RFL - Rafael Holdings

[bobozou]

Summary - I think RFL is ultimately a speculative bet on a CEO with an amazing track record, but at an attractive price

 

------------------

 

1) It's a recently completed (last week) spinoff from IDT.  It has a marketcap of roughly $60M, while the parent IDT has a marketcap of $140M.

 

Some interesting trading dynamics:  back in February (pre-spin) the combined market cap of IDT (& RFL) was approximately $250M ($10/share of IDT).  In early March (pre-spin) the combined market cap was approximately $300M ($12/share of IDT).  Currently, the combined market cap of both ($200M) is significantly below pre-spin levels.

 

2) Parent is IDT, which is famous in value circle, though not without debate (just look in VIC).  More relevantly, IDT was also the parent of such HOMERUN spinoffs as IDWM & STRP (among others like GNE and ZDGE which are doing poorly/ok, though jury may still be out).  Jonas is the CEO, and he's reclusive/brilliant/eccentric. 

 

I think whether you invest is going to ride heavily on whether you believe in the jockey, in this case Jonas.  For me, I'd say his value-generation is very impressive, and his behavior towards minority-shareholders is not egregious.

 

3) Book value of $115M vs marketvalue of $60M.  Minimal liabilities.  Main assets are 1) cash of roughly $50M, 2) several pieces of real estate, the primary one in Newark held at $50M, and 3) some other investments in biopharma startup (held at $10M)

4) Real estate - the primary real estate is 520 Broad, which was purchased in 2008 for $50M.  I don't know how much it's worth. 

 

I know that it was flooded a few years after purchase. 

 

I know that they renovated the first few floors (I dont know the cost). 

 

I know that another building next to it sold for $16M (in 2016) - but I don't know how relevant the comp is (still, the comp is concerning). 

 

I know that it's only very partially rented out, to IDT & Genie primarily - I don't know if that's a reflection of strategy (delaying until renovations are done), or reflective of lack of interest.

 

I know that, at the rate IDT is currently paying, the implied rent for the whole building is ~$9.3M/year - however, they will need to complete all renovations (at an unknown cost), or charge less for pre-renovation sq footage.

 

However, my guess is the building is probably worth at least $20M (implied based on sq ft price from the purchase of the building next door).  It could be higher, if the neighbor was sold without any previous renovations.  If IDT put in $10M already, then maybe the building is worth $30M.  If they can sell it for book value, it's worth $50M.  If it's fully renovated, maybe they can generate ~$9M of rent, and the building would then be worth much more - I do fully believe that Jonas will be prudent in whether to invest more capital in the building.

5) Biopharma Investment - this is interesting/speculative.  Not much detail is known, but supposedly they got a 'sweet deal' on their original investment.  Their $10M could be worth more (or not), but they also own warrants to purchase alot more.  I have 0 knowledge or opinion on what this WILL be worth.  However, in 10 years, this will obviously be $0 or alot-alot. 

 

In this case, I trust Jonas's original investment.  I trust that if he puts more $ into it, it will be a prudent decision.  If anyone has a more educated opinion, I'm all ears.

 

In the final assessment, you have $50M cash, $20-50M of building, and $10M of pharma lottery tickets.  The value of assets is what gets me interested, but the ultimate outcome rests largely on Jonas's business acumen.  You either believe he is an extremely astute investor (who may still get things wrong), or not.  If not, I don't know that the asset value alone is more attractive than other opportunity sets (especially given that the cash will almost certainly deployed on the building, the pharma investment, or other things).

[Jurgis]

Re: Howard Jonas - anyone investing into one of his companies should read his books. "On a Roll" PDF free link was posted here on CoBF. Here is a link to IDT discussion and "On a Roll" link is there: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/idt-idt-corp/msg106958/#msg106958

 

IMO, Howard is not a visionary, but he is tough and pretty good at milking cash from (sometimes questionable) products. He is also very broad, so he does a lot of businesses, some of which work and some that don't. As outside shareholder you may or may not figure out which of his current projects will work.

 

He believes that his companies are really his and he will do whatever he likes with them. He may not intentionally screw minority shareholders and minority shareholders might do well if they hold a company that is on Howard's success wave. But he will not care about shareholders explicitly. That's why he has supervoting shares for all his cos (pretty much, there may be some exceptions). And he does mini-secondaries to himself and buddies for under-market prices. And he has his kids as CEOs/leadership of his companies. I don't have an opinion about the skills/capabilities of his kids.

 

IMO Jonas companies are not hold-forever investments. You can make (a lot of?) money if you invest before the wave up and sell when the wave is up. They are not businesses that last (forever), but the wave top is sometimes very high.

