The turmoil in the markets continues…
After three major bank failures in less than a week, everyone is skittish and waiting for the next domino to fall.
Today, credit rating company S&P Global gave a massive downgrade to First Republic Bank (FRC), dropping it from an investment grade A- rating to a speculative BB+ rating.
That means it thinks the bank “faces major ongoing uncertainties to adverse business, financial, and economic conditions.”
And it’s not just American banks that are under scrutiny. Across the pond, the Swiss investment bank Credit Suisse admitted “material weakness” in its reporting procedures. That led one of its top shareholders to say it wouldn’t offer any more financial assistance to the troubled bank.
Why are all these banks collapsing?
The incredibly rapid rise in interest rates over the past year has caught many financial institutions off guard. But it’s not just banks that need to be concerned.
Companies that loaded up on cheap debt now need to consider if they’ll be able to handle refinancing those loans at much higher interest rates when they come due.
Which brings me to the company I want to talk about today and the new “Dear CEO” series I’m starting. In this series, I will be sending out one CEO letter every month.
I will be reaching out to various companies and their CEOs with several suggestions to enhance the value of their respective companies. And I’ll share my thoughts with you, so you know what to look out for when making investments for your own portfolio – especially during uncertain times like the ones we’re in.
Here at the Intelligent Income Daily, sustainable shareholder returns are always the front and center focus of our research. And one of my goals is to advocate for shareholder-friendly decisions whenever I meet business leaders.
Today I want to share with you my first “Dear CEO” letter that I am sending to Six Flags CEO, Selim Bassoul.
Over the past year, shares are down nearly 37%. I’ve been advocating for Six Flags to make some changes since 2019. And with rising rates impacting Six Flags as 41% of its debt is coming due in 2024, now is the perfect time to implement the changes I’m suggesting.
Selim Bassoul, CEO
I’m not an activist, just a suggestivist. And I was very encouraged to write this letter after listening to your most recent earnings call, where you stated the following:
We are open to learn from everyone and anyone. And that’s what we do every single day: try to have a learner’s mind. And I think in the case of looking at our real estate, we have a valued real estate.
As you are aware, Six Flags owns and operates 27 parks across the U.S., Mexico, and Canada that occupy approximately 6,000 acres. And approximately 700 additional acres with development potential.
This represents a sizeable real estate portfolio that’s worth far more than your company’s current market capitalization of $2.5 billion.
As a real estate investor for over three decades, adjunct professor at NYU, and the most followed analyst on Seeking Alpha, I hope you and your management team will consider the sale-leaseback transaction as a means to drive shareholder value.
[Editor’s Note: For a refresher on sale-leasebacks, read our previous Intelligent Income Daily article here.]
I understand there are two activist investors who also recognize the value of Six Flags’ real estate holdings. According to the Wall Street Journal, H Partners Management LLC and Land & Buildings have been pushing Six Flags to consider bifurcating its operating business and its real estate.
As Jonathan Litt, CEO of Land & Buildings explained, “Six Flags could add $11 per share today by unlocking its real estate value. L & B is assuming conservative estimates of value and that Six Flags could drive 50% upside to the shares in 2023 and over 100% in the next 18 months.”
Now, unlocking the value of real estate on a company’s balance sheet is something I’ve seen before.
Iron Mountain successfully converted its business from a corporation to a real estate investment trust (REIT) in 2014. In 2020, it began to monetize its owned real estate to generate capital and expand its data center business operations. Over the last two years, Iron Mountain has sold approximately $448.7 million in real estate. And during that period, shares have returned 112.25%.
However, as I’m sure you are aware, Congress closed the loophole that allowed tax-free treatment in a spin if either the distributing corporation or controlled corporation is a REIT in 2019. That leaves the sale-leaseback transaction as the most promising option.
And what would you do with the money if you entered into a sale-leaseback transaction? Below are four ideas that would help secure operations, boost shareholder value, and attract new investors.
Pay down debt. Six Flags is junk rated (B+) with approximately $2.3 billion in long-term debt as of January 1, 2023. The company has a large maturity looming in 2024. In the last earnings call, you said the company is working “towards a target net leverage ratio of 3 to 4x net debt-to-adjusted-EBITDA.” Paying down debt from this sale-leaseback would go a long way in credit agencies revisiting your credit rating.
Acquire new assets. Six Flags currently operates in all of the top 11 market areas in the U.S, as designated by A.C. Nielsen Media Research. Acquiring new assets would allow you to expand further into some of the fastest growing markets areas in the country.
Invest in new rides and attractions. Gary Mick, your CFO, said the company “expects to increase capital spending to $150 million in 2023 with an increased emphasis on improving the amenities and infrastructure in parks, adding new and exciting rides, events and attractions, and implementing guest-facing technology.” Having the means to fund this growth will help realize these goals.
Buy back stock. Six Flags is trading at 4.8x price-to-EBITDA ratio compared with the normal range of 8.8x. Buying back shares would make shares more valuable and attractive to investors.
So, as CEO of Six Flags, and when faced with the opportunity to monetize the real estate in the form of a sale-leaseback, these are the four levers to pull from my humble perspective.
And given where I see the value today, options 1, 3, and 4 seem the most logical.
Several large net-lease REITs utilize sale-leasebacks on a frequent basis.
Realty Income just closed on a $1.7 billion deal to sale and leaseback the Encore (Wynn) in Boston.
VICI recently closed on the acquisition of the remaining 49% interest in MGM Grand Las Vegas and Mandalay Bay Resort for approximately $1.3 billion and VICI’s assumption of the existing property-level debt of around $3 billion.
As you know, as rates continue to rise, Six Flags will be under continued pressure. And as Jonathan Litt pointed out, shares in Six Flags could drive the value by over 50%.
In closing, again, I am not an activist, just a suggestivist. But I hope that you and your management team will consider the sale-leaseback transaction to drive shareholder value.
Suggestivist, Not an Activist
One of the great privileges I have is communicating with CEOs and board members through interviews and letters like these. And while I can’t force anyone to do anything like activist investors, as a “suggestivist” I will continue to advocate for shareholders.
If you’re interested in more “suggestivist” stories like this, join us at Intelligent Income Investor. In our last issue, I recently spoke with a well-known billionaire investor… And taking a page out of his book is giving us the rare, discounted chance to get involved in a sector billionaires are piling into and earning income along the way.
During times like these, it’s important to know the companies in your portfolio are run by smart people. Folks who know how to manage debt, risk, and market downturns. That way, you can create a growing income stream that will passively support your lifestyle with stress-free investments — no matter how crazy things are in the overall market.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily