Empires are not often replaced by new ones. What usually happens, the disintegration converts them to many smaller pieces. Look at the Mongols or the USSR as examples (or, in the futuristic USA, will you be in Liberalandia, the Dixie Republic, The Free State of New Hampshire, Mexico-Norte, etc.?). This happens with businesses as well: newsprint is replaced by many formats: web, several mobile, several tablets, social sharing, etc. Coal as a primary energy source of the industrial revolution has been replaced- somewhat- by other sources, some fossil, some not. I have the hunch that "old" Wall Street does not really know what is coming, both from the outside and from the inside.
In no particular order, and with no particular company in mind (some have more lines of business than others):
- Working hard not to be an employer of choice: firing people en masse the week before bonuses, deferring ever greater % of comp, laying off 1st year analysts, etc. employment practices
- Net interest margins are getting killed: borrowing at zero and collecting 2% is worse than borrowing at 3% and collecting at 7%
- Investment management fees are more transparent than ever (and the benchmark is Vanguard at 0.10% or less); the last bastion of gravy, 401(k) plans, are pushed into better disclosure
- Retail brokerage/"financial planning"/"wealth management"- conflicted model is being replaced by independent advisers with fewer conflicts, self-education, mirroring (like AlphaClone or Covestor) and, yes, apps
- Trading volumes/commissions down due to technological advancements (automated market-making, multiple venues, etc.) and the brainchild of corrupt failures Frank and Dodd
Less obvious things:
- Buyside consolidation depresses margins (quite possibly in both debt and equity) as it reduces the value of the "go to market" intermediary and the syndication process. Institutional Investor did a story on how BlackRock is squeezing the underwriters; not hard to see them teaming up with other behemoths that might well account for 60-80% of the market for certain issues (the GM IPO at 75 bps is the target, vs. the old standard of 700 bps)
- Research, already both conflicted and restricted, is getting devalued by Twitter for chatter, SumZero and blogs for long theses and Estimize for the real market consensus
- Financing, as a general concept, is getting more democratized and scattered (now with the likes of Kickstarter and Prosper and Gust and GSVC and Second Market, who knows what will come up later as regulations change)
- M&A expense visibility is higher as it is easier for an activist to spread the word very fast at no cost
- Anecdotally, serial acquirers do more M&A work in-house (i.e. anything under $1 bn is done internally) which means basically zero fees paid to the Street from what would have been bread-and-butter accounts 15 years ago, and there are plenty of bankers willing to move to corporate
- With CapitalIQ, and so on, it is very hard for a banker to show a company that has not been seen by the acquirer before or the multiples paid in similar deals, so the value of the M&A banker is limited to relationships and execution
The ecosystem is evolving rapidly in several directions, and the dinosaurs may continue to be around due to regulations that favor large firms, but they won't be what they were in prominence and profitability.
Sunday, February 5, 2012
Sunday, January 29, 2012
They Don't Always Ring a Bell at the Top But They Sure Eat a Lot of Steak
Here's the thing about IPOs. They are about supply and demand. Yeah, sure, access to "permanent" capital, "liquidity events" for the founders and the Mitt Romneys, recapitalizations, and so on, but, fundamentally, they are about supply and demand. Offer too much stock, and it might be a flop (see GRPN's "float" in their I"P"O). Generate robust demand, and it might pop. But by the time a company gets to that stage, it has been scrubbed, polished, shopped and priced to perfection (which is why Uncle Warren does not play the game). Demand comes in cycles, and high beta companies usually go public later as they need to show a good upswing in results.
The Facebook IPO filing hogged all the attention this week, but what caught my eye was Del Frisco's, a steakhouse chain, filing an S-1 for a $100 million IPO. Uncle Lehman (now trying to pay off his creditors) has bought me meals in the Del Frisco's across the street. Great place.
But what does it indicate about "the cycle"? Steakhouses are "expense account" locations: business lunches, deal closing dinners, awards banquets, top sales teams doing the single-malt tasting menu, you name it. It is all "high beta" spending, and it all (or nearly all) goes away when the purses tighten.
What does history show? Let's look at the comps.
Morton's (MRT), a larger steakhouse chain, went public in early 2006 in the $16-$17 range, just as the national housing prices peaked. Do you remember 2006? The housing bubble was in full swing, everyone made "product", from the mortgage broker to the securitization machine, and the times were good, and the purses were loose. MRT then went on to drop to the $1.60-$1.70 range in early 2009. This is a 90% loss for the IPO buyers who held. The company was just taken private at $6.90/share but at least you can enjoy their internet-only NYC surf-and-turf three-course special at $109.99 for 2 through March.
Ruth's Chris (RUTH), also larger than Del Frisco's, went public in the summer of 2005 above the initial range, at $18/share. The IPO was in the $200 million range. RUTH tanked to $0.75 or something in early 2009, so call it a 95% loss for an IPO-price buyer. The stock is currently in the $6 range. Their Midtown location is running a $44.95 filet-and-lobster tail special for Valentine's Day, so get with the program (and do not take her to White Castle's Valentine Day specials, seriously).
But the icing on the cake is... Del Frisco's themselves. They filed their first ever S-1 on October 23, 2007, barely 12 days after the S&P500 index reached its all-time high of 1,530. The registration was withdrawn in December 2008. No, I am not making it up, and, yes, the irony is juicier than anything you can pick out from their menu.
They don't ring a bell at the top but they do eat a lot of steak.
The Facebook IPO filing hogged all the attention this week, but what caught my eye was Del Frisco's, a steakhouse chain, filing an S-1 for a $100 million IPO. Uncle Lehman (now trying to pay off his creditors) has bought me meals in the Del Frisco's across the street. Great place.
But what does it indicate about "the cycle"? Steakhouses are "expense account" locations: business lunches, deal closing dinners, awards banquets, top sales teams doing the single-malt tasting menu, you name it. It is all "high beta" spending, and it all (or nearly all) goes away when the purses tighten.
What does history show? Let's look at the comps.
Morton's (MRT), a larger steakhouse chain, went public in early 2006 in the $16-$17 range, just as the national housing prices peaked. Do you remember 2006? The housing bubble was in full swing, everyone made "product", from the mortgage broker to the securitization machine, and the times were good, and the purses were loose. MRT then went on to drop to the $1.60-$1.70 range in early 2009. This is a 90% loss for the IPO buyers who held. The company was just taken private at $6.90/share but at least you can enjoy their internet-only NYC surf-and-turf three-course special at $109.99 for 2 through March.
