Peregrine

Looks like this company got bought for a song. Stephen Smith paying book value for a company that generates mid-teens ROE. Opportunistic of him to buy during a bear market last year.

Aer traded down to $54 recently and I think it's gotten more interesting. The company has managed through the pandemic extremely well, decreasing leverage, increasing liquidity, maintaining cash flows and keeping their utilization high. And because they've emerged from the worst of the pandemic in a pretty strong position, they will soon do a fairly accretive acquisition that will make them the largest lessor in the world by far. Over time, I think the company can generate a 11% type ROE and management will resume repurchases once the GECAS deal is consummated. Co currently trades at 3/4 of BV.

Seems clear that the key question about this company is whether they can grow receivables. The way the market is pricing the stock (~7x 2021E EPS) currently suggests no. I think that they can. Credit sales are now probably above pre-pandemic levels, they have strong positions in secular growing verticals and have moved meaningfully away from struggling retailers over the past 5 years. Moreover, they have Bread - which is the only white label BNPL player currently. I think they resume growth in receivables starting in H2 and start seeing revenues inflect upward next year.

Equitable started as a small trust company in the 1970s and has since grown to become Canada's 9th largest schedule 1 bank by assets. The bank has an impressive record of growth as shown in the chart below yet it trades at a P/E of 8x and P/BV of 1.3x while consistently generating ROEs in the 15-17% range throughout its publicly-traded history. Most importantly, Equitable achieved this growth with a high degree of conservatism, maintaining capital levels well in excess of that of the Big Banks (current CET1 at 14.5% compared to Canada's big banks at ~12%), and achieved loan loss ratios that never exceeded 0.3% in any one year (also substantially better than the big banks). Equitable's loans are divided as follows: 1. Insured loans: $13.4 billion (48% of total) Personal loans - mostly prime single-family mortgages: $9.5 billion Commercial loans - mostly multi-unit residential mortgages: $4 billion 2. Uninsured loans: $14.7 billion (52% of total) Personal loans - mostly alternative single-family mortgages: $9.8 billion Commercial loans: $4.9 billion Nearly half their loan book is insured by mortgage insurers that are backed by the Canadian government and sold into securitizations so Equitable assumes virtually 0 credit risk on this portfolio. The other half are uninsured, of which 2/3 are uninsured "alternative" SFR mortgages. Here, Equitable primary borrowers are the self-employed or new immigrants, two demographic segments that have grown strongly in Canada. These borrowers are generally highly credit-worthy but nonetheless have more difficulty qualifying at the Big Banks because of income sources that are more difficult to prove and/or insufficient credit histories. The Big Banks use auto-adjudicated systems to underwrite mortgages against tightly defined credit boxes, which while highly effective in processing homogenous applications at very large volumes, are ill-equipped to evaluate the more heterogeneous profiles of Equitable’s core customer base. Unconventional should not be confused with a lack of conservatism, however. Equitable lends only on a first-liens basis, employs rigorous income verification processes, demands down payments for its uninsured mortgages of nearly 30% on average (current LTVs are 61%) and focuses its lending on mid-priced homes in metropolitan areas that tend to be more liquid and in which they are highly familiar. These practices have resulted in an average net non-performing loan ratio of just 0.4% over the last 10 years. Moreover, the substantial equity buffer underlying the homes that Equitable lends on helps minimize damage when defaults do occur: the company’s loan losses have averaged just 0.04% per year since the company became public. The company operates a branchless model, so their overhead costs are substantially lower than branch banks. Their efficiency ratio, generally in the high-30% range, routinely ranks the best among all Canadian banks. Five years ago, they started EQ Bank, an online bank that they've steadily added more and more functionality to (CAD and US savings accounts, free E-transfers, international money transfers, direct bill deposit, all with no fees) and was recently ranked the #1 bank in Canada on Forbes. Over time, management envisions EQ Bank being the platform where they offer more banking services to their customers. EQ Bank savings accounts are also lower rate than traditional GICs, which has reduced and will continue to reduce funding costs over time. Since Equitable targets niche areas of lending that the Big Banks generally ignore, the bank has benefited as regulation, institutional dynamics and the oligopolistic nature of industry has bred homogeneity, allowing a smaller lender like themselves to thrive. Moreover, demographic trends are in their favor as the numbers of the self-employed and new immigrants continue to increase at a far higher rate than that of the overall population in Canada. As such, Equitable continues to find more avenues for growth even as they are now the largest "alternative" residential mortgage lender in the country. The company pays out just 10% of their earnings and despite announcing an increase in their dividend growth rate, they anticipate to be able to redeploy the vast majority of their earnings back onto their balance sheet. At 1.3x BV, you're getting a bank that consistently generates ROEs of 15-17%, with a strong track record of credit adjudication, exceptionally strong capital position, proven management team and a very long growth runway.

This is the big factor IMO. NIMBYism exists everywhere. I don't think the situations in Toronto and Vancouver are all that different from other cities that's 1) attracting a lot of net migration; and 2) experience chronic obstacles to increase housing supply.

