McGuire ValueInvestingCongress 100112
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Disclosures
This document is confidential and intended solely for the addressee and may not be published or distributed without the express written consent of Marcato Capital Management, LLC (Marcato). This document is not intended for public use or distribution. This document does not constitute either an offer to sell or a solicitation of an offer to buy any interest in any fund associated with Marcato. Any such offer would only be made at the time a qualified offeree receives the funds confidential offering memorandum and related subscription documentation (together, the Offering Documents). To the extent, therefore, there is any inconsistency between this document and the Offering Documents, the Offering Documents govern in all respects. Figures provided herein are rounded as applicable. Information contained herein is believed to be accurate and/or derived from sources which Marcato believes to be reliable; however Marcato disclaims any and all liability as to the completeness or accuracy of the information contained herein and for any omissions of material facts. Securities or investment ideas are presented to illustrate Marcatos typical research process and not to suggest or show profitability of any or all transactions. There should be no assumption that any specific portfolio securities identified and described herein were or will be profitable. Marcato may, at any time, reevaluate its holdings in any such positions.
<1>
Under GAAP Codification Section 360, land is recorded at cost and is then subject to an ongoing recoverability/impairment test. In most all cases, the carrying value of the land at any point in time is the lower of cost or fair value.
This can lead to major understatements when the market value of a property is well above its original cost, and often occurs when the property in question is very old.
Source: FASB.
<2>
I. Alexander & Baldwin (ALEX) II. Gencorp (GY) III. Brookfield Residential Properties (BRP)
<3>
<4>
Capitalization:
Equity Market Value: $1.3 billion Total Enterprise Value: $1.5 billion
Source: Company documents (1) All financials in this presentation assume a stock price of $30 (2) Excludes discontinued operations
<5>
<6>
JV development projects
<7>
Easy to Value
Harder to Value
<8>
Industrial Office Retail Unimproved Land (1) Total Value 2011 NOI Blended cap rate Value
Recent Ow ned Market Sq. Ft. Price / Sq Ft. 564,800 $100 185,800 694,980 11,770 150 400 5,000
Source: Company documents, Marcato estimates (1) Represents land leased to third parties and included in reported NOI. Numbers represent acres and $ / acre
<9>
Industrial Office Retail Unimproved Land Total Value 2011 NOI Blended cap rate Value
(1)
Source: Company documents, Marcato estimates (1) Numbers represent acres and $ / acre
< 10 >
ALEX: Valuation
Balance Sheet Value Com m ercial RE Portfolio Haw aii Mainland Total Property Under Developm ent Wholly Ow ned JV Total Land Less: Corporate (1) Less: Debt Equity Value Current Stock Price % Premium / (Discount) to Current 0 (224)
Market Value Per Share $425 493 $917 $10.02 11.62 $21.63
$819
Source: Company documents, Marcato estimates (1) Estimated at $15m of pre-tax expenses per year, capitalized at 8x
< 11 >
Maui
Maui Business Park II Haliimaile
Kauai
Wailea
Kukuiula
Wailea resort originally developed by ALEX and sold to Shinwa Golf Group in 1989 270 fully zoned, undeveloped acres at Wailea reacquired in 2003 for $67m
Subsequently sold 70 acres in 2004 for $70m Contributed 25 acres to Kai Malu JV with Armstrong Builders
< 13 >
Phase II of ALEXs Maui Business Park comprises 179 acres of industrial zoned lands in central Kahului, close to the airport and harbor Final zoning approval received in 2008 and infrastructure work completed in 2011 Planned for 160, -acre lots Sales and leasing have begun
4-acre anchor parcel sold to Costco in January 2012 at ~$1.5m / acre
< 14 >
