be honest, this is how we got the housing crisis in the first place...ppl taking floating rates and paying sky high prices for homes.

 

 

I took it to mean *originating* at 60% LTV in aggregate, which is much more conservative than the average underwriter as I understand it.
 

Fair enough point that the average doesn’t tell us about the distribution but I’d be surprised if they underwrote any loans >80% LTV if 60% is the average. 
 

Also fair point that floating is good for inflation protection until a bunch of underwater borrowers hand you the keys. On the flip side, if you have the ability to foreclose and finance the assets and hold longer term, your recovery should be quite good unless things really fall apart. Just look at returns on CRE last decade.
 

Still, I like that risk reward at ~60% LTV (even if it’s now looking more like 70-80%? after valuations reset) with some inherent inflation protection in the underlying assets. Much better than most other fixed income. 

 

It’s possible I’m missing something but it seems like it would take cap rates nearly doubling (valuations on mid cycle ish earnings getting cut in half) for Fairfax to lose money on these loans.

To Buffett/Munger’s point yesterday, in this sort of environment the assets won’t go anywhere but the ownership may change hands.
 

Maybe an opportunistic Fairfax will end up a beneficiary of that, starting as they are from this position of short duration strength in fixed income.
 

Edited May 7, 2023 by MMM20

[This2ShallPass]

4 hours ago, MMM20 said:

I took it to mean *originating* at 60% LTV in aggregate, which is much more conservative than the average underwriter as I understand it.

I'm also curious how do you get to originate loans like this. 60% LTV loans are gravy, the default risk is so low and no one is transferring these loans to you (not cheaply at least). Also, there's no way those borrowers get a floating rate at 8%. Are majority of their loans in Ireland / UK and are the mortgage int rates much higher than US?

 

Basically this sounds too good to be true, what am I missing?

 

[Spekulatius]

@Viking I looked at KW recently and this looks like an overlevered entity. It wont do well with interest where they are. The bonds are trading around 10%  and that was the reason I was looking at this. The equity looks like it's too "hot to touch", imo.

[Viking]

3 hours ago, Spekulatius said:

@Viking I looked at KW recently and this looks like an overlevered entity. It wont do well with interest where they are. The bonds are trading around 10%  and that was the reason I was looking at this. The equity looks like it's too "hot to touch", imo.

@Spekulatius I agree. I am not looking to invest in Kennedy Wilson the stock. Fairfax’s ownership of 10% of Kennedy Wilson is likely table stakes (as Jamie Dimon would say). It looks like Fairfax has been getting good value from the KW relationship. 
 

It is interesting looking at all the different relationships that Fairfax has been cultivating over the years. Stuff like Kipco in Kuwait. Relationship started in 2010. And culminated in sale of Kipco’s stake in GIG to Fairfax this year. Kennedy Wilson is another, this time focussed on global real estate. Lots also going on in Greece. And of course, even more in India. These relationships can take a decade to bear fruit. And Fairfax is extracting more value from these relationships with each passing year. It really is impressive the network across assets and geographies that they have built. Its almost like the senior team at Fairfax has been working on a portrait for years and we are just now able to start to make the picture out. 

[Thrifty3000]

16 hours ago, Viking said:

@Spekulatius I agree. I am not looking to invest in Kennedy Wilson the stock. Fairfax’s ownership of 10% of Kennedy Wilson is likely table stakes (as Jamie Dimon would say). It looks like Fairfax has been getting good value from the KW relationship. 
 

It is interesting looking at all the different relationships that Fairfax has been cultivating over the years. Stuff like Kipco in Kuwait. Relationship started in 2010. And culminated in sale of Kipco’s stake in GIG to Fairfax this year. Kennedy Wilson is another, this time focussed on global real estate. Lots also going on in Greece. And of course, even more in India. These relationships can take a decade to bear fruit. And Fairfax is extracting more value from these relationships with each passing year. It really is impressive the network across assets and geographies that they have built. Its almost like the senior team at Fairfax has been working on a portrait for years and we are just now able to start to make the picture out. 

Yes! Cultivating the network/portfolio of non-insurance capital allocators has been a big part of the strategy over the last decade. They placed a lot of bets on an array of people/opportunities to see which ones could perform. Several flamed out, which provided plenty of fuel for the doubters. Now the ones that worked out are not only providing solid growth, but they’re also providing more opportunities for additional investment than Fairfax can afford to fund. So, now Fairfax gets to allocate its billions of cash annually among the highest return opportunities afforded by a solid group of insurers AND a solid group of non-insurers. Amazing position to be in. 

