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Jeremy Johnson, CFA

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  • An Opportunity in Healthcare Stocks [View article]
    Genesis is gone -- no longer any investment by HCP.

    HCR MC has a 1.5 DSCR coverage pro forma for the 11% reduction. This is a master lease and good properties will have to cover for bad properties within the portfolio. The deal was underwritten without the impact of the higher rates seen over the last 6-9 months. With the higher rates the DSCR would be about 1.65.

    I don't see any impairment to the HCR MC DFL based on this Medicare reduction.

    The investors that got taken were those that bought the SUNH IPO and in general equity holders in the operating companies that thought these rates would continue. Some of the operating company debt may be seeing some impairment as well.

    There will be some some smaller SNF players that this will hurt badly, because the cut is overdone compared to quality of care increases in connection with RUGs-IV.
    Aug 8, 2011. 08:49 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    I know most about HCP so I'll use that example. They have $50 million of goodwill, which is immaterial to their value and in any event is just a reflection of economic profits and is therefore the same thing as talking about net income. Saying there will be a write-down of goodwill is the same thing as saying profits will be down so we can deal with profits directly.

    Regarding the cash flow of the biggest skilled nursing provider in HCPs portfolio, the underlying properties have a DSCR of 1.5 excluding the impact (increased profits) of RUGs-IV. Inclusive of RUGs-IV, before the 11% reduction, the DSCR will top out in the 1.65 area. The operating company can easily more than cover the lease payments. I don't much care about the market value of the property, since it has little value, or at least significantly less value exclusive of the SNF operations. I just want HCP to get the lease payment, and be well covered so that the payment is not viewed as more risky.

    HCP has very little SNF exposure outside of the one big provider and yet the stock is down 20%. I know RUGs-IV isn't the recent.
    Aug 8, 2011. 07:41 PM | Likes Like |Link to Comment
  • How to Find Opportunities After a Flood of 20% Decliners Last Week: Part 2 [View article]
    For the healthcare names, your debt level is misleading. For example, SUNH's "debt" is in the form of operating leases. At 8x this is $1.2 billion in debt. Anyway, SUNH is a highly levered company and I am intimately familiar with their financials as I have funded their loans in the past.
    Aug 8, 2011. 05:10 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    I think all the value is in the real estate and not the operating companies. HCP, HCN, etc.
    Aug 8, 2011. 05:03 PM | Likes Like |Link to Comment
  • 5 Closed-End Funds With Low Beta/Expenses and Selling at a Discount [View article]
    Not sure 4 & 5 are all that better at the end of the day than LQD investment grade ETF.

    MTS may have materially shorter duration, but significant exposure to non-U.S. based financials; not to mention significantly more Ba and below rated paper.
    Jul 26, 2011. 03:08 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    You will systematically exclude any company with a large acquisition or lots of asset growth. Maybe not such a bad idea. Better to challenge that directly. This isn't really the forum to make such sweeping generalizations and assumptions and bury them in lots of math. People here want to know if BRK's recent growth in assets will produce good returns, not whether the average, generic, hypothetical company's asset additions produce shareholder wealth for which most people have a jaundiced eye in any event.
    Jun 30, 2011. 01:41 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    There is a second factor influencing your results which is that asset growth often impairs returns on assets, but it doesn't in every case. Without knowing your study methodology I can't comment further.

    However, in the case of BRK assets have grown by large amount in the last 5 years, you are making a large assumption to state that earnings on the 2011 asset base are well represented by earnings on the 2006 asset base.
    Jun 29, 2011. 01:42 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    You're valuing an insurance company. The operating assets are the investments. They produce the earnings stream you are valuing. You're trying to sell all the securities and keep the income stream. You're valuation in deeply flawed.
    Jun 29, 2011. 04:25 AM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    Normalize around returns on assets not raw earnings.

    Also consider a more generic business cycle approach rather than picking out a specific set of years.

    Look at peak / trough returns on assets and determine how many years the company will spend at each level.

