The Intelligent Investor

1
The Intelligent Investor

• The Practical Approach to Successful Investing
• Hesham Gad,
• Managing Partner
• Gad Partners Funds
• www.gadcapital.com
• sham_at_gadcapital.com

2
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

GAD CAPITAL MANAGEMENT

www.gadcapital.com
3
Warren Buffets Rules of Investing

• Rule 1 Dont Lose Money
• Rule 2 Dont Forget Rule 1

GAD CAPITAL MANAGEMENT

www.gadcapital.com
4
Six Characteristics for Investing Intelligently
( Profitably)

1. A sound investment philosophy
2. A good search strategy
3. Ability to value business assess quality of
   management
4. Discipline to say no
5. Patience
6. Courage to make a significant investment at point
   of maximum pessimism

5
Six Characteristics for Investing Intelligently
( Profitably)

• 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
• A Good Search Strategy
• See what the smart investors are buying
• www.gurufocus.com, www.stockpickr.com
• Value Line

GAD CAPITAL MANAGEMENT

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6
Six Characteristics for Investing Intelligently
( Profitably)

• Ability to Value Businesses Assess Quality of
  Management
• 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!

GAD CAPITAL MANAGEMENT

www.gadcapital.com
7
Six Characteristics for Investing Intelligently
( Profitably)

• 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.

8
Six Characteristics for Investing Intelligently
( Profitably)

• Patience
• 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.

GAD CAPITAL MANAGEMENT

www.gadcapital.com
9
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 capitalized.

GAD CAPITAL MANAGEMENT

www.gadcapital.com
10
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

GAD CAPITAL MANAGEMENT

www.gadcapital.com
11
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

GAD CAPITAL MANAGEMENT

www.gadcapital.com
12
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

13
Sunrise Senior Living (SRZ)A Value Based Approach

• The Numbers
• 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

GAD CAPITAL MANAGEMENT

www.gadcapital.com
14
Sunrise Senior Living (SRZ)A Value Based Approach

• Valuation
• 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 lt 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

GAD CAPITAL MANAGEMENT

www.gadcapital.com
15
Sunrise Senior Living (SRZ)A Value Based Approach

• Valuation
• 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
• Free Cash Flow
• 2.55 (NI) 1.25 (Dep.) - 0.25 (Cap Ex)
  3.60
• 14-15x FCF equals 50 to 53.65 per share

GAD CAPITAL MANAGEMENT

www.gadcapital.com
16
Thank you.

• Contact Info
• Gad Capital Management
• 1260 S Milledge Ave, Ste. C
• Athens, GA 30606
• 1.706.340.4817
• sham_at_gadcapital.com

GAD CAPITAL MANAGEMENT

www.gadcapital.com