[MMM20]

1 hour ago, Thrifty3000 said:

Yes! Cultivating the network/portfolio of non-insurance capital allocators has been a big part of the strategy over the last decade. They placed a lot of bets on an array of people/opportunities to see which ones could perform. Several flamed out, which provided plenty of fuel for the doubters. Now the ones that worked out are not only providing solid growth, but they’re also providing more opportunities for additional investment than Fairfax can afford to fund. So, now Fairfax gets to allocate its billions of cash annually among the highest return opportunities afforded by a solid group of insurers AND a solid group of non-insurers. Amazing position to be in. 

Yup. Looking more and more like (good) endowment style portfolio management. Market is slow to recognize the value of that for high incremental return opportunities across asset classes and geographies.  KW stock may or may not be cheap but what we can bank on is that they’ll bring FFH good coinvestment opportunities that may arise from CRE distress, and FFH should have $2-3B+ annual cash flow to allocate to such things over the next few years at minimum. I could see them doubling their capital allocated here over the next few years if things break a certain way. 
 

 

Edited May 10, 2023 by MMM20

[Viking]

If I was Fairfax, what would be my next take-private equity purchase? Probably Dexterra. Yes, not a needle mover. But it would be a solid addition to their current collection of private companies.

 

Why? Dexterra is dirt cheap (the stock), generates solid free cash flow and has solid growth prospects. And Fairfax has the cash.

 

What is the Dexterra story?

 

in 2018, Fairfax purchased Carillion Canada out of bankruptcy. The problem with Carillion was its UK parent went bankrupt. Fairfax paid about 5 times free cash flow for the Canadian operations. In 2020, Dexterra acquired Horizon North Logistics in a reverse takeover. Fairfax owned 49% of the combined company. This deal closed in May of 2020 (as covid was raging). At the time, Dexterra’s CEO, John MacCuish, set the audacious target for C$1 billion in revenue and C$100 million in EBITDA in the ‘next few years’.

 

How is the company doing? After hitting a speed bump in 2022, Dexterra is on track to achieve both of their financial targets in 2024. As part of an updated 5-year vision just unveiled today at the AGM, a new C$2 billion revenue target has been set. The growth at Dexterra is being funded by internally generated cash and debt (which is reasonable). EBITDA conversion to free cash flow is expected to be 50%.

 

What was the speed bump in 2022? Inflation knocked two business units on their ass:

1.) IMF: was not able to reprice contracts quick enough

2.) Modular Solutions: BC contracts did not have inflation clause (CEO of this division has since left)

 

In Q1, 2023 we learned IMF profitability is getting back to targeted levels. In modular, the remainder of the unprofitable BC contracts will be run off in Q2 and Q3 (the financial hit was largely already booked in Q4, 2022). The turnaround in modular will likely be a late 2023 or 2024 story.

 

Bottom line, 2023 is shaping up to be a decent year for the company. More acquisitions are coming. Growth should pick up again in 2024. Dividend yield is a solid 6.8% (with no risk of being cut). Chug, chug, chug.

 

- https://dexterra.com/wp-content/uploads/2023/05/2023-AGM-Presentaion.pdf

- https://dexterra.com/wp-content/uploads/2023/05/Analyst-Presentation-v6-Q1-2023.pdf

—————

Dexterra (DXT.TO)

• Stock price = C$5.15
• Market cap = C$335 million
• Dividend = C$0.0875/share = $0.35/year = 6.8% yield
• 2023 revenue est = C$1 billion
• 2023 EBITDA est = C$85 million
• 2023 free cash flow est = C$40 million

—————

What are Dexterra’s businesses? It is a really diverse collection of businesses.

1.) Integrated Facilities Management (IFM)

 - growth engine

2.) Workforce Accommodations, Forestry, Energy Services (WAFES)

3.) Modular Solutions

 

- https://dexterra.com/wp-content/uploads/2021/03/Dexterra_ServicingTheFuture_Brochure.pdf

—————

—————

What would it cost Fairfax to buy the 51% of Dexterra they do not own? 

• C$6.50/share? x 33.2 million shares = $222 million?

If Dexterra shares continue to trade in the low C$5 range in 2023 I think Fairfax may swoop in and take the company private similar to what they did with Recipe in 2022. Like with Recipe, have Dexterra fund part of the cost with debt (which they can then quickly pay off). Opportunistic. Smart.  

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2022AR: Dexterra is on track to achieve its vision of becoming a leader in delivering quality solutions to create, manage and operate infrastructure. John MacCuish is retiring after an outstanding performance for us, from rescuing Carillion from bankruptcy to the merger with Horizon North to form Dexterra. A big thank you to John for his leadership and dedication to Dexterra and best wishes to him and his family for a long and healthy retirement. The new CEO Mark Becker has been a senior leader in the organization for several years and is supported by three strong business unit Presidents. Dexterra closed two important integrated facilities management acquisitions early in the year and, coupled with organic growth, this strategic business unit almost doubled in size in 2022. The workforce accommodations segment also continued to build market share and deliver strong profitability while capitalizing on higher activity levels in Canada’s resource industries, although Dexterra’s modular business experienced short-term profitability challenges given high inflation and supply chain disruptions. Management expects to continue to build its modular platform and diversify its product mix, with strong demand for social and affordable housing across Canada.