2-acre urban Honolulu parcel acquired by ALEX in 2Q10 for highrise condominium development Extremely well located in the Ala Moana corridor near shopping, restaurants, and beaches
Successfully navigated complex permitting process Limited new product in supply-constrained market
< 15 >
Fully ow ned Developm ent Properties Wailea - under development (ex Kai Malu JV) Bluffs at Wailea Ridge at Wailea Wailea MF-7 Wailea - future developments Wailea SF-8 Wailea MF-10 (Residential) Wailea MF-10 (Commercial) Wailea MF-6 Wailea MF-16 Wailea - Other Wailea - Subtotal Haliimaile Kane Street (Residential) Kane Street (Commercial) Kahului Tow n Center (Residential) Kahului Tow n Center (Commercial) Maui Business Park II Port Allen Residential - Kai Olino Keola Lai (mostly sold) Waihonua - Honolulu Brydesw ood Total Fully Ow ned Developm ent
Avg. Sale Price $1.5 1.5 1.3 0.3 1.3 350.0 1.3 1.3
Sales Proceeds $18.0 13.5 97.5 27.0 58.5 22.8 78.0 26.0
Costs to Com plete $0.0 0.0 84.0 25.0 40.0 16.0 14.0 7.0
Net Proceeds $18.0 13.5 13.5 2.0 18.5 6.8 64.0 19.0
Tax Basis $9.0 8.0 90.0 25.0 40.0 20.0 20.0 10.0
Tax Years to Rate Com plete 35% 35% 35% 35% 35% 35% 35% 35% 0 0 3 5 5 5 2 3
Discount Rate 15% 15% 15% 15% 15% 15% 15% 15%
NPV $14.9 11.6 8.3 0.9 8.1 2.9 35.5 10.2 49.8 $142.0 15.1 9.9 1.7 9.8 7.1 44.9 11.3 5.7 32.2 14.5 $294
0.6 170 103 20,000 440 240,000 160 75 10 341 24 0.4 0.5 300.0 0.5 300.0 1.0 0.5 0.6 0.7 1.8 68.0 51.5 6.0 220.0 72.0 160.0 37.5 6.0 238.7 43.2 34.0 32.0 2.0 200.0 53.0 82.0 19.0 0.0 185.0 15.0 34.0 19.5 4.0 20.0 19.0 78.0 18.5 6.0 53.7 28.2 35.0 33.0 2.0 202.0 53.0 95.0 30.0 5.1 206.0 17.0 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 5 3 3 4 4 2 4 0 3 3 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
We note that in 2006, Goldman Sachs performed DCFs of Wailea and Haliimaile, valuing the projects at $144m and $186m, respectively. (1)
Source: ALEX Real Estate Supplements, Marcato estimates (1) Goldman Sachs Initiation Report, January 11, 2006
< 16 >
We believe ALEXs fully owned development projects are worth roughly ~$294 million
Wailea Maui Business Park II Waihonua - Honolulu Kahului Tow n Center Haliimaile Brydesw ood Kane Street Port Allen Residential Keola Lai Total Fully Ow ned Developm ent
< 17 >
77% interest in JV with DMB Associates 1,000 acre master planned community on Kauai
Up to 1,500 units planned High end resort / residential with price points $1 - $4 million / lot Amenities include golf course, spa, country club, water access, trails, parks 79,000 sq. ft. commercial retail center opened for business in August 2009 and construction is complete on 178 lots Construction of all amenities completed 88 lots sold to date
< 18 >
JV Developm ent Properties Kukui'ula Kukui'ula Village Kai Malu at Wailea (mostly sold) Ka Milo Palmdale Trade & Commerce Center Crossroads Plaza Bakersfield - Panama Grove Santa Barbara Ranch Total JVs
Koloa, Kauai Koloa, Kauai Wailea, Maui Kona, Big Island Palmdale, CA Valencia, CA Bakersfield, CA Santa Barbara, CA
Avg. Sale Price $1.5 800.0 1.3 1.2 150.0 150.0 150.0
Tax Years to Rate Com plete 35% 10 35% 35% 35% 35% 0 4 5 5
NPV $343.7 39.9 6.8 6.1 1.4 4.2 2.1 0.0 $404
We note that in 2006, Goldman Sachs performed a DCF of Kukuiula, valuing the project at $288m, before ALEX increased its project ownership from 60% to 77%. (1)
Source: ALEX Real Estate Supplements, Marcato estimates (1) Goldman Sachs Initiation Report, January 11, 2006
< 19 >
JV Development Projects
We believe ALEXs JV development projects are conservatively worth roughly ~$404 million
Kukui'ula Kukui'ula Village Kai Malu at Wailea (mostly sold) Other Total JV Developm ent
< 20 >
ALEX: Valuation
Balance Sheet Value Com m ercial RE Portfolio Haw aii Mainland Total Property Under Developm ent Wholly Ow ned JV Total Land Less: Corporate (1) Less: Debt Equity Value Current Stock Price % Premium to Current 0 (224)
Market Value Per Share $425 493 $917 $294 404 $698 $10.02 11.62 $21.63 $6.93 9.53 $16.46
Source: Company documents, Marcato estimates (1) Estimated at $15m of pre-tax expenses per year, capitalized at 8x
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< 22 >
ALEX Ag Land Sales Transactions - Last 5 Years Avg Price High Total Acres Sold Per Acre 0 - 5 Acres 10 $107,300 $175,000 5 - 20 Acres 67 61,300 167,800 20 - 100 Acres 260 25,900 40,700 100+ Acres 649 22,800 29,000 Total 986 $27,100 $175,000
Kauai Ag Land Sale Com ps - Last 5 Years # of Total Transactions Acres Sold 32 300 3 70 5 1,730 40 2,100 Avg Acres Per Transaction 9 23 346 52 Avg Price Per Acre $111,000 68,700 17,200 $32,100
Maui Land & Pineapple Precedent Land Sales Date Acres $ / Acre Description Jan-12 89 $16,854 Upcountry Maui (1) Mar-10 128 13,281 Upcountry Maui (1) 2008 111 39,460 Upcountry Maui 2007 683 29,136 Upcountry Maui 2006 2,200 15,227 Upcountry Maui 2005 640 44,063 Upcountry Maui (2) Q1-2002 9 70,112 Upcountry Maui Total 3,860 $23,267
Source: Maui Land & Pineapple Company documents (1) We believe these were forced sales, as MLP is in financial distress (2) Consideration included 1 acre in west Maui valued at $350k < 25 >
NOI from leasing unimproved land in Haw aii Unimproved land leased to third parties in Haw aii Market rent / avg leased acres of ag land Assumed "Normalized" Market Rent / Acre Cap Rate Im plied Value / Acre of Ag Land
$435
Methodology Lease Value Maui Land & Pineapple Value Historical ALEX Sales Land Comps Plus: Other Land
(2)
(3)
Plus: Value of Agricultural Operations LTM Agribusiness EBITDA EBITDA $34 Multiple 4.5x Value $154
Source: Company documents, Marcato estimates (1) Adjusted for taxes and time value of money (2) Represents all of ALEXs agricultural land, excluding the 11,770 agricultural acres leased to third parties in 2011, the income from which was included in the NOI of the Hawaiian leased commercial properties (3) Includes entitled acreage not included in the 441 acres of fully owned development projects for which we performed DCFs < 27 >
ALEX: Valuation
Balance Sheet Value Com m ercial RE Portfolio Haw aii Mainland Total Property Under Developm ent Wholly Ow ned JV Total Land (1) Less: Corporate (2) Less: Debt Equity Value Current Stock Price % Premium to Current
Market Value Low High $425 493 $917 $294 404 $698 $582 $425 493 $917 $294 404 $698 $734
Per Share Low High $10.02 11.62 $21.63 $6.93 9.53 $16.46 $13.72 $10.02 11.62 $21.63 $6.93 9.53 $16.46 $17.32
(2.83) (2.83) (5.28) (5.28) $43.70 $47.30 $30.00 $30.00 45.7% 57.7%
Source: Company documents, Marcato estimates (1) Balance sheet value of land estimated based on Company comments of $150 / acre carrying value (2) Estimated at $15m of pre-tax expenses per year, capitalized at 8x < 28 >
< 29 >
GenCorp, Inc.
GenCorp is a supplier of propulsion technologies to the aerospace and defense industries
Longstanding reputation as a highly regarded supplier Founded in the 1950s by Cal Tech scientists
Capitalization:
Equity market value: $600 million Enterprise Value: $700 million
Operating Statistics:
LTM Revenue: $930 million LTM EBITDAP(2): $113 million LTM CapEx: $27 million LTM Free Cash Flow: $69 million
Source: Company and other public documents (1) All financials in this presentation assume a stock price of $9.75
Valuation Multiples:
EV / EBITDAP(2): 6.2x EV / EBITDAP(2) CapEx: 8.2x FCF Yield: 11.5%
(2) Earnings before interest, taxes, depreciation & amortization, and non-cash pension expenses
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< 31 >
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< 33 >
Entitlement and zoning are in place for the first 1,400 acres (Glenborough and Easton Place), with detailed plans for residential, commercial, and office property development
Source: http://easton-ca.com
< 34 >
GY Land
< 35 >
60 $3,000,000
< 36 >
< 37 >
We believe GYs excess real estate is worth ~ $370m today, and potentially much more as real estate markets recover and the Company makes progress on its development plans
Excess Real Estate Valuation Asset Sacramento Land Sacramento Office Space Chino Hills Land Total Value / Share % of Current M arket Cap Value $302 66 0 $368 $5.99 61% Methodology 6,044 acres @ $50k / acre LTM NOI @ 8% cap rate Conservatism
