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A Father's Day Gift For Warren Buffett

|Includes:AVB, Berkshire Hathaway Inc (BRK.A), BRK.B, ESS, MAA

I was shocked when I read yesterday the auction high bid price for lunch with Warren Buffett had only reach $200,000, with less than 24 hours to go. Below is a chart of previous winning prices for lunch with Warren, courtesy of CNBC:

Mr. Buffett is on a bit of a losing streak, lately. The billionaire's offer to buy Residential Capital (ResCap) from Ally Financial Inc. (NYSE:ALLY) before the government-owned company put the home lender in bankruptcy was rejected, according to a May 17th, Bloomberg article.

The Bloomberg article also suggests that Berkshire Hathaway Inc. (BRK/A) would have paid little cash upfront while taking on potential liabilities. Instead, ResCap voted to declare bankruptcy and arrange a sale to Fortress Investment Group LLC (NYSE:FIG) and Nationstar Mortgage Holdings Inc. for approximately $2.3 billion.

The Bloomberg story concludes with "Fortress and Nationstar won't take on the liabilities that Berkshire had proposed assuming…" Former hedge-fund manager Ted Weschler, assigned to negotiate the offer with Ally, happens to be last years' winner of Lunch with Warren, paying the $2,626,411 for a chat and chew.

I've watched WB expound for the past six months about the various virtues of owning real estate at this time. It just so happens a very attractive deal came into my inbox the other day.

Although this would be a light snack for you, perhaps just an appetizer, I know of a portfolio that will become available this June 15th, through a receivership's auction. As a fan of yours, I would be remiss if I did not bring this opportunity to your attention to pay $.40 cents for dollar bills. Consider it an early Father's Day gift.

One of the major real estate firms in this country has sent out a marketing brochure featuring 3,701 units of multi-family housing, comprising of 14 different properties. It is an all cash auction. The portfolio is cash flowing at $27 million, annually. This is a meal for big boys.

Looking at a quick and dirty calculation of these properties; the cash flows are decent, vacancy rates are small, and in this era of yield starving investors (the 10-year T-note made historical low on June 1, of 1.45%), and you can purchase this cash flow and turn it around within 6 to 9 months in any number of ways.

For comparison, capturing a $27 million a year in cash flow using two-year treasuries, with a current yield of just .26%, would require a cash outlay of greater than $10 billion dollars. Even going out 10 years, your outlay would require $1.7 billion for treasury notes to secure $27 million in annual cash flow.

Below is the list of properties that will be sold to the highest bidder. Due to a confidentiality statement I signed, I cannot get more specific about these properties in an article (have your people call me; I have no people, it's just me and my Apple iPhone).

 

 

Properties Locations Total Units Occupancy Monthly Cash Flow Annual Cash Flow
1 Maryland 144 97 $164,682.72 $1,979,084.64
1 Virginia 128 95 $84,268.80 $1,013,901.60
1 South Carolina 112 97 $65,401.28 $787,323.36
1 Florida 193 99 $136,997.19 $1,647,470.28
3 Nevada 860 89 $480,462.00 $5,776,932.00
7 Texas 2,272 95 $1,322,589.61 $15,899,479.32
14   3,709 94 $2,254,401.60 $27,104,191.20

According to Barron's, a company seeking to become a REIT must satisfy two main criteria: It must derive at least 75% of its revenue from rents and other direct real-estate activities, and it must pay out at least 90% of its profits to shareholders as dividends. In return, those profits are untaxed at the company level, and the hope is that yield-focused investors will flock to the shares.

But you are a man with many options if you decide to make this investment. Off the top of my head, I can see you purchasing this portfolio for one of your current philanthropic organizations. Or, a private label income investment vehicle option for the Berkshire Hathaway employees' retirement account. Or, you could package this portfolio and convert it into a publicly traded REIT along the lines ofAvalonBay Communities, Inc. (NYSE:AVB), Essex Property Trust, Inc. (NYSE:ESS), orMid-America Apartment Communities Inc. (NYSE:MAA).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: BRK.A, BRK.B, AVB, ESS, MAA