Our best idea remains AIG common (35% of the Fund) with a reported book value of $57 per share. There are few occasions when systemically important franchises sell for half of book value and are profitable. This is one of those times. AIG warrants held by the Fund (another 3% of the Fund) provide the right to 21+ million shares at $45, or maybe more shares at lower strike prices for the next 34 quarters if dividends above $0.675 per trailing 12-month period are paid.Continue Reading (PDF)
Bank of America is the Fund’s next largest financial holding (9% of the Fund) affected by the great housing price collapse. The company’s reported book value is over $20 per share. We believe that America’s bank is returning to its retail roots (think of Wells Fargo) with a $1 trillion deposit franchise and that bank profits will skyrocket as legacy real estate loans burn-off.
Sears Holdings (11% of the Fund) is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles (“GAAP”) mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company’s reported book value of $43 understates real values.
Warrants received by the Fund from General Growth Properties (7% of the Fund) during its reorganization provide the Fund the right to “cash-in” the difference between GGP’s market price and the current strike price of $9.52 on now 45 million shares. For the next 22 quarters, distributions by GGP will further reduce this strike price and increase the number of shares.
Saturday, August 4, 2012
Fairholme Capital Q2 Update — Bruce Berkowitz