(1)
< 38 >
< 39 >
With half of revenue from cost-plus contracts, pre-corporate EBIT margins in GYs aerospace segment have consistently been between 9.8% and 11.7% for the past 8 years
'04 - '11 CAGR 9.3%
2004 489.1
56.6 11.6%
8.4%
< 40 >
$1,377 $1,191
$380 $573
$1,422
$520
Unfunded Funded
% Growth
15.7%
3.2%
< 41 >
GYs Free Cash Flow significantly exceeds its reported GAAP Net Income, for four separate reasons
1) Minimal cash taxes 2) Substantial non-cash GAAP pension charges 3) D&A > Ongoing cash Capital Expenditures 4) Non-cash interest expense
< 42 >
Adjusting for the combined effects of all of these dynamics, it becomes clear that GY is trading at 8.2x the recurring cash earnings power of its aerospace and defense business
Revenue OpEx (incl Pension) D&A EBIT Unusual Items Interest Taxes Net Income P / E Multiple
Adj. PF Cash $930 44 (818) 4 (20) $48 $92 6 0 16 (11) (9) $69 $73 8.2x
< 43 >
Transformative Acquisition
In July, GY announced the acquisition of Pratt & Whitney Rocketdyne from United Technologies Corporation for $550m Deal expected to close 1Q 2013 Significant Revenue and Cost Synergies Financing with cash on hand and new borrowings Highly Accretive Transaction
< 44 >
What is it Worth?
GY-Rocketdyne Pro Form a Revenue EBITDAP % Margin Interest
(2) (3) (1)
GenCorp Rocketdyne $920 $792 $115 12.5% (2) (10) (10) (25) $68 $149 18.8% (36) (10) (21)
Synergies PF Com bined $1,712 $50 $314 18.3% (38) (46) (20) (46) $164 4.7x 5.5x 27.3% $164 10.0% $1,638
(1) EBITDAP = Earnings before interest, taxes, depreciation & amortization, and non-cash pension expense (2) Assuming full dilution from the $200m outstanding 4.0625% convertible subordinated notes (strike price = $9 / share) (3) GY pays minimal cash taxes due to a combination of NOLs and various tax planning strategies. We conservatively apply a 20% tax rate to the combined entity (4) Mid-point of Marcato estimated value
Adj. TEV / EBITDAP Adj. TEV / EBITDAP - CapEx % FCF Yield to Current M arket Cap Free Cash Flow Target FCF Yield Implied Equity Value Plus: Excess Real Estate Total Equity Value FD Shares Out Im plied Share Price % Premium to Current
(2) (4)
< 45 >
< 46 >
Company Overview
Brookfield Residential Properties (BRP or the Company) is a hybrid land developer and homebuilder Primarily acquires and develops land for residential use Ticker: BRP Price: $14.39 (1) Capitalization Mkt. Cap TEV $1.5B $2.8B Financials: 2011 Revenue (2) 2011 Free Cash Flow (3) $819M $163M Valuation Multiples: P / Q2 2012 TBV P / 2011 FCF 1.5x 9.0x Occasionally designs and constructs homes and commercial properties Operates both in Canada and the United States
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) (2) (3) Represents share price of NYSE: BRP. Brookfield Residential Properties is also traded on the TSX under ticker BRP. Excludes non-recurring lot sales in 2011. Excludes land acquisition capex.
< 47 >
RawLand,62%
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 48 >
Land Development
Identify Attractive Land Opportunities Acquire, Convert and Entitle Land Design and Construct Homes
Homebuilding
Market and Sell Finished Homes
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 49 >
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 50 >
LA/Southland, 4%
Other,0%
Denver,10% Austin,13%
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 51 >
750
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
U.S.
U.S.Avg.
Canada
CanadaAvg.
Jul12
0 (000sstarts)
< 52 >
U.S.
Canada
Source: Teranet Composite 6 and S&P Case-Shiller Composite 10. (1) January 2000 indexed to 100.
< 53 >
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) Excludes non-recurring lot sales in 2011.
< 54 >
6.5x 6.0x 4.0x 2.0x 0.0x Calgary Edmonton Toronto Vancouver 4.7x 3.8x
Calgary
Edmonton
Toronto
Vancouver
Source: Teranet, Statistics Canda, CMHC and regional real estate boards. (1) September 2007 indexed to 100. Alberta home prices peaked in September 2007. (2) Avg. home price / estimated median family income as of July 2012 .
