Reproduction of “classic value investing”? At a time when the US property market is under pressure, Berkshire bucked the trend and added warehouses to the housing company Rainer Construction (LEN.US)

The Zhitong Finance App learned that, according to a securities declaration, Berkshire Hathaway (BRK.B.US) has bought the troubled residential builder LEN.US (LEN.US) in a big way, with a shareholding ratio close to 10%. According to an analyst at CFRA, this position is a “classic” value investment. According to US securities filings, in the three trading days up to Monday, Berkshire Hathaway bought nearly 2.7 million shares of Rainer Construction Class A shares, bringing its holdings to 23.7 million shares worth $1.8 billion. The Omaha-based group also holds 528,000 Class B shares of Rainer Construction — each Class B share has 10 times more voting power than Class A shares.

On Tuesday, Rainer Construction surged 6.6%, hitting a high of $83.24, and finally closed up 6.38%. The Miami-based company has accumulated losses of more than 32% over the past year.

Background: High interest rates are impacting the US housing market

Berkshire's latest purchase comes at a time when interest rates are rising — interest rates are driving up interest rates on 30-year mortgages and reducing the affordability of buying a home, thereby impacting homebuilders. According to Freddie Mac, interest rates on 30-year fixed mortgages across the US reached 6.95% last week, up from 6.76% the previous week and 6.26% in the same period last year. The State Street SPDR S&P Homebuilders ETF (XHB) is down nearly 16% since the end of June. Every time interest rates rise to the next level, the dilemma for builders deepens by one point: price cuts erode profit margins, and insured prices cause inventory to accumulate heavier — it is the price that Berkshire buys that is difficult to weigh down.

“Berkshire likes to buy undervalued assets,” CFRA Research analyst Catherine Seifert (Catherine Seifert) said. Betting on Rainer Construction is a “classic Berkshire value investment.”

For current Berkshire CEO Greg Abel (Greg Abel), the move was unsurprising — he took over from Warren Buffett last year. Seiffert said Berkshire “already has a significant presence” in the residential construction market after it completed the acquisition of Taylor Morrison. Berkshire also owns construction materials companies, including paint manufacturer Benjamin Moore and roofing material manufacturer Johns Manville. In 2003, Berkshire bought manufacturing and modular housing company Clayton Homes for nearly $2 billion.

Weak performance

Rainer Construction last week announced weak results for the third quarter of the fiscal year (fiscal quarter ended August 31): earnings per share of $1.23, lower than Wall Street analysts' consensus expectations of $1.29; revenue fell 8% year over year.

More importantly, the fourth quarter guidance provided by Rainer Construction fell short of expectations, citing the affordability challenges brought about by rising interest rates. In a conference call between company management and analysts, CEO Stuart Millar (Stuart Millar) said the 7% 30-year mortgage rate curbs affordability and narrows the pool of qualified buyers. For large builders that win by volume, losing guidance usually means that competition for pricing and incentives will be more intense in the future.

Plagued by a mismatch between supply and demand, the housing industry has been dragging down consumer confidence. The shortage of new homes has boosted the price of existing homes and made new homes more difficult to afford. Higher mortgage rates have completely pushed millions of first-time homebuyers out of the market.

Adhering to a deep value, often backward investment philosophy, the difficult housing environment may provide Berkshire with a rich target — by the end of June, Berkshire had an “ammo depot” of around $367 billion.

Buffett officially stepped down as chairman on Friday, effective immediately, and was replaced by his son Howard Buffett (Howard Buffett).

From 800 million trial warehouses to 1.8 billion heavy warehouses

Rainer Construction is one of the largest home builders in the US, and Houghton Homes (DHI.US) has long been in the top two deliveries in the industry (according to public information). The industry's self-help methods are not new: in the last high interest rate cycle in 2023, builders generally used low mortgage interest rates (rate buydowns), price cuts, and transaction rebates to maintain sales. But now, the 30-year interest rate is once again approaching 7%, and the rise in demand is eroding builders' profit margins — this is the other side of what Miller called the “shrinking pool of qualified buyers,” and a direct source of pressure on Rainer Construction's gross profit and guidelines.

Berkshire is no stranger to home builders, but this increase in Rainer Construction means a jump in its industry exposure. In August 2023, Berkshire first disclosed in the 13F filing that three builders had simultaneously opened a warehouse: Houghton House (DHI.US) with about 5.97 million shares, NVR about 11,000 shares, and Rainer Construction with only 153,000 shares — the total value of the three is just over 800 million US dollars. Rainer Construction is the smallest of them. Three years later, Rainer Construction's single holdings reached 23.7 million shares, $1.8 billion, and a share ratio of nearly 10% — the builder was bought by Berkshire as a major shareholder at the time of the deepest drop in stock prices (down more than 32% in one year) and the weakest performance. From exploratory small positions to strategic holdings of nearly 10%, this pace in Berkshire's history of opening positions usually means that management's decisions are long-term rather than transactional.

The timing of the increase in positions is also intriguing: it happened the week after Rainer Construction's quarterly report fell short of expectations and the fourth quarter guidance was lowered, and when interest rates on 30-year mortgages were approaching 7% — a typical “buy at the most pessimistic place” Berkshire operation. At this point, Berkshire had plenty of ammunition: cash reserves of around $367 billion at the end of June provided what management called a “classic value investment.”

At the governance level, this deal is also a footnote to the Abel era: Buffett stepped down as CEO last year, officially stepped down as chairman this Friday, Howard Buffett took over as chairman, and Abell took over the management. Berkshire's construction industry chain map (Clayton Homes, Taylor Morrison, Benjamin Moore, Johns Manville) plus a nearly 10% shareholding in Rainer Construction means that the group's bet on “American housing” is extending from materials and manufacturing to the entire residential value chain.

For the market, this sign of opening a position is more significant than its financial significance: $1.8 billion is only a fraction of the $367 billion in cash reserves, but it came at a time when sentiment in the housing sector was weakest — mortgage interest rates approaching 7%, XHB falling close to 16%, and leading performance guidelines fading one after another — tantamount to Berkshire publicly endorsing “deep value is still there.” CFRA's Seiffert characterized the deal as a “classic”. The 6% increase given by the market on Tuesday was an instant vote of speculative funds on the same signal.