 

Anyway, just MHO. I don't have valuation opinion about RFL. I have tiny investments in IDT/ZDGE/RFL/IDWM. I am unlikely to buy more and may sell, but that's just MHO and not implied (dis)endorsement. Good luck.  8)

[writser]

Looks somewhat interesting at first glance. Seems like they want to plow most of the cash back into the office building (which is currently only ~25% occupied):

 

The total estimated capital expenditures including building upgrades, tenant improvements and leasing commissions will be approximately $24 to $45 million comprised primarily of tenant improvements.

 

So mostly a bet on the real estate? Also, book value includes 10m in noncontrolling interests that you should probably substract.

[bobozou]

Jurgis - I think I'd agree with everything you said, even/especially the last part that he is not building the next buy&hold-forever/berkshire. 

 

That being said:

 

1) Though he is no bastion of fiduciary responsibility, he has never gone out of his way to screw shareholders.  On the spectrum of Buffett/Malone/Biglari, I think Jonas is very much akin to a Malone.  I'd trust him with my capital, just not 'buy & forget'.

 

2) Like you said, he does a lot of different businesses.  My sense is that he's out 'looking for a bargain' (rather than empire-build).  STRP's spectrum was a (very) successful example.  Genie was a less successful example.  Jury's out on the pharma-investment, but I wouldn't be surprised if he did buy-in on a 'good deal'.

 

3) I have no opinion on his progeny-CEO's, with rabbinic training (Admittedly, I was more skeptical before STRP went parabolic;  and to be fair, I wonder how much my degree-in-engineering really taught me anything relevant to what I do today.  FWIW, Howard Jonas has the academic pedigree, but maybe he also felt that formal education/degree is not strongly relevant to real-world skills).

 

For me at least, the sheer number/variety of undertakings, the success-rate of the undertakings, and the magnitude of the successes create a positive association in my mind.

 

Lastly, I think the quirky, rebel-sympathizing, do-things-differently part of me is sympathetic to Jonas's eccentricities  :)

 

 

Writser - thanks for the note/correction on building capex & noncontrolling interests

[Jurgis]

FWIW, Howard Jonas has the academic pedigree, but maybe he also felt that formal education/degree is not strongly relevant to real-world skills).

 

You should definitely read "On a Roll". He says directly what he thinks about Harvard. ;)

 

Good luck.  8)

[Foreign Tuffett]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

[cameronfen]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

Knowing Howard Jonas the reason the building is vacant is so he could keep the spinoff price low.  Also why the real estate is a non-core holdings.  520 Broad St has 500k sq feet of land.  Based on comps here: http://www.loopnet.com/for-sale/newark-nj/3/?sk=f80ff3372bc4fa6a846f53d789ec385f this is worth at least $150 per square feet of 75 million dollars which is 25 million above carrying value.  Other properties are maybe 8-10 million of value.  Howard Jonas MO is hiding value in spinoffs and he seems to be doing that again here.   

[Foreign Tuffett]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

Knowing Howard Jonas the reason the building is vacant is so he could keep the spinoff price low.  Also why the real estate is a non-core holdings.  520 Broad St has 500k sq feet of land.  Based on comps here: http://www.loopnet.com/for-sale/newark-nj/3/?sk=f80ff3372bc4fa6a846f53d789ec385f this is worth at least $150 per square feet of 75 million dollars which is 25 million above carrying value.  Other properties are maybe 8-10 million of value.  Howard Jonas MO is hiding value in spinoffs and he seems to be doing that again here. 

 

I think the below link is a more relevant comp for 520 Broad. If you go on Google Maps you can see that this building is more-or-less directly across the street from IDT's

 

http://www.nj.com/essex/index.ssf/2017/03/downtown_newark_office_tower_sold_for_172m.html

[cameronfen]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

Knowing Howard Jonas the reason the building is vacant is so he could keep the spinoff price low.  Also why the real estate is a non-core holdings.  520 Broad St has 500k sq feet of land.  Based on comps here: http://www.loopnet.com/for-sale/newark-nj/3/?sk=f80ff3372bc4fa6a846f53d789ec385f this is worth at least $150 per square feet of 75 million dollars which is 25 million above carrying value.  Other properties are maybe 8-10 million of value.  Howard Jonas MO is hiding value in spinoffs and he seems to be doing that again here. 

 

I think the below link is a more relevant comp for 520 Broad. If you go on Google Maps you can see that this building is more-or-less directly across the street from IDT's

 

http://www.nj.com/essex/index.ssf/2017/03/downtown_newark_office_tower_sold_for_172m.html

 

Maybe my numbers are not conservative enough but just to push back a little on your numbers.  Using the market rate for rental office prices which is both a deeper and more relavent market: http://www.loopnet.com/new-jersey/newark_office-space-for-lease/ .  Rental prices are around $2 a month a square foot.  Notice the 17 washington property is also listed above $2 a mo a square foot.  At 500k sq ft (both idt and 17 washington are 500k sq ft) this comes out to be 12 million a year.  Assuming ffo marigin of 50% this comes out to profit od 6 million a year.  This certianly suggests 17 million is too cheap and 75 million is the right ballpark.  Maybe my numbers are not conservative enough but 17 million is so cheap maybe you arent getting the whole story.  Additionally looking here: http://www.loopnet.com/Newark_New-Jersey_Market-Trends?linkcode=31130 prices for buying in newwark range from 125 dollars a square foot to 200 dollars a square foot.  Putting 75 million low middle of that range. 

[Jurgis]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

 

[Foreign Tuffett]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

Knowing Howard Jonas the reason the building is vacant is so he could keep the spinoff price low.  Also why the real estate is a non-core holdings.  520 Broad St has 500k sq feet of land.  Based on comps here: http://www.loopnet.com/for-sale/newark-nj/3/?sk=f80ff3372bc4fa6a846f53d789ec385f this is worth at least $150 per square feet of 75 million dollars which is 25 million above carrying value.  Other properties are maybe 8-10 million of value.  Howard Jonas MO is hiding value in spinoffs and he seems to be doing that again here. 

 

I think the below link is a more relevant comp for 520 Broad. If you go on Google Maps you can see that this building is more-or-less directly across the street from IDT's

 

http://www.nj.com/essex/index.ssf/2017/03/downtown_newark_office_tower_sold_for_172m.html

 

Maybe my numbers are not conservative enough but just to push back a little on your numbers.  Using the market rate for rental office prices which is both a deeper and more relavent market: http://www.loopnet.com/new-jersey/newark_office-space-for-lease/ .  Rental prices are around $2 a month a square foot.  Notice the 17 washington property is also listed above $2 a mo a square foot.  At 500k sq ft (both idt and 17 washington are 500k sq ft) this comes out to be 12 million a year.  Assuming ffo marigin of 50% this comes out to profit od 6 million a year.  This certianly suggests 17 million is too cheap and 75 million is the right ballpark.  Maybe my numbers are not conservative enough but 17 million is so cheap maybe you arent getting the whole story.  Additionally looking here: http://www.loopnet.com/Newark_New-Jersey_Market-Trends?linkcode=31130 prices for buying in newwark range from 125 dollars a square foot to 200 dollars a square foot.  Putting 75 million low middle of that range.

 

 

I will freely confess to not knowing the "whole story", but aren't you ignoring the elephant in the room here: both buildings are mostly vacant!

 

Also, you can look at IDT's 10-K to see the (recently adjusted) rent they pay at 520 Broad, why don't you start with that instead of looking at comps all over Newark?

[matts]

As has been mentioned in this thread already, the majority of 520 Broad Street is vacant. Even more, the building has only a single non-related party, non- ground level lease. Have they expressed any plans to renovate the non-IDT occupied parts of the building and/or expressed any optimism about locating additional tenants?

 

The new company is named after Rafael Pharmaceuticals right? That leads me to believe that the real strategy for the company is going to be using its cash hoard to (in effect) fund Rafael Pharmaceuticals' research via exercising the warrants it owns. The lead drug candidate looks to be something called CPI-613. CPI-613 is an attempt to, via a mechanism I don't claim to understand, exploit the altered metabolisms of cancer cells to prevent them from thriving.

 

I think it only makes sense to be bullish on this to the extent you are bullish on Rafael Pharmaceuticals' drug development efforts.

 

Knowing Howard Jonas the reason the building is vacant is so he could keep the spinoff price low.  Also why the real estate is a non-core holdings.  520 Broad St has 500k sq feet of land.  Based on comps here: http://www.loopnet.com/for-sale/newark-nj/3/?sk=f80ff3372bc4fa6a846f53d789ec385f this is worth at least $150 per square feet of 75 million dollars which is 25 million above carrying value.  Other properties are maybe 8-10 million of value.  Howard Jonas MO is hiding value in spinoffs and he seems to be doing that again here. 

 

I think the below link is a more relevant comp for 520 Broad. If you go on Google Maps you can see that this building is more-or-less directly across the street from IDT's

 

http://www.nj.com/essex/index.ssf/2017/03/downtown_newark_office_tower_sold_for_172m.html

 

I'm not a real estate expert but that 33 Washington property should be a very good comp. It was a recent transaction just across the street, similar square footage, mostly vacant.

