$BBRY – BlackBerry Demystified 5: Think Like A Bank – Sell Real Estate

And Focus...
And Focus…

The recent news that BlackBerry had agreed to sell a bundle load of property and then, in some instances, lease back some of that space led the usual suspects straight Under The Bridge in force.

‘Oh’, they said, ‘See? Panic stations at BlackBerry. Won’t be long now before the end!’

Well, surprise, surprise, heard it all before.

Hello! Still here! Not going anywhere I’m afraid!

Because, the voice of financial reason comes, once again, in the form of our friend Transcend Asset who, quite correctly argues that this deal is a VERY smart one from BlackBerry’s point of view. Real estate money is dead money. And the cash generated by this deal isn’t being used to pay wages or fund layoffs, it’s being used to fund the growth of the company.

She also makes the point that this strategy has been used to great effect by other well known company’s too – to great effect…

This is what she had to say:

  • Exiting from real estate holdings has a positive impact on share price over time. Banks such as CIBC have registered +207%. Nokia is +123%.
  • To refocus on its core business, BlackBerry sells its real estate. Going forward, the cash will provide the necessary liquidity to start up new ventures.
  • Two new ventures on the horizon are the Security Innovation Center in Washington, DC and the partnership and associated factory build in Indonesia involving Foxconn.
  • Raising new capital without needing to approach a bank keeps the business from acquiring new debt.
  • The renewed focus on the core also reduces the company’s responsibility for costs associated with owning property (taxes, insurance, and maintenance).

More Money, Fewer Headaches, More Flexibility

In recent years, many banks and technology firms have sold off their real estate to focus on their core businesses. Selling real estate when there is a perceived bubble is a common Canadian practice. Even the federal and provincial governments do this. There are many great reasons for firms to exit from real estate holdings:

  • Not having to do what they are not good at. They no longer have to play landlord to tenants who rent parts of their property.
  • Reducing associated costs. Owning property means paying for taxes, insurance, and upkeep. Having a few less legal, tax, and insurance entanglements on the plate is always a plus.
  • Being debt-free faster. By using cash to reduce liabilities, the balance sheet will improve.
  • Funds for new opportunities. Cash on hand will allow for acquisitions, new equipment, hiring, and expansions.
  • Reducing tax liabilities. Rent is a legitimate business expense, and can be deducted on annual returns.
  • Increased flexibility. If the business is in a country or region that is suddenly politically unstable, windup is faster and with fewer loose ends. Shutting down and windup in response to negative events such as unionization and wage hikes is faster. Starting up in a location with the best possible business conditions (talent pool, location, political stability, and tax breaks) is also faster.

The Takeaway From BB’s Sale-Leaseback

BlackBerry (BBRY) is on track to cashflow breakeven under CEO John Chen as value is unlocked from assets and directed towards innovations and future products. Contrary to what TheStreet.com may want you to believe, analysts are mostly neutral on BlackBerry. There are 37 such analysts in the neutral pool, and the average price target of all analysts is $8.87 (suggesting, at the very least, a 11.8% upside from the recent close). Most recently, the stock has been upgraded by Oppenheimer and Needham Company. It has also received an excellent write-up from Goldman Sachs.

Interestingly, the real estate sale is announced earlier than I anticipated: based on the roadmap Chen has given, I expected the announcement to follow the actual release of the Z3, and not before. It is typical for real estate sales to take a long time and possibly fall through as the buyer will want to do a thorough investigation of what they are purchasing. But as stated, “Spear Street Capital, LLC has waived its due diligence condition,” and the deal is pretty well complete.

The parties expect to complete the sale of properties valued at approximately 80% of this total later this month, with the sale of the remaining properties to be completed during the third calendar quarter of 2014, subject to customary closing conditions in each case. – BlackBerry Press Release

From this information, we can conclude:

  • 80% of the transaction will be complete very soon. $244 million Cdn (or $222.4 million US) will be transferred to the company later this month.
  • After which, the balance of monies is expected between July and September – $61 million Cdn (or $55.6 million US).
  • At over 3 million square feet, that is less office space than the Burj Khalifa (5 million square feet across 160 floors); but more than the Empire State Building (2.7 million square feet across 102 floors).
  • Startups and also competitors can move into the existing space, but the undeveloped lands may or may not receive much go-ahead for building and development. If the city holds out on approvals and permits, competitors will have a hard time getting a footing in BlackBerry’s old real estate. In my view, the reason BlackBerry is receiving $305 million and not much more (some think $600 million to $700 million) is because undeveloped land comes with a significant risk to the buyer. Further complications can develop during construction, as well.
  • It is not certain if the 80% of the transaction set to complete soon involves mostly land or office space. If mostly land, this is to BlackBerry’s benefit. Land development requires zoning and city permits, consultations with architects, contractors, consultants, and developers. From proposal through to completion, projects can take 5 to 10 years to complete. As long as John Chen’s turnaround is on track and the Q20/ BES12 is well-received, changes in real estate holdings will not negatively affect the bottom line as the competition will still have to jostle with the start-ups for what space is available when new space is not built.
  • The cash from the closing of this transaction will be available for BlackBerry to fund the Security Innovation Center in Washington, DC and all the setup, equipment, and hiring costs that it entails.
  • Furthermore, the partnership with Foxconn and the investment in NantHealth will require start-up funds. Now that cash is not a problem, the company can focus on innovation.

