Greenlight Capital 2009 Annual Letter

We found a copy of Greenlight's 2009 letter floating around online. David Einhorn did extremely well in 2009, up 36.9%, 33.7% or 30.6% depending on the fund. His average annualized return since 1996 is now 22%. One thing we found interesting was that he had average 18% of the fund invested in debt securities throughout the year, which included a huge 30% gain from CIT debt in the 4th quarter. He also continues to have long positions in physical gold. While we feel that there are better ways to hedge inflation given the current gold price (bond options/rate caps/curve caps), only the future can say how that position pans out.

Greenlight Capital - 2009 Annual Letter

Stay Tuned.

Chesswood Income Fund (CHW.UN)

We believe that the trust units of Chesswood Income Fund present a compelling value opportunity as well as offering the potential for growth.

Chesswood Income Fund owns 3 businesses: Pawnee (an equipment lease financing company operating in the US), Acura Sherway (an automobile dealership in Toronto), and Lease-win (an automobile lease financing company) which is being wound-down. We very much like the business of Pawnee, where most of the trust’s profits come from. The business of Acura Sherway, while not in the most attractive industry, has an excellent location adjacent to sprawling Sherway Gardens shopping mall in Toronto. Acura Sherway has shown remarkable resilience to the economic downturn, especially for an automobile dealership, although it does not throw off very much in terms of profits. On a consolidated basis the fund as a whole has operated profitably throughout the credit crisis, after adjusting for goodwill impairments.

We believe the real value driver going forward will be Pawnee, with added optionality from the business that is Acura Sherway.

Pawnee offers commercial equipment lease financing to “B” credit businesses and start-ups for up to but not exceeding $30,000 per lease. We like this “niche” business because if risk is managed properly the margins are much better than a typical leasing company. We feel that management has done an excellent job of managing risk as proven over the trying credit-crunch period.

The company has a rigorous credit testing process and generally only funds a lease when they feel they are getting an above average risk/reward ratio; they actually fund less than 10% of lease applications received by dollar volume.

As a matter of protection, Pawnee diversifies to an incredible extent. No individual leasing contract makes up more than 0.01% of the lease portfolio. Leases are also diversified across 85 different industries and 65 different equipment categories. All leases require a personal guarantee from the business owner. And they eat their own cooking too; Pawnee keeps all of their leases on-balance sheet, rather than generating fees through the origination and sale process.

Obviously revenue from leases must exceed charge-off rates in order for the investment to be successful; so how about little bit of math. Since 2000 charge-offs as a % of net investment in leases has averaged 8.5%, while lease income as a % of net investment has averaged 30%. Assuming credit standards have not changed (leases funded as a % of applications received have not), this would imply a normalized charge-off rate of $6.8M, and revenue of $24.4M on $81.2M net investment in leases.

Assuming no recovery in revenue streams, and adjusting to normalize provision for credit losses, earning power of at least $7M can be conservatively expected within the next few years. Using this number, EPS of $0.76 is not to be unexpected, after assuming conversion of outstanding dilutive securities. The trust units are currently trading at only 5.3 times this number, and at 75% of book value.

It is important to bear in mind that Pawnee’s lease portfolio grew at a rate of ~17% between 2000 and 2006, and averaged 12% between 2000 and 2008. If the pre-credit crisis expansion rate is any indication then we feel that the patient unit-holder may be pleasantly surprised with a purchase at today’s price of $4.02.

Although we would rather own a pure-play on Pawnee, Acura Sherway should not be a drag on investment performance through a holding in Chesswood Income Fund. We do, however, feel that a transaction to split Pawnee and Acura Sherway would be beneficial to unitholders.

NOTE: If you are Canadian as we are, keep in mind by holding this position you are incurring foreign exchange risk, even though the equity is listed on the Canadian market. Management owns ~28% of CHW.UN on a diluted basis.
NOTE: Author has a long position in CHW.UN. This is not a recommendation or an offer to buy or sell securities. Do your own research.

Sanborn Map Company - 1960

McGill's library has a collection of the Moody's manuals going back to 1950. My natural reaction when I discovered this fact was to look up some of Warren Buffett's investments from the Buffett Partnership days. He has talked about Sanborn Map Company several times at his annual meetings and it was mentioned in the 1960 Buffett Partnership letter. From the 1960 letter:

Last year mention was made of an investment which accounted for a very high and unusual proportion (35%) of our new assets along with the comment that I had some hope this investment would be concluded in 1960. This hope materialized. The history of an investment of this magnitude may be of interest you.

Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities in the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide minute details on each structure. The map would be revised by the paste-over method of showing new construction, changed occupancy, new fire protected facilities, changed structural materials, etc. These revisions would be done approximately annually and a new map would be published every twenty or thirty years when further paste-over became impractical. The cost of keeping the map revised to the Omaha customer would run around $100 a year.
...
There was considerable opposition on the Board to change of any type, particularly when initiated by an “outsider,” although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton, Management Experts. To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, including 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $1¼ million in government and municipal bonds as a reserve find, and a potential corporate capital gains tax of over $1million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate.