 

And on that note, why are 2 office buildings in downtown Newark mostly vacant? Were they both flooded due to the same event?

 

 

[Spekulatius]

Newark is really dumpy, but wasn’t there some talk about Amazon moving there for their second headquarter?

[cameronfen]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million. 

[bizaro86]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million.

 

The question is whether Newark will end up as a second tier city or a deserted wasteland.

[Spekulatius]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million.

 

The question is whether Newark will end up as a second tier city or a deserted wasteland.

 

It’s too close to Manhattan and it has an airport, which makes it unlikely to become a wasteland, IMO.

[cameronfen]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million.

 

The question is whether Newark will end up as a second tier city or a deserted wasteland.

 

It’s too close to Manhattan and it has an airport, which makes it unlikely to become a wasteland, IMO.

 

According to the same loopnet link i wrote above.  Newark office real estate price has been stable or trending up

[bizaro86]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million.

 

The question is whether Newark will end up as a second tier city or a deserted wasteland.

 

It’s too close to Manhattan and it has an airport, which makes it unlikely to become a wasteland, IMO.

 

That was almost entirely tongue in cheek, my apologies. I would be a bit concerned about the crime though. https://www.neighborhoodscout.com/nj/newark/crime

 

I really know very little about the area. Is there convenient public transportation to Manhattan? Distance should probably be measured in minutes not miles in this case.

[cameronfen]

Maybe the building that was sold for 17M was haunted ... by real-estate investors past...  ::)

 

 

 

Just sayin'  8)

 

Ya I dont know.  Obviously that price should shift the prior to a lower valuation.  But I dont think you can often buy a 20 story office building in a second tier city for 17 million.

 

The question is whether Newark will end up as a second tier city or a deserted wasteland.

 

It’s too close to Manhattan and it has an airport, which makes it unlikely to become a wasteland, IMO.

 

That was almost entirely tongue in cheek, my apologies. I would be a bit concerned about the crime though. https://www.neighborhoodscout.com/nj/newark/crime

 

I really know very little about the area. Is there convenient public transportation to Manhattan? Distance should probably be measured in minutes not miles in this case.

 

I don't think commuting to Manhattan is necessarily the biggest factor.  Newark has it's own city center and the people working there are likely to live in suburban areas.  If you want to go to Mahattan you can take the path it takes 30 mins approx: https://bit.ly/2ExyzWG. 

 

Another sanity check is residential prices which I thought was often a lower bound on office space but after some googling I am not sure.  It is, however, a deeper market.  Using Trulia data: https://www.trulia.com/blog/data-portal/data/ you can see that price per sqft for residential is about $150 over the past year and trending upward. 

[supertutti]

Don't know much about this company but know a decent amount about Newark real estate. Broad street is very interesting area. Prudential has it's HQ there, and recently built a second tower there, and a whole foods open on the street. But there have been many efforts to develop housing and office there, and they have all struggled. While they have built nice places to work or live, Newark still has a stigma, and honestly, rightfully so. It's not the best place to walk during the day, and certainly not at night. Most of the nicer office space for Newark is very close to Penn Station, about 3-4 blocks away from Broad Street. There has been a resurgence in renovating and new construction in Newark, but I still don't see many companies lining up to move their HQ there. So in summary, the building being vacant is a red flag and not something I'd see as being filled quickly. There is a lot of available office space in Newark.

[hillfronter83]

Don't know much about this company but know a decent amount about Newark real estate. Broad street is very interesting area. Prudential has it's HQ there, and recently built a second tower there, and a whole foods open on the street. But there have been many efforts to develop housing and office there, and they have all struggled. While they have built nice places to work or live, Newark still has a stigma, and honestly, rightfully so. It's not the best place to walk during the day, and certainly not at night. Most of the nicer office space for Newark is very close to Penn Station, about 3-4 blocks away from Broad Street. There has been a resurgence in renovating and new construction in Newark, but I still don't see many companies lining up to move their HQ there. So in summary, the building being vacant is a red flag and not something I'd see as being filled quickly. There is a lot of available office space in Newark.

 

Thanks for the comment. Here is another news regard Newark real estate:

https://www.bisnow.com/national/news/multifamily/former-nba-superstar-shaquille-oneal-tops-off-79m-shaq-towers-apartment-complex-87218

 

Any idea about the other building they bought in 1999 for $5.9m in Piscataway? This looks like a reasonably priced lottery ