Denali Investors Q1 letter
Denali Investors letter for the first quarter ended March 31, 2016.
Denali Investors - General Comments
During the first quarter, our portfolio did not perform in a challenging environment. Our performance is attributable to a combination of unfavorable outcomes and a number of our positions simply not working during this window. The market experienced significant volatility which impacted both our names and the market more broadly.
We have had success in taking advantage of opportunities created by volatile markets. We remained consistent to our process throughout and acted quickly to capture new opportunities. We were able add to existing positions and initiate new ones including Liberty Braves Group (BATRA), among others. The special situations pipeline for 2016 remains robust and continues to expand. Our portfolio contains numerous specific and understandable catalysts with attractive risk/return profiles.
Select Portfolio Positions
Liberty Braves Group (BATRA/BATRB/BATRK, “Braves”) – In November 2015, Liberty Media (LMCA) announced it would separate into three tracking stocks, one of which being the Liberty Braves Group (BATRA). BATRA represents assets including the Atlanta Braves baseball team, the new SunTrust Park stadium, and the adjacent mixed-use development project. BATRA began trading as a separate tracking stock on April 18, 2016 and for each LMCA share, 0.1 shares of BATRA were distributed. During the when-issued period as well as initial regular way trading, the price fell significantly. BATRA, the smallest Liberty Media entity, is subject to the greatest mispricing due to forced selling. We began building a position during this window.
In June 2016, BATRA also completed a $200m rights offering at a strike of $12.80 per share. LMCA now holds a 15.6% stake through an Inter/Group Interest (IGI). Pro forma, including the IGI held by LMCA, there are 58.3m shares.
BATRA consists of a number of valuable assets. The new stadium, SunTrust Park, is 54% financed by municipal funding from Cobb County. BATRA debt funding will finance the remaining 46% of the stadium. Effectively, BATRA will build the new stadium with no direct equity contribution but yet will accrue nearly all of the direct economic value generated by the stadium. This is a highly favorable transaction for the Braves. The stadium has a 30-year lease term.
The new sponsorships are another source of significant value for the Braves. For example, in the new stadium naming rights agreement, SunTrust is reported to pay in excess of $10m per year for 25 years, worth $250 in aggregate (before annual escalators and present value discounting). This one sponsorship alone amounts to over one-third of the stadium cost. Overall, sponsorship contracts have an average length of over 10 years with 3% average annual escalators. Approximately 80% of the year one sponsorship revenue is already committed under contract.
Higher ticket prices create additional value. The ticketing strategy is to apply a more subscription like model with season tickets requiring long-term, multi-year contracts. More than half of the ~4,000 premium seats in SunTrust Park have been sold. Pricing for the 4,000 premium seats are double or triple the levels of Turner Field. Overall, approximately one quarter of the 41,500 seats have been sold as season tickets. The goal is to reach half of overall seating as season ticket sales.
The adjacent mixed-use development will have approximately 1.5m square feet of space at a cost of $558m, or $372 per square foot (PSF). This includes 375k SF of Retail, 500k SF of Multifamily, 250k SF of Office, 250k SF of Hotel, and 130k SF of Entertainment. Assuming total net operating income (NOI) of $35m to $45m, or $23 to $30 PSF, this implies a range of 6.3% to 8.1% returns on total capital. The returns on equity funding of $200m are even more attractive. We believe that substantial value will accrue to equity over time.
BATRA controls the entire development with leading joint venture partners. No other professional sports team has constructed both a stadium and adjacent mixed-use development simultaneously. The project is precedent setting, and through this lens, BATRA can be viewed as a real estate company with a baseball team attached.
The new stadium and development is located at the western corner of the intersection of I-75 and I-285. The improvements to these highways are part of a massive $834m Northwest Corridor improvement project. The completion of the managed lanes will improve traffic flow and the experience for fans and residents.
In addition, BATRA owns 1/30th of MLB Advanced Media (MLBAM) (adjusted for the NHL holding a 7% - 10% stake through a partnership). MLBAM formed BAM Tech in August 2015 to take over all non-baseball related services. BAM Tech has provided backend online service for organizations like the NHL, ESPN, HBO, WWE, March Madness, PGA, and white label Super Bowl streaming. Disney announced in June 2016 an investment in BAM Tech for a 1/3 stake at a $3.5b valuation. Separately, MLBAM itself has an estimated valuation range of $5b to $10b.
In April 2016, the Seattle Mariners sold for $1.4b, net $1.25b for other asset value, to a group of minority owners led by John Stanton. Due to the structure of sports team economics, transactions are typically valued at multiples of revenue. With a new stadium, the pattern across professional sports has been a substantial increase of revenue of approximately 20%. If we apply this to the Braves historic average of $250m, we can expect ~$300m revenue. At 4x to 6x, the implied value of the core assets are materially higher than the current price.
Precedents include the Boston Celtics (BOS), Cleveland Indians (CLEV), and Florida Panthers (PUCK, PAW). Although each of the teams represent a different professional sport, the common pattern is of both substantial initial mispricing as a public company and acquisition premiums paid by new ownership. We believe the eventual outcome should be a take out of BATRA. Assets with these characteristics do not stay public as a pure play entity for long as evidenced by precedent comparables. Factors include the persistent discount to intrinsic value as well as the social, civic, and economic benefits that accrue to the new ownership.
Denali Investors LLC
DENALI INVESTORS = VALUE + SPECIAL SITUATIONS + HEDGES
H. Kevin Byun founded Denali Investors in 2007. The firm employs an opportunistic special situations and value-oriented framework. Denali seeks to identify catalyst driven situations that will unlock value and produce market agnostic returns. Mr. Byun has a triple major from Rice University and an MBA from Columbia Business School.
Value + Special Situations (Catalysts): Denali seeks to identify value-oriented and special situation investment opportunities at substantial discounts with definable catalysts or by being the catalyst through proactive methods. Our special situations focus and experience has generated outstanding market agnostic returns.
Fundamental Research + Analysis: Denali’s research and analysis have consistently produced a high rate of success. Our investment process uses a combination of thematic and rigorous fundamental research on individual companies and catalyst driven situations.
Portfolio Construction + Risk Management: Denali invests in only its highest conviction ideas. Concentration into 5 – 15 very attractive, non-market correlated investments is an advantage. Our opportunistic style of investing allows the firm to select investments with highly favorable risk-reward profiles. We structure the portfolio to have favorable asymmetric characteristics that we believe will provide substantial upside yet preserve capital in a downturn.
Flexible & Opportunistic Mandate: Denali has a flexible mandate that allows the firm to look at opportunities across the spectrum. Unlike other funds that are designed to fit into a limited ‘style box,’ we are opportunistic generalists focused on special situations. Our flexible approach has resulted in numerous outstanding investments.
Net Cash = Fortress: Cash is a valuable strategic asset. Our cash has typically averaged 20% to 35%. Cash remains the default in the absence of greater opportunities.