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Berkowitz to use JOE as a mini BRK?


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Interesting tidbid from an very well done writeup on Bruce Berkowitz from the Institutional Investor magazine:

 

But Berkowitz and Fernandez’s vision for St. Joe is much bigger than that. As an asset manager in its own right, St. Joe, which has owned everything from railroads to banks, would give Fairholme a way to play corporate restructurings and do private investments that would not be permitted directly under securities laws regulating mutual funds. Because Fairholme is set up as a mutual fund rather than a hedge fund, it faces restrictions on owning real estate or other illiquid assets — a potential disadvantage for a mutual fund going up against hedge funds as restructurings become more important. But if St. Joe owned it, they could. “We could own a company whose shares are liquid that owns illiquid assets,” Berkowitz says.

 

Like a mini–Berkshire Hathaway?

 

“It could be,” Berkowitz says. “That’s an interesting way of describing it. Except the shareholders of Fairholme will benefit, as opposed to Charlie and myself directly. We’ll benefit through our participation in the fund.”

 

Although St. Joe currently represents less than 3 percent of Fairholme’s assets, Berkowitz hopes to make it a more significant holding. “Our game plan will be to make it a bigger part of the portfolio,” he says. “We’re not wasting our time or our shareholders’ or partners’ time. I hope one day St. Joe is our largest position.”

http://www.institutionalinvestor.com/Article/2824162/Fairholmes-Bruce-Berkowitz-Is-Beating-Hedge-Fund-Managers-At-Their-Own-Game.html?ArticleId=2824162&p=1

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I find this a somewhat disingenious argument, the vast majority of public companies are liquid investments that own so-called "illiquid assets." Some exceptions, insurance, banking, and even there it takes years and years to run-off an insurance operation so even that is not entirely liquid.

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Myth - I think your comparison to Howard Hughes is right in the near to medium term.  As I mentioned in my blog, long term (like 10+ years) it wouldn't surprise me if JOE looked like LUK or BAM.

 

Basically, if Berkowitz has an investment opportunity in a publicly traded security it will happen through one of his mutual funds, but my guess is he'll now have an outlet through which he can invest in real estate, private companies, partnerships, etc.

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Myth - I think your comparison to Howard Hughes is right in the near to medium term.  As I mentioned in my blog, long term (like 10+ years) it wouldn't surprise me if JOE looked like LUK or BAM.

 

Basically, if Berkowitz has an investment opportunity in a publicly traded security it will happen through one of his mutual funds, but my guess is he'll now have an outlet through which he can invest in real estate, private companies, partnerships, etc.

 

I think those are even better comparisons. I think you are right on the money. He has owned LUK for quite a while and worked with Bruce Flatt as well. I thought he would use FUR in such a way as well, but I think its too small and he doesnt have enough control. Its also highly focused on realty.

 

Everyone is so focused on float.

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It'll definitely be an interesting story to watch.  If this is indeed what Berkowitz has in mind AND he's successful it wouldn't surprise me to see other mutual funds do the same thing (Longleaf, Wintergreen, 3rd Ave, etc)

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Kind of an odd investment vehicle. From what I understand, it doesn't produce stable free cash flow, it's assets are not readily salable and it's not like there is any float. It will be interesting watching the story.

 

If this discussion were about anyone other than Bruce, we would all be saying: What an absurd idea that a cash poor company with assets that are dead money would become a dynamic investment vehicle.

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It's very interesting to think about Ackman and Berkowitz potentially using these publicly traded real estate companies as "mini-Berkshires."

 

Essentially, these companies are intended to monetize their hard assets (real property) over time in the most optimal way possible until depletion.  However, instead of distributing all the cash that is generated over time to shareholders, Ackman and Berkowitz seem to be indicating that they will deploy the cash generated into other investments.  In other words, both those guys think that they have bought into Martin Whitman-style net-nets that will serve as investment vehicles.

 

You know, David Herro's video talked about how the Florida economy would eventually come back.  JOE is in many ways a bet on Florida over the long run.

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Kind of an odd investment vehicle. From what I understand, it doesn't produce stable free cash flow, it's assets are not readily salable and it's not like there is any float. It will be interesting watching the story.

 

If this discussion were about anyone other than Bruce, we would all be saying: What an absurd idea that a cash poor company with assets that are dead money would become a dynamic investment vehicle.

 

I think the answer lies in considering SHLD, HHC, and JOE as Whitman-style net-nets rather than as Graham net-nets.

 

Sears happens to actually generate free cash from the retail operations, though.

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Kind of an odd investment vehicle. From what I understand, it doesn't produce stable free cash flow, it's assets are not readily salable and it's not like there is any float. It will be interesting watching the story.

 

If this discussion were about anyone other than Bruce, we would all be saying: What an absurd idea that a cash poor company with assets that are dead money would become a dynamic investment vehicle.

 

Bruce or no Bruce, BRK seems a terrible comparison (as has been noted by others) and I'm not sure I buy the conglomerate/holding company concept at all in this case.  Mostly, I think Bruce is trying to paint some lipstick on this pig and would accept any complementary comparison at this point.  I think it's more like a SHLD with marginal land assets instead of marginal retail assets.  It might work, but it needs to start with some stable cash generation.  Maybe some day.

