Fairfax 2023

[TwoCitiesCapital]

5 hours ago, gfp said:

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

 

I tend to agree that I don't want them owning 30-year credit risk at rates less than short term treasuries. 

 

I think if they want duration, they can buy long dated treasuries, Treasury futures, or get reasonable spreads on low-coupon agency mortgages which will have extended durations due to lower prepayments and low coupons.

 

Why not lock in something like 6% YTMs for 5-10 years on agency mortgages instead of 5% with credit risk? 

 

I hope the only credit risk they're taking is at the front of the curve for the additional 1.5% of spread that won't blow out terribly much in a recession. 

[gfp]

My point was that they wouldn't be taking credit risk on a BNSF bond.  But opinions differ on the direction of long term rates.  I think all rates go lower from here and FFH wouldn't be worried about locking in 3yr bonds using forwards at 3.7% if they disagreed with my view that rates aren't headed higher.

[MMM20]

I’ve been wondering “whats the catch”  with the KW deal and saw the following in the JPM transcript. Could the mark to market LTV across the pool be closer to 70-80%? If so, still very attractive for that duration, but the ~10% expected return makes more sense… maybe the transcription is wrong and they’re just talking office…

 

”So we did a bit of work to understand the dynamics in the real estate market in the last several months. And so the real estate market’s totality in this country is around $13 trillion, $14 trillion, commercial real estate. The average inception loan-to-value was in the low-50s. If you were to do a mark-to-market of that portfolio now at the new cap rates and new occupancy rates and all that so that probably, the loan to value at the moment is between 70% to 80%. So definitively, it has been a deterioration. So an asset class that an insertion was $2.2 trillion, giving or taking, probably now is sometime between $1.5 trillion to $1.7 trillion. The amount of lending against that is $1.2 trillion. That is roughly half by — provided by banks and have provided by the markets, CMBS, some insurance companies, other participants" - JPM call

[Parsad]

Guys...they've run surpluses in their insurance ops for 15 straight years...I think they've got it down on how to structure their bond portfolio so that income and credit risk is balanced with future insurance claims.  Cheers!

[TwoCitiesCapital]

2 hours ago, gfp said:

My point was that they wouldn't be taking credit risk on a BNSF bond.  But opinions differ on the direction of long term rates.  I think all rates go lower from here and FFH wouldn't be worried about locking in 3yr bonds using forwards at 3.7% if they disagreed with my view that rates aren't headed higher.

 

It might be a better credit than other corporates, but it will still be hurt by a widening of spreads which is nearly guaranteed to happen as rates rise and the economy slows. 

 

All in all, if they want duration, they can get it in far more liquid and direct ways.

 

If they want credit exposure, I'd want them to wait until corporate spreads are priced attractively to lock in long duration spread. They can always use treasury futures/rates to hedge/manage the duration component at that time.  

[glider3834]

4 hours ago, MMM20 said:

I’ve been wondering “whats the catch”  with the KW deal and saw the following in the JPM transcript. Could the mark to market LTV across the pool be closer to 70-80%? If so, still very attractive for that duration, but the ~10% expected return makes more sense… maybe the transcription is wrong and they’re just talking office…

 

”So we did a bit of work to understand the dynamics in the real estate market in the last several months. And so the real estate market’s totality in this country is around $13 trillion, $14 trillion, commercial real estate. The average inception loan-to-value was in the low-50s. If you were to do a mark-to-market of that portfolio now at the new cap rates and new occupancy rates and all that so that probably, the loan to value at the moment is between 70% to 80%. So definitively, it has been a deterioration. So an asset class that an insertion was $2.2 trillion, giving or taking, probably now is sometime between $1.5 trillion to $1.7 trillion. The amount of lending against that is $1.2 trillion. That is roughly half by — provided by banks and have provided by the markets, CMBS, some insurance companies, other participants" - JPM call

Worth considering loan mix (skew to residential multi-family/student housing) and completion guarantees in addition to the LTV

 

All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

 

 

 

Edited June 6, 2023 by glider3834

[dartmonkey]

15 hours ago, glider3834 said:

Worth considering loan mix (skew to residential multi-family/student housing) and completion guarantees in addition to the LTV

 

All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

 

 

 

Yes, there doesn't seem to be any indication that this is a distressed sector like office space. With 70% being multifamily/student housing, and the rest in industrial/hotel/life science office property, it doesn't seem like the LTV would be any different now from when the loans were initiated. I don't exactly know what 'science office property' is, but while the word 'office' is scary, in these work-from-home tiimes, from the way the deal is described, it doesn't seem like it should be a big part of the deal.

[Dipesh Patel]

[dartmonkey]

4 hours ago, DM1 said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

[dartmonkey]

Just now, dartmonkey said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

Sorry,, I mean $1013, up $23...

[Santayana]

And/or close out the TRS position.

[valuesource]

2 hours ago, dartmonkey said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

I think they're a long way from backing off on repurchases.

[Viking]

14 minutes ago, valuesource said:

I think they're a long way from backing off on repurchases.

i agree. Prem has said that they feel their shares are worth much more than book value. My guess is he is probably thinking a minimum of 1.3 x BV (i am probably low). Fairfax also know earnings could total $300/share over the next 11 quarters. Book value today is $800. Book value could easily be $1,100 the end of 2025. At a 1.3 x multiple that would put the value of Fairfax shares (low end) at $1,400 at Dec 2025. Buying shares today at $750 is a bargain for Fairfax.

[Thrifty3000]

58 minutes ago, Viking said:

i agree. Prem has said that they feel their shares are worth much more than book value. My guess is he is probably thinking a minimum of 1.3 x BV (i am probably low). Fairfax also know earnings could total $300/share over the next 11 quarters. Book value today is $800. Book value could easily be $1,100 the end of 2025. At a 1.3 x multiple that would put the value of Fairfax shares (low end) at $1,400 at Dec 2025. Buying shares today at $750 is a bargain for Fairfax.

+1

[gfp]

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf

[glider3834]

1 hour ago, gfp said:

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf 3.32 MB · 4 downloads

Milk puts (like other agri product derivatives) i think would be related to insurance business eg protection sold to dairy farmers example below from Hudson crop insurance site 

 

'Dairy Revenue Protection (DRP) is an insurance plan approved by the Federal Crop Insurance Corporation to allow dairy farmers to purchase risk management protection against declines in quarterly revenue from milk sales as a result of a decline in milk prices, a decline in milk production, or both.'

 

https://hudsoncrop.com/products/drp/

Edited June 8, 2023 by glider3834

[Parsad]

7 hours ago, gfp said:

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf 3.32 MB · 9 downloads

 

Shareholders should know that the investment portfolio is partially dispersed among the less senior investment managers and analysts. 

 

So you might see some esoteric ideas in the portfolio at different Fairfax subs and some of those ideas are testing the waters or involve the individual smaller portfolios being managed by those managers and analysts. 

 

All big ideas, and most of the investment portfolio, runs through the Investment Committee at Hamblin Watsa.  Kind of like how Ted and Todd manage some money for Berkshire, but Buffett handles most of it.  If you see big ideas, you know it's Buffett or Hamblin Watsa.  If you see smaller ideas, it is likely Ted or Todd and in Fairfax's case, these other managers and analysts outside of the Hamblin Watsa Investment Committee.

 

Cheers!

[Masterofnone]

12 times average trading volume on FRFHF today. Some institution cashing out while another sees opportunity in the future. Does Fairfax buy back OTC shares or do they only purchase on TSX?

[SafetyinNumbers]

On 6/7/2023 at 3:29 PM, Santayana said:

And/or close out the TRS position.

That's the last thing I would do. It's a sizable buyback where we have already paid the premium. Might as well wait, buy stock on the NCIB and enjoy the higher weighting in the index. I think the closet indexers will be the big driver for the stock over the next five years as they are way underweight and Fairfax is now 80bps of the index which is about what CSU was when they started chasing it in 2018. 

 

There are a lot of similarities between Fairfax now and CSU in 2018 like market cap, share price, shares outstanding, price momentum i.e. stuff that matters to closet indexers. The big difference is CSU starting valuation looked optically expensive 5 years ago which is what active managers had to overcome to get back to market weight. Fairfax meanwhile, is exceptionally cheap on every measure so in theory it should be easier to convince PMs to go to market weight or even overweight but we also have more jaded PMs to overcome as many stayed overweight FFH long after the outperformance ended.

 

On the same note we likely have more willing sellers as Mark Leonard has achieved god status over the past 5 years while mostly everyone is waiting for Prem to make a mistake so are much more likely to take profits as price goes up even if valuation and technicals are screaming buy.

 

 

[A_Hamilton]

13 hours ago, SafetyinNumbers said:

That's the last thing I would do. It's a sizable buyback where we have already paid the premium. Might as well wait, buy stock on the NCIB and enjoy the higher weighting in the index. I think the closet indexers will be the big driver for the stock over the next five years as they are way underweight and Fairfax is now 80bps of the index which is about what CSU was when they started chasing it in 2018. 

 

There are a lot of similarities between Fairfax now and CSU in 2018 like market cap, share price, shares outstanding, price momentum i.e. stuff that matters to closet indexers. The big difference is CSU starting valuation looked optically expensive 5 years ago which is what active managers had to overcome to get back to market weight. Fairfax meanwhile, is exceptionally cheap on every measure so in theory it should be easier to convince PMs to go to market weight or even overweight but we also have more jaded PMs to overcome as many stayed overweight FFH long after the outperformance ended.

 

On the same note we likely have more willing sellers as Mark Leonard has achieved god status over the past 5 years while mostly everyone is waiting for Prem to make a mistake so are much more likely to take profits as price goes up even if valuation and technicals are screaming buy.

 

 

I'd close out, was a great trade at a silly price, less attractive now. The other thing is that TRS are priced at SOFR + a spread, so this isn't necessarily cheap capital.

[SafetyinNumbers]

11 minutes ago, A_Hamilton said:

I'd close out, was a great trade at a silly price, less attractive now. The other thing is that TRS are priced at SOFR + a spread, so this isn't necessarily cheap capital.

Do you know how the SOFR + spread compares to the cost of other borrowing or the returns on alternative investments including buying their own shares back? 

[gfp]

19 minutes ago, SafetyinNumbers said:

Do you know how the SOFR + spread compares to the cost of other borrowing or the returns on alternative investments including buying their own shares back? 

 

SOFR moves with the Fed Funds rate - it's around 5% now and has moved up similarly to other overnight rates.  It's just a secured (collateralized) overnight rate.

[Viking]

30 minutes ago, A_Hamilton said:

I'd close out, was a great trade at a silly price, less attractive now. The other thing is that TRS are priced at SOFR + a spread, so this isn't necessarily cheap capital.

The key is what Fairfax thinks:

- fair value is for their stock is today (1.3 x BV?)

- what the prospects are for earnings over the next 12, 24, 36 months (my base case is $120/year)

- what the plan is for share buybacks (as the hard market ends, share buybacks could increase materially to reduction of +4% per year if they wanted)

 

Fairfax, of course, has better information than we do. I would continue to hold the TRS.

[TwoCitiesCapital]

55 minutes ago, A_Hamilton said:

I'd close out, was a great trade at a silly price, less attractive now. The other thing is that TRS are priced at SOFR + a spread, so this isn't necessarily cheap capital.

 

I'm not quite ready for them to close it out yet. 5-6% is still cheap financing if they're buying mortgages at 10% and taking out the shares that own those mortgages below book value. 

 

The bigger deal to me is the cash drag for when shares fall - it makes their liquidity very pro-cyclical to have to deliver hundreds of millions on cash as the share price is falling at the same time all other stocks are falling (or as catastrophes hit). 

 

Fairfax bucked the trend over the last two years of weak equity markets so am willing to give a little grace here, but I do think it would be prudent to begin reducing the position if there is another 10-15% pump in the stock. 

Edited June 9, 2023 by TwoCitiesCapital

[Thrifty3000]

Seems to me we're getting closer to the point where it makes sense to cash in the TRS gains and focus on buying back the $1 billion Odyssey position from OMERS. Not sure if we ever nailed down the interest rate FFH is paying OMERS for that deal, but it sounded like an $80 or $90 million annual interest expense. Given FFH's expected earnings power it sounds to me like a risk-weighted break even point might be in the neighborhood of $800 to $1,000 USD per FFH share. (Of course this depends on the TRS interest rate and, more importantly, on how FFH sees its growth prospects. The more growth expected the higher they'll let the TRS run.)

 

In fact, I think the point at which they cash out the TRS will be a pretty strong signal for how FFH sees its growth prospects. If they were to cash out the TRS now I'd think it's a signal they expect normal earnings to remain flat beyond the 3 year horizon. However, if the shares run up to $1,000 USD and they still hold the TRS then that seems like pretty strong conviction favoring growth.

 

^ PS. "cash in the TRS gains" is the wrong terminology. I should have said "exit the TRS position". TRS gains have already been booked.

 

 

Edited June 9, 2023 by Thrifty3000