Ruth's Chris (RUTH), also larger than Del Frisco's, went public in the summer of 2005 above the initial range, at $18/share. The IPO was in the $200 million range. RUTH tanked to $0.75 or something in early 2009, so call it a 95% loss for an IPO-price buyer. The stock is currently in the $6 range. Their Midtown location is running a $44.95 filet-and-lobster tail special for Valentine's Day, so get with the program (and do not take her to White Castle's Valentine Day specials, seriously).
But the icing on the cake is... Del Frisco's themselves. They filed their first ever S-1 on October 23, 2007, barely 12 days after the S&P500 index reached its all-time high of 1,530. The registration was withdrawn in December 2008. No, I am not making it up, and, yes, the irony is juicier than anything you can pick out from their menu.
They don't ring a bell at the top but they do eat a lot of steak.
Wednesday, January 4, 2012
Thoughts for 2012 and Selective Review of 2011
I am crossposting here and on Davian, the technology and marketing partner for my inflation-focused product.
Thoughts for 2012 (some more serious than others):
- Flash mob acceleration makes standard retail an even less desirable place to be; retailers blame evil short-sellers for organizing the mobs
- The "better burger" and the soft-serve ice cream waves top out, there might be an IPO or two (Smashburger, Red Mango)
- Carl Icahn buys a ton of treasurys, demands seats in Congress, asset sales
- Apple somehow takes over your TV, car and fridge
- Hillary for VP; gets elected and takes "the suitcase" away from the O-Fail
- Brazil starts to look uglier than most think possible
- 100 m sprint record broken in London 2012
- Social media and tech start-up rapid valuation deflation
- Germany wins Euro 2012
- Chris Christie weight loss surgery during his summer vacation fuels 2016 speculations (promptly denied)
- Since every hedge fund strategy is negative for 2011, many expect mean reversion in 2012: the reversion does not happen
- US ISPs tighten data limits + USPS down to three delivery days = NFLX in the teens
- The Fed is sued by a pension funds group led by CalPERS for causing severe underfunding by rate manipulation
- Some widely despised sector does really well (financials, sovereigns, old telcos, big pharma?)
- Department of Education requires that colleges take "first loss" position in any student loan; this leads to differential pricing by major and a big decline loan availability for worthless/hobby/lifestyle degrees
- Surge in specialty spirits: ouzo, calvados, grappa, cachaca, etc.
- TSA-free/fly-at-your-risk airline fails to take off due to red tape
- Obama caught smoking with Carla Bruni, Michelle disapproves and flies coach back home
- Twitter still can't figure out how to make money, introduces a paid 240 character account; paid individual "pimped tweets" displayed in color and flash
- Unsynchronized transmissions and carburated engines make a comeback with enthusiasts
- ACLU sues school districts on behalf of American Muslims juveniles who feel excluded from football because of the "pigskin"
- Major newspaper takes a position against veteran privileges based on non-draft, paid military
- Perry, Palin and Santorum co-author a book on evolution, promote it with a trip to the Galapagos Islands
- Payroll deductions renamed from abbreviations to "old people pay", "old people healthcare", "Middle East occupation", etc.
- Cocktail food trucks (these really are coming)
Looking at my meager blog postings over 2011, here are a few things that make me look good. Not that I can eat that: inflation-positioning, even with good sized TIPS and cash/opportunistic holdings, was a disaster in the 2nd half of the year.
January 2011: Stay away from the Crumbs Bakery reverse-merger IPO. The stock gyrated in the low teens after the transaction closed later in the spring, prior to tanking to $3-$4 range. Who knew?
April 2011: Are we at the peak? This was a well-timed listing of current events pointing to a peak in economic activity. The US has not gone into a double-dip but we are not seeing mega deals, big resource mergers, and so on. Follow-up post in June, M&A Activity Indicative Of Peak Cycle
May 2011: The Ira Sohn Conference Lemming Trade: from the charts there, HOGS $15 to $8 now, CIT $44 to $34, MBI $9 to $12 (this one is up on the legal developments), BPI $26 to $24 (not bad, and a great story about the guy presenting it), MMC $30 to $32, AON $52 to $46. As discussed, one should not be following blindly (unless it was for a quick trade)
June 2011: Howard Marks is Selling, Should You Be Buying? Oaktree's filing was not a good harbinger. I discuss why.
July 2011: Coffee Stocks: Do Not Burn Your Fingers. This post discussed some of the hot coffee stocks. JVA, JCOF, JAMN, CRVP have all tumbled since then (some were on their way down already); the real businesses (SBUX, THI, PEET) soldier on, while the grandfather of all hot coffee stocks, GMCR is... well...GMCR.
With that, good luck in the new year.
Thoughts for 2012 (some more serious than others):
- Flash mob acceleration makes standard retail an even less desirable place to be; retailers blame evil short-sellers for organizing the mobs
- The "better burger" and the soft-serve ice cream waves top out, there might be an IPO or two (Smashburger, Red Mango)
- Carl Icahn buys a ton of treasurys, demands seats in Congress, asset sales
- Apple somehow takes over your TV, car and fridge
- Hillary for VP; gets elected and takes "the suitcase" away from the O-Fail
- Brazil starts to look uglier than most think possible
- 100 m sprint record broken in London 2012
- Social media and tech start-up rapid valuation deflation
- Germany wins Euro 2012
- Chris Christie weight loss surgery during his summer vacation fuels 2016 speculations (promptly denied)
- Since every hedge fund strategy is negative for 2011, many expect mean reversion in 2012: the reversion does not happen
- US ISPs tighten data limits + USPS down to three delivery days = NFLX in the teens
- The Fed is sued by a pension funds group led by CalPERS for causing severe underfunding by rate manipulation
- Some widely despised sector does really well (financials, sovereigns, old telcos, big pharma?)
- Department of Education requires that colleges take "first loss" position in any student loan; this leads to differential pricing by major and a big decline loan availability for worthless/hobby/lifestyle degrees
- Surge in specialty spirits: ouzo, calvados, grappa, cachaca, etc.
