Invest For Kids 2015 Notes From Sam Zell, John Burbank, Barry SternlichtVW Staff
Full notes of all speakers – Sam Zell, John Burbank, Barry Sternlicht, Jim Flynn, Ricky Sandler, Rupal Bhansali, and many more from the Invest For Kids Conference held in Chicago on Nov. 5, 2015.
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- Invest For Kids: Zell Wonders If Market In 10th Inning, As Sternlicht Eyes Fed Manipulation
- Invest For Kids: Burbank Reiterates CF Industries Buy, Market Says No Thanks
- Invest For Kids: Healthcare Hedge Fund Calls Valeant Pricing “Outrageous” While Recommending Horizon
- Invest For Kids: Bollywood Film Distributor Eros International Target Of Short Seller Glaucus
Invest For Kids 2015: Sam Zell – Fireside chat
Is Sam Zell calling a top with sales on CRE markets?
Would know in three years. Has always been very disciplined, sold because he was being offered more for it than he thought it was worth. This sale is a bit of a different story. He determined long ago that the future was in high rises, not suburbs. Had opportunity to complete this transformation in one fell swoop. These assets should be 75% leveraged, not 33%. In two to three years from now Barry will be making money. A good deal for both. He's here today. Was able to liquidate huge amounts of the portfolio without generating any gain.
Seem to be a seller, what's your view of cycle in CRE?
In the 8th inning on Commercial real estate. When we get to the 9th inning what happens to the value of the RE at that point is dramatically dependent on the quality of the RE. High quality stuff will show minor alteration vs. the marginal stuff that today is getting historic pricing is where you'll see the impact. The U.S. is doing great today, the Rest of the World ain't, can't last too long.
In most cases is another word for ownership. The biggest fallacy is that our companies are not owned. Management has a responsibility to produce. Activists are doing much better today than what people think. There is a need for activists.
Where are the opportunities in RE?
Didn't answer the question. All over the world it's different, it comes down to where is the demand. Hard to identify any place where there is significant demand. Investing now in Western Mexico because of manufacturing build-out. Other parts of Mexico not doing so great. Thinks that you can grave-dance in the energy sector. Haven't seen all the ramifications of this bear market. The most attractive sector at the moment. Don't need to assume oil prices don't go to zero. There's enough distress out there that you can find good assets. Look for forced sales of assets.
Went into Brazil early, things got very heady, sold all but one of their assets. Still a huge market, Petrobras and the scandals and unstable political situation going to slow the growth. When it's all said and done, it might be an opportunity. Institutions aren't yet prepared to take discounts to clear the market there yet... so more pain to come. Need to clear market first there in RE. Deferring and not facing up to issues translates into a longer and more questionable recovery.
View on rates?
Too low for too long. In never Neverland right now. No one can answer the question of, "How do we get out of zero ratesand QE?" How to service the debt if we don't keep rates low. A significant risk LT. Talked about raising rates, mortgage rates went up 25bps and the market stopped.
Invest For Kids 2015: Jim Flynn - Deerfield Management - Health Care fund
People spending too much time on how these companies distribute their products. Managed care makes it hard for patients and physicians to get the drugs. Valeant Pharmaceuticals pushes every financial structure to its limit, more a statement of their company vs. the industry.
Drug pricing - what people should be paying attention to. 1993 a big Clinton issue about why drug companies are allowed to push prices as much as they are. Drug and biotechs all fell hard. Then drug companies agreed that they would price along with generalized price inflation. At that time the high end of drug price inflation was 15-20%, Valeant reported 85 of drugs up 36%, leading to a net price increase of 24%. Breaking the industry pledge to keep drug prices in line with inflation. This is just an annual number. This issue won't go away, Clinton will attack. Valeant acquires all the drugs it's raising prices on, so doesn't fit the high risk high return argument.
Valeant also using offshore tax status. Increasing costs to the system and taking away the revenues. Will stay in the headlines until behavior changes.
All really bad for Valeant, mostly acquires drugs - old tired stuff, raise price dramatically, no patent life, business model invests almost nothing on R&D, margins can only go one way if then need to develop. Vulnerable to tax regulation and leverage is an issue. A legit short. Could pay off all debt in about five years if things hold. That's the bull case now.
Horizon Pharma - has raised prices on some products and is an offshore company. But it chose to buy products that were targeted to physician sales, long exclusivity products and all are growing. Leverage not an issue. Horizon can pay off all debt based on FCF in one year and buy itself back in entirety in six years. Lack of risk to business model. Can double in 18 months.
Invest For Kids 2015: Steve Tannenbaum - GoldenTree Asset Management
Credit cycle sequence - Leverage ratios increase, market multiples pick up. Drives an increase in default rates. Market doesn't differentiate who defaults and who won't, it just takes the market wider. Spreads should keep widening. Almost two-thirds of bonds are trading below par, a debt picker's market right now.
Calpine - High quality company at trough earnings with FCF and low valuation. 27,000 megawatts of power gen, young gas fleet. Geothermal fleet. Half of FCF is locked in for next three years. Operate in TX and CA markets which are difficult, oversupply and cool summers so pricing has been difficult. Also environmental regulations will help take coal capacity out of the market which will be met by Calpine facilities. YTD down 32%, market is pricing in their product will be priced off of $2 gas with no benefit of their FCF being locked in. NOLs 1.1b, buying back stock aggressively, 15% more by YE 2017. A 12% fully taxed FCF yield, selling for less than half of replacement value. Mid to high teens FCF yield going to mid 20's. High leverage is the risk, increasing supply of wind and solar, credit markets valuing calpine well, all above par. FCF conversion should improve due to taking capacity out of Tx to due maintenance, so FCF going fwd will improve.
Invest For Kids 2015: Andy Hall - Astenbeck
Consensus view of oil very pessimistic. Worries to China outlook. World hostile to fossil fuels. 2m bbl per day surplus, storage capacity exhausted. This is all detached from reality. Con-tango is not consistent with a huge over-supply, in 1985 and 2009 this return ripped. Oil demand growth revised much higher.. close to 2m bpd vs 1 initial estimates. 7% China demand growth YTD. Worries of a Chinese hard landing are over-blown, a consumption shift. What the media calls a glut has already shrunk to a modest over-supply. Commercial crude oil inventories will fall over the rest of the year. During 2016 they will continue to sink and turn into a growing deficit by 2H of the year. OPEC producing flat out, so spare capacity no where near 1986 at 20% today closer to zero. Yet the oil industry has cut capex by 25% in 2015 and more in 2016... only second time in 30 years capex cut in consecutive years. Capex reductions will prove excessive, this is not 1986! Lead times are shortest for shale, will feel it here first. There is a lag here in supply response, now rolling over down 500,000. EIA will continue to downwardly revise supply estimates. Expect rig counts to continue to fall. The high grading is coming to an end. Expect that EIA will make further revisions increasing the future deficit. Ongoing SPR purchases by China and India are not counted in demand.
Saudi Close to max capacity, Iran will add 3-500k, Iraq will struggle to sustain production, financially-strapped Iraqi gov is asking IOCs to cut back on spending, other OPEC -- Nigeria, VZ and LB -- will fall. Budget cuts are coming, adding risk to political turbulence.
Rapid natural decline leading to depletion. Natural decline rate for oil is around 8.5% if all investment stopped. Global oil demand is growing at 1.4% in past 20yrs, 1.3m bpd in annual growth. Need 9m bpd annually of supply additions, cannot be achieved by investment of oil industry at current investment rate. So price is too low. Need around $70 to get investments. Most haven't got FCF at $100 oil. Prices will increase when demand comes back, especially given consolidation in sector. Cheap capital will dry up as Fed tightens interest rates. Even at $60, two-thirds of E&P's have negative FCF, EOG said need $70-80 to drive further investment to grow production fast enough. Need higher prices to get equilibrium.