    And yes, you're right about cash / investments.
    Jun 29, 2011. 03:58 AM | Likes Like |Link to Comment
  • Mission Impossible: How Can Greece Exit the Euro? [View article]
    Luxembourg has external assets and liabilities that completely offset each other.
    Jun 28, 2011. 09:33 PM | Likes Like |Link to Comment
  • Mission Impossible: How Can Greece Exit the Euro? [View article]
    It would not be hard to change the rules. Many of the rules of E-zone have already been openly broken. Give Greece rights and responsibilities on par with that of Sweden.

    Your comparison with the U.S. just doesn't fit. Federal Reserve Notes are backed by Federal liabilities backed by a great ability to tax, not liabilities of the various states.

    People in the U.S. might mildly complain about fiscal transfers from California to Mississippi made possible by Federal debt issuance in many cases, but transfers on the scale in Europe appear to be producing much greater consternation and I see little ability or willingness to issue e-zone debt backed e-zone citizens and not their respective sovereign governments.
    Jun 28, 2011. 09:31 PM | 2 Likes Like |Link to Comment
  • Mission Impossible: How Can Greece Exit the Euro? [View article]
    Cash euros would likely remain euros. Many Greek people would convert their cash euros because they need transaction funds and it's not clear that it would matter to your average person for relatively small amounts of cash funds. The ECB would take the hit on that not converted and remitted to it. They have Greek Gov't bonds as assets and the euro as a liability, so after a default a good portion of the liability would remain outstanding, but the asset would be worth much less. My off the cuff answer would be that the difference would only be a couple tens of billions of euros and the ECB could be either recapitalized directly or allowed to keep the earnings on assets for a series of years to re-balance it's books.

    There is no "Greek" euro anyway, all euros are obligations of the ECB. Euros in Greek banks are not really euros, they are bank deposits denominated in euros usually with government guarantees up to some limit.

    Mechanically the Gov't would print the new currency in secrecy, declare a bank holiday where they told the public the plan, distribute the currency over a series of a couple days to banks and then people would line up to exchange currency. Deposits at Greek banks could be kept in euros with strict capital controls and given the "option" to convert or a forced conversion could happen. People and businesses could be given access to a limited quantity of euros from their bank deposits either for critical national business or for relatively immaterial amounts without qualification.
    Jun 28, 2011. 09:14 PM | Likes Like |Link to Comment
  • National Bank of Greece Appears Undervalued [View article]
    It's not a technical impossibility. Greece would have two currencies: a euro with strict capital controls and an internal currency. Euro claims would be left outstanding and renegotiated over a series of years. The government would finance itself with the new currency and compel its citizens to convert. Cash euros would continue to be euros. In theory, the whole thing would be a negative for the euro since there would be an impairment to the asset side of the ECB's balance sheet while the same liabilities remained outstanding, but the return of confidence to the euro could counterbalance this to a degree. It would all be pretty messy, but a Greek default would be just as messy without taking care of the underlying problem of having a monetary policy inconsistent with the underlying Greek economy.
    Jun 28, 2011. 08:47 PM | Likes Like |Link to Comment
  • Undervalued Cisco: An Economic Profit Valuation and Analysis [View article]
    Cisco has been overvalued for a decade. At $26.00 it was very overvalued, even under rosy scenarios. With the stock at $15.00, it has started to make some sense from a valuation perspective. At this point, the stock is even discounting things getting worse, far removed from the past where the market has continually given credit for things improving before they had. There are still large risks, but they are more balanced.
    Jun 28, 2011. 08:34 PM | Likes Like |Link to Comment
  • Transocean: Deep Rigs at a Deep Discount [View article]
    The problem is that it's starting to look like the drillers will play out like the shippers. There are some 60 drillships + ultra deepwaters in construction. Returns on capital are very high right now, probably a little over 2x cost of capital. This is motivating the expansion. There is little barrier to entry, but somewhat better than shippers admittedly. In 2-3 years you could have a glut of ships and dayrates will come down substantially.
    Jun 27, 2011. 12:56 PM | Likes Like |Link to Comment