BH - Biglari Holdings

[Partner24]

As long as the actual CEO remain in place, you should take into account is corporate governance ethics and decide if you should apply a discount or not. Personaly, even after the discount, I would not buy shares, because to me there is no alternative to confidence and trust.

[Ballinvarosig Investors]

Latest quarterly is out.

 

https://www.sec.gov/Archives/edgar/data/93859/000092189516004360/form10q07428007_05062016.htm

 

Maxim still losing gobs of cash. Biglari has already installed himself as editor. The next logical step is to surely dispense with female models and to put make himself the centre-fold. Maybe he could pose with stacks of shareholders cash selectively disguising his nether regions.

[Poor Charlie]

During the first quarters of 2016 and 2015, the Company accrued incentive fees for Biglari Capital of $2,921 and $4,331, respectively.

P. 9 of 10q

 

-How is TLF in carry?  He was down 7% in 14 and, given the performance of BH/CBRL/VRX, most likely down last year as well.  What about the high-water mark with a 6% compounding hurdle? 

 

During the year that ended December 31, 2015, the Company provided services for Biglari Capital under the Shared Services Agreement having an aggregate cost of $4,425,439.

p. 29 of proxy

 

-If there are no management fees whats up with the $4.5m last year?

[awindenberger]

During the first quarters of 2016 and 2015, the Company accrued incentive fees for Biglari Capital of $2,921 and $4,331, respectively.

P. 9 of 10q

 

-How is TLF in carry?  He was down 7% in 14 and, given the performance of BH/CBRL/VRX, most likely down last year as well.  What about the high-water mark with a 6% compounding hurdle? 

 

During the year that ended December 31, 2015, the Company provided services for Biglari Capital under the Shared Services Agreement having an aggregate cost of $4,425,439.

p. 29 of proxy

 

-If there are no management fees whats up with the $4.5m last year?

 

I guess you missed the fact that the investment accounts were up $79mil during Q1. For accounting purposes, accruals likely assume that any growth or loss continues at the same pace the rest of the year. The actual allocation doesn't occur until the end of the year, so this is simply an accounting requirement.

 

The "services provided" for Biglari Capital are in exchange for the 6% hurdle rate, vs 5% for Biglari Capital's other limited partners. Obviously in years that have a loss for investments, there is no benefit, but in positive years the benefit is already much larger than the cost (the additional 1% is worth $8mil assuming total assets are $800mil)

 

 

[Poor Charlie]

I guess you missed the fact that the investment accounts were up $79mil during Q1.

 

I understand TLF was up through q1.  What I don't understand is the GP (Sardar) earning carry given (a) the high-water mark and (b) the 6% compounding hurdle.  As I mentioned he was down in 14 and likely down in 15 putting him well below his compounded hurdle and therefore making his returns in q1 ineligible for performance fees.

 

For accounting purposes, accruals likely assume that any growth or loss continues at the same pace the rest of the year. The actual allocation doesn't occur until the end of the year, so this is simply an accounting requirement.

 

If this is indeed the accounting treatment I didn't know that.  Just to get things straight what you're saying is incentive fees are accrued even if the performance hurdles haven't been achieved?  So if TLF does 4% in q1 you annualize the figure to 16% and book a .0625% (16% - 6% * 25% * 25%) expense in q1?  And you do this irrespective of the high-water mark?  If this is the case wouldn't there have been a number of credits back to income over the last few years as earlier comp accruals are reversed?  Why haven't we seen any of those?

 

The "services provided" for Biglari Capital are in exchange for the 6% hurdle rate, vs 5% for Biglari Capital's other limited partners. Obviously in years that have a loss for investments, there is no benefit, but in positive years the benefit is already much larger than the cost (the additional 1% is worth $8mil assuming total assets are $800mil)

 

I know about the Service Agreement.  During the AGM he justified his performance fees by saying he doesn't charge management fees.  He then went on to say that if he did charge management fees they would've been in the $10m-$15m range (I don't remember the exact #).  I understand there are operational expenses associated with TLF but given it's basically him running a single account out of a shared office I don't get how these operational expenses sum to $4.5m.

 

 

Apologies if my questions come across as snarky.  Not a Sardar hater, just asking questions that I don't have answers to.  Thanks.

 

[gfp]

Its not usually $4.5million - there were unusually high legal expenses incurred by the Lion Fund and BH last year associated with both the proxy contest and exploring the legalities of the tender offer before it was launched.  (not saying I approve, but that's the deal)  There are two Lion Funds, with different holdings / concentrations.  The Lion Fund 2 is largely Cracker Barrel - which was up in 2014 and parts of 2015 when a distribution was made apparently.

[OracleofCarolina]

I guess you missed the fact that the investment accounts were up $79mil during Q1.

 

I understand TLF was up through q1.  What I don't understand is the GP (Sardar) earning carry given (a) the high-water mark and (b) the 6% compounding hurdle.  As I mentioned he was down in 14 and likely down in 15 putting him well below his compounded hurdle and therefore making his returns in q1 ineligible for performance fees.

 

For accounting purposes, accruals likely assume that any growth or loss continues at the same pace the rest of the year. The actual allocation doesn't occur until the end of the year, so this is simply an accounting requirement.

