John Khoury's Sohn Canada Presentation: Long Forest City Enterprises ~ market folly

Thursday, October 1, 2015

John Khoury's Sohn Canada Presentation: Long Forest City Enterprises

We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.)  Next up is John Khoury from Long Pond Capital.  He pitched a long of Forest City Enterprises (FCE/A).

John Khoury's Capitalize For Kids Presentation

-    Questions to ask:
o    Is it cheap?
o    Why is it cheap/misunderstood?
o    Why will it cease to be cheap?
o    What is the downside protection?

-    Long Forest City Enterprises (FCE/A): 40% discount to NAV, 70% upside potential
-    Was over levered in 2008 and it dropped 90%.
-    In 2011, FCE/A brought in a non-family member CEO (family owns 500million in stock)
-    They own office, retail and multifamily properties
-    Office: 8.3million leasable area, 38 properties, focused in NYC, Boston and Washington -    Retail: > $500 spsf
-    Multifamily: 95% occupancy
-    Large development pipelines, often a place for undervaluation as sell side does not attempt to value these projects
-    Reasons for discount: not a REIT, has non-core assets (complicated BS), lower operating margins and high leverage
-    Catalysts: becoming a REIT in 2016, selling non-core assets and deleveraging.
-    The stock is up 7% since 2011, underperformance of 35% behind REITs in the US.
-    With the value of margin expansion and development properties included the NAV will be approximately $35/share. Trading at $20 currently.
-    Only real estate company over $5Bn that’s not a REIT, should cause appreciation upon conversion as indexes and ETFs will need to include it
-    Non-core assets such as Brooklyn Nets and Barclays center will be sold
-    Have ~$600MM of assets left to sell
-    Cost cutting should add $35-45MM savings per year, adds 5% to NAV
-    They see apartments adding margin as low hanging fruit
-    Are currently deleveraging from 10x currently to 7.5x in net debt/EBITDA
-    Projected asset sales, conversion of convertible debt and NOI growth will help to bring down leverage
-    Downside protection: high quality real estate, non-recourse debt, incentivized board and management team

Be sure to check out the rest of the presentations from the Capitalize For Kids Conference.

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