Unlikely - there's only one foundry at the cutting edge and that's TSMC and a handful of others less advanced. Capacity increases do not appear out of thin air in this industry and it's not clear at all when demand growth slows given the explosion of use cases set to come. On the other hand, if the folks who make the capital equipment for the industry are completely sold out, it seems like new capacity is coming somewhere. There's only a select few companies that make the high tech capital equipment so they're facing capacity constraints as well.

Unlikely - there's only one foundry at the cutting edge and that's TSMC and a handful of others less advanced. Capacity increases do not appear out of thin air in this industry and it's not clear at all when demand growth slows given the explosion of use cases set to come.

Why does this need to be winner-take-all, given the capacity issues in the semiconductor industry? Does Intel even need to be at the cutting edge to have a successful foundry? And from what I've read, the problem with their previous attempt at creating a foundry was that their process technology was highly specified for their own designs. Agree that this is a big challenge.

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction. Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal. I may be a little bit tipsy, but $24B plus 111,5 shares at $53 ($6B) plus $1B in cash/notes is $31B, right? How do you get to the P/B of 2/3? $34 bn asset value - which is what AER marked the GECAS book at - less $25 bn in debt, leaves $9 bn in equity. AER issuing 111.5 mm shares at $53 = $5.9 bn. 5.9/9 = 0.65. Incidentally, if the deal was more levered, the discount to book would be even higher.

That's the assumption - but I'm not sure that's the case. The new AER fleet is only slightly older and now comprises of a higher mix of narrowbodies - which are a lot more liquid and faces less uncertainties than the widebody market. They also wrote down the fleet substantially - GECAS assets stood at $36 bn at end of 2020, now remarked at $34 bn and being bought for $30 bn at AER's current price. On a leveraged business like lessors, these impairments can lead to huge discounts on BV. Crucially, Gus mentioned that these assets were all marked at cost and the impairments were taken on cost.

I have a feeling that this deal is less leveraged for AER - as in they're issuing less debt than the debt outstanding that was funding GECAS. At $34 bn to $9bn equity value, that's just a 3.78x A/E ratio. Most lessors are leveraged at >4x. It will increase the D/E ratio as of now because of the equity that's being issued.

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction. Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal. It matters just because I wanted to look at it from another point of view. I'm not sure my math is correct so I welcome the push-back: GECAS had $1B in profit in 2019. If Aercap is buying that for $7B, that's a 7x multiple, but there's interest costs in the mix. Let's say Aercap gets a 2% interest rate on the $24B. That's $480M that you need to take from the $1B in profits, leading to $520M of profits per year, leading to a multiple of 13.4x. The issue is, what were the interest costs before the acquisition that led to the $1B dollars in net income for GECAS that will be now replaced by the $480M? GECAS's $1 bn in profits in 2019 includes their own interest costs. I think the spreads are similar and the ROE profiles of both businesses are similar. I look at it like this: AER is issuing stock at 0.75x BV (at $55 price) to to buy GECAS at P/BV of 0.67x. It's accretive but not hugely so.

That is not what matters. AER is issuing $25 bn in debt and 111.5 mm shares for this deal. At current AER stock price - that equates to ~80% debt/20% equity financed transaction. Looks like AER values the GECAS assets at $34 bn (down from $36 bn at the end of 2020), so they're buying at a P/BV of 2/3 using AER stock at ~75% of BV. Accretive assuming the ROE profiles are similar but not like the ILFC deal.

Not no one. I was buying. I recall that Junto and Ericopoly were as well. This is value investing and it's hard. You can use any name you want really. When I was buying AAPL on sale at the end of 2018 almost everyone was running from it. Now everyone they're gushing over it. What changed? Nothing. Just the PR. Simply back then the stock was going down and now the stock is going up. Value investing. Easy in theory. Tough in practice. +1 I made a ton of money on this one over the last year, with a combination of stock and options. I remember some days during last spring and summer it was just dropping like rocks. It was nerve wracking but every time I felt anxious I just looked at the market cap vs. the book value and earnings power. It just didn't make sense. I have started taking some profits here, especially with options. What about others? I did sell my Jan 2022 $37.50 call options I bought last fall today. I previously rolled some to Jan 2023 $50 call options. I was crazy long going into November (tilt is the best way to say it) and adjusted on the run up to overweight. I think there is room to run yet but definitely not the deal it was last fall. $45 is my fair value estimate right now. That's where I have it pegged too...that will add another 100% gain to my current 200% gain on my WFC LEAPs. Cheers! Curious Parsad - what were the terms on those LEAPs you bought?

All else equal - yes. Bigger = better negotiating leverage, both with the OEMs and in the credit markets. Bigger also = better informational advantage and greater operational scope which enhances portfolio management. A bit surprised that AER is pulling the trigger on a deal of this size and this early...they had been reticent about doing sale leasebacks while others were being aggressive. Just me reading the tea leaves here - I'm guessing that the terms were really good that they didn't want to pass up.