- TSA-free/fly-at-your-risk airline fails to take off due to red tape
- Obama caught smoking with Carla Bruni, Michelle disapproves and flies coach back home
- Twitter still can't figure out how to make money, introduces a paid 240 character account; paid individual "pimped tweets" displayed in color and flash
- Unsynchronized transmissions and carburated engines make a comeback with enthusiasts
- ACLU sues school districts on behalf of American Muslims juveniles who feel excluded from football because of the "pigskin"
- Major newspaper takes a position against veteran privileges based on non-draft, paid military
- Perry, Palin and Santorum co-author a book on evolution, promote it with a trip to the Galapagos Islands
- Payroll deductions renamed from abbreviations to "old people pay", "old people healthcare", "Middle East occupation", etc.
- Cocktail food trucks (these really are coming)
Looking at my meager blog postings over 2011, here are a few things that make me look good. Not that I can eat that: inflation-positioning, even with good sized TIPS and cash/opportunistic holdings, was a disaster in the 2nd half of the year.
January 2011: Stay away from the Crumbs Bakery reverse-merger IPO. The stock gyrated in the low teens after the transaction closed later in the spring, prior to tanking to $3-$4 range. Who knew?
April 2011: Are we at the peak? This was a well-timed listing of current events pointing to a peak in economic activity. The US has not gone into a double-dip but we are not seeing mega deals, big resource mergers, and so on. Follow-up post in June, M&A Activity Indicative Of Peak Cycle
May 2011: The Ira Sohn Conference Lemming Trade: from the charts there, HOGS $15 to $8 now, CIT $44 to $34, MBI $9 to $12 (this one is up on the legal developments), BPI $26 to $24 (not bad, and a great story about the guy presenting it), MMC $30 to $32, AON $52 to $46. As discussed, one should not be following blindly (unless it was for a quick trade)
June 2011: Howard Marks is Selling, Should You Be Buying? Oaktree's filing was not a good harbinger. I discuss why.
July 2011: Coffee Stocks: Do Not Burn Your Fingers. This post discussed some of the hot coffee stocks. JVA, JCOF, JAMN, CRVP have all tumbled since then (some were on their way down already); the real businesses (SBUX, THI, PEET) soldier on, while the grandfather of all hot coffee stocks, GMCR is... well...GMCR.
With that, good luck in the new year.
Saturday, December 3, 2011
Tom Russo Lecture At Columbia Business School/Greenwald (2009)
I am crossposting here and on Davian, the platform for my inflation-focused product.
This is a 1.5-hour Columbia Business School lecture by Tom Russo from Spring 2009 (unconfirmed, my estimate).
Staying the course is important and hard to do in bear markets: Buffett visited his Stanford bschool class in 1980 and gave the following principles.
(1) The IRS does not tax unrealized gains so try to find things you can hold forever, the long term matters
(2) In a lifetime, you might have 20 great ideas so buy and hold
(3) Define your circle of competence (for Russo, consumer product and media companies)
(4) Choose management well. There is no deal to be made with corrupt people. It is an agency cost.
Long-term holding/stay the course has worked for his partnership. In 1999, they were down while the markets were up 27%. The story at time was that the internet will change everything, including grocery shopping and media. Traditional businesses were sold off, and the investors were bidding up the glamorous internet. Then in 2000, the market was down, while they were up 17%.
Also thinking long-term, stocks do reflect underlying cashflows. Since they hold a lot of basic consumer companies, these cashflows have been generally stable and growing over time. Also brand owners are able to match inflation well.
In addition, consumer companies are very shareholder-friendly: less agency costs. They do keep shareholders in mind when making capital allocations. He likes family-controlled businesses (unlike many who are wary of it) provided that, upon inspection, there is no self-dealing. Gives Adelphia vs. Comcast example. The families do not need to get bigger, and are less likely to do accounting manipulations.
Since they invest in global companies they also get some currency tailwinds. While admittedly not statistically significant, their experience has been that during years in which the US markets are weak, the US dollar has been weak. So an investor holding 40-65% international portfolio gets some boost from currency gains. For example, in 2002 they ere barely down (with 6% gain in currency) vs. S%P down ~25%.
Now the downside, they hold PM: they expect 80c decline EPS decline on $3.40 solely due to currency. Also holds other brand companies, Nestle, SAB, Heineken, Pernod Ricard, and likes the products, as it makes the research more fun.
There are few new ideas. A professor had an investment: an undervalued champagne company with no earnings, lots of inventory and acreage. Then at Sequoia Fund, he researched Brown Forman. BF then expanded into the flavored alcohol/coolers business. The stock shot up on the acquisition, but then the business fell off the cliff and the stock tanked. The shares plunged, and Sequoia researched them. So he's been investing in alcohol for a while. In 1987 the partnership was up 35% vs. market down 7% largely because of an alcohol company they had (Beefeater-brand owner) that was acquired. Great single brand companies do not survive for too long on their own: usually no distribution clout. Overtime they owned Corby, BF, Diageo, Allied Domeq. The point is you can figure out things, you will have multiple times to participate in the industry you know.
He also invested in newspapers, straight from Berkshire, so he started following them ("no new ideas"). Now that industry has hit a wall.
Now owns global liquor businesses: huge reinvestment opportunities. The brands have very small shares in the most interesting markets (China, India). So the cash flows from the mature business go to build in the new markets. So the real return to value investors is not only from the discount but also growth because of good reinvestment prospects. The market sometimes gets it wrong when the emerging market investments create short-term financial reporting disappointments. But these are often fixed cost investments, then they scale very well. So "reported" profits may be understated. This is true across many businesses they have with EM operations. They first bought BF in 1989, doing at 5 mm cases of Jack Daniels, mostly in the US. The multiple was low. The entire return since that time has come from growth abroad. They do 10 mm cases now. The shares have compounded at 15% per year. It has never been very exciting, largely a forgotten company. And now the future prospects are even higher as they hit the breakevens on the various international markets. Same with Pernod.
Pernod case: management has a good record. They started with a small cashflowing business in France, then started acquiring abroad. Irish Distillers, then Seagrams. With Seagrams, they got a good China business, Chivas and Martell. Then the 1997/98 crisis happened in Asia, and many Western businesses shut down. Back then, the crisis led currency collapses adn lack of buying power. Importers found it very hard to import, so foreign companies left. Pernod did not leave, and ended up "owning" the market once the recovery came. Many portfolio companies have the ability to endure losses like these. Then Pernod bought Allied Domecq and became a global. The business is decentralized. They own their distribution channels whenever possible. Now Pernod bought Absolut, the shares tanked due to the leverage, so Russo is buying Pernod. Pernod understands branding: in China, they just increased Absolut prices 50%, it was not aspirational enough. They will quickly make up the volume with dollars margin. Also very good at localizing products to taste or complimentary products. Price is suppressed: fear of emerging markets, fear of downtrading in OECD, the Absolut acquisition put 5 bn euros of debt/future credit access, share repurchases have stopped and the price paid for the acquisition. Position sized at about 5%, have 25% in alcohol. Across the board at single P/Es but all have good prospects for growth.
