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Matt and I will be there. Wes Looks like we may be a little later than 12:30. Maybe be closer to 1:00 before we can get there. Wes

Matt and I will be there. Wes

The bear thesis is contingent on a violent collapse in demand for high-priced condos and luxury rentals. I don't think that happens. I don't think prices will collapse either, but that's not the bear thesis. I think that's what Green King and myself are trying to point out. When you lend to highly-levered, speculative developments that are collateralized by overvalued assets, prices don't need to fall by much to end up with a bad ending ('compounding effects'). This is why you'd want to look at loan to cost, unless you think the raw materials are overvalued? Edit: But now that I think about it, I always did think the difference between LTC and LTV was too small. I bet their LTC includes the purchase price of the prior property that gets modified. Interesting point and something I hadn't considered Loan to cost would include all hard and soft costs in the deal including the land/prior building cost, the cost to develop the site, all hard construction costs, development fees, marketing costs, interest, loan fees, and a big contingency. One bank's loan to cost is different than another's. I wouldn't put much faith in an LTV or an LTC. Just like you can't blindly accept the reported leverage of one company to another. The adjustments made to EBITDA are very different across companies in the same industry. For any bank that has doubled or tripled in size since the downturn, my first question would be whether their track record mattered. If they were booking loans of $250 million pre-crisis to establish that record, it would definitely matter. If they were booking $25 million loans, it would require a little more work.

I'd be interested in whether the CRE lenders of the most recent three acquired banks were retained. Given the focus on centralized, large scale CRE development lending, it's likely they were not. If I'm right, OZRK has little chance of driving growth out of the acquired banks. To justify the multiples of book paid for these targets, they have to further scale the CRE division, effectively forcing themselves to become more concentrated. I for one like the idea of concentration, but not in a levered vehicle like a bank, which naturally has very limited returns on assets, and needs leverage to earn a reasonable ROE. One thing I used to find odd was their concentration in Arkansas muni bonds, especially long dated bonds. That just seemed to be another sign that they had little concern for liquidity. Despite their rather obvious need to pay huge premiums for deposits...

I'll start by saying that I haven't done in depth research on OZRK due to my working in the banking industry and having limited interest in adding to my natural long. Views within the banking industry are obviously more skeptical of OZRK than in the investment community. A strategy of buying banks across a very wide geographic area in order to fund a centralized CRE platform lending throughout the US doesn't scream conservatism. Depositors from a recently acquired bank probably have no real tangible association with OZRK today. A low cost deposit base is what makes banks attractive today. Banks have yet to be forced to reprice their liabilities (deposits). When that happens, customer retention won't be so high across the board. I question the company's ability to translate low cost deposits from a target into low cost deposits for OZRK. On top of the deposit beta, there is a natural deposit decay rate that should only speed up for an acquirer. Couple that with huge unfunded liabilities, and you see why OZRK is forced to be an acquirer. Their loan growth cannot be funded organically or through wholesale funds. While their CRE track record appears to 'speak for itself' as an analyst has said, the company was much smaller 5-10 years ago, likely had a better core deposit franchise, and was dealing with an improving market in certain commercial areas in the country. I tell people that you shouldn't confuse a bond fund with genius in a declining interest rate environment. The same holds true for a CRE lender in a declining CAP rate environment. I may be wrong on OZRK, but the price to book and the strategy should cause one to do their own homework and not get caught up in analysts re-rating the stock over and over again.

Table in back right of restaurant for those joining.

Please include two additional guests. Looking forward to it. Wes

Thanks for setting up the lunches Packer. I plan to be at both. Will have a fellow COB&F member joining me as well. Thanks, Wes

For me, reading books like Quality of Earnings is as much about figuring out what struck Ackman and others to recommend the book to those who work for their firm. Many newer books have similar ways to assess earnings quality. CFA Institute published a good monolith on the topic and other PDFs are easy to find that do a good job on the topic. My favorite book is Martin Fridson's Financial Statement Analysis; A Practicioner's Guide. It is certainly more thorough than QoE but it wasn't 'the first' book on the subject. Even books like What's Behind the Numbers are interesting to read for their case studies, even if they are geared more towards the masses and less toward the analyst. In any event, QoE resonates with investors because it provided actionable ways to assess liberal revenue recognition policies and taken as a whole, provides a framework for thinking about not only earnings quality, but reporting quality as well. For this alone, I would recommend QoE without reservation.