Invest For Kids 2015: Soren Aandahl - Glaucus Research Group - EM activists
Short Eros International - Bollywood movie distributor. Think it is worth zero. Growth engine is a Netflix-like streaming business, fabricating user base, fabricated overseas revenues, and dodgy payments to family. Was going to be the Netflix of India. App analytics disprove their user base numbers. Ratings on Google Play etc. A pump and dump. If they adopted an industry-standard amortization policy, they'd have negative EBITDA. Sister company getting kickbacks under shell company.
Invest For Kids 2015: Ricky Sandler - Eminence Capital
Long Keurig Green Mountain - Credible short story but believe it's already priced in with a good long story underneath. Hot and Cold business, cold is new like a soda stream. Leader in Hot platform. Razor/Razor Blade model. Significant room for growth in household penetration 21-22 million households, 70 million homes with a coffee maker. Single serve is where the market is going. K-cups growth in L DD range. Hot business earned $4 this year or so. Hot can reach $5 over next few years, volume growth, penetration, $300 million restructuring plan, lost a lot of money selling brewers in last holiday, that will normalize. Hedged coffee prices at higher level will roll off, buying stock. Are seeing negative mix shift away from GMCR brands vs. partner brands like Starbucks. They've won the game. Cold Platform, developed with Coca-Cola. Addressable market for Cold is 5-10,000 that of Hot. Initial reviews were high on Quality but negative on price value. $375 machine with pods more expensive than a can of Coke... same as initial Hot system, think cost will come down and they'll get it right. The range of beverages you can have here is massive, this is version 1.0. Big global potential vs HOT with KO as their partner. Lost about 50c a year in Cold in year that just ended. 13.5x ex Cold. Estimates down on poor execution on 2.0 brewer last year, and K cups under pressure. Bears are confusing this with issue of patents going away. They have scale and disti. Negative reaction to Cold, market capitalizing losses. Hot 17-20x $5, Cold has real option value that could be huge. Coca-Cola bought stock at $90 per share.
Baidu - top 5 positions.
Zynga - mobile gaming co. Farmville, Words with Friends, Zynga Polka and Slots. 75 million monthly active users. Key thesis, missed a transition from desktop to mobile, 70% of bookings in quarter were mobile from 30% last year. Can now be offensive in this market. Lots of new titles coming. 2.3 billion market cap, SF RE worth 500m, $1.1 million in net cash gets you to $700 million EV ex this, so trading at 1x revenues/bookings. Six new games brings bookings to $900 million, King Digital sold 2.6 = $5 if sold for similar, company has the infrastructure for a bigger business. If one of games turns out to be a top hit with $1 billion in revs. Better development topline, very fast growing market.
Short on Western Air Brake Technologies - 60% of EBIT comes from NAFreight, rail equipment industry is cyclical. Track record is unbelievable. Up 14 years in a row. You feel good owning this. Bulls think it's not cyclical, the company sells much more OE than bulls think. Does a bunch of deals, and they don't give you a lot of detail. Freight now rolling over, freight car deliveries to fall. Peak of rail equipment cycle driven by oil and gas. At very big peak in cycle. 10-k says demand driven by rail traffic, freight car production, Locomotives - all turned down dramatically or are going to. NSC storing 200 locomotives. GE's Locomotive orders way down. Freight cars at a peak. 40% downside in deliveries to get to normal demand. 20x PE ratio, 13x EV/EBITDA, 2015 the peak of earnings, mid-cycle $3.50-$4 per share, 16x there's 30% downside. Not a well trafficked short idea, consensus is thinking growth.
Invest For Kids 2015: Rupal Bhansali - Ariel Investments
GlaxoSmithKline - 50% share in Respiratory, growth industry - competition for blockbuster drug Advair is priced in. Market leader in Vaccines, high barriers to entry (one of the highest in the world). Margin upside from purchasing Novartis' vaccines business. Goal is 20% EBIT margins. Consumer - strong brands (Theraflu, Aquafresh, Flonase) new management team with mandate to double the margins. A hidden jewel inside this organization was under-managed, new management team from Lo'real to apply best practices to this division.
CEO talking to these points, grow both revenues and earnings. Company with steady growth undervalued. Corrected on earnings disappointments. Trades at 16x earnings, FCF fully-distributed. 6% coupon to clip. Earnings to double in next six years with income stream.
Baidu - Thought of as Google of China, but it's also Expedia, Groupon, YouTube, OpenTable. Have copied lots of Silicon Valley ideas. Profit warning caused it to fall $100. Has kept rising though, as they beat earnings. Now $200 though. Wait for a hiccup. Still in the third inning of a nine-inning game. A net cash company without corporate government risk. Owned and managed like an Anglo Saxon company, CEO from Stanford. Net cash BS. Profit warning wasn't due to macro in China, it's because they decided to conservatively expense through their P&L in their core business vs. below the line. They disappointed on earnings but improved the franchise value of the company.
Invest For Kids 2015: Local Managers Panel - Andy Greenberg Saker - old Citadel guy, event driven
NexPoint Residential Trust - Spun off from a closed-end fund. Zell just crapped all over this sector. Rental demand way up since crisis. Class B compelling, harder to buy a home and supply in Class B slightly negative. Spun out of listed fund controlled by Highland Capital, those guys still own a bunch. Buying poorly managed class B building and driving metrics higher. Has a lot of excess cash for renovations, can grow to $1.90 FFO in 2017, so 7x, now at 10x FFO. Large cap trade 20x, other low DD's, ex the cash, more like a 7x multiple. Gross leverage screens high, largely variable debt with a cap. Will be more cyclical in a recession. Variable rate mortgages make it easier to pay down quickly. Lack of new Class B supply add stability. This portfolio to have a different owner in next 18 months, thinks they can sell for $20 looking at deal comps. Highland CEO owns $45 million, management contract can be cxl for no fee. When the manager starts to buy stock again, then they'll have thrown in the towel. At $13.5 it trades below its purchase price. 6% dividend yield.
Largest consumer products pkging companies in the world. Lower oil a bit of a tailwind but generally a pass through. Just bought Avintiv - non-wovens, make wipes, diapers and surgical materials. $1.2 billion, $6 billion of debt after deal. 500m FCF, 12% yield.. market speaking to the risk. Bear 1 - deal doesn't make any sense to achieve volume growth. Will be the world's largest purchaser of polypropylene, accelerates international growth. Bear 2 - Story changed, was deleveraging and now re-levered at a bad time. Bank debt 2020, bonds 2022, half a turn every year. Bonds trading well. Bear 3 - melting ice cube. Base business has declined slightly the last few years. Trades at a 10% discount to comps on EV/EBTIDA, but 50% on FCF yield basis. $52-$58 in two years. Conservative with projections. Catalysts - new products, international growth, better synergies. Uber Bull $65.
Invest For Kids 2015: David Samra - Artisan Partners
Royal Bank of Scotland - generally don't like banks. First 10 years didn't own any of them. Everyone hates banks. Even the bankers find it difficult to understand when risk is occurring. Amount of shareholder equity has doubled, much less risk. Capital is highest it's ever been - going back 100 years. Very different time period than last cycle. Same trends have happened in the U.K. Complexity is down. If you take into consideration all the things that are done with other capital buffers, the amount of capital is up 7x. P/B ratios are crazy low. Over 2x to now sub 1x. Safer, cheaper, better assets, more liquidity. Creates a good R/R balance. RBS was recapitalized twice, U.K. owns 73%, effectively nationalize. Since crisis mgmt has been selling assets and simplifying operations. Will take more than a decade for this transformation. 16% Tier 1 capital ratio, the best. Will shrink to core retail and commercial bank. Cost outs, and ibank lower. Investors don't like bad news, banks or waiting... the shares are cheap. Five-year period - Worth almost double post transformation. $18b coming back to the shareholders but will pay some fines etc. Special div to the govt. Will chew up most earnings. $64 billion vs. current $36 billion. U.K. has a conservative pro-growth govt, and this backdrop could help. Headline risks with fines. Recession could hurt credit losses, delay to core earnings.
