Land and Buildings gets a chance to create value in the real estate game with Six Flags

Customers are socially distanced at attractions such as Wonder Woman: Lasso of Truth at Six Flags Great Adventure in Jackson, New Jersey.

Kenneth Kiesnoski/CNBC

Company: Six Flags Entertainment (SIX)

Business: Six flags is the world’s largest regional theme park operator and the largest water park operator in North America. They generate income mainly from the sale of admission to their parks and the sale of food, beverages, goods and other products and services in the parks.

Stock Value: $1.9B ($23.25 per share)

Active: Land and Building Investment Management

Ownership percentage: about 3.0%

Average price: no

Comment from the activist: Land & Buildings is a long-term hedge fund focused on real estate and will seek to engage with management on a friendly basis when it sees deep value. It invests in deeply discounted real estate in the public markets and selects corporate bonds. The firm’s positions are often below the 5% 13D reporting threshold. He is willing to nominate directors and has held board seats at American Campus Communities, Brookdale Senior Living, Felcor Lodging Trust, Life Storage, Macerich, Mack-Cali (now Veris Residential) and Taubman Centers.

What is happening?

On December 21, Land & Buildings held a presentation detailing a potential operational and strategic turnaround of Six Flags Entertainment, which would include monetizing the company’s real estate assets and a sale-leaseback.

Behind the scenes

Land & Buildings (“L&B”) is a real estate focused investor and is primarily a real estate play. The firm is proposing to divest Six Flags’ real estate, which L&B believes is worth more than the company’s current enterprise value. L&B has extensive knowledge and experience in this field. In 2015, the hedge fund launched an activist campaign at MGM Resorts International, which resulted in the formation of the MGM real estate investment trust, which was acquired by VICI Properties and significantly increased margins at the operating company. Recent private transaction comps for gaming real estate, as well as public gaming REIT valuations, show the upper 6% to 7% range and plenty of mid-teens for assets like theme parks. L&B believes there will be many interested buyers.

In its analysis, L&B assumes a premium of 7.25% and a value of $2.8 billion for the real estate. The real estate sale-leaseback could reduce earnings before interest, taxes, depreciation and amortization from $520 million to $315 million, and assuming an EBITDA multiple of 7x (ALTI’s current multiple is 8x), the operating company is 2.2 will have a billion dollar enterprise value. With $2.8 billion in cash and $2.4 billion in debt, that would equate to an asset value, or market cap, of $2.6 billion. With 83 million shares outstanding, this would equate to a share price of $31.32, or a 34% premium to Six Flags’ current stock price (47% premium to the company’s breakeven stock price prior to the announcement of the L&B plan). L&B performed the same analysis on 2024/2025 EBITDA targets, which resulted in $6.8 billion in value and 150% growth. Moreover, the hedge fund’s analysis suggests that the company will have $2.8 billion left on its balance sheet. If used to buy back shares where they currently trade, the yield would be even greater.

L&B believes the sale of Six Flags’ real estate will allow the company to increase share buybacks, restore its dividend (which was canceled at the start of the Covid pandemic) and pay down debt. What’s more, it’s a shareholder base with many like-minded investors (HG Vora, H Partners, Long Pond Capital) and a relatively new CEO (November 2021) who could fit a plan like this.

Implementing such a plan would give the CEO plenty of time and capital (both real and figurative) to do what really needs to be done—solving operational problems. When Selim Bassoul was named CEO of Six Flags in November 2021, he began a strategy to enhance the guest experience and create a more profitable, higher-margin business by moving to a more affluent, family-oriented customer base. This new strategy, which included getting rid of several customer preferences, led to a significant decline in engagement, alienation of many current customers, and subsequently lower prices for peers. However, the jury is still out on whether it works. If it results in more participation at higher prices in 2023, then it has worked and operationally nothing will need to be done. However, if participation continues to decline through 2023, Bassoul could start giving back many of the benefits it took away, such as modified meal cards. It may even have to consider reducing prices to previous levels. Without stabilizing operations, a real estate strategy can only generate so much shareholder value. However, optimizing attendance and stabilizing operations will increase any value generated by a real estate strategy.

We expect that Land and Buildings will want to have some form of board representation to help with this strategy. Obviously, if Six Flags chooses to monetize real estate, they should seek help from the firm. So it wouldn’t be surprising to see an amicable settlement for one or two of the board members. However, the director nomination window is between January 11, 2023 and February 10, 2023. If there is no agreement by then, L&B is almost certain to appoint directors, if only to protect the rights of the firm. talk to management. If it goes to a proxy fight, the aforementioned like-minded investors – H Partners (13.5%), HG Vora (4.2%) and Long Pond Capital (5.7%) – could be potential backers of L&B.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.

Source link