VRX closing share price on 9/30/15 was $178.38, so barring any sales or buys and at current prices, that position would be ~$300 million today. Based on VRX share price change alone, the pension surplus would be down to $900m (overall equity markets are generally flat to slightly up since 9/30/15). On a per GHC share basis, the decline in VRX's share of net surplus would be ~$47.50 per GHC common share, so certainly part of the reason for GHC's slide, but doesn't account for all of it since 9/30. wabuffo I believe they stated that the pension was down ~6.5% in the Q&A portion of the UBS conference so I think these numbers are a little high. Having said that, my calculation included $1.3 billion in cash and marketable securities and $900 million for the pension asset (I too just assumed they got crushed by Valeant). I should have mentioned that piece in the post.

OPY seems to be trading at an incredibly low valuation at ~60% of tangible book. Even if you believe that management is awful and is only interested in expanding the under performing IB at the expense of the valuable business lines of asset management and commercial mortgage, I feel like the only way to make 60% of tangible book value make sense is to believe that the company will lose advisors (and AUM) at an increasing rate over the next few years. I know there have been some advisors leave the platform, but I don't believe it has been nearly as catastrophic as would be required to justify the current price. Further, an increase in the FF rate helps OPY's earnings without increasing costs. I'm still in the camp that the FOMC will raise the FF rate next week, so seeing all of these advisors and highly asset sensitive banks trade down (specifically the ones with zero exposure to Energy) strikes me as crazy.

Is anyone else following GHC on their ride down? Based on my math, GHC trades for $950 million (net of debt) if you give full credit to cash, marketable securities and the over funded pension. Management's recent presentation illustrates that the remaining Kaplan assets produce good operating income, the broadcasting business (while down in 2015) is still quite valuable, and the remaining assets, including Social Code are performing well. The broadcasting assets alone should be worth ~$1.4 billion. If you are looking for an interesting SOP investment with little risk of permanent impairment, GHC seems like a good place to invest.

Packer - I would like to reiterate everyone's comments. Your willingness to share your thought and investment processes on the CoB&F board are very much appreciated. I hope all of us are able to find and share an idea of similar quality one day. Thanks again!

I will take a look at the 10K. The credit agreement certainly allows them to enter into a swap but i couldn't quickly locate the section that would compel them to hedge a portion of the interest rate risk. Thanks.

Hi Packer, I am trying to reconcile the interest rates in the latest 10K and 10Q without success. The 10K indeed states that the Term loan is at LIBOR + 4.75% with a floor of 1%, for an effective rate of 5.75%, which you used in your model. However, in Note 7 of the 10Q (page 12), it states: The Company’s blended average effective interest rate on its long-term debt was approximately 6.3% for both the three months ended March 31, 2015 and 2014, respectively. I cannot reconcile these two numbers - 6.3% and 5.75%. To the best of my knowledge LIBOR has been under 0.25% since 2013, so the Term Rate effective interest should indeed be 5.75% for both Q1 2014 and 2015. Also, when I take the average LT debt in 2014 (using 485 from end of 2013 and 520 from the end of 2014) and divide the interest paid in 2014 of 32.7m I get ~6.5% effective interest rate ... I am trying to understand what I am missing ... TIA, Andy I'm not sure this is the case with NTLS, but generally the lenders on a term loan B will require the borrower to convert a portion of the loan, say 50%, to fixed rate debt via a back-to-back interest rate swap. This reduces the likelihood of default due to rising interest rates but creates a higher all in cost of debt for the borrower. Given that term loan B's are generally 7 year loans, the fixed rate portion would be meaningfully higher that the floating rate. I haven't read this section of the 10K but would be surprised if this wasn't a requirement from the lender group at loan origination.