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Whats the Case for SNS and Whats the Best Vehicle


Myth465
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Hi all, with ORH going under I need another work horse position. I own a ton of FFH and FUR and want another core owner manager position with a good capital allocator at the helm. I personally like BAM and LUK but, think both are overpriced / fairly priced.

 

SNS has gotten quite a bit of play here and I have read over most of the recent posts but, wanted to see if anyone had a quick simple rational for there purchase in SNS and more importantly wanted to know what you all think is the best way to start a position. Right now I like buying via WEST due to the debentures and share spin off.

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While considering my investment in LUK or SNS my thought process was along these lines.

 

The turnaround story at SNS is pretty impressive and Sardar seems to have a pretty good head on his shoulders.  Looking at the past available material, he has been able to allocate capital in some interesting companies and some of them have worked out so far.  However, I do not have access to the Lion Fund returns or letters and I’m not sure how he will allocate capital in the future.  Is he going to try and fight every company he invest in, will he take some easy layups with stocks that are just undervalued and wait for the market to realize the stock is undervalued?  There are a few questions that I have that can only be answered with time.  In saying that, I feel that this is beginning of something after reading articles and shareholder letters.  I don’t want to miss the boat if he does prove himself as a top notch investor down the line. 

 

I made several trips to SNS and fell in love with the restaurants and the food.  In making a purchase decision everything was based on the restaurants, buy the restaurants at what I feel is a fair price and get Sarder for free.

 

Luk has a long history of how management has performed and currently in some great long term investments.  They seem to thrive in markets like this so I also wanted to tag along in their success. 

 

Basically in the end, I split one position into two positions, half SNS and half LUK.

 

 

 

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Myth,

 

I own a ton of FFH and FUR and want another core owner manager position with a good capital allocator at the helm.

 

your reference to FUR piqued interest on me.. if you don't mind Can you plz introduce me to your valuation thesis on FUR

 

TIA

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I am actually thinking of raising my FUR position. This is a few months old but, FUR is cheaper now. FUR is similar to HRP Trust but cheaper on a FFO basis. HRP and most of the REITs are up 50 percent but, FUR has gone nowhere but down really.

 

They have 2 investment platforms which are causing a bit of fear with investors, Concord and Mark Realty. Last quarter they had huge write downs in each but, now Concord is at $0 but, I think it is worth more then that. They are doing very interesting things with loans which I am still working to understand. Last Q they bought a loan on a building from Concord which yielded greater then 10% then sold the loan for a bit less then 10%. If the business pays off the loan they get a few million due to the difference in purchase to loan and they also get to collect 2 - 3% of interest for doing nothing. If the loan goes bad then I believe they get the building which is worth more. Interest and Dividends for the Q are up to $2.2 million from $350k and this is likely due to the preferreds and REIT shares. If the loan purchases work out INV and DIV could double. Should be interesting to watch.

 

Ashner is very interesting to watch and owns a ton of stock. FUR has some building which produce cash flow and form the base value. The real kicker INMO is Concord and Ashner's portfolio of REITs and Cash. He is actively investing that in all types of Realty transactions and is a skilled investor. Plus you get 11% to wait and his basis is much higher then the current stock price.

 

Valuation as of 07/09

 

FUR generates FFO (Funds Flow from Operations) of about $31.6 Million dollars each year and was purchased at around $160 Million Dollars. This gives it a value of 5 times FFO. There is also around $100 million dollars in the hands of a capable REIT Investor and 2 loan platforms (Concord and Mark Realty which may not be total zeros). This is another work horse position and I feel comfortable with the purchase price. FUR is below book and has capable focused Management with tons of skin in the game. This is similar to FFH & ORH. I will wait for obvious overvaluation and will watch and learn from management.

 

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They are doing very interesting things with loans which I am still working to understand. Last Q they bought a loan on a building from Concord which yielded greater then 10% then sold the loan for a bit less then 10%. If the business pays off the loan they get a few million due to the difference in purchase to loan and they also get to collect 2 - 3% of interest for doing nothing. If the loan goes bad then I believe they get the building which is worth more.

 

Yeah, the loan transaction you mentioned is definitely interesting.  The return on equity for the loan based solely on collecting and paying interest is close to 40%.  And if everything goes well and the building owner prepays the loan a couple years out, then we're talking about a 3.7x return on the equity invested.  If things go poorly, FUR gets the building, which should cover the amount borrowed if necessary.  Great risk/reward outlook with this transaction.  Clearly a margin of safety there. 

 

I've been following FUR for two years now and have slowly averaged down in the REIT for my dad's account.  Note that Fairholme owns a stake in FUR, and I wouldn't be surprised if Berkowitz uses FUR as a platform for the coming distressed environment in commercial real estate -- meaning that the REIT may issue new equity to Fairholme and other institutional investors to buy up properties that go into foreclosure.

 

 

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great post txlaw. I saw that you also hold ATSG which is my largest holding and RRGB. Whats your take on each and whats the thesis with RRGB. I quickly looked at it and it looks like they generate tons of cash (30% yield) but, I dont know much else.

 

Thanks, Myth465.

 

ATSG -- I pretty much agree with what you, Cardboard, and some of the other board members have posted on the company.  I wanted to wait until more info came out on ATSG, so I waited until the latest quarter's results came out to buy in.  I missed out on the huge upside from the March lows, but I think waiting was the prudent thing to do.  They seem to be adapting very well to the environment, and their conference call indicates that they are making progress on their negotiations with DHL (and their pilots) regarding the potential dry leasing of their planes to DHL going forward.  I'm also heartened by FedEx's latest earnings release.  Someone mentioned that they could see ATSG being valued at $8 at some point in the future, and I think that's definitely a possibility if they continue to work on strengthening their balance sheet.

 

 

RRGB -- First, the bad news about this company.  Same store/restaurant sales are down and may continue to go down.  Operating margins will definitely go down because of the minimum wage increase and because of price reductions at major competitors such as TGI Friday's and Applebee's (saw a commercial for $5 burgers at TGI Friday's -- limited time only, though).  So cash flow from operations will probably continue to deteriorate when adjusting for new restaurant openings (NROs).

 

However, the company continues to grow and can fund growth through cash flow from operations.  So once you adjust earnings for depreciation, maintenance/growth capex, and margin compression, the company appears to be trading for at worst a reasonable price for growth and at best a very cheap price for growth.  Note that it's a bit difficult to calculate maintenance capex.  According to management, maintenance capex historically has run between 12% and 15% of total capex.  However, that percentage will probably change going forward.  You can also use restaurant opening costs and the new opening schedule to try to estimate maintenance and growth capex.  New company-owned restaurants require about $2.1 M of capex per unit, and the company is slated to have opened 15 new company-owned stores in FY 2009.  It's not clear, however, whether capex for NROs match up on a yearly basis.

 

I really like their demographic mix, and I think they're building strong brand awareness among tweens, teenagers, and their parents.  They attract high income customers, and they make their NRO decisions based on catering to these demographics.  I like their focus on dense, wealthy suburban areas for NROs.  I also like their focus on customer service, which is really important in the casual dining industry.  They have quite a bit of room to grow in North America, and in the long run they may even be able to expand abroad if they play their cards right and build up a really strong brand.

 

Their brand awareness campaign definitely seems to be working.  While they have ceased their national marketing campaign for now, it seems to have worked.  I can't tell you how many people I know who know about the restaurant but who have never been to one because there isn't one nearby.  There also seems to be a trend for expensive gourmet burger joints, and Red Robin seems to be doing a good job of capitalizing on this trend.  Everyone I've talked to who's been there has been a fan.  Rarely have I heard anyone say that it's overrated.  In fact, more than one member on this board seems to be a fan (I've never been to one, so I have no real opinion about the food or atmosphere).  It's interesting that people voted for the place in the Zagat's survey re: best burgers.  That shows that they have customer loyalty going on.

 

Finally, the company appears to be quite well run, and I like that officers have bought stock over the last year.

 

I'm attaching the company presentation so that you can get a better picture of the company from the horse's mouth.

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Has Biglari stated his feelings on fiduciary duty? How would he prioritize investment ideas between SNS (assuming that it becomes an investment vehicle) and his hedge fund?

 

Now that WEST is being merged into SNS, I think the best way to align things would be for the Lion fund to either hold nothing but SNS or be wound up, and for Sandar to use SNS as his investment vehicle, ala WEB and BRK.

 

my $0.02

 

cheers

Zorro

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TX thanks for the very detailed reply. RRGB seems like a very interesting company with a great FCF yield and a negative working capital model. I may have to visit one in Houston one of these days. I am also going to double down on FUR. I just relooked at the loan transactions and they have gone from interesting to Brilliant, once ORH is settled I will be buying more. I think Q2 was the last quarter of negative EPS and negative FFO due to write downs, and I also think Q2 will be the last Q to pick it up under my basis of $9.50. The loans were bought at 17% ytm and sold at around 9%. So very little capital was tied up and all they do is collect and pay interest to earn this return. I believe they will be able to cherry pick assets from Concord for quite a while and Lexington is still paying shares in dividends and will likely decline to participate.

 

My other REIT is HRP Trust but it has rallied quite a bit and I may be selling it soon. It is approaching 8 times FFO but, they are still making great moves and interesting transactions which makes me want to hold.

 

If you dont mind me asking, what city are you located in? Im in Houston.

 

 

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If you dont mind me asking, what city are you located in? Im in Houston.

 

 

At the moment, I'm actually in Mountain View, California.  I was an attorney in Washington, D.C., but I moved out here to pursue a start up venture.  The venture has been relegated to side project status at the moment, so I'm trying to figure out what to do next, and I will probably be coming back to Texas for a bit before I do whatever I do next. 

 

I grew up in Central Texas, and I went to the University of Texas School of Law -- hence the user name "txlaw". 

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TX thanks for the very detailed reply. RRGB seems like a very interesting company with a great FCF yield and a negative working capital model. I may have to visit one in Houston one of these days.

 

I've been to the one on Richmond & Rogerdale more than a few times, the service was always excellent. Haven't been back in a while though.

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thanks Myth and Txlaw for the info on FUR..

 

i am still getting my head around this idea..

 

it seems they are big buyers of preferred between 20 - 25 % discount off face value..I am trying to find the quote by googling but was unsuccessfull.. just wondering if you have any idea where i can get quote from also cusip number of the preferred issue..

 

TIA

 

 

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In doing the math, it appears that if you think SNS is going to go up it is better to sell and by SNS and if you think there is going to be short-term pressure on SNS, then you want to hold WEST get the cash then by SNS with cash.  I ran it with the SNS prices ranging from $10 to $13.

 

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