Invest For Kids 2015: John Burbank - Passport Capital
CF industries - Biggest positions for two years, one of few commodity equities since they've been bearish and remain bearish commodities. Will move HQ after deal. The two deals were transformative and powerful but the stock dropped. OCI - CF slowly acquired control of the N fertz business in NAM, allowable because it's only 5% of global capacity, with low Natgas drives margins that are out of this world. At $3, gas margins are 45%, 50% with $2 gas. This deal allows for $500 million in synergies and a tax inversion that will be allowed. HSR was approved yesterday and the stock dropped. Not understood by the market. S-4 by end of month, shareholder vote that will be approved. Will buy back stock. Largest customer bought 9% of business for $107 per share, they know the value of this company. $2.8 billion payment for 9% of pre OCI business, finally an inefficient market. $17b market cap, ev 21b, EBITDA post-deal $3-5 billion, assuming steady state ag prices. $2-3 billion in free cash that will go back to shareholders. Nothing else to do with this money but give back to holders. Trade is long CF and short the basket of others. Negative on commodities and markets for next 12 markets. Long the $, they receive dollars. Cheap natural gas eliminates comp. 8th best performing stock in S&P in last 10 years. Earnings $5.50-$6, hired someone from Dow and GE who covered chemicals, feel good about their edge there. People don't care, st doesn't factor in, OCI deal doesn't factor in buybacks. Have returned 10% annually since 2011. Have bought back 35% of company since 2012, dividends up too. Will buy back a lot more stock before raising the div again. Execs are buyers not sellers. Shareholder access to BOD. $12 billion in shareholders next four years. Market cap $17 billion. Feb 1st they'll start buying back $4 billion in stock. Can buy back another $7 billion after this year. If they took the $3.5 billion and bought stock this year at different prices, what is fwd PE at 2017 - at $50 stock price is $140ii, at $65 it would be $115, if they pay $80 it's still a double. Markets getting less efficient, less liquid, don't be long most equities next year. U.S. will go into something that feels like a recession. Will keep buying stock next few years. Trade is long CF and short Potash/MOS.
Invest For Kids 2015: Barry Sternlicht & Michael Sacks - Starwood & Grosvenor
Have been buying more assets in the tax-free states, fewer blue states today. Will see a retrenchment from ME sovereigns and continued flow from Asian funds. New York is a short, Russian and Arab buyers are gone. Real Estate is really well-positioned in the U.S. because slow growth is good for them, no new supply and doesn't push interest rates up.
#1 tourists in the U.S. are Canadians, their FX just fell 30%. Demand on the margin impacts returns. AirBnB a big deal as well. Thinks Starwood at 60% leverage trading at a 9% dividend yield is a bit too fearful.
Chinese said to him they were angry at QE 1 - counterfeiting, now everyone is doing it.
Japanese government buying stock. Chinese skeptical of this. Tail risk is confidence in central banks. Chinese revalued because JPN depreciation putting them out of business with labor cost kicker.
Thinks oil - gave the Arabians a 150b strike fund. Gave them the market to bring it on the market, oil could go down first. Saudis could reform OPEC and oil rips, Saudis just got downgraded. High yields in energy risky. Market will re-balance itself, bad actors need higher oil prices.
Lower longer on rates, no one believes the Fed governors. Getting double digits on Sam Zell's assets. Like demographic bet. Record number of 18-year-olds.
Work hard, read a lot and you'll create your own luck. The people who do best are curious. What are you are not asking to CEO: "What am I not asking you I should be?" Cool to say you don't know but you're going to find out. You need to have a thesis but open to new data and being wrong, cut losses quickly. Highest reward for lowest risk is key.
You get complacent with success... don't let it happen.