Pershing Square 2nd Quarter 2009 Letter

Thanks to Jay at MarketFolly for posting this.

Pershing Square Q2 Letter

Some quick points an analysis, from my perspective:

• I actually saw Bill Ackman speak last year and was thoroughly impressed with the work he did with FSA - a bond insurer. Interestingly, we were already short FSA at the time. Strong analysis and presentation.
• I analyzed EMCsometime in June, and unfortunately, missed the opportunity. Error of not pulling the trigger.
• McDonald's is probably quite cheap here. 13x earnings for that sort of business makes no sense to me - especially when the general market is trading around 20+x forward earnings. They have not participated in the rally as the opposite of the Walmart effect has been occuring in the stock market.

GGP gets its own paragraph. I just don't know with this one and am not thoroughly convinced. My analysis is still coming up with 50-60ish on the Rouse bonds (discounted back two years at 20%...i.e basically where it is trading today), and it has been that way for nearly a year now. Maybe I am suffering from some kind of anchoring mechanism. I have seen all the sell-side models out there: At a 9% cap rate, and call it $850M on NOI, then add in some love for land and JV value you get $10-$11B value for Rouse less $7.4B of secured debt leaves a recovery for the Rouse bonds well in excess of par.

Do I think the 9% cap rate is correct? That is a broad statement. I think some malls could go for 7% and other malls could go for 15%. I would say it is close to correct. Do I think the $850M of NOI is correct? Frankly, I think it is lower. I also think that ascribing a billion dollars to the ancillary assets only makes sense if someone will actually buy them at that level. Also - And this is more a theoretical question: But are CRE lenders just going to extend the maturity on the mall loans? Won't some of them want more security / rate to compensate them? Some of the GGP and Rouse malls were financed at a 3-4% cap rate. These lenders are significantly underwater. In a number of stressed CRE's situations this year, borrowers have added collateral and upped rate to make lenders happy. How does that factor into the equation?

Here is the Pershing Square GGP Presentation. It is well thought out. I suggest everyone interested read.

GGP Presentation 5.27.2009

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The Credit Rally of 2009

I commented on a previous post about how I think index funds could be driving the high yield / credit rally that we have seen in distressed debt and on-the run vanilla high yield in the past 6 months.

Accrued Interest, one of my favorite blogs out there, posted a fantastic piece on mutual fund flows over the past two years, and what effects these might have had on the credit rally:

"So far this year investors have added virtually nothing to equity funds. There is no mania there, at least not when it comes to retail mutual fund investors. Now there is significant variation month-by-month. In the first three months of 2009, investors withdrew $40 billion only to add $53 billion since. But even there, it doesn't look like a mania at all. Over the last 6 weeks, there have been $4 billion in net redemptions. Even the $53 in net purchases over the last 6-months seems paltry compared with the $233 billion in redemptions last year.

By contrast, take a look at bond funds. Fund investors have made net purchases to the tune of $253 billion so far this year. That is just about double the last two years of net purchases combined.

And unlike stocks, bond investors don't have any need to "catch up." If anything, mutual fund investors would seem to have come into 2009 over weighted in bonds. Not only did mutual fund investors redeem $233 billion in equity funds in 2008, those same funds plunged in market value during the year. If retail investors followed any kind of rebalancing discipline (no laughing back there anyone who deals with retail investors... I said "if"), there would be the need to redeem bond funds and buy stock funds. Right now the opposite is happening.

So it makes one wonder. If there is a bubble, isn't it more likely in bonds? If there is an asset class that is getting more than its fair share of the excess liquidity, it isn't stocks. Its debt."

What a fantastic posts. I wonder how much of the fund flows have been to index funds who apparently cannot get their hands on bands in the primary and hence are pushing up prices after the break? Is that why we are seeing IG bonds trade 20-30 basis points tighter than when issued or high yield bonds trade up 3 - 6 points on the break?

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Distressed Debt Investor Club Beta Test Follow Up

First off - I am humbled by the amount of emails I received today regarding the distressed debt investor club beta test. Over 125 people sent me an email asking to be a beta tester. I sent an email out to the first five that were in my inbox (was out of the office at a few meetings and a roadshow today). If you did not receive an email, please stay tuned in the next few weeks. I very much appreciate your support in this boondoggle I am trying to accomplish.

Thanks again

-Hunter

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Distressed Debt Investor Club

Development for the Distressed Debt Investor Club is nearly complete (call it 90%). Final launch date is still TBD, but think soon. That being said, I thought I would put a post up on how I expect things to unfold in the next few weeks, and what you should be thinking about if you are planning to join / apply.

It really boils down to having an investment idea (that is actionable today) ready to submit. This idea could range from anything to a long bank debt idea, a merger arb opportunity, a spin-off, a short bond idea, stub play, post-reorg equity, a trade claim, etc. And I don't want the idea to be a "post-mortem" analysis...I want to be able to trade on the idea right now. The format that we will be using, similar to the Tiger Management process: A four sentence synopsis of the idea, followed by a more thorough write-up explaining the investment opportunity. On the site, you will be able to attach a file to your write-up, and if you think it appropriate, reference the attachment in your write-up. The write-up doesn't have to be more than 2 pages (I'd prefer 1 page...but understand some ideas need more vetting than others).

When the site is live, we will have a small beta test, and then launch the site to all after all the kinks are worked out. If you are interested in the beta test, please email me (first 5 to email me will be selected - benefits include free membership for 2010...hunter [at] distressed-debt-investing.com).

I really hope everyone applies. We are targeting 250 members by the end of the year, and will stagger the acceptance process up until then. From the 2 or 300 emails I have received on it, this will be a very high caliber group, with a number of the best distressed debt / event-driven hedge funds represented (anonymously of course).

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Howard Marks: A Legend

I have spent the last four hours reading this collection. The amount of investing gold from Howard Marks of Oaktree Capital is incredible. I would download and save in case this is taken down. Enjoy.

Edit: Already taken down. Here is direct URL: http://www.oaktreecapital.com/memo.aspx

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