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Kind of an odd investment vehicle. From what I understand, it doesn't produce stable free cash flow, it's assets are not readily salable and it's not like there is any float. It will be interesting watching the story.

 

If this discussion were about anyone other than Bruce, we would all be saying: What an absurd idea that a cash poor company with assets that are dead money would become a dynamic investment vehicle.

 

I think the answer lies in considering SHLD, HHC, and JOE as Whitman-style net-nets rather than as Graham net-nets.

 

Sears happens to actually generate free cash from the retail operations, though.

 

Perhaps Whitman-style net-net is the not the right analogy because I think Whitman looks for real estate which he determines can be monetized immediately in a way that results in net-net.

 

This could be the next iteration of net-net investing.  A run-off net-net. 

 

Or perhaps I'm stretching . . .

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I think the answer lies in considering SHLD, HHC, and JOE as Whitman-style net-nets rather than as Graham net-nets.

 

Sears happens to actually generate free cash from the retail operations, though.

 

Sears did, up until last year that is.  The timing of the liquidation of SHLD assets as a last resort wasn't much of a concern for me right up until their operating results went to shit.  Up until FY 2011, SHLD was able to generate about a $1billion in FCF and had almost no path to insolvency due to a very modest debt load.  In the past year FCF went to crap and they've added a little debt, so the whole operation looks a little less appealing right now.  I'm still an owner, but I've reduced the size of my position and I'm less enthusiastic about it generally.

 

/derail

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I think its pretty smart. Bruce could buy additional shares using FAIRX, taking ownership up to 60%-75%. That gives Joe the capital to acquire quite a bit. Look at what Klarman does, Bruce cant do alot of those style transactions. With Joe he can. I also think he really enjoyed the work he did on General Growth, Joe will give him additional flexibility.

 

I dont think its material to FAIRX, but his smaller focus fund could be heavily into Joe. I think Joe started off as passive. Einhorn pointed out it sucked, he stepped in, and after sleeping on it he has new ideas for it. Its probably a bit of lipstick on a pig, but its a good idea inmo.

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I think the answer lies in considering SHLD, HHC, and JOE as Whitman-style net-nets rather than as Graham net-nets.

 

Sears happens to actually generate free cash from the retail operations, though.

 

Sears did, up until last year that is.  The timing of the liquidation of SHLD assets as a last resort wasn't much of a concern for me right up until their operating results went to shit.  Up until FY 2011, SHLD was able to generate about a $1billion in FCF and had almost no path to insolvency due to a very modest debt load.  In the past year FCF went to crap and they've added a little debt, so the whole operation looks a little less appealing right now.  I'm still an owner, but I've reduced the size of my position and I'm less enthusiastic about it generally.

 

/derail

 

Yeah, I got out of SHLD around $75 last year because I was worried that results would deteriorate even further and because it was nowhere near the same bargain as when I bought it in the low $60s.

 

I don't have much confidence in Eddie Lampert's ability to get an operations team in there that will turn around the operations.  He doesn't seem to have the right personality for that.  And I really dislike how he's cashing out selling shareholders without giving them enough disclosure about what he's up to.

 

Sometimes I wonder whether Lampert is more Biglari-esque than Buffett-esque. 

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  • 6 months later...

http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid=449656

 

Wade's moving over to the EDA may in fact be a net positive for St. Joe. It's not outrageous to think that Wade's more natural role may be that of an economic developer more affiliated with a region than with a specific company. As mentioned above, he enjoyed much success in Alabama, a track record that he hasn't yet repeated at St. Joe. Although he went out of his way to imply he won't strictly be a shill for the St. Joe Company in his new position, it's obvious that St. Joe and the EDA will need each other in order to meet their goals. Joe needs a strong EDA to help facilitate the incentive packages needed to lure exogenous businesses to its airport development, and the EDA needs St. Joe for its large inventory of developable land. We think inserting Wade, by all accounts still a trusted friend of the senior St. Joe team, as the EDA director strengthens the bond between the two entities. At the same time, the currently unprofitable St. Joe improves its cost structure a bit.
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I don't have much confidence in Eddie Lampert's ability to get an operations team in there that will turn around the operations.  He doesn't seem to have the right personality for that.  And I really dislike how he's cashing out selling shareholders without giving them enough disclosure about what he's up to.

 

Sometimes I wonder whether Lampert is more Biglari-esque than Buffett-esque.

 

comparing lampert to biglari is way too harsh. essentially, he's following the same script with shld that he has with an & azo. year in & year out he's shrinking the share base with a portion of free cash flow, a form of financial engineering that's his peculiar trademark. he's had stellar results those other 2 co's. and the ceo's there dont seem to be in a hurry to get out of dodge due to some problem dealing with lampert's personality. he's obviously still trying to figure out how to stabilize shld & position it for the future operationally. the real estate values are only a safety net, tho a diminishing one that he probably didnt imagine the severity of 5 years ago. same thing with the weak market position at the combined shld. he missed that too. i still think that he'll eventually get it right. but in this debt laden deflationary economy i'm not a nibbler yet.