Q&A:
Q: Formula for financials' assessment?
A: the core business of Pernod is strong, Absolut is transformative in our view. We cannot put a precise number on that.
Q: Do you have an intrisic value for Pernod?
A: No
Q: On currencies/EMs in the turmoil?
A: Currencies and foreign markets are unknowable. Met with PM CEO, and he thinks the crisis is a US crisis. So (EM example) Russia, will be better vs. 1998: stronger country, local expenses, local production, several pricepoints. Russo has exposure in E Europe: the currencies look wobbly but no view on the future.
Q: How do you assess total addressable market in EM?
A: You will know it when you see it, no real approach. You know an elephant when you see it. He's investing in the conversion of rising GDP to branded consumer products. Often this displaces an indigenous product, like baiju in China, with a global brand. In India, beer is at 0.7L per person vs. 17 in china and 100+ in US. PG and disposable diapers: started at 3 mm cases few years ago, 2008 70 mm cases. But this is 2 cents per capita vs. few dollars/capita in the US. PG has tiered the product. New diaper plants come pre-assembled and can put it up in a week.
Q:How do you measure management alignment of interest with shareholders?
A: Have to pick the family right. No litmus tests, spend time with the family.
Q: Direct EM investments?
A: Often have the multinationals that deal in EMs, so they get more control over local management, more audit certainty, etc. Had a direct investment in a Slovakian chocolate company. The information flow burdens and the risk were too high to bear. Also the valuations have been much higher in EM for locally listed subsidiaries (ie Unilever Hindustan).
Q: Sell discipline
A: Now more prepared to take a critical look after 2008. But now harder to want business at lower prices.
Q: ??
A: Good discussion of how Richemont expanded in Russia (carefully, no partners, spent more for real estate they control).
Q: Tech?
A: Can't see Dell's future so no investment there. Ultimate commodity, and threatened by technology. Can't model it after consumer company process.
Q: ??
A: Sarbox is helping them with more controlled entities. Comfort varies from family to family, it is qualitative. With Berkshire's new independent board, succession is centerstage, and this is helping them as outside holders.
Q: Brand impairments?
A: Try not to get involved with impaired brands. Absolut might have been underutilized, and Pernod has the capacity to revitalize. Cadbury Schweppes: their great growth came when Mars went to sleep. Mars is now back, bought Wrigley, and this might hurt C-S company.
Q: Sell at what multiples?
A: At very high multiples, he'd sell no matter what; at high multiples, they reduce if it is a higher percent of the portfolio (i.e. grown from 5% to 8%). Often uses the cash to add to undervalued/underrepresented positions.
This is a 1.5-hour Columbia Business School lecture by Tom Russo from Spring 2009 (unconfirmed, my estimate).
Staying the course is important and hard to do in bear markets: Buffett visited his Stanford bschool class in 1980 and gave the following principles.
(1) The IRS does not tax unrealized gains so try to find things you can hold forever, the long term matters
(2) In a lifetime, you might have 20 great ideas so buy and hold
(3) Define your circle of competence (for Russo, consumer product and media companies)
(4) Choose management well. There is no deal to be made with corrupt people. It is an agency cost.
Long-term holding/stay the course has worked for his partnership. In 1999, they were down while the markets were up 27%. The story at time was that the internet will change everything, including grocery shopping and media. Traditional businesses were sold off, and the investors were bidding up the glamorous internet. Then in 2000, the market was down, while they were up 17%.
Also thinking long-term, stocks do reflect underlying cashflows. Since they hold a lot of basic consumer companies, these cashflows have been generally stable and growing over time. Also brand owners are able to match inflation well.
In addition, consumer companies are very shareholder-friendly: less agency costs. They do keep shareholders in mind when making capital allocations. He likes family-controlled businesses (unlike many who are wary of it) provided that, upon inspection, there is no self-dealing. Gives Adelphia vs. Comcast example. The families do not need to get bigger, and are less likely to do accounting manipulations.
Since they invest in global companies they also get some currency tailwinds. While admittedly not statistically significant, their experience has been that during years in which the US markets are weak, the US dollar has been weak. So an investor holding 40-65% international portfolio gets some boost from currency gains. For example, in 2002 they ere barely down (with 6% gain in currency) vs. S%P down ~25%.
Now the downside, they hold PM: they expect 80c decline EPS decline on $3.40 solely due to currency. Also holds other brand companies, Nestle, SAB, Heineken, Pernod Ricard, and likes the products, as it makes the research more fun.
There are few new ideas. A professor had an investment: an undervalued champagne company with no earnings, lots of inventory and acreage. Then at Sequoia Fund, he researched Brown Forman. BF then expanded into the flavored alcohol/coolers business. The stock shot up on the acquisition, but then the business fell off the cliff and the stock tanked. The shares plunged, and Sequoia researched them. So he's been investing in alcohol for a while. In 1987 the partnership was up 35% vs. market down 7% largely because of an alcohol company they had (Beefeater-brand owner) that was acquired. Great single brand companies do not survive for too long on their own: usually no distribution clout. Overtime they owned Corby, BF, Diageo, Allied Domeq. The point is you can figure out things, you will have multiple times to participate in the industry you know.
He also invested in newspapers, straight from Berkshire, so he started following them ("no new ideas"). Now that industry has hit a wall.
Now owns global liquor businesses: huge reinvestment opportunities. The brands have very small shares in the most interesting markets (China, India). So the cash flows from the mature business go to build in the new markets. So the real return to value investors is not only from the discount but also growth because of good reinvestment prospects. The market sometimes gets it wrong when the emerging market investments create short-term financial reporting disappointments. But these are often fixed cost investments, then they scale very well. So "reported" profits may be understated. This is true across many businesses they have with EM operations. They first bought BF in 1989, doing at 5 mm cases of Jack Daniels, mostly in the US. The multiple was low. The entire return since that time has come from growth abroad. They do 10 mm cases now. The shares have compounded at 15% per year. It has never been very exciting, largely a forgotten company. And now the future prospects are even higher as they hit the breakevens on the various international markets. Same with Pernod.