To further analyze BlackBerry’s decision to see if it is beneficial to BlackBerry, I have taken a look at the stock performance of others who have done sales and leasebacks:

Stock Price After Annoucements

The downside risk of selling real estate is limited. CIBC (CM), Nokia (NOK), and AMD (AMD) are top performers when considering how they have done since their sale-leasebacks. Sony (SNE) shows a fairly significant return when considering performance as of the first sale announcement, but they are not so stellar when considering the timeframe of another (March 2013) announcement to now. Contrary to our gut reaction to a “sale,” the data shows that over time, there is no negative impact. None of the entities registered glaring double-digit declines. Instead, we even witness 3-digit appreciations in share price.

Sale-Leaseback a Preference Over Stock Offerings and Loans

Canadian banks and various levels of governments are some of the top participants in sale-leasebacks. It is of no surprise to Canadians when BlackBerry chooses to sell and then rent. This practice unlocks cash, limits debt and liabilities, fosters growth, and allows a clean exit when the real estate is bubbly. BlackBerry is getting upwards of $101.66 per square feet in the deal. It is not a fire sale. Rental rates are forecasted by CBRE to be lower in 2014 and on average, only $14.16 per square feet. Furthermore, contrary to what the media may suggest, the Waterloo region is not falling apart. There is not a glut of new construction or supply:

  • The Canada-wide 2014 forecast for new supply is 7.94 million. That of Waterloo is only 0.33 million. Under construction is 16.24 million across Canada, but only 0.16 million in Waterloo.
  • This further solidifies my conclusion that BlackBerry is the one in full control of the real estate in the Waterloo region. Without it selling, the real estate price is locked at a high. With it selling, the real estate price goes down for the entire market.

Below is data and market outlook from CBRE on the Waterloo Region:

CBRE Overall Rates in the Waterloo Region

BlackBerry is exiting from property that has appreciated, and renting when the associated costs and benefits are better than ownership. Prior to selling to Spear Street, BlackBerry’s other transaction was with the University of Waterloo, for $41 million. This space is used by the university for expansion purposes. By keeping it out of reach of competitors, and selling it to the university, BlackBerry is securing its future source of talent and limiting the competition’s access to the talent pool as they will not have an easy time competing with startups for space. While its footprint in Canada’s tech hub consolidates to the newer buildings to the northern parts of Waterloo, the sale is making resources available for expanding into new developments in Washington, DC and Indonesia.

“Jack” and the Future

BlackBerry now shows signs of being the nimble Jack in the children’s story, Jack and the Beanstalk. After slashing employees and selling real estate, it looks poised to surprise:

  • By hiring employees for the new Washington, DC location
  • By hiring employees (indirectly) at the Foxconn factories in Indonesia
  • By hiring employees (indirectly) at NantHealth
  • By opening and closing locations with maximum efficiency as conditions change, and being better able to adapt to changing times.
  • By reporting cashflow breakeven and a small profit sooner than expected due to restructuring.

Google (GOOG, GOOGL), Apple (AAPL), and Samsung (OTC:SSNLF) are like sleeping giants, very comfortable with their success and unaware of the magnitude of the impact BlackBerry’s changes can have on their futures. “Jack” and his partners are out to get the golden eggs.

Too true.

We’re coming back.

And those sleeping giants are in for a shock because, as we’ve explored previously, they’re all still too wedded to the upgrade gravy train which is slowing to a crawl whereas BlackBerry have had their shock early – and are now ready for the future.

A future that is #BlackBerryUnleashed

Source: Seeking Alpha

Oh, and if you want a laugh, click on the link above and check out the haters comments at the bottom of the article. Yes, they even let it blind them when it comes to stock investments.

Bigglybobblyboo

Bigglybobblyboo is a legend almost nowhere at all. He is a founder member of UTB and spends his spare time taking out his anger at the world with a fishfork and a spatula. He is also a Cribbage Master, having won 1 fight online as the other guy refused to turn up out of fear for his life.

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