It is easy to see that the stock is trading at less than the market value of the investment portfolio. Situations akin to this are a rarity these days, although if you flip over enough stones you can find a few in the smaller capitalization area.

More to come.

SG

Quest Capital Corp (QC) - Update

Quest Capital has announced a normal course issuer bid under which it will repurchase up to 10% of its outstanding shares. In addition the company has repurchased $20M worth of their preferred share liability. I think that this bodes well for an investor in the company's common stock, as it shows they are making progress on resolving their loan impairments and that there has been significant cash flow generated by monetization efforts. Also, the insiders are still buying shares, acquiring roughly 7% of the company since the beginning of this year.

Disclosure: I own shares in QC.

SG

Warren Buffett's Hedge Fund Days...(or more politely "partnership")

Probably the best thing I've ever read.

Buffett Partnership Letters 1959-1969

SG

Monarch Services (MAHI) - Liquidation Update

We originally wrote about Monarch Services on September 4, 2009 because they had a plan to liquidate the company and appeared to be trading at a discount to the estimated amount of cash that would ultimately be distributed to shareholders. On November 5, Monarch confirmed the sale of their remaining asset, the Girl's Life Plantation Parcel (GLPP) to Baltimore County. Cash proceeds received were the full $624000 agreed upon. Net of fees this worked out to roughly $548000.

We had previously taken a 75% discount to the agreed sale price of $624000 in our estimate of cash proceeds, due to the impaired real estate market and to remain conservative. In light of this favourable development we have revised our estimate of liquidation cash proceeds upwards to $1253000 from $1173000.

Current Market Cap: $971772
Estimated Liquidation Proceeds: $1253000
Return Profile: 28.9%

Disclosure: I own shares in MAHI

SG

Walter Schloss Collection - From Valueinvestingpro.com

A collection of 13 articles written by Walter Schloss who has a 5 decade investment record averaging 16% annually and is touted by Warren Buffett as a superinvestor in his 2006 annual report.

Walter Schloss Collection

Young Warren Buffett - Writings from 1951 and 1952

Here are articles on 2 companies Warren Buffett wrote about in 1951 and 1952:

GEICO

Western Insurance Company

SG

Quest Capital Corp (QC)

(All data from quarterly June 30 2009)

Quest capital is a mortgage finance company in Canada. They focus on short-term (less than 2 years) mortgage lending, and therefore do not have significant exposure to interest rate risk. The investment thesis for this company is quite simple; the company was hit quite hard by the credit-crisis and is now trying to monetize its loan portfolio. They have stopped issuing new loans. The share price is trading at less than a reasonable estimate of what the company will be able to recover through its monetization efforts.

The market cap of QC is $170M or $1.12 per share with 151M shares outstanding. It appears as though this price is much too low; the shares are trading at 55% of adjusted book value.

The company has paid down all its debt and is working on the repayment of its preferred shares. The preferred shares carried a coupon of 13.5% that has now been renegotiated to 12.75% and will be reduced further to 12% on January 1st 2010. Preferred shares have been subtracted in the calculation of book value above.

The company has 49 loans outstanding with total principal of $369.8M. They have taken provision for loan losses of $20M. The company classifies loans as impaired when either principal or payment becomes past due by 90 days. 17 of the 49 (34%) loans outstanding have been deemed impaired as at the end of Q2. Total impaired principal is $162M (44%). However, management’s estimate of fair value of the collateral underlying these impaired loans is $171M.

There is also $6M of loans past due but not yet classified as impaired. For the purpose of this analysis I will assume this amount is already impaired. The $6M appears to be the last of the past due loans.

The nature of the business is such that the balance sheet can be used to determine the value of the business to a purchaser of the company’s common shares.

The majority of the loans outstanding should be partially recoverable, if necessary, through the monetization of collateral. Since the total collateral value is estimated at $171M, which is more then the total value of the impaired loans, it is reasonable to assume that most, if not all, of the principal will eventually be recovered. For this reason, I feel there is a higher probability for a positive outcome.

It seems as though the current price offers an appealing risk-reward scenario. Of course the success of this investment depends on stability in the real-estate market. Even if a relapse were to occur, it is not certain that a purchaser of the shares at these prices would suffer a permanent impairment of capital. The situation as it is along with the fact that the CEO is purchasing shares seems to provide a sufficient margin of safety to warrant an investment of capital in this situation as part of a diversified portfolio.

Disclosure: I own shares in QC. This is not a recommendation to purchase or sell securities.

Greenlight Capital and Pershing Square Q2 Letters

Here are the Q2 letters from David Einhorn and Bill Ackman, who are actually quite good friends. It is interesting to see how their approaches differ with regard to the structural risks the U.S. is still facing:

Greenlight Capital Q2 Letter to Shareholders

Pershing Square Q2 Letter to Shareholders