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.

Next Wave Sohn Conference Notes: John Khoury, Jason Karp, Nitin Saigal, Ethan Devine, Will Snellings

The 19th annual Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK, has completed and we've posted notes from the event.  This year though the event featured a new addition: Next Wave Sohn.  This mini-conference was held before the main Sohn event and featured emerging managers pitching their latest investment ideas.  Here are those presentations.


Next Wave Sohn Conference Notes 2014


John Khoury. Long Pond Capital 

Idea: American Homes for Rent (AMH).  REIT, buys houses, fixes them up and rents them out.   Debate is whether it is a good business or not. Bears say it is impossible to manage thousands of homes efficiently. Bull case: 95% occupancy, length of stay 2x that of apartments NOI margins at or higher than apartments. Doing securitization now at L+1.66 Levered up- "you want to own an asset when it begins to be securitized."

Currently 2.7% FCF yield, but with 45% net leverage get 7.0% FCF yield. "REITs do not trade at 7% FCF yields."   Apartment REITS trade at 5%, if this gets there, stock has $23 PT, 40% upside. "Free call option" is consolidation, they could roll up other businesses.  Still only 20% of 1% of the total market. $3T market opportunity.  Founder and management own $1B of the stock. Unlevered now, so limited downside if they are wrong.


Jason Karp.  Tourbillon Capital

Idea: Ctrip (CTRP) - Tourbillon: looks for durable themes, ideas that there is a different way to look at it (he's formerly of SAC). Chinese travel one of the highest probability growth themes on the planet. $7.5B market cap, $800M cash,  $48 now, LT price target $115-170.  Trades at 17-25x p/e.

China is largest global spender on international tourism, but low per capita. Thesis is travel spend per person will catch up with other countries. China is only 50% internet penetration, but already has 600M users, double the US population.  If CTRP just holds share, the revenue goes up 7.7x . They have 40% market share now. People always mismodel or underestimate the upside.

In 2009, sell side thought PCLN would do $9.19 eps in 2013, they actually did $41.00. PCLN went from $5.5B to $61.7B, up 10x in 5 years. CTRP is on similar trajectory, but their core market is growing faster.  Controversy: margins have declined because they are investing in their business in a battle with eLong. Mobile room nights went from 0% to 35% since 2012.  Problem is operating margins from 2007-2011 were 40%.  Now in the 20s, but he says it will expand back up since they will not be able to spend so much on the business simply because the topline is so big.


Ethan Devine. Co-PM of Indus Capital

Idea: Goldcrest. Listed in Japan.  Largest condominium developer in Japan. Trades at 0.50x book.  Condos in Tokyo.  Thesis is stock is cheap, despite how hot real estate is in Tokyo.  He focuses on global special situations.


Nitin Saigal. CIO at Kora Management

Idea: Bharti Infratel.  Originally thought it was a great short:  Unattractive Industry, Regulatory uncertainty, hurdles to scale, capital allocation concerns.   Bull case:   There is competition and was overdevelopment in the past, but supply has rationalized. 900M cell phones in India, only 90M smartphones. Data demand story- like the US, China. India just did a spectrum auction.  $7B market cap, 80k towers, 25% market share- has scale- nationwide tower network. Capital allocation has gotten better- dividend payout increased, disclosure better. Costs $50k to build a tower, one tenant 7.5% ROI, 3 tenants $15,500 annual revenue 25% ROIC.  Thinks it should trade  at 330 rupees/share, trades at 6% FCF yield, growing 15% per year, TEV/EBITDA 11X.  Kora is an emerging markets fund, based in NYC, but offices in China, India, and Sao Paolo  


Will Snellings. Founder of Marianas Fund. 

Idea: Jet Blue (JBLU). Two big changes: consolidation- top 5 players control 85% of capacity.  Cost curve shift- Southwest was destabilizing the industry, taking share because they had a cost advantage- which they no longer have. So industry is still below mid-cycle economics. Jet Blue has youngest fleet in industry- 8 years, low cost position and low ticket prices.  Has 7.5% of industry capacity- small enough to grow without disrupting industry stability.  2013: $758M op cash flow vs $4.5B EV, $2.8B market cap.  JBLU has materially underperformed the industry over last 2 years.  He worked at Ospraie while setting up his own fund.  Likes structural changes in businesses that make a bad industry become a very good one.


We've also now posted up notes from the main Sohn conference as well, featuring David Einhorn, Bill Ackman, Paul Tudor Jones and more.  So be sure to check that out as well.