Chad Brand

Registered investment advisor, value, contrarian
Chad Brand
Registered investment advisor, value, contrarian
Contributor since: 2006
Company: Peridot Capital Management LLC
EBITDA is just operating income plus depreciation/amortization (which is a non-cash accounting expense).
Actually now it is trading a little lower at 4.44x EBITDA:
Stock Price: $22.00
Share Count: 90M
Equity Value: $1.98B
Cash/Investments: $471M
Total Debt: $0
Enterprise Value: $1.51B
EV/EBITDA: 4.44x
The SEC site you cite says nothing about 9.9%. Eddie could personally own 40% of the REIT, and if the next 4 largest individual owners cumulatively did not own more than 10%, it would be perfectly fine. And Eddie's hedge fund investors would likely count as separate individuals since they actually own the shares via their LP interest in the fund.
I still do not see any evidence provided of a law that would make it such that Eddie could not own 10%+ of both SHLD and the new REIT. In addition, Sears did not say they are planning to spin-off the real estate into a REIT. They said they are considering selling the real estate to the REIT. AS far as I know, this is a different situation to GLPI. I don't believe GLPI purchased the real estate from PENN.
Eddie personally owns about 24% of SHLD. You can check the SEC filings. The investors in his hedge fund own another 24%.
There is no law saying that nobody can own more than 9.9% of a REIT. The 5/50 rule does exist, but Eddie personally only owns about 24% and Bruce personally owns a very small percentage.
They would not publicly announce that the $250M financing will be used for share buybacks and then not follow through on it. Also, a buyback would not be used to cash out insiders. You can bet that the buy side investors who gobbled up the convertible offering know very well that their $1250 strike price becomes even easier to attain if the share count shrinks. If you wanted a reason to believe the stock was a buy, not a short, this press release should be all you need. The idea that Erbey would repurchase an overvalued stock flies in the face of everything he has said on conference calls for years. There will be a delay of at least 6 months before houses become ready to rent out, and then another 1-2 months before they find a renter, so you will see the number of homes rented accelerate going forward as their NPL purchases age a bit more. There is a lag that the bears tend to ignore. FD: Long AAMC.
Free cash flow breakeven at $14B is very reasonable. Assumptions: 37% GM, SG&A 31.5%, $500M interest, $250M capex.
"So assuming the numbers represent a reasonable estimate, it doesn't take much effort to determine the number of shares outstanding of a little more than 304.5 million times the estimated quarterly losses to calculate an accumulated cash flow deficit of over $1.7 billion before projected profitability is reached."
So you are claiming that reported earnings per share equal cash flow? I stopped reading there and suggest you reassess that assertion. Reported earnings are in no way comparable to cash flow.
Well, I don't know if an equity value of $1.5B is pricing in BK (seems high to me in that case), but yes, they should avoid BK given the levers they have to pull (more store closures and lots of owned stores they could sell, etc). The question is, can they get sales to 14B or 15B by 2016? Can they get gross margins from 30% up to 37% by 2016? If they don't, and I think it will be very difficult given the competitive environment, it's hard to see the stock being $10-15 (assuming you value it on EV/EBITDA). Now, the 2015 bonds have a yield to maturity of 16%... that seems like a great play if you think JCP survives...
If you want to put a fair value on a stock, you have to put a value on the company first. To arrive at an enterprise value you have to factor in their debt. Maturity dates don't matter in that exercise. If you are arguing that the debt maturities are staggered well and therefore JCP is not filing BK anytime soon, I would agree with you. But comparing the net asset value of JCP to the equity value and not the enterprise value doesn't make very much sense to me.
Why are you ignoring the enormous debt load? Net debt is now $4.8B instead of $2.6B last year. You can't just ignore the debt because those holders get first crack at JCP's assets and therefore the real estate. In order for the market cap to be worth $1.5B the entire company needs to be worth $6.3B. That does not value the rest of the business at zero... not even close. And is it clear that JCP can get back to making solid profits? They are going to lose a ton of money in 2014. They could reach breakeven in 2015 if they cut enough costs and close more stores...
Let's come back in 6 months or a year and see if RESI is trading at a 10% discount to book value, as you suggest it should. Good luck on your shorts.
Well, those who do follow me are pretty happy. SHLD is down 30 points in 2 months (my last article). And the bullish article on NFLX at $55 in August 2012 has turned out pretty well so far. Most of my readers subscribe to my blog, since I don't write for SA very much anymore. Good luck with those shorts.
Yet another "short RESI" article on SA... how original.
Why exactly do you think SFR rental reits should trade at NAV (ignore the discount you assign due to AAMC's incentive fee)? Why would SFR reits trade at such large discounts to multi-family reits over the long term? One of the bullish arguments for SFR reits is that if multi-family reits trade for 2x book and SFR reits trade at 1x book, then there is an arbitrage opportunity there if the SFR sector can show investors that their long-term returns are going to be strong (many people doubt it right now).
I think most people buying into the RESI equity offerings have done enough research to know that AAMC collects an incentive fee, so that is factored into their valuations and purchase decisions.
RESI's equity offerings are not dilutive, they are accretive, so what helps AAMC's owners does not have to hurt RESI's owners. RESI's book value was $13/share at the time of the spin-off. Today it is $23/share. Nobody has been diluted. Both sets of investors can win. If RESI trades below book, then AAMC will have a problem.
Please stop saying that you need to add up the two market caps because RESI pays a fee to AAMC out of its own capital base. That's like saying the owner of a McDonalds franchise has to pay McDonalds a royalty fee, so in order to value a franchised restaurant you need to add in the market cap of MCD since the income from the restaurant has to be split among both entities.
It is much easier to simply factor AAMC's incentive fee into RESI's estimated returns. That way you can determine how much profit will be attributable to RESI's shareholders and thus you can value RESI stock on its own.
So you think once the company starts reporting positive free cash flow, that the market is still going to focus on mark-to-model earnings? If the actual cash flow falls far short of the returns the company is targeting, then the stock price will drop to reflect that. But if the cash flow backs up the return assumptions, then your thesis will be wrong. You're essentially betting that the can't earn the returns they say they can. In that case, your bearish articles should articulate why they won't earn said returns, rather than just saying the returns are based on the company's modeling and therefore "aren't real." This company has raised over $1.3 billion of equity and at $31/share is valued at about 1.3x that amount. Their actual returns will have to fall far short of their targets for this stock to be a great short. Good luck.
Paulo - How can you say that RESI's "future" financials will be based on a model and therefore somehow "not real?" Do you honestly believe that RESI's business model will not be able to generate enough future cash flow to justify a valuation anywhere near the current level?
Obviously they don't have cash flow today to justify the current market cap, but if you really believe that this is mark-to-model in perpetuity and we will never be able to determine how accurate their models are (by comparing them to the actual cash returns they earn in the future) or eventually actually value the stock based on cash flow and not a model, then I think you may misunderstand RESI's business model.
Here is a link to the cash flow statement for the 1st 9 months of 2013. FCF is negative $60M.
Free cash flow for the first 9 months of 2013 was negative to the tune of $60M. Even if you look at trailing 12 months in order to include a holiday quarter, it is still negative $26M. Why on earth would you assume they can consistently earn FCF margins of 3-5%? In 2011 (the year before the 2012 spin-off, which resulted in a lot of one-time items), FCF margins were 1%. I think your estimates are way too high.
The real problem for Eddie is that he can't get the retail business to cash operating income break-even or better. Between just three items (corporate interest expense, minimal capex, and pension contributions) SHLD faces over $1 billion of cash needs in 2014. Add in the retail losses and the hole is huge. So he has to sell assets just to tread water from a financial condition perspective. That results in a decline in intrinsic value (you have fewer assets and are no better off financially). Until cash flow from operations can more than cover interest, capex, and pension costs, the upside for equity holders cannot truly be realized.
Agree. I have been spending more and more time on Sears now that the asset monetizations have sped up, but the more I look at it, the more I don't see as much value. Which makes me wonder if it makes sense to devote more time to it...
This LE spin-off really baffles me. They are getting no cash for it, and it earns $100M of EBITDA for them that they now won't have. So the retail losses are going to get bigger post-spin. Why are they doing this now? It just means Eddie is going to have larger liquidity issues in the short term. Why not keep the things that are earnings a profit (SHOS, LE, etc) and spend your time getting rid of money-losing stores, which would enhance liquidity?
I don't get it.
Bad news for SHLD longs... Lands End spin-off will give SHLD no cash. Not only that, 2012 financials: $1.59B revenue and $108M EBITDA. At 7-8x EBITDA Lands End is only worth about $750M, about half of what Baker Street Capital projected ($1.4B).
Exactly. No idea why Eddie does his best to provide as little information as possible in SHLD's filings. You can, however, find out in each annual report what their sublease income was for the year. It's just one data point (and I would assume excludes rent generated from owned properties) from the leased stores only. But it's a start. FYI: Sublease income was $47M in 2012, and down vs 2010 levels, so real estate development has not ramped up yet (I would not expect a huge increase for 2013).
It's a good question. I was under the impression that this is what Baker Street was trying to do with their presentation. They called it a "break-up" analysis and assigned a value to each asset separately. To me, that means they were assuming "everything" was sold piece by piece.
I'm not sure what a book value would tell us about the ultimate value of SHLD's assets. Real estate companies are valued based on the NOI they generate from tenants, not book value. I still believe that if Sears' properties were already rented and generating income, they would be worth far more than if they were simply starting the process of closing the Kmarts and Sears and finding buyers/tenants for the properties. You have to discount the value due to the time it would take to turn SHLD into a real estate "company" rather than just a real estate "play" with an unclear future.
Interestingly, I could see Seritage being a mini Howard Hughes (HHC). I say "mini" because they are nowhere near that far along as a real estate development company. The potential is there, though. HHC is worth about $4 billion and is a good comp in my view (FD: Long HHC)
You are right, Eddie owns 25.1M shares personally, all of which are held in the ESL Partners fund. That fund has 47.1M shares in total, so 22M belong to the other LPs. There are 4 other smaller funds, which hold a total of 4.4M shares on behalf of LPs, giving Eddie control over a total of 51.5M shares (48.4% of the company)
Here is a new article on SHLD posted today on my blog:
If one is evaluating the Sears/Kmart merger, then Kmart by itself is simply not relevant. I cannot argue that it was a great move if you bought Kmart stock the day it emerged from bankruptcy at $15, but how many people really bought on day one? A month later it was already at $25. I would bet most early-ish investors in Kmart paid around $30. In those cases you are looking at a double over a nine year period, which is an 8% annual return. Solid, but not ESL-like by any means.
The point of the article was the Sears combination, not Eddie's investment picking skills more generally. But since "Sears Holdings" has not worked yet, that is what people are clinging to. We'll just have to see what happens over the next 2-3 years. I think by then we'll have a better idea of exactly how much the different assets are worth, assuming he continues to accelerate the monetization efforts.
My article was pointing out the disaster that the Sears deal has been. It was not questioning Eddie's skill as a hedge fund manager and his Kmart investment was clearly brilliant.
I firmly believe you have to look at the entirety of the track record. You can't ignore the past nine years, or the next two years if they are good. You have to look at the entire horizon. Let's say Eddie continues to accelerate the asset monetization and gets the stock to $100 in two years. This is close to Baker Street's intrinsic valuation (which I would guess is close but a bit high). In that case I still would not call him a genius. He would just be back to break-even for his shareholders since the Sears merger. If Kmart was $100/share pre-Sears and 11 years later with Sears is at the same level, you can't argue the Sears deal was good for shareholders.
How is it misleading to say he paid $11B for Sears? It was a stock and cash deal that diluted Kmart shareholders and that was the price that was paid. We'll see how much value he ultimately gets for the legacy Sears assets relative to that purchase price.
The midpoint of the Baker Street valuation for SHLD was $13.9B and that figure was not adjusted for the time value of monetizing the assets. It's hard to argue that the Sears deal was accretive to Kmart shareholders.