Pernod case: management has a good record. They started with a small cashflowing business in France, then started acquiring abroad. Irish Distillers, then Seagrams. With Seagrams, they got a good China business, Chivas and Martell. Then the 1997/98 crisis happened in Asia, and many Western businesses shut down. Back then, the crisis led currency collapses adn lack of buying power. Importers found it very hard to import, so foreign companies left. Pernod did not leave, and ended up "owning" the market once the recovery came. Many portfolio companies have the ability to endure losses like these. Then Pernod bought Allied Domecq and became a global. The business is decentralized. They own their distribution channels whenever possible. Now Pernod bought Absolut, the shares tanked due to the leverage, so Russo is buying Pernod. Pernod understands branding: in China, they just increased Absolut prices 50%, it was not aspirational enough. They will quickly make up the volume with dollars margin. Also very good at localizing products to taste or complimentary products. Price is suppressed: fear of emerging markets, fear of downtrading in OECD, the Absolut acquisition put 5 bn euros of debt/future credit access, share repurchases have stopped and the price paid for the acquisition. Position sized at about 5%, have 25% in alcohol. Across the board at single P/Es but all have good prospects for growth.
Q&A:
Q: Formula for financials' assessment?
A: the core business of Pernod is strong, Absolut is transformative in our view. We cannot put a precise number on that.
Q: Do you have an intrisic value for Pernod?
A: No
Q: On currencies/EMs in the turmoil?
A: Currencies and foreign markets are unknowable. Met with PM CEO, and he thinks the crisis is a US crisis. So (EM example) Russia, will be better vs. 1998: stronger country, local expenses, local production, several pricepoints. Russo has exposure in E Europe: the currencies look wobbly but no view on the future.
Q: How do you assess total addressable market in EM?
A: You will know it when you see it, no real approach. You know an elephant when you see it. He's investing in the conversion of rising GDP to branded consumer products. Often this displaces an indigenous product, like baiju in China, with a global brand. In India, beer is at 0.7L per person vs. 17 in china and 100+ in US. PG and disposable diapers: started at 3 mm cases few years ago, 2008 70 mm cases. But this is 2 cents per capita vs. few dollars/capita in the US. PG has tiered the product. New diaper plants come pre-assembled and can put it up in a week.
Q:How do you measure management alignment of interest with shareholders?
A: Have to pick the family right. No litmus tests, spend time with the family.
Q: Direct EM investments?
A: Often have the multinationals that deal in EMs, so they get more control over local management, more audit certainty, etc. Had a direct investment in a Slovakian chocolate company. The information flow burdens and the risk were too high to bear. Also the valuations have been much higher in EM for locally listed subsidiaries (ie Unilever Hindustan).
Q: Sell discipline
A: Now more prepared to take a critical look after 2008. But now harder to want business at lower prices.
Q: ??
A: Good discussion of how Richemont expanded in Russia (carefully, no partners, spent more for real estate they control).
Q: Tech?
A: Can't see Dell's future so no investment there. Ultimate commodity, and threatened by technology. Can't model it after consumer company process.
Q: ??
A: Sarbox is helping them with more controlled entities. Comfort varies from family to family, it is qualitative. With Berkshire's new independent board, succession is centerstage, and this is helping them as outside holders.
Q: Brand impairments?
A: Try not to get involved with impaired brands. Absolut might have been underutilized, and Pernod has the capacity to revitalize. Cadbury Schweppes: their great growth came when Mars went to sleep. Mars is now back, bought Wrigley, and this might hurt C-S company.
Q: Sell at what multiples?
A: At very high multiples, he'd sell no matter what; at high multiples, they reduce if it is a higher percent of the portfolio (i.e. grown from 5% to 8%). Often uses the cash to add to undervalued/underrepresented positions.
Thursday, October 6, 2011
Notes from Bloomberg's "One Hour with Bill Ackman"
I am crossposting here and on Davian, the technology and marketing platform for my inflation-focused autotraded product for retail.
This is a very recent interview with Bill Ackman (BA) in which he discusses several of his past and present investments, and shares thoughts on Hewlett-Packard, Fannie/Freddie, and the overall US economic policies. About half the questions are from the Bloomberg interviewer, and about half are from the admittedly friendly and well-heeled audience. I use Bill Ackman ("BA") when he uses "we" to refer to his fund, Pershing Square. The headlines focused on the HPQ "brain damage" line but the interview has a lot more interesting bits.
Q: What is activism to Bill Ackman?
Lots of capital is managed passively: we are more concentrated. Look for undervalued companies and understandable reasons, and then work with management ("come up with irrefutable answers to problems").
Recent examples:
JCP: "iconic" retailer, moved from NYC to Plano, TX, in 1992. Stock was at $38, BA bought it at $21. JCP also sold its Manhattan building (today worth probably $2.5 bn) and built HQ in Plano. JCP spends $1.3 bn/year on marketing. Old CEO made two changes, but they needed to do more. CEO was near retirement, and BA was invited on the board.
New CEO: HBS, went to Mervyn's, then AAPL eleven years ago to build AAPL retail from scratch. BA worked hard to recruit him.
New CMO: just hired out of TGT
They will work with great assets: the brand, owns most RE or leases it for free, and it will be transformational over time.
JCP is an example of their longer-term, operationally focused approach. A different example is Fortune Brands (BC: formerly FO). FO owned three disparate businesses: Titleist golf, Moet faucets and the parent company for Jim Beam, Sauza and other alcoholic beverages. FO was trading at a substantial discount, BA built a 12% stake at $41, met with management, laid out a case, and the businesses were separated. Today they trade at $57 on an equivalent basis.
GGP: took a 25% stake in Nov 2008. Market cap was $23 bn in 2007, to $10 bn before the Lehman weekend, to $100 mm market cap in November. Founding Bucksbaum (sp?) family stake went from $4 bn to $25 mm. BA bought 80 mm shares for less than $1/share, joined the board (adviser Goldman Sachs did not want him; family member cast the deciding vote), BA led the restructuring. Now BA chairs HHC (Howard Hughes assets from the GGP Rouse acquisition).
Q: Why is JCP going to be successful where you [failed] at TGT?
TGT: it was already successful. We had two ideas for them, sell the credit card business (uses up capital, subscale, no advantage) and separate the owned real estate they own into a very safe REIT with NNN leases (ground rents). The land was worth $40/share with TGT at $50/share.
Went to management, management was very receptive and asked them to be quiet. Management was slow and really missed the market to sell, our loss was 50%, BA was upset, led a proxy contest, management agreed to some changes, little profits after four years. Now JCP hired their top marketing guy that led the designer strategy and now JCP will make it easy to buy Missoni and others.
Beauty of the retail business: JCP has 1,100 boxes, selling an unimpressive $150/sq ft of product. With retailers, next year you can be selling something very different so with the right marketing, merchandising and customer service, the number can improve a lot.
Q: People think that a proxy contest is needed at HPQ. They have hired GS preemptively to defend even though there is no activists around. Why do you think people think that an activist is needed?
Over the last few months, BA has gotten calls from the 5-6 top shareholders of HPQ begging him to take a stake and be proactive. BA focuses on predictability, and HPQ is a number of businesses that are difficult to predict even on a five-year basis. the PC business might be irreparably damaged after the spin announcement. So it looks cheap but it is a "big complicated mess".
BA learned early in his career to do "return on brain damage" for investment decisions: there would be too much brain damage at HPQ without the potential profit to justify it. GGP justified it, HPQ is a big mess. HPQ is also very large, BA likes 10% stakes.
Q: You recently bet on the reevaluation of the HKD: you gravitate towards retail, real estate, etc. Is it out of your comfort zone?
BA are known for our large stakes but also do small "mispriced probabilistic investments" like CDS on MBIA, bought for $30 mm, ended up at $1.1 bn. Small position; investors "would not notice if we lost it"/asymmetric payouts. Also likes to hedge the big stakes against market declines. Used to do it with CDS but now corporate America has recapitalized and is in good shape. So this is how he came across the HKD.
HKD was pegged to silver, then to GBP, then floating but in the early 1980s, the UK/China handover negotiations were not going well (Thatcher broke her leg, bad sign), the HKD started to depreciate rapidly, people panicked and started stocking up supplies. The government was forced to peg to the USD. However, since then, the GDP has grown by leaps and bounds, HK gained AAA rating while the US lost it, housing market is overheating, inflation is high, but their monetary policy is identical to the US. So ZIRP with 6% GDP growth, heavy imports, heavy asset inflation. The currency is artificially held. Eventually it will break.
Because it has been pegged for so long, the volatility of the options is zero. The bet is $100 mm in calls so a small move will yield enormous profit. It is also a hedge against a USD collapse- we might be headed in that direction. You're earning zero on your money market, buy some HKD, better yield, and may be you'll make out well if the peg is removed and the HKD appreciates.
Q: How do you keep your LPs from getting "squirrly"? Your strategies take time, people redeem.
Benefit of good record over eight years, low 20% compounded net of fees. We've made people money. But more importantly, BA is the opposite of a black box strategy: most investments end up being public and people just know what BA tries to do. They also understand that it is a concentrated strategy. BA does not offer smooth returns and investors understand this. BA communicates quarterly and annual dinner.
Q: Loeb and Einhorn have created reinsurance funds for permanent capital. Will you do this?
Buffett has the best permanent capital because he does not have to worry about redemptions. In BAs case, even though they had good 2008, in 2009, they lost 27% to redemptions from investors who had outside liquidity needs. This means being defensive when it is the best time to be offensive.
BA does not like mixing reinsurance risk (with no expertise, small scale) with investment risk. The world is too uncertain; can't really feel confident in the maintenance of the 30-year old reactors like Fukushima. BA plans to issue a closed-end vehicle to investors some time in 2012 for permanent capital.
Audience questions:
Q: Auto industry?
Might be cheap now, post-restructuring GM is competitive cost-wise, but does not/never did love it. It is too volatile (likes "annuities"-type businesses), too capital-intensive, labor unions always ask for more when times are good. Better opportunities elsewhere.
Q: Newspapers?
Learned a valuable lesson 5-6 years ago with Borders investment. NYT is relatively better now (become more national) as the smaller competitors have blown up. The iPad gives some hope, people are paying for it. The NYT might be a vanity investment, like the WSJ/Murdoch. NYT is now more like artwork, not for me. Also controlled.
Q: Human capital/marketing/etc/ investment in JCP that is required?
JCP is a $18 bn "Start-up", $1bn+ EBITDA to do whatever he wants to. Big advantage. Replacement cost of the real estate is $12-15 bn. You get all that for about $6 bn market cap. The business is cheap, good place to start. Now has to attract talent, new CMO is a coup: now people want to come work for them. With the asset base, attract people and go from there.
Q: Financials?
Likes the big banking franchises, likes C the most, at these prices: there is a lot baked in the prices. The government bailed out the banks, converted to common, sold it, and now sues the banks. FRE/FNM lawsuit is absurd that they did not know. Now best thing, the government should take a face-saving litigation, and let them focus. Regulation also a problem, reporting to too many agencies: hurts small/medium business access to capital. Current stock prices factor a lot, C is still at 6x current bad earnings, and may be 4x core earnings after the noise which will take time. Interesting risk/reward but don't put half your assets.
Q: Why did you not wait to buy financials until now?
By the time the dust settles, the stock is up 50%; you have to do it when it is cloudy. BA bought GGP 11/16/2008, on the brink of bankruptcy, no securitization market, BA has to predict the future but the odds have to be good.
Q: Occupy Wall Street consequences?
Not sure what they are protesting but it should not be ignored. Governments can be overthrown without leaders now. Unemployment and disparity is a problem, especially for non-college educated. Cost of healthcare, housing, commodities increasing. It is critical to have leadership in DC.
The president is the CEO of the US as a business, we can have real problems. Obama began as anti-business, and it cost us. Legislation has made it more difficult, tax policy does not incentivize investment.
Whoever is the next president will have to make the country succeed as a business.
Q: Russia and China/rule of law?
(Goes on to talk about US legal system instead of the international investing question). Our legal system is still pretty good. Some expections to that. Recent proposals are hurting the markets. For example, Wachtell Lipton is in the busienss of protecting entrenched management to get M&A deals. WL invented the poison pill. WL is now trying to speed up activist disclosures and impose cooling off purchasing periods post-5% acquisitions which would effectively mean that BA will not be able to accumulate the target 10% stake. The passive and small retail investors rely on activists for helping but we have to buy a big enough stake.
No outstanding CEO worries who the shareholders are, only the weak ones do.
Q: Yahoo is putting up a fight with Loeb; is corporate America getting better at "defending"?