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2021AR: Dexterra remains on track to achieve Cdn$1.0 billion in sales and Cdn$100 million in EBITDA in the near term. John MacCuish is leading the transformation to be a capital-light business. The workforce accommodations segment experienced strong growth and had strong profitability as resource industries in Canada rebounded in 2021. The strong underlying demand in affordable housing across Canada is also a priority for both the federal and provincial governments, and Dexterra’s modular solution business is in an excellent position to support this very important social issue. In January 2022, Dexterra also closed two facilities management acquisitions at attractive multiples with a combined purchase price of approximately Cdn$50 million. Dana Hospitality expands the company’s existing culinary services into education, entertainment, healthcare and leisure activities. Tricom Facility Services group, a business with a long history of providing janitorial and building maintenance services, builds the company’s strength in the hospitality, transit and entertainment verticals. These acquisitions have been financed by the company’s existing credit facility and the company’s balance sheet continues to be strong to support future growth.

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2020AR: The development of Dexterra’s business was dramatically reshaped by the reverse takeover in May 2020 of Horizon North. Dexterra, now a listed public company and led by John MacCuish, has a vision to build a Canadian support services champion. Its activities include a comprehensive range of facilities management, workforce accommodations, and forestry and modular build capabilities, including being a leader in social housing projects. Dexterra has publicly stated that it is on course in the next few years for Cdn$1 billion in revenue and Cdn$100 million in EBITDA.

 

Acquisition of Horizon North Logistics

On May 29, 2020 Horizon North Logistics Inc. (‘‘Horizon North’’) legally acquired 100% of Dexterra by issuing common shares to the company representing a 49.0% equity interest in Horizon North. The company obtained de facto voting control of Horizon North as its largest equity and voting shareholder and accounted for the transaction as a reverse acquisition of Horizon North by Dexterra. The assets, liabilities and results of operations of Horizon North were consolidated in the Non-insurance companies reporting segment. Horizon North, which was subsequently renamed Dexterra Group Inc. (‘‘Dexterra Group’’), is a Canadian publicly listed corporation that provides a range of industrial services and modular construction solutions.

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2019AR: Dexterra continues to provide industry-leading facilities management and operation solutions in Canada under the leadership of John MacCuish, its CEO. Bill McFarland is also Chair of Dexterra. The company continues to be the go-to service provider for some of the country’s largest airports, premier retail and commercial properties, corporate campuses, research and education facilities, large industrial sites, defence and public assets, camps and catering and state-of-the-art healthcare infrastructure. The company is also one of the country’s largest reforestation contractors and forest firefighters.

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2018AR: I am happy to report that we also made two significant private company investments in 2018/2019 – Dexterra and AGT. Dexterra, led by John MacCuish as CEO, is the new name for Carillion Canada which went into bankruptcy because of the bankruptcy of its parent in the U.K. Dexterra provides industry-leading facilities management and operation solutions across Canada, including maintenance solutions for over 50 million sq. ft. of high-quality infrastructure. This includes some of the country’s largest airports, premier retail and commercial properties, corporate campuses, research and education facilities, large industrial sites, defence and public assets and state-of-the-art healthcare infrastructure. The company is also one of the country’s largest reforestation contractors – planting over 40 million trees annually, it annually completes 4,400 hectares of forest thinning/brushing and 1,200 hectares of site preparation–it employs hundreds of firefighters, with an emphasis on Indigenous communities, and for the last 30 years it has been supplying and operating full-service remote workforce services. We were able to buy Dexterra at about 5x free cash flow.

 

Acquisition of certain businesses of Carillion Canada Inc.

On March 7, 2018 the company acquired the services business carried on in Canada by Carillion Canada Inc. and certain affiliates thereof relating to facilities management of airports, commercial and retail properties, defense facilities, select healthcare facilities and on behalf of oil, gas and mining clients. The acquired business was subsequently renamed Dexterra Integrated Facilities Management (‘‘Dexterra’’). Dexterra is an infrastructure services company that provides asset management and operations solutions to industries and governments. The assets and liabilities and results of operations of Dexterra were consolidated in the Other reporting segment.

 

Purchases of subsidiaries, net of cash acquired of $163.1 in 2018 primarily related to the acquisitions of Dexterra (100%) and Toys ‘‘R’’ Us Canada (100%).

Edited May 11, 2023 by Viking