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Bank of America Sale Leaseback of Properties


Parsad
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I stated this some time ago when there were questions about BAC raising capital, and said that they could easily sell and leaseback their hordes of corporate offices around the United States.  A rough estimate from me says that they could raise anywhere from another $5B-$7B for some of their fantastic real estate.  Glad they are now doing so!  Cheers!

 

http://online.wsj.com/article/BT-CO-20120201-720714.html

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Moynihan is rapidly becoming the dream CEO. When the time comes let's see if he is also a good capital allocator.

 

Probably not.  But banking is actually a simple business when you keep it to the basics of deposits, lending and investments.  Everyone has the same spreads.  Everyone has the same target client base.  The low cost operators, who stay away from esoteric and risky products, keeping their company's best interest and their client's best interest at heart, will do fine long-term.  It's when the pigs get greedy you start to see problems. 

 

Moynihan strikes me as the "keep it simple, stupid" type, and he'll just run a plain old national banking business while being one of the low-cost operators in the industry.  If he does just that, the bank will trade at book and grow at a very nice ROE long-term.  Cheers! 

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What I don't understand about Fairholme funds investors is that Berkowitz doesn't take on a lot of leverage so you don't benefit from ultra-low rates; he doesn't focus on exotic securities or high transaction cost investments; and his expected holding period is long enough to simply cherry pick from his investor letters.

 

One major benefit to being a shareholder is that Berkowitz will stomach the volatility and maintain discpline in your stead. So if a shareholder pulls out when NAV implies a reasonable probability of bankruptcies, then what exactly was the point of investing with Berkowitz? It makes no sense!

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http://dl.dropbox.com/u/60381306/120201%20-%20Case%20Study%20I%20%28With%20Disclaimers%29.pdf

 

Updated Berkowitz case study of BAC, he's thinking fair value around $20

 

Thanks for the link. I didn't know that Berkowitz had updated his presentation. I think, at this point, the market is looking past non-litigious loss reserves, but there still seems to be excessive penalization for non-interest expenses. The efficiency ratio won't stay at 85% forever.

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How does it really work though? Do you choose your investors or do they choose you?

 

It is well worth reading http://finance.fortune.cnn.com/2010/12/10/bruce-berkowitz-the-megamind-of-miami/ again and also the discussion on this board http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fortune-magazine-article-on-bruce-berkowitz/

 

His comments on his $25 Bn target was pointed out as a concern (see below)

 

I think it is a challenge to get $25Bn together from true value investors.

 

There is an important lesson in this for anyone on this board that manages OPM. 

 

Bargainman...

I think Berkowitz and Miller are completely different.  Berkowitz is continuously focused on the downside.  I mean he has like 2/3 in equities, and the rest in cash and bonds?  He does special deals like GGP, and ACF.  Miller loved taking risks.  I remember the interview with Bruce about his manager of the decade award.  He basically said 'yeah that's nice, but it doesn't matter if I don't perform going forward so whatever".  He basically took it in stride as if it barely mattered.  Bill Miller's foray into the financials after the first shoe dropped also showed me the clear difference between the two.  Miller's reasoning if I remember it, was basically that 'yeah this happens and it's a buying opportunity, and I bought into financials the last time this happened and made a bundle' (at least that's the gist of what I remember reading, contrarian but not focused on the downside).  Bruce stayed the heck away, way away until everything cleared out.  Or mostly cleared out.  Anyway, the only thing that makes me uncomfortable about the article is the lavishness of his house, but I guess if you manage 10+ billion you can afford luxuries like that, and hey not everyone can be like Buffet :-)  Oh and of course the 10+ billion and his statement that he things 25 billion is a good size for the fund..  Doubt he'll be able to outperform much with that but who knows?  The other thing I liked was his daily speed walk and workouts with a personal trainer.  Just finished the book "Brain Rules" and the whole "exercise is scientifically proven to improve executive function" kind of struck a cord with that article. :-) (my emphasis)

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You might want to rethink the sale & leasebacks, & see them for what they really are: a hedge against a future significant increase in interest rates (1) (2), & a B/E reducer (3).

 

(1) It is highly likely that they have agreed to pay a sweetheart - but increasing rent, for an extended period. Discounting the CF at todays historic low interest rate, maximizes the sale price, & their regulatory capital. 

(2) In 5-7yrs+ BAC buys back the lease, & does so when interest rates are 'normal' - reducing the PV of the remaining CF as low as possible. If the lease sale was at 2.5%, & the repurchase was at 4.5% - 5-7yrs in; BAC will book a PV gain of 2% on the remaining CF - when they repurchase. A off BS cookie that gets bigger, the longer the lease.

(3) 5-7B of fixed cost becomes variable. But if the lease cost in the early years is less than the existing depreciation (& it will be), the difference is an increase (probably significant) in contribution margin & a reduction in the banks operating BE level. EPS rises (& share price), but it starts to rise at a much lower level of business.

 

Thinking its just an indirect immediate capital raise, is to minimally capture the true value of the transactions.

 

SD

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