Usually the entrenched CEO is defending himself. HPQ is very unfortunate story: Hurd had an incident, got fired (is the Board held by the same standards), then hired CEO with no core business expetise. He said he's not acquiring anything then overpays. Then the stock tanks, the Board fires him, does no search, hires Whitman with no core expertise. Morale is low.
Boards are to blame, and the election process is Stalin-esque: there are no alternatives on the ballot, plurality voting, etc. BA ran the TGT slate: it cost BA $10 mm to put up alternatives for shareholders. Last year SEC put up a new rule to help this but it was defeated. The directors are typically selected by other directors or the CEO. TGT board had no retailers, no real estate, no credit card execs.
Q (from Ackman's father): Congress is a disgrace; we cannot get qualified people to run; what can we do to get qualified people to run for office?
Likes the Bloomberg model: business oriented, rich, and can do what is right. Country is ready for a candidate who says what he thinks, this is why people were excited about Chris Christie because he does not care what people think. If BA were Obama right now, he'd come up with a few pro-business policies:
(1) To change both the spirit and the confidence of business, get rid of all tax loopholes. Do a flat rate with no exemptions. Do something similar with personal tax code (incl. HF manager taxation). But now 49% of people pay ZERO taxes: so if you don't pay for the country, you don't care about it. Everyone should have some ownership in the country. Two-page form, couple of rates. BA's personal tax form is an absurdity, has not read it, has no idea if it is right.
Repatriation should be easy/low tax: no sense to have HPQ overpay because it will be taxed at home and subsidize UK employment. Obama has to respect the business community, the corporate aircraft industry is great, don't pick on Las Vegas, people there need jobs, too.
(2) Merge Fannie and Freddie, stop dumping foreclosed houses, turn them into REITs for single homes. In most markets you can make high single digits unlevered. This will dry up the supply in the market. Now FNM FRE are subsidizing apartment construction, their competition. Better off having local renters/maintenance, may be tweak the tax on home capital gains, too.
/end/
This is a very recent interview with Bill Ackman (BA) in which he discusses several of his past and present investments, and shares thoughts on Hewlett-Packard, Fannie/Freddie, and the overall US economic policies. About half the questions are from the Bloomberg interviewer, and about half are from the admittedly friendly and well-heeled audience. I use Bill Ackman ("BA") when he uses "we" to refer to his fund, Pershing Square. The headlines focused on the HPQ "brain damage" line but the interview has a lot more interesting bits.
Q: What is activism to Bill Ackman?
Lots of capital is managed passively: we are more concentrated. Look for undervalued companies and understandable reasons, and then work with management ("come up with irrefutable answers to problems").
Recent examples:
JCP: "iconic" retailer, moved from NYC to Plano, TX, in 1992. Stock was at $38, BA bought it at $21. JCP also sold its Manhattan building (today worth probably $2.5 bn) and built HQ in Plano. JCP spends $1.3 bn/year on marketing. Old CEO made two changes, but they needed to do more. CEO was near retirement, and BA was invited on the board.
New CEO: HBS, went to Mervyn's, then AAPL eleven years ago to build AAPL retail from scratch. BA worked hard to recruit him.
New CMO: just hired out of TGT
They will work with great assets: the brand, owns most RE or leases it for free, and it will be transformational over time.
JCP is an example of their longer-term, operationally focused approach. A different example is Fortune Brands (BC: formerly FO). FO owned three disparate businesses: Titleist golf, Moet faucets and the parent company for Jim Beam, Sauza and other alcoholic beverages. FO was trading at a substantial discount, BA built a 12% stake at $41, met with management, laid out a case, and the businesses were separated. Today they trade at $57 on an equivalent basis.
GGP: took a 25% stake in Nov 2008. Market cap was $23 bn in 2007, to $10 bn before the Lehman weekend, to $100 mm market cap in November. Founding Bucksbaum (sp?) family stake went from $4 bn to $25 mm. BA bought 80 mm shares for less than $1/share, joined the board (adviser Goldman Sachs did not want him; family member cast the deciding vote), BA led the restructuring. Now BA chairs HHC (Howard Hughes assets from the GGP Rouse acquisition).
Q: Why is JCP going to be successful where you [failed] at TGT?
TGT: it was already successful. We had two ideas for them, sell the credit card business (uses up capital, subscale, no advantage) and separate the owned real estate they own into a very safe REIT with NNN leases (ground rents). The land was worth $40/share with TGT at $50/share.
Went to management, management was very receptive and asked them to be quiet. Management was slow and really missed the market to sell, our loss was 50%, BA was upset, led a proxy contest, management agreed to some changes, little profits after four years. Now JCP hired their top marketing guy that led the designer strategy and now JCP will make it easy to buy Missoni and others.
Beauty of the retail business: JCP has 1,100 boxes, selling an unimpressive $150/sq ft of product. With retailers, next year you can be selling something very different so with the right marketing, merchandising and customer service, the number can improve a lot.
Q: People think that a proxy contest is needed at HPQ. They have hired GS preemptively to defend even though there is no activists around. Why do you think people think that an activist is needed?
Over the last few months, BA has gotten calls from the 5-6 top shareholders of HPQ begging him to take a stake and be proactive. BA focuses on predictability, and HPQ is a number of businesses that are difficult to predict even on a five-year basis. the PC business might be irreparably damaged after the spin announcement. So it looks cheap but it is a "big complicated mess".
BA learned early in his career to do "return on brain damage" for investment decisions: there would be too much brain damage at HPQ without the potential profit to justify it. GGP justified it, HPQ is a big mess. HPQ is also very large, BA likes 10% stakes.
Q: You recently bet on the reevaluation of the HKD: you gravitate towards retail, real estate, etc. Is it out of your comfort zone?
BA are known for our large stakes but also do small "mispriced probabilistic investments" like CDS on MBIA, bought for $30 mm, ended up at $1.1 bn. Small position; investors "would not notice if we lost it"/asymmetric payouts. Also likes to hedge the big stakes against market declines. Used to do it with CDS but now corporate America has recapitalized and is in good shape. So this is how he came across the HKD.
HKD was pegged to silver, then to GBP, then floating but in the early 1980s, the UK/China handover negotiations were not going well (Thatcher broke her leg, bad sign), the HKD started to depreciate rapidly, people panicked and started stocking up supplies. The government was forced to peg to the USD. However, since then, the GDP has grown by leaps and bounds, HK gained AAA rating while the US lost it, housing market is overheating, inflation is high, but their monetary policy is identical to the US. So ZIRP with 6% GDP growth, heavy imports, heavy asset inflation. The currency is artificially held. Eventually it will break.
Because it has been pegged for so long, the volatility of the options is zero. The bet is $100 mm in calls so a small move will yield enormous profit. It is also a hedge against a USD collapse- we might be headed in that direction. You're earning zero on your money market, buy some HKD, better yield, and may be you'll make out well if the peg is removed and the HKD appreciates.
Q: How do you keep your LPs from getting "squirrly"? Your strategies take time, people redeem.
Benefit of good record over eight years, low 20% compounded net of fees. We've made people money. But more importantly, BA is the opposite of a black box strategy: most investments end up being public and people just know what BA tries to do. They also understand that it is a concentrated strategy. BA does not offer smooth returns and investors understand this. BA communicates quarterly and annual dinner.
Q: Loeb and Einhorn have created reinsurance funds for permanent capital. Will you do this?
Buffett has the best permanent capital because he does not have to worry about redemptions. In BAs case, even though they had good 2008, in 2009, they lost 27% to redemptions from investors who had outside liquidity needs. This means being defensive when it is the best time to be offensive.
BA does not like mixing reinsurance risk (with no expertise, small scale) with investment risk. The world is too uncertain; can't really feel confident in the maintenance of the 30-year old reactors like Fukushima. BA plans to issue a closed-end vehicle to investors some time in 2012 for permanent capital.
Audience questions:
Q: Auto industry?
Might be cheap now, post-restructuring GM is competitive cost-wise, but does not/never did love it. It is too volatile (likes "annuities"-type businesses), too capital-intensive, labor unions always ask for more when times are good. Better opportunities elsewhere.
Q: Newspapers?
Learned a valuable lesson 5-6 years ago with Borders investment. NYT is relatively better now (become more national) as the smaller competitors have blown up. The iPad gives some hope, people are paying for it. The NYT might be a vanity investment, like the WSJ/Murdoch. NYT is now more like artwork, not for me. Also controlled.
Q: Human capital/marketing/etc/ investment in JCP that is required?
JCP is a $18 bn "Start-up", $1bn+ EBITDA to do whatever he wants to. Big advantage. Replacement cost of the real estate is $12-15 bn. You get all that for about $6 bn market cap. The business is cheap, good place to start. Now has to attract talent, new CMO is a coup: now people want to come work for them. With the asset base, attract people and go from there.
Q: Financials?
Likes the big banking franchises, likes C the most, at these prices: there is a lot baked in the prices. The government bailed out the banks, converted to common, sold it, and now sues the banks. FRE/FNM lawsuit is absurd that they did not know. Now best thing, the government should take a face-saving litigation, and let them focus. Regulation also a problem, reporting to too many agencies: hurts small/medium business access to capital. Current stock prices factor a lot, C is still at 6x current bad earnings, and may be 4x core earnings after the noise which will take time. Interesting risk/reward but don't put half your assets.
Q: Why did you not wait to buy financials until now?
By the time the dust settles, the stock is up 50%; you have to do it when it is cloudy. BA bought GGP 11/16/2008, on the brink of bankruptcy, no securitization market, BA has to predict the future but the odds have to be good.
Q: Occupy Wall Street consequences?
Not sure what they are protesting but it should not be ignored. Governments can be overthrown without leaders now. Unemployment and disparity is a problem, especially for non-college educated. Cost of healthcare, housing, commodities increasing. It is critical to have leadership in DC.
The president is the CEO of the US as a business, we can have real problems. Obama began as anti-business, and it cost us. Legislation has made it more difficult, tax policy does not incentivize investment.
Whoever is the next president will have to make the country succeed as a business.
Q: Russia and China/rule of law?
(Goes on to talk about US legal system instead of the international investing question). Our legal system is still pretty good. Some expections to that. Recent proposals are hurting the markets. For example, Wachtell Lipton is in the busienss of protecting entrenched management to get M&A deals. WL invented the poison pill. WL is now trying to speed up activist disclosures and impose cooling off purchasing periods post-5% acquisitions which would effectively mean that BA will not be able to accumulate the target 10% stake. The passive and small retail investors rely on activists for helping but we have to buy a big enough stake.
No outstanding CEO worries who the shareholders are, only the weak ones do.
Q: Yahoo is putting up a fight with Loeb; is corporate America getting better at "defending"?
Usually the entrenched CEO is defending himself. HPQ is very unfortunate story: Hurd had an incident, got fired (is the Board held by the same standards), then hired CEO with no core business expetise. He said he's not acquiring anything then overpays. Then the stock tanks, the Board fires him, does no search, hires Whitman with no core expertise. Morale is low.
Boards are to blame, and the election process is Stalin-esque: there are no alternatives on the ballot, plurality voting, etc. BA ran the TGT slate: it cost BA $10 mm to put up alternatives for shareholders. Last year SEC put up a new rule to help this but it was defeated. The directors are typically selected by other directors or the CEO. TGT board had no retailers, no real estate, no credit card execs.
Q (from Ackman's father): Congress is a disgrace; we cannot get qualified people to run; what can we do to get qualified people to run for office?
Likes the Bloomberg model: business oriented, rich, and can do what is right. Country is ready for a candidate who says what he thinks, this is why people were excited about Chris Christie because he does not care what people think. If BA were Obama right now, he'd come up with a few pro-business policies:
(1) To change both the spirit and the confidence of business, get rid of all tax loopholes. Do a flat rate with no exemptions. Do something similar with personal tax code (incl. HF manager taxation). But now 49% of people pay ZERO taxes: so if you don't pay for the country, you don't care about it. Everyone should have some ownership in the country. Two-page form, couple of rates. BA's personal tax form is an absurdity, has not read it, has no idea if it is right.
Repatriation should be easy/low tax: no sense to have HPQ overpay because it will be taxed at home and subsidize UK employment. Obama has to respect the business community, the corporate aircraft industry is great, don't pick on Las Vegas, people there need jobs, too.
(2) Merge Fannie and Freddie, stop dumping foreclosed houses, turn them into REITs for single homes. In most markets you can make high single digits unlevered. This will dry up the supply in the market. Now FNM FRE are subsidizing apartment construction, their competition. Better off having local renters/maintenance, may be tweak the tax on home capital gains, too.
/end/
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