The Intelligent Investor

The Practical Approach to Successful Investing

Hesham Gad, Managing Partner Gad Partners Funds
www.gadcapital.com sham@gadcapital.com

A Practical Definition
An investment is an operation which upon thorough analysis promises safety of principle and a satisfactory rate of return. Operations not meeting these requirements are speculative.
Investment is most prudent when it is most businesslike Ben Graham All intelligent investing is value investing Charlie Munger
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Warren Buffets Rules of Investing

Rule 1: Dont Lose Money Rule 2: Dont Forget Rule 1

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Six Characteristics for Investing Intelligently (& Profitably)

1. 2. 3.

4. 5. 6.

A sound investment philosophy A good search strategy Ability to value business & assess quality of management Discipline to say no Patience Courage to make a significant investment at point of maximum pessimism

Six Characteristics for Investing Intelligently (& Profitably)

1.

You need a sound philosophy

The Intelligent Investor by Ben Graham Stick to what you know You are part owner of a business so think like one Let the market SERVE you, not GUIDE you

2.

A Good Search Strategy

See what the smart investors are buying www.gurufocus.com, www.stockpickr.com Value GAD CAPITAL MANAGEMENT Line
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3.

Ability to Value Businesses & Assess Quality of Management

Six Characteristics for Investing Intelligently (& Profitably)

Stick to your circle of competence Invest with managers who think like owners because they are owners Alignment of interest is another type of margin of safety Seek those who EAT THEIR OWN COOKING!

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Six Characteristics for Investing Intelligently (& Profitably)

3.

Discipline to Say NO

Good Businesses do not mean good investments (Google) Businesses are undervalued at one price, fairly valued at another price, and overvalued at yet another price. Always ask yourself how much do you stand to lose before thinking about how much you stand to gain.

5. 5.

Patience

Six Characteristics for Investing Intelligently (& Profitably)

Price is what you pay, value is what you get.

Courage to make a significant investment at point of maximum pessimism.

Businesses are usually very cheap in times of distress Be greedy when others are fearful Warren Buffett

Have the conviction to make a big investment when your data and reasoning tells you to do so.

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Sunrise Senior Living (SRZ)

A Value Based Approach
The Picture in 2002-2003

Assisted Living Participants were performing poorly and stock prices were falling. Industry participants were disappearing due to poor balance sheets & high costs of capital High barriers to entry (4 years before properties become cash flow even

Not surprisingly, Sunrise was being punished as well although the company seemed to be well managed and GADcapitalized. CAPITAL MANAGEMENT

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Sunrise Senior Living (SRZ)

A Value Based Approach
The Company

Founded in 1981 by husband/wife team of Paul & Theresa Klaaseen who owned 10% of SRZ at the time. Operated over 200 assisted living centers in U.S., Canada, & U.K Properties did not take the form of traditional assisted living communities instead they looked liked Victorian houses, high rises and elegant mansions While driving home from the airport one day, I happened to pass a Sunrise facility in Atlanta and stopped in for a visit very impressive

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Sunrise Senior Living (SRZ)

A Value Based Approach

Sunrise was different:

Facilities are clustered in top 20 metropolitan areas in U.S. with 6-25 properties per cluster While assisted living new development was declining, Sunrise was growing at a healthy clip Only player that developed assisted living communities

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Sunrise Senior Living (SRZ)

A Value Based Approach

Sunrise was different:

Very smart at site selection pay extra attention to income and age demographics Average age of resident was 80-84 age segment growing 3x as fast as rest of population. 2 sources of revenue: sale of mature properties (that would later be managed by Sunrise) & mgmt fees

Sunrise Senior Living (SRZ)

The Numbers

A Value Based Approach

$11.7 million to build using $2.5M in equity Sell for $16M or pre-tax profit of $4.3M (170% ROI) Retained 20% residual interests SRZ was building & selling about 20-30 a year, so that meant about $60M in income or $3 a share. Management fees were growing at over a 25% annual rate

EPS: $0.59(2000), $0.79 (2001), $1 (2002), $1.29 (2003) Avg. resident stay was 2.5 yrs and growing 29% a year so safe to assume that 20% was achievable over next 4-5 years

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Sunrise Senior Living (SRZ)

Valuation

A Value Based Approach

2003 EPS of 1.29

15-20x multiple comes to $19 to $25 a share. Multiple is reasonable as it is below the EPS growth rate and implies a PEG ratio < 1

Historical Real Estate Transactions

Between 2000 and 2002, completed six transactions where properties were sold for an average of 53% premium to book value $800M worth of property on balance sheet in 2002 Past transactions suggested that properties were undervalued by as much as 50%

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Sunrise Senior Living (SRZ)

Valuation

A Value Based Approach

Book value was understated by as much as $14 a share. Tangible BV: $19 a share Real BV: ~ $33 a share Management Division Value: $19 - $25 Intrinsic Value: $52 - $58 per share Actual Stock Price: ~$28 a share Very high margin of safety $2.55 (NI) + $1.25 (Dep.) - $0.25 (Cap Ex) = $3.60 14-15x FCF equals $50 to $53.65 per share

Free Cash Flow

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Thank you.
Contact Info:
Gad Capital Management 1260 S Milledge Ave, Ste. C Athens, GA 30606 +1.706.340.4817 sham@gadcapital.com

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