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Land & Buildings sees a chance to add value in a real estate game with Six Flags

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Customers are socially distanced on rides like Wonder Woman: Lasso of Truth at Six Flags Great Adventure in Jackson, New Jersey.

Kenneth Kiesnoski/CNBC

Company: Six Flags Entertainment (SIX)

The business: six flags is the world’s largest regional theme park operator and North America’s largest water park operator. They generate revenue primarily from selling tickets to their parks and selling food, beverages, merchandise, and other products and services within the parks.

Stock market value: $1.9 billion ($23.25 per share)

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Activist: Management of investments in land and buildings

Ownership Percentage: about 3.0%

Average cost: n/a

Activist comment: Land & Buildings is a long-short real estate-focused hedge fund that will attempt to engage with management in a friendly manner when it sees deep value. He invests in heavily discounted real estate in public markets and in select corporate engagements. Company positions are generally below the 5% 13D reporting threshold. It is poised to nominate directors and has received board seats from American Campus Communities, Brookdale Senior Living, Felcor Lodging Trust, Life Storage, Macerich, Mack-Cali (now Veris Residential) and Taubman Centers.

What’s happening?

On December 21, Land & Buildings released a presentation detailing a potential operational and strategic turnaround for Six Flags Entertainment, which includes monetizing the company’s real estate assets and considering a resale.

Behind the scenes

Land & Buildings (“L&B”) is a focused real estate investor, and this is primarily a real estate game. The company is suggesting that Six Flags spin off its real estate holdings, which L&B believes are worth more than the company’s current value. L&B has extensive knowledge and experience in this area. In 2015, the hedge fund initiated an activist campaign at MGM Resorts International, which eventually led to the formation of a real estate investment fund MGM acquired by VICI Properties and significantly increased margin at the operating company. Composites of recent private transactions for gaming real estate, as well as public gaming REIT valuations, point to a 6% to 7% cap rate and a mid-teen multiple for assets like theme parks. L&B believes there would be many interested buyers.

In its analysis, L&B assumes a cap rate of 7.25% and a value of US$ 2.8 billion for the real estate sector. A sale-leaseback of the property could decrease earnings before interest, taxes, depreciation and amortization from $520 million to $315 million, and assuming an EBITDA multiple of 7x (SIX’s current multiple is 8x), the operating company would have an enterprise value of $2.2 billion. 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, that would equate to a share price of $31.32, or a 34% increase over the current Six Flags stock price (47% increase over the company’s unaffected stock price before the release of the L&B plan). L&B performed the same analysis on the 2024/2025 EBITDA targets, which led to a value of US$6.8 billion and an increase of 150%. Furthermore, the hedge fund’s analysis assumes that the $2.8 billion remains on the company’s balance sheet. If it’s used to buy back shares around where they’re trading right now, the return would be even greater.

L&B believes that the sale of the Six Flags properties would allow the company to increase share buybacks, reinstate its dividend (which was eliminated at the start of the Covid pandemic) and pay down debt. Also, this is a shareholder base with many like-minded investors (HG Vora, H Partners, Long Pond Capital) and a relatively new CEO (November 2021) who might be receptive to a plan like this.

Making a plan like this would give the CEO a lot of time and capital (both real and figurative) to do what really needs to be done – fix operational problems. When Selim Bassoul was named CEO of Six Flags in November 2021, he embarked on a strategy of trying to enhance the guest experience and create a more profitable, higher-margin business by moving to a richer, more customer-oriented customer base. family. This new strategy, which included the elimination of several customer benefits, led to a significant drop in service, the alienation of many current customers and subsequent poor price performance relative to competitors. However, the jury is still out on whether it’s working. If it results in greater service at higher prices in 2023, then it has worked and nothing needs to be done operationally. However, if fulfillment continues to be delayed until 2023, Bassoul may have to start giving back many of the perks he had taken away, like modified dinner passes. He may even have to consider lowering prices to previous levels. Without stabilizing operations, the real estate strategy can only create so much shareholder value. However, optimizing service and stabilizing operations will amplify any value generated by the real estate strategy.

We expect that Land & Buildings will want to have some type of representation on the board to help with this strategy. Frankly, Six Flags should want the company’s help if it chooses to monetize the property. So it wouldn’t be surprising to see an amicable deal for one or two board seats. However, the director nomination window is between January 11, 2023 and February 10, 2023. If no agreement is reached by then, L&B is almost certain to nominate directors, if only to preserve the company’s rights while it continues. talking to management. If this goes down to a proxy fight, the like-minded investors mentioned above – H Partners (13.5%), HG Vora (4.2%) and Long Pond Capital (5.7%) – could be potential backers of the L&B.

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