Tuesday, 12 August 2014

New News

I have finally left my post in the investment industry to branch off on my own.  Time will tell if I was insane for making this decision, but I am confident things will work out.

Nothing gives me more pleasure than significantly growing someone else's savings.  My value style is not complicated; all it requires is passion, diligence, and public information.

It will take several months to set up the business, at the end of which I'm planning to either cut this blog off or somehow transfer it to the new website. I realize that I have droned on about HHC in the past.  This reflects my obsessive compulsive nature when I lock onto a unique idea.  And the truth is that without the HHC opportunity, I would not be taking this step in my life. Yes, it was that hard of a swing.  

I have invested in numerous other spinoffs recently, including VRTV, RYAM, and POST, but have not been able to free up the time to write about them.  When the dust settles from setting up my business, I then must think about how to share and communicate ideas in a manner that does not conflict with the interests of my clients. 

Saturday, 17 May 2014

HHC Annual Meeting

I attended the annual meeting last Wednesday to listen in on the latest news. Though well attended, it was full mostly of employees.  There were only two questions during Q&A; both were from non-employees.  I would hazard a guess that there were fewer than five investors (outside of directors/employees) present.  Is it just me, or is it bizarre that a $6 billion company can stay so under the radar with the investment community?

Bill Ackman conducted the meeting and Q&A, and Dave Weinreb followed up with a few comments. One question from the crowd concerned the company's C-corp structure and whether Ackman thought a REIT conversion would be appropriate at some point. Ackman replied by saying that the C-corp structure made sense given the ability to retain and reinvest earnings. Also, HHC to this day has not paid much in the way of taxes given the net operating losses inherited by the company. Lot sales from MPCs and condo sales do not qualify under the REIT structure, but once core projects underway (e.g. Riverwalk Marketplace, Exxon build-to-suit office buildings) reach stabilization, the proportion of traditional lease-type income will significantly increase; Ackman stated that eventually the company may find itself in two different businesses and that a reassessment will be made to see what the optimal structure should be.

Sounds to me as though some kind of spin-off is imminent. The tax loss carry-forwards will be used up eventually, all the while office and retail NOI will gap up significantly over the next three years. By 2017, I estimate that office/retail income before tax could exceed MPC + Ward condo income. Of course, the margin of error is as wide as one can imagine in such a model.  The point is that a big percentage of income will soon be exposed to tax. 

Speaking of range of outcomes, management's success in their executive warrant scheme is ultra-levered.  If they are as money-centric as me, I lose absolutely no sleep over whether they will do the right thing.  By my calculations, the value of Weinreb/Herlitz's shares if a net settlement were to occur today would be $260.4 million. That's right - a 15 bagger so far!   In layman's terms, a net settlement is a way for management to exercise a portion of their warrants without expending cash from their pockets.  HHC did this to cancel Brookfield's warrant position in late 2012, and the same can be done here.  My estimate shows HHC (at today's price of 145.90) could repurchase ~900K warrants for $93 million from Weinreb and Herlitz.  This would leave the two with enough money to exercise warrants for 1.8 million shares for $75 million and still have $18 million remaining, which would be required to settle the capital gains tax from the sale of the 900K warrants. It goes without saying that the net settlement won't happen today - it will be transacted when the share price is higher, which will put management in a position to realize an even bigger ownership stake from the swap.  Somebody sign me up for one of these deals!!  The only problem is I lack the secret sauce that these guys have to create the value! Heck, these guys have made me lots of money, so how could I complain anyway?

I am not aware of management's intentions, but I don't see why they (Ackman/Weinreb/Herlitz/Richardson) couldn't rinse and repeat the whole thing again in 2018.  The two big x-factors at the time would be where the housing market is in the cycle, and whether they are up for doing it all over again. With a split-off transaction, the MPCs and remaining development properties could be placed into Newco ("HHC Developments"?).  The remaining HHC can convert into a REIT and lever up in order to provide Newco some cash to start off with.  Newco will also be self-sustaining out of the gate, provided the housing market doesn't go into another dive.  An exchange ratio will be set; management can backstop the offering and also have an oversubscription clause.  Ultimately, the transaction will allow interested parties to transfer their interest to Newco, and the exchange will dub as a buy-back for remaining HHC.  If I'm correct in my speculation that Weinreb/Herlitz have an intense love the development game, Newco will make complete sense in two ways: (1) Allow them to focus their time on developing commercial properties. Remaining HHC will in a few years become too big and bureaucratic for their liking, and (2) By maxing out their exchange to Newco, which will be smaller in market cap, their wealth can compound from a smaller base (i.e. escape diminishing returns from law of large numbers). 

Disclosure: The author still owns all his shares...and recommends those on the border of selling to keep delaying that decision.  Do not be a slave to your NAV models; when a large component of the investment outcome hinges on successful deal making, basing your sell decision on cash flow a few years out is likely to give you the wrong answer.  Rather, focus more on the insiders and how they maneuver their ownership stakes around future corporate action. As a wise-man named Joel Greenblatt once said, "it pays to follow the insiders"

Sunday, 9 February 2014

Reflections on Thinking, Fast and Slow

My apologies for the long absence. Sometimes life gets busy, and other times it gets incredibly busy. Such is the case when your day job consistently occupies 13.5 hours per day (due in part to a long commute), compounded by family demands. But enough whining... the good news is that the day job involves investing, my favorite hobby. It is safe to say though that what I do during the day does not overlap at all with any ideas presented on this blog. As for the commute, it is a net positive given the round trip provides a solid hour each day to read anything of my choosing.

I recently finished Daniel Kahneman's "Thinking, Fast and Slow".  It is essentially a psychology book published in 2011 that a number of people referred to me. The interesting thing is that I don't know anyone else who actually finished the book. I suspect this is because the content is somewhat akin to a text book (i.e. not conducive to scanning), and at nearly 500 pages, not a quick read.

The book is worth buying because it will give you awareness of certain psychological tendencies we have as human beings that sometimes lead to bad decisions. The key finding is that everyone makes decisions based on their subconscious ("System 1") and more rationally through calculated thought ("System 2"). Although it was not written specifically for investing, the direct application of several concepts is striking. For example, one chapter goes through our tendency to take quick averages. This applies to sum-of-parts type investments, where opportunities present themselves because the market throws a multiple over a company's net profit instead of determining the value of each segment.

As an illustration, assume a company's income is $100mm but is a sum of $200mm from Division 1 and a loss of $100mm from Division 2.  A price of $1,000mm would equate to 10x earnings, but assuming that Division 2 could in the worst case scenario be shut down, you are effectively paying 5x earnings for Division 1 and getting Division 2 for free.  This would have been the basic gist of Brookfield Residential a few years ago, when the stock price at $6.50 implied you are paying less than the intrinsic value of the Canadian division and getting the U.S. assets for free. A current example would be News Corporation, which in my estimation trades at a 30%+  discount to the sum of its parts.

Other concepts that I thought are particularly applicable for investors are:
  • Anchoring: The tendency to be influenced by numbers seen in recent memory. An example you may be familiar with is the over-use of comparable multiples, or relative valuation. This leads to the market underpaying for entire industries for prolonged periods, and conversely overvaluing them later on. 
  • Loss aversion: When agony associated with realizing a loss outweighs the positive feeling of achieving an equal gain (e.g. -$50 vs. +$50). This can lead to irrational follow-up decisions, such as doubling down when unwarranted, and/or setting up a mental account for the stock in question. By keeping a mental account for each stock (as I have been guilty of doing in the past, and still do), we are prone to taking profits on winners while waiting to breakeven on losers before moving on.
  • Overconfidence: How important is luck in determining our investment results, or life in general? Howard Marks discusses the importance of being lucky in a recent write-up.  For me, luck played a role in almost every big life decision, from becoming interested in Buffett, to being told about the HHC opportunity by a friend months before the spin-off, to meeting my life partner, to my choice of school... the list goes on and on. By not crediting luck enough to past successes, we become vulnerable to overconfidence. And overconfidence in turn will lead to errors such as overweighting investments without doing the necessary due diligence, or leaving a high-paying job to start a sole proprietorship without having realistically weighed the odds of success.

My personal belief is that psychology is just as important to being a good investor as anything else. Had I read this book sooner, I would have recognized a mental error (excessive loss aversion) sooner and saved myself an amount that works out to >1,700x the cost of the Kindle version... and that is assuming I took only a 50% loss on that particular mistake (instead of selling at -85% last week after reading Kahneman - ouch!)

Disclosure: The author owns shares of Brookfield Residential and News Corporation.

Sunday, 6 October 2013

Life after 2017 in HHC? Channeling John Malone...

I have no doubt in my mind that as HHC transitions into a cash flow vehicle, the insiders would have made their killing from their own investments in the company (but most deservedly). However, for long term investors who aspire to own HHC past that point, there remains an unanswered question: how will the upside motivate the insiders versus November 2010 at the bottom of the housing market? Of course, Nov. 2010 was a once in a life time opportunity. But if structured optimally, there is a way for HHC insiders to morph the company and thus their holdings into a position where great future upside is possible. 
I'm sure many of you have invested in and followed Liberty Media for years.  It wasn't until a few months ago though that I read Cable Cowboy (by Mark Robichaux). Since then, I keep thinking about how different my life would be now had I spotted that opportunity. But as a 14 year old at the time and several years away from becoming interested in investing, I suppose it's wrong to obsess over missing the boat.

In a nutshell, Malone split-up (note not spun-off) TCI's content assets into a vehicle called Liberty Media in 1991 via a rights offering. At the time, he was already an accomplished CEO, having built up TCI into the largest cable company.  The problem was that, despite his accomplishments, Malone did not own a significant stake in TCI (though I'm sure he already did quite okay for himself) while his peers in the industry had made billionaires of themselves. By placing a bunch of non-publicly traded minority interest stakes in Liberty, this gave Malone the opportunity to lowball their values.  At the same time, he structured the deal in such a way that not only discouraged investors to participate, but limited equity ownership to those who did.  The result was Malone owning close to 20% of Liberty's equity and a 10 bagger in less than two years.

So let's walk through the Liberty Media math and see how it could make lots of sense for HHC in a few years time.
  • Ownership of 200 TCI shares granted 1 right. Each TCI share traded for $16 at the time. In other words, you would have needed to own $3,200 of TCI stock at the time just to get 1 right 
  • Surrendering 16 shares and 1 right gave you 1 Liberty share. Translation: at $16 per TCI share, this equated to a $256 purchase price per Liberty share (16 shares x $16)
  • TCI had a fully diluted share count of ~415 million shares; so only a maximum of 2.1 million shares would have been outstanding even if all rights were exercised (415mm / 200)
  • Only ~1/3 of the rights were exercised, which translated into approximately 700,000 shares outstanding.  As a result, the initial implied market cap was $179 million ($256 x 700K shares) for a collection of fractional ownership stakes that was worth much, much, much more than that.  Further leveraging the upside for shareholders was TCI's commitment to issue preferred shares at 6% interest for all equity not sold in the rights offering.
From what I read in Cable Cowboy, Bob Magness (founder and largest TCI shareholder) did not see the merits of exercising his Liberty rights until Malone convinced him. So either Magness was withdrawn enough from TCI in 1991 such that this deal slipped under his radar, or the structure of the transaction was complex enough to confuse even him.

When I suggest that a similar approach is possible for HHC's remaining development assets in a few years, I do not mean to say that Liberty Media's 1991 split-up should be used as a playbook. But as the "owner's mentality" that Weinreb writes of in his annual letter is crucial to the success of HHC, structuring the potential spin-off such that insiders are hyper aligned is paramount. It is perhaps way too early to speculate which properties will be selected for the REIT vs. the Splitco in 3-5 years time, though I think it highly likely that the new development company will be granted some income generating properties and liquidity (just as HHC was), such that it can hold its own to begin with.

My hope is that the separation will be effected via a split-up.  The insiders by 2016 should be able to secure debt to exercise their warrants.  Since a dividend will be paid by that time, the debt will carry itself.  Perhaps most importantly, a split-up would allow the insiders to transfer a portion of their ownership into a more leveraged vehicle whose needle is moved significantly with the completion of each new development, while their remaining shares in the REIT would more than cover their living expenses (or so I would hope!)

I also think the odds are in favor of a stock split in HHC by 2017, but for illustrative purposes, here is an example of what could transpire:
  • In 2017, HHC announces a split up of development assets into "Splitco"
  • 1 right is distributed for every 25 shares.  For simplicity's sake, let's assume there will be 50 million shares outstanding at the time. This would max out the number of shares in Splitco at 2 million.
  • If 1 right + 1 HHC share (which will hopefully be at least $300 each by then!) were exchangeable for 1 Splitco share, this would place a value of $600 million on the new company (2 million shares x $300)
  • Now the real artistry will be in the selection of assets to transfer into Splitco... As with HHC, I am sure that management will have a far better understanding of the development possibilities of the selected assets than anyone else.  A lot of the remaining, undeveloped acreage (e.g. Circle T Ranch, West Windsor) could be stuffed into the new vehicle alongside a few income generating malls.
  • At $300 per share, this would imply a $15 billion market cap in 2017 for HHC. If a certain insider at the time owned 5% of the company, this would mean 2.5 million shares or $750 million market value.
  • With the above logic, this 5% insider would have rights to buy 100,000 shares of Splitco (2.5mm/25). And with 1:1 exchange ratio at $300 price, this would mean a $30 million purchase price without outlaying any extra cash from his pocket.
  • BUT......what if the stakes were further raised if HHC guaranteed to replace any unexercised rights with preferred shares on fair terms? In such a scenario, if 50% of the rights were exercised, there would be 1 million shares (worth $300 million) initially outstanding with Splitco and $300 million outstanding of preferred equity. Mr. Insider, who originally would have owned 5% of Splitco had all rights been exercised, now owns 10% of the equity and also has exposure to a more leveraged situation as a result of the preferred outstanding.
Though it is fun to run through scenarios with a split-up, I more commonly see spin-offs with rights offerings WITH oversubscription privilege AND a backstop clause (think Brookfield Residential and Sears Hometown and Outlet).  So maybe the odds favor this type of transaction to eventually occur.
Chances are that by this time (2016-2017), the ownership base will contain lots of dividend and REIT fund managers, who will either punt the Splitco stock (if management chooses a straight spin-off option) or totally overlook the potential of participation in the split-off, if that option should be chosen.
Insiders will then have the best of both worlds: a dividend paying REIT in HHC, backed by top tier properties, and (2) shifted a portion of their HHC holdings into Splitco for exposure to more upside. Also, just to put icing on the cake, with the board's help a similar executive warrant package can be repeated in the new development company (e.g. 7 year non-transferrable, exercisable in year 6). So there you have it: a totally legal way for insiders to maximize ownership and rewards for layman investors shrewd enough to see it coming!

Sunday, 7 July 2013

HHC: Hard copy is always the best

When I first read Weinreb's annual letter to shareholders in March, I opened it on my iPad and devoured it in probably less than 15 minutes.  But now, after having ordered a hard copy of the annual report from the investor relations department (thereby destroying shareholder value by increasing SG&A expense!), some key words jumped off the page.  Here they are:

"Our long-term goal is to increase the value of the company on a per-share basis. We do this by improving our assets through the development process and by opportunistically deploying excess cash. In the fourth quarter, we purchased approximately 6.1 of the 8 million Sponsor warrants issued as part of our emergence as a public company. These warrants had a strike price of $50.00 per share and a November 2017 expiration date. They were the most expensive and dilutive security in our capital structure. Before their retirement, the warrants represented an economic drag on our per-share progress as every dollar of appreciation of our stock price above $50.00 would require us to generate $1.16 of value. The repurchase of these warrants in exchange for $81 million of cash and 1.5 million shares is a breakeven proposition for the company if our stock price equals $81.10 in 2017, a price which we expect will be well below the potential value of our stock at that time. As a result of retiring the warrants, our shareholders now own 10.1% more of the company."

One can say, "increasing per share value? duh....anyone can say that!"  But no, not every CEO does, and even fewer deliver like Weinreb/Herlitz have in such a short time. It is amazing how many sophisticated investors I know who own this stock were not at all aware of the warrant repurchases mentioned above until I personally told them about it.  I actually think Weinreb was being modest in his annual letter; his timing was quite prescient given the share price rally that has since ensued.

So what is the running tally on value created in the warrant buy-backs? The short answer is $102.5 million for the Blackstone/Fairholme cancellation.  For the Brookfield warrants, this is a less straightforward question since a net settlement swap was used, but I have a few points to make below.

First off, the 2.25 million warrants cancelled for Blackstone/Fairholme was done at $30 per warrant (or cash settlement of $57.5 million), versus the $50 strike price.  At the time, HHC would have needed the stock to appreciate above $80 ($50 strike + $30 warrant) to breakeven.  This also worked out to a ~10% premium above the prevailing price at the time.  Assuming that Blackstone/Fairholme would have demanded a like premium had the warrants been cancelled at today's $110 price, I estimate that the same transaction would have cost HHC $159.8 million dollars ($110 + 10% = $121, minus $50 strike = $71 per warrant, x 2.25mm).  So in other words, Weinreb has thus far saved shareholders $102.5 million by completing the deal in December versus today!  And this is just a running number. When the price crosses $200, I will write up another update!!

The value surrendered by Brookfield can also be worked out... it is substantial, but I don't want to be too explicit because of my respect for this team.  Suffice it to say that Brookfield underestimated the value of HHC in their internal estimates (I guess they are conservative) and would much rather deploy the capital in a non-passive investment.  But I will publish one estimate/guestimate:  Had they waited until today to execute a share swap with HHC, they would have ended up with at least 50% more shares from their warrants (2.3 million vs. 1.5 million) and still received a net settlement of $8 million from Weinreb & company.  How do I arrive at this estimate?  Well, it appears that the swap was designed such that neither Brookfield nor HHC would have to outlay much cash.  The $38.69 buyout price per warrant implied a breakeven price of $88.69, which if I remember correctly was approximately 21% premium to the prevailing share price.  Applying a 20% premium to today's $110 share price, this would imply Brookfield would demand a breakeven price of $132 for HHC, or $82 per warrant ($132 minus $50).  This would mean the scales would be reweighed such that Brookfield could have exercised 2.3 million warrants (vs. 1.5 million in the December deal), while having the residual 1.5 million warrants retired by HHC (vs. 2.3 million warrants in the December deal) at $82...and Brookfield have still received $8 million to settle the net amount.  To sum up, this "finesse" of a transaction by Weinreb/Herlitz/Richardson saved an extra 0.8 million shares from being issued in the net swap settlement. 

When to sell?  Believe me, I've spent many hours pondering over this question.... When you are 90% invested in one stock that has appreciated farther and faster than you originally expected, while seeing other stocks out there that seem more empirically undervalued (e.g. AIG selling at a considerable discount to book value per share), it takes a lot of willpower not to take some profits.  But I've decided that HHC really is a one off opportunity, and it's still early in the U.S. housing recovery. Though it can be argued that execution success is already built in to the current share price, I will not sell a single share until Weinreb, Herlitz or Ackman sells. Ideally, a spin-off or split-off of some of the assets is done in a few years, and structured in a fashion that creates another undervalued security.  Even better would be a spin-off done simultaneously with a rights offering for the REIT assets, as I bet the insiders would use this as a (legal) opportunity to increase their net worth.  And in such an event, I would be a follower.

Final thought: Okay, where's the sell side coverage for this company? With a $4.3 billion market cap, only two brokerages (one very small and another one quite small) have initiated coverage on HHC.  But what is Bank of America, Goldman, JPM, etc waiting for?  These sell side analysts have a habit of all jumping in at the same time.  Just look at all the analysts initiating coverage on Brookfield Residential recently.  They've had more than two years, and now that the stock is up over 100% off the rights offering/spin-off price, they are now interested!  With HHC, watch for the same behavior.

Disclosure: I still own HHC and BRP, but do not own AIG (yet)

Thursday, 6 June 2013

HHC: David Weinreb buys for first time in the open market

A Form 4 was filed two days ago after HHC's CEO, David Weinreb, purchased ~$1 million of stock in the open market (10,000 shares @ $99.56).  This is the first time since the spin-off in Nov. 2010 that he bought shares, notwithstanding the $15 million in 7-year warrants that he bought when first joining.

One must ask: why now after the huge price spike? I realize that it is difficult for CEO's to buy in the open market, what with the blackout periods and all. But a simple two year chart will show that the price has been far below $100 for the vast majority of HHC's life as a public company.  Has something changed fundamentally in the past few weeks that has further brightened his outlook on the company's future?

I attach great significance to insider buying on the open market; it is one of the "very, very nice to haves" on my investment checklist.  If the person who knows most about the company is buying more shares (with his disposable income) at 150% than what I got in at, I would say it is pretty good validation of my belief that there is still healthy upside in this stock.


Saturday, 20 April 2013

The Triple Crown

As a first priority, adhere to The Magic Formula

I'm sure you have all heard about Joel Greenblatt's Magic Formula.  If you haven't, I can sum up what it achieves in a single sentence: In a given population of stocks, it brings attention to the companies with the best combination of cheapness (as measured by EV/EBIT multiple) and quality (as measured by Return on Invested Capital).   Sounds easy enough, doesn't it?  It is also based on common sense. If you are a long term investor, why wouldn't you want the best quality company for the cheapest price possible? The truth is that most professional investors would fare better if they just stuck with Joel's formula and did nothing else. Mr. Greenblatt is one of the greatest investors ever. I have never attended his classes at Columbia University, but am a big fan of his writing.  Did you know that at one point, he achieved a 40% compounded annual return over 20 years?  That is absolutely ridiculous in terms of an investment track record.  Joel was able to achieve this through (1) extreme concentration - having his capital deployed in his best 5-6 ideas at any given time, (2) using the Magic Formula, and (3) investing in special situations such as spinoffs and merger securities to take advantage of forced selling.  I believe he really is another Warren Buffet. Where Buffett stood apart from all the other great investors was his creative way of securing permanent capital.  Not only did he do this through taking control of a public textiles company called Berkshire Hathaway, he also vended insurance companies into it and benefitted from being able to invest the float at a negative cost of capital.

The Triple Crown

However, there is third prong I would add to the Magic Formula: alignment.  I have already discussed at length in previous posts about the importance of having your investments run by managers who think as owners rather than as employees, so I will not repeat those points here.  The obvious way to add this criterion to the Magic Formula would be add a column for percentage of shares owned by insiders. However, the problem I've encountered with the information providers I have experience with (Bloomberg, Thomson Reuters) is that this field often is not accurate, at least not for my purposes. So while I cannot claim that the Magic Formula should be altered from a computer screening perspective, satisfying the requirement of strong alignment serves as icing on the cake.  In fact, I find alignment to be so important that when I see the right indications, I am willing to think outside the box a little on the traditional yardsticks of valuation and quality.

So what are some indicators of alignment that close attention should be given to?

In my opinion, there are various ways that alignment can be signalled:
  • >10% ownership of stock by founder, a family, and/or notable investor
  • a strategic investor or management backstopping a rights offering in a spinout (e.g. Brookfield Residential, Sears Hometown and Outlet)
  • insider buying (in the open market, private placement, or executive subscribed warrants)
I almost added share buy-backs as a way management can show alignment, but thought the better of it since good capital allocation is a by-product of alignment rather than a signal of it.

Example #1: Brookfield Asset Management

This investment would probably never top the Magic Formula list, but is nonetheless worth mentioning as an "anti-fragile" phenomenon that grows stronger from each global crisis. Brookfield trades less than the sum of its parts but would not show well on an EV/EBIT basis (it owns a lot of land and other investments that do not subscribe neatly to the screen).  The same applies to ROIC; Brookfield's assets are by their very nature capital intensive, though only from an initial capex perspective.  Whether it is office buildings, infrastructure, or hydro-power stations, all these assets in the portfolio benefit from scarcity (usually due to trophy locations), low maintenance capex, and smart financing in the form of non-recourse debt.  So while Brookfield owns assets that cost a fortune to build or replace, they are financed in such a way that in the worst case of a default, the sinking of a single property does not threaten the whole company as a going concern. Furthermore, inflation escalators are typically built into the contracts. For example, in its Class A office buildings, the leases have clauses which allow for pricing in tandem with inflation, thus protecting the value of its cash flows. 

I believe Brookfield will double in price within six years.  Management owns 17% of the company; this number is likely to increase as it was announced last week that stock buy-back is in play to repurchase up to 10% of outstanding shares in the open market.

Example #2: Brookfield Residential Properties

When I purchased shares in the summer of 2011 at an average of $7.50, this had the makings of a Triple Crown investment. From a valuation standpoint, it provided multiple margins of safety: (1) it traded at a 25% discount to book value, which had already been significantly written down during the recession, (2) I estimated $1 per share of earnings power from just the Canadian portion of operations, so in other words I bought the Canadian half of the business at 7.5x normalized earnings and received the U.S. half for free!  With U.S. housing at the very bottom at the time, profitability from a consolidated perspective was somewhat hidden because the Canadian half was being offset by the loss generating U.S. part.  Homebuilding isn't a bad business; it is however inescapably cyclical.  I was willing to forgo the requirement of a virtuous, in-the-box good company in this case.  After all, how many homebuilders were still cash flow positive and financially strong at the very bottom of the U.S. housing market?  Brookfield Residential stood out in this respect because its Canadian portion (mostly in Alberta) was strongly benefitting from a thriving regional economy, which allowed for deficits from its mostly Californian operations (California by the way was one of the hardest hit regions in the U.S. housing crash) in the U.S. to be carried until the housing market naturally recovered.

Last, and most important, were the signals of alignment during the spin-off process.  The parent company, Brookfield Asset Management (written about in Example #1 above) designed the spin-off thusly: (1) a partial spinoff, (2) via a rights offering, with (3) a backstop provision which allowed the parent company to exercise the remaining rights not acted on by other shareholders.

As per Greenblatt, your interest should always be strongly piqued when this sort of spinoff happens. I will add the personal note that this is because management will set a strike price on the rights which undervalues the company, thereby giving themselves an absolute bargain should shareholders overlook the opportunity.  In fact, in the prospectus, assumptions used in the fairness opinion were disclosed, which included a 20% discount rate used in the DCF!  Talk about conservative!  In this case, the exercise price was $10 per share, which was still a steal.  I didn't buy the rights on the market during the 30 days they traded because the underlying share price was around $10 (meaning I could have just bought the shares on the open market).  I was lucky that the Greek crisis a few months later caused the price to dip as low as $6.50, where I filled half my position. 

Even though the parent company owned ~72% of Brookfield Residential post the spinoff, it proceeded to buy more shares in the open market during the summer of 2011 between $6.50 and $8.00 (if my memory serves me correctly - you can verify via the 13D filings on the SEC website) and thus brought its ownership up another ~1% to about 73%.  What a mouth-watering, incredible opportunity this was: a U.S. housing related investment that was still generating profits at the very depths of the U.S. housing market, trading at an obvious bargain price, and bought by insiders (in this case the parent company) in multiple ways!  If it weren't for the Howard Hughes opportunity, I would've taken a much bigger swing on this one!

I recently sold 1/3 of my position at $24 to recover my initial cost.  I know that I'll end up regretting it because significant upside still exists.  However, I believe the U.S. housing recovery is in its 2nd inning, while U.S. homebuilder stock prices have raced ahead to the 5th inning.  Where I stand to be very incorrect is in the ultimate span of the recovery: as we have just witnessed the biggest bust in U.S. housing history, it may turn out to be the case that the recovery lasts for longer than anyone expects given the pent-up demand that has been built up in the system (in the form of 35 year olds living with their parents).

Disclosure: the author owns HHC, BRP, but not BAM