< 55 >
$300
200 100
443 342
$0 2Q11 2Q12
0 2Q11 2Q12
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 56 >
74 41
72
81
2Q11 Central&Eastern
2Q12 California
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 57 >
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Composite 10 Dallas Denver SanDiego San Washington LosAngeles Francisco D.C. 3.2% 3.3% 3.7% 2.1% 3.8% 6.7% 5.2%
< 58 >
($Ms) HomeClosings: Canda U.S. LotClosings: Canda U.S. TotalRevenue GrossMargin %Margin
1,200 550
1,700
Strong growth despite management not providing guidance on U.S. land sales
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) Management provided home and lot closings figure only. Pricing and margin assumptions are assumed to be flat from 2011.
< 59 >
Other Homebuilders
Inventory Runway Short Cash flows needed to refill depleted land inventory Mostly homes Recently acquired Long
BRP
Less need to recycle cash flows into new land acquisition Mostly land Old Book value (original cost) Market prices have since increased substantially
Portfolio Composition
Carrying Value Marked-to-market (impairments) of Property Market prices have fallen/stagnated since purchase
< 60 >
Homesasa% ofInventory 30% 41% 77% 27% 33% 35% 28% 32% 70% 41% 12%
(3)
2010 2011 6.6x 8.2x 6.2x 7.4x 6.8x 7.4x 5.4x 6.9x 9.5x 10.3x 4.1x 5.1x 8.6x 8.6x 8.7x 10.3x 13.2x 14.4x 7.7x 8.7x 26.4x 30.1x
(2)
BRPs portfolio consists of mostly mature land investments vs. more recent housing inventory for other homebuilders
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) (2) (3) Defined as total lots or home sites / total closings or home deliveries. Excludes non-recurring 2011 lot sales. Defined as housing inventory + model homes / total land and housing inventory.
< 61 >
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) Management commentary.
< 62 >
35%
3%
May07
May08
May09
May10
May11
Source: S&P Case-Shiller Composite 10, Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) January 2006 indexed to 100.
< 63 >
May12
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Sep06
Sep07
Sep08
Sep09
Sep10
Sep11
Jan12
($Ms) LandandHousingInventory: ValueofHomes ValueofLandSingle ValueofLandMulti&Other ValueofRawLand LandandHousingInventory HomesCosttoComplete LandCosttoComplete "Market"LandandHousingInventory "Book"LandandHousingInventory %Increase(Decrease) TangibleBookValue: "Market"LandandHousingInventory Plus:AllOtherAssets Less:AllLiabilities&MinorityInterest "Market"TangibleBookValue "Book"TangibleBookValue %Increase(Decrease)
$467 $783 $233 $2,244 $3,727 ($124) ($289) $3,314 $2,212 49.8%
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 64 >
P/Adj.BV MRQ
(2)
P/Adj.TBV MRQ
(2)
P/E 2012 27.7x 20.9x 32.5x 46.8x 32.0x 30.1x 2013 20.0x 24.5x 18.3x 31.7x 23.6x 22.3x
4% 5% 7% 2% 6% 5% 5%
4% 4% 6% $1,475 $2,753
35.7x 33.5x NA
23.2x 22.2x NA
55.6% 53.8% NA
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) (2) (3) Represents share price of NYSE: BRP. Brookfield Residential Properties is also traded on the TSX under ticker BRP. Adjusted for off balance sheet DTAs. Assumes full conversion of preferred.
< 65 >
MedianofComps ($Ms) "Market"TangibleBookValue Multiple EquityValue TotalFDSharesOut. ImpliedSharePrice SharePrice(9/24/12) %Increase(Decrease)toCurrent Adj.TBV $2,287 2.0x $4,573 102.48 $44.63 $14.39 210.1%
(1)
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information. (1) Adjusted for off balance sheet DTAs.
< 66 >
Ignored by Analysts
BZH BAML Barclays Citi CreditSuisse DeutscheBank GoldmanSachs JPMorgan UBS Total
DHI Y Y Y Y Y Y Y 7
HOV
Y Y
Y Y 4
Y Y Y Y Y 5
KBH Y Y Y Y Y Y Y Y 8
LEN Y Y Y Y Y Y Y Y 8
MTH Y Y Y Y Y Y Y Y 8
PHM Y Y Y Y Y Y Y Y 8
SPF Y Y
Y Y Y 5
TOL Y Y Y Y Y Y Y Y 8
Avg.
BRP
6.8
Source: Company filings, research, Bloomberg, CapitalIQ, public commentary and information.
< 67 >