Friday File: Pot Landlord Financing, Buffett’s Portfolio, Fake Prices, and Buying More Growth

What's up with the Real Money Portfolio this week?

By Travis Johnson, Stock Gumshoe, February 18, 2019

Everyone was watching this week to see if Warren Buffett did anything big with Berkshire Hathaway’s (BRK-B) portfolio in the fourth quarter of last year, news that comes once each quarter (large investors have to file their end-of-quarter holdings in US stocks 45 days after the quarter ends), and… he didn’t.

Berkshire did add to its investments in the big banks, just like they did earlier last year, and they did sell a few Apple shares (about 1% of the position), though Buffett made clear later that this wasn’t a decision he made — the “core” Apple position is unchanged, which must mean that one of Berkshire’s other asset managers sold down part of his holdings to buy something else. If you want to have exposure to the big banks, Berkshire Hathaway has you even more covered than before… but otherwise, no real change. Berkshire shares tend to rise in the weeks leading up to the Annual Meeting (first weekend of May), but we’ll know more about the current state of the company when they report their next quarter (that next quarterly filing will probably come this weekend — Buffett prefers to report earnings on Fridays after the close, but the timing could certainly change). If there’s any upheaval or anything disappointing in the earnings, like a bad underwriting quarter,

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Innovative Industrial Properties (IIPR) announced this week that they are doing a debt offering, which has the potential to change the game pretty substantially.

Why does this change things?

Leverage.

If they can do 15% cap rate deals (meaning that the annual cash flow from the property is 15% of the amount they invested), and get debt financing that’s less than half that price, the margins improve considerably and cash flow ramps up rapidly. Real Estate Investment Trusts (REITs) almost always use a hefty amount of debt, and they use that debt to buy buildings with cash returns that are greater then the cost of the debt (or the blended cost of financing, since funds are usually from both equity sales and debt offerings), which means that as long as you can think of the debt as being somewhat perpetual (they won’t have trouble refinancing it), the cash flow rises on a per-share basis. REITs that are in the process of both growing fast, with high cap rate deals, and also levering up can ...

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