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I don't have much confidence in Eddie Lampert's ability to get an operations team in there that will turn around the operations.  He doesn't seem to have the right personality for that.  And I really dislike how he's cashing out selling shareholders without giving them enough disclosure about what he's up to.

 

Sometimes I wonder whether Lampert is more Biglari-esque than Buffett-esque.

 

comparing lampert to biglari is way too harsh. essentially, he's following the same script with shld that he has with an & azo. year in & year out he's shrinking the share base with a portion of free cash flow, a form of financial engineering that's his peculiar trademark. he's had stellar results those other 2 co's. and the ceo's there dont seem to be in a hurry to get out of dodge due to some problem dealing with lampert's personality. he's obviously still trying to figure out how to stabilize shld & position it for the future operationally. the real estate values are only a safety net, tho a diminishing one that he probably didnt imagine the severity of 5 years ago. same thing with the weak market position at the combined shld. he missed that too. i still think that he'll eventually get it right. but in this debt laden deflationary economy i'm not a nibbler yet.

 

You're right, I'm being too harsh on Lampert.  It just drives me nuts that he's keeping things so close to the vest.

 

It allows Mr. Market to be stupid and for him to cash out unsophisticated selling shareholders who don't know any better.  I also think it hurts SHLD because it keeps them from drawing in great people who are not financial engineers, so to speak.  I'm talking about people like Ron Johnson -- people with visions for the new retail world.  Of course, perhaps people who have done more due diligence on SHLD's hires could disagree.  I'd love to hear from those folks.

 

As for Biglari, even he's not as bad as people make him out to be.  I mean, he's going to do well for his shareholders -- there's no question in mind about that.  I just vehemently disagree with his whole notion of comp and what he's worth to the shareholders.  I also don't like the low hurdle rates he's picked.  I guarantee you a lot of people on the board are afraid to speak up and say that they agree with Biglari's views of comp, though I'm not one of those people. 

 

I'm not gonna fault Biglari for liking Aston Martin's -- those are pretty sweet cars.

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I am not in love with Biglari. As a stockholder you have to keep a vigilant eye because the Board is stacked. However I am not particularly upset with his desire to be paid what he thinks he is worth. Do I think the threshholds should have been better:  Yes.  But lets analyze it for a moment.  Biglari has stated on several occasions that investing in BH is similiar to investing in a publicaly traded hedge fund. Now for most of us investing in a hedge fund is beyond our means. In addition the normal hedge fund fee structure (2 and 20) is not something most here would agree to. With BH you get a smart, aggressive, savvy, control investor with a flat 25% fee after a 6% hurdle, where the total annual compensation is capped out at $10mil.  Less expensive then your typical hedge fund and completely incentive based. In addition I believe Biglari will do anything possible not to torpedo the stock price because in the long run thats where his big gains will come from, his stake in the company which he is required to add to annually from his incentive compensation, I believe the number is 30%. 

 

Now would I rather have a Warren type earning $100,000, yes indeed. But I don't know how practical that is in this day and age. 

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I don't have much confidence in Eddie Lampert's ability to get an operations team in there that will turn around the operations.  He doesn't seem to have the right personality for that.  And I really dislike how he's cashing out selling shareholders without giving them enough disclosure about what he's up to.

 

Sometimes I wonder whether Lampert is more Biglari-esque than Buffett-esque.

 

comparing lampert to biglari is way too harsh. essentially, he's following the same script with shld that he has with an & azo. year in & year out he's shrinking the share base with a portion of free cash flow, a form of financial engineering that's his peculiar trademark. he's had stellar results those other 2 co's. and the ceo's there dont seem to be in a hurry to get out of dodge due to some problem dealing with lampert's personality. he's obviously still trying to figure out how to stabilize shld & position it for the future operationally. the real estate values are only a safety net, tho a diminishing one that he probably didnt imagine the severity of 5 years ago. same thing with the weak market position at the combined shld. he missed that too. i still think that he'll eventually get it right. but in this debt laden deflationary economy i'm not a nibbler yet.

 

You're right, I'm being too harsh on Lampert.  It just drives me nuts that he's keeping things so close to the vest.

 

It allows Mr. Market to be stupid and for him to cash out unsophisticated selling shareholders who don't know any better.  I also think it hurts SHLD because it keeps them from drawing in great people who are not financial engineers, so to speak.  I'm talking about people like Ron Johnson -- people with visions for the new retail world.  Of course, perhaps people who have done more due diligence on SHLD's hires could disagree.  I'd love to hear from those folks.

 

As for Biglari, even he's not as bad as people make him out to be.  I mean, he's going to do well for his shareholders -- there's no question in mind about that.  I just vehemently disagree with his whole notion of comp and what he's worth to the shareholders.  I also don't like the low hurdle rates he's picked.  I guarantee you a lot of people on the board are afraid to speak up and say that they agree with Biglari's views of comp, though I'm not one of those people. 

 

I'm not gonna fault Biglari for liking Aston Martin's -- those are pretty sweet cars.

 

Buying Aston Martins is negatively corellated with good long term results.  Look what happened to Rich Santulli. 

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