 

If this is indeed the accounting treatment I didn't know that.  Just to get things straight what you're saying is incentive fees are accrued even if the performance hurdles haven't been achieved?  So if TLF does 4% in q1 you annualize the figure to 16% and book a .0625% (16% - 6% * 25% * 25%) expense in q1?  And you do this irrespective of the high-water mark?  If this is the case wouldn't there have been a number of credits back to income over the last few years as earlier comp accruals are reversed?  Why haven't we seen any of those?

 

The "services provided" for Biglari Capital are in exchange for the 6% hurdle rate, vs 5% for Biglari Capital's other limited partners. Obviously in years that have a loss for investments, there is no benefit, but in positive years the benefit is already much larger than the cost (the additional 1% is worth $8mil assuming total assets are $800mil)

 

I know about the Service Agreement.  During the AGM he justified his performance fees by saying he doesn't charge management fees.  He then went on to say that if he did charge management fees they would've been in the $10m-$15m range (I don't remember the exact #).  I understand there are operational expenses associated with TLF but given it's basically him running a single account out of a shared office I don't get how these operational expenses sum to $4.5m.

 

 

Apologies if my questions come across as snarky.  Not a Sardar hater, just asking questions that I don't have answers to.  Thanks.

 

 

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

[awindenberger]

Poor Charlie,

 

I think I figured out the issue: Up through 2014, BH was on an Oct-Sept FY year. They then had a transition period in Oct-Dec 2014. During that quarter, investments were up $144mil before taxes, which led to a reallocation of $34.4mil to Biglari in 2014.

 

In 2015, Investments were down $110mil.

 

In Q1 2016, they were up $116mil.

 

Thus, in one quarter they've almost reached or even surpassed the previous high-water mark (depending on the timing of new investments). As such, the company needs to accrue potential reallocation fees. However, as stated before, the actual reallocation does not occur until the end of the year, so BH share of growth does not shrink during a year.

 

Note also that the 6% hurdle rate does not compound. EG: he doesn't have to reach 12%+ in 2016 before getting paid because 2015 was a loss; he only needs to exceed the previous high-water mark by 6%.

 

As noted by Global Finance, the $4.5mil annual total was much higher than usual due to legal fees associated with the proxy battle. Typically these fees are allocations for the office space he's in, and probably corporate jet allocations and so forth.

[InelegantInvestor]

As noted by Global Finance, the $4.5mil annual total was much higher than usual due to legal fees associated with the proxy battle. Typically these fees are allocations for the office space he's in, and probably corporate jet allocations and so forth.

Trips to Monaco...

[Poor Charlie]

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

 

My misunderstanding was I thought there was a compounding hurdle.  Without the compounding hurdle I can see how he’s now in carry.  Thanks.

[awindenberger]

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

 

My misunderstanding was I thought there was a compounding hurdle.  Without the compounding hurdle I can see how he’s now in carry.  Thanks.

 

No problem. Many investors I've talked to all assumed that the hurdle was compounding. I believe Buffett's hurdle with his partnerships back in the day were also non-compounding.

[Parsad]

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

 

My misunderstanding was I thought there was a compounding hurdle.  Without the compounding hurdle I can see how he’s now in carry.  Thanks.

 

No problem. Many investors I've talked to all assumed that the hurdle was compounding. I believe Buffett's hurdle with his partnerships back in the day were also non-compounding.

 

That's not true.  Buffett's hurdle was compounding.  I'm pretty sure Lion Fund was compounding.  As is Mohnish's funds, our funds and many other funds that I know of.  There are also many others that do not compound.  Cheers!

[Poor Charlie]

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

 

My misunderstanding was I thought there was a compounding hurdle.  Without the compounding hurdle I can see how he’s now in carry.  Thanks.

 

No problem. Many investors I've talked to all assumed that the hurdle was compounding. I believe Buffett's hurdle with his partnerships back in the day were also non-compounding.

 

That's not true.  Buffett's hurdle was compounding.  I'm pretty sure Lion Fund was compounding.  As is Mohnish's funds, our funds and many other funds that I know of.  There are also many others that do not compound.  Cheers!

 

I'm almost certain Buffett had a compounding hurdle.  I also believe he had another arrangement without any hurdle at all but would assume some percentage (25% ?) of the downside in exchange for a larger percentage (50% ?) of the upside.  Anyways, my understanding was that Sardar modeled his comp plan off of BPL, that's why I was under the impression it was compounding. 

 

I have enormous respect for people who use the compounding hurdle in their partnerships.  It's nice that some people still want to make money with, not off of, their LPs.

 

 

[gfp]

https://www.lawinsider.com/contracts/T7lHDHzgOGLZKpitEkf8F/biglari-holdings/partnership-agreement/2015-06-04

[OracleofCarolina]

On one hand, I know Sardar is pleased about Cracker Barrel hitting an all-time high today and declaring a special dividend.

 

But, my understanding is the 1.25 million shares of CBRL under the "prepaid forward contract" had a collar of $131-$156, so that if the shares go above the $156, it will cost BH more money and I am not sure about the dividends either.

 

Can anyone add some color on this?

[arcticfox]

If I recall correctly, forgoes the upside on the pledged shares, can deliver stock or cash. Also the dividends on the pledged shares are taxed as ordinary income.

 

Overall a positive, benefits from CBRL rise but also widens the value gap or drags BH stock up with it, which is also a benefit due to his holding in BH.

 

CBRL pays the specials so his ownership does not increase.

[awindenberger]

On one hand, I know Sardar is pleased about Cracker Barrel hitting an all-time high today and declaring a special dividend.

 

But, my understanding is the 1.25 million shares of CBRL under the "prepaid forward contract" had a collar of $131-$156, so that if the shares go above the $156, it will cost BH more money and I am not sure about the dividends either.

 

Can anyone add some color on this?

 

The cap price is $157.58. Next June Biglari will need to pay JPM $131.58+ any amount over $157.58, or simply send over the shares. I would not be terribly surprised to see him sending over shares of BH instead of CBRL.

 

Biglari is entitled to all dividends paid by CBRL, which is one of the reasons he structured this "sale" in this way.

[accutronman]

Nice approximate $15M pickup for Biglari on the special dividend

[awindenberger]

Nice approximate $15M pickup for Biglari on the special dividend

 

CBRL has now paid the special dividend two years in a row, and Biglari's yield on purchase price of the shares is about 15% ($7.85/$51). Buying CBRL was quite simply a phenomenal choice. The best part is that Biglari/Cooley still feel like the company could generate even more cash if it was better run.

[Txvestor]

Yes but he also blew about the size of that special dividend with his recent Valeant bet.

[gfp]

It's true he did buy Valeant shares.  Those are in the Lion Fund I, in which BH has a 58.7% interest.  Cracker Barrel is held in Lion Fund II, in which BH has a 92.7% interest.

 

Yes but he also blew about the size of that special dividend with his recent Valeant bet.

[Txvestor]

If lets say one fund performs well and the other underperforms. My understanding is he will get the incentive bonus from the one that performs and we shareholders hold the bag in the one that doesn't. Then if the underperformance continues for a while, he can close down lion fund 1 and roll that money over into Lion fund 2. Am I mistaken?

[gfp]

That sounds about right.  If a fund performs above the hurdle he gets the performance reallocation to himself, the GP.  If a separate fund misses the hurdle there is no performance reallocation to the GP.  There are 5 year lock-ups, and fund investors other than BH can do what they want when their redemption windows open but, yes, I see nothing preventing him from transferring BH's capital to a different Lion Fund if he wants to.  I've been critical of a lot of his moves, but at the end of the day he is compensated as a hedge fund manager if BH gets a good return on their capital.  He isn't overpaid if BH doesn't receive a good return - in my opinion.  At this point, it is pretty clear to BH shareholders or prospective shareholders what the deal is and you can either choose to invest or not but he's been pretty clear about his intentions recently - total control, hedge fund-like compensation, certain CEO perks like private aviation and an office in Monaco, and the likelihood of a dual class share structure if equity is ever issued for an acquisition.  Shares were discounted accordingly because of his toxic reputation.  I think the shares were underpriced at anything starting with a '3' handle recently, and others wouldn't touch the thing at any price - understandably so.  At least I know why it was cheap.

 

If lets say one fund performs well and the other underperforms. My understanding is he will get the incentive bonus from the one that performs and we shareholders hold the bag in the one that doesn't. Then if the underperformance continues for a while, he can close down lion fund 1 and roll that money over into Lion fund 2. Am I mistaken?

[NBL0303]

we shareholders hold the bag in the one that doesn't.

 

Are you a shareholder?

[awindenberger]

Poor Charlie,

 

Is there a 6% compounding hurdle? Last time I read through the agreement, I was under the impression there was a high water mark, but the LF did not need to make up for 6% hurdles that were not met previously, the LF only had to pass the highwater mark, do 6%, and start accruing incentive fee again

 

My misunderstanding was I thought there was a compounding hurdle.  Without the compounding hurdle I can see how he’s now in carry.  Thanks.

 

No problem. Many investors I've talked to all assumed that the hurdle was compounding. I believe Buffett's hurdle with his partnerships back in the day were also non-compounding.

 

That's not true.  Buffett's hurdle was compounding.  I'm pretty sure Lion Fund was compounding.  As is Mohnish's funds, our funds and many other funds that I know of.  There are also many others that do not compound.  Cheers!

 

I'm almost certain Buffett had a compounding hurdle.  I also believe he had another arrangement without any hurdle at all but would assume some percentage (25% ?) of the downside in exchange for a larger percentage (50% ?) of the upside.  Anyways, my understanding was that Sardar modeled his comp plan off of BPL, that's why I was under the impression it was compounding. 

 

I have enormous respect for people who use the compounding hurdle in their partnerships.  It's nice that some people still want to make money with, not off of, their LPs.

 

I missed your responses until today. I've done some research and couldn't find anything confirming that Buffet's partnerships hurdles were in fact compounding. Thus, I'd love to get your source on that statement. In practice, it wasn't an issue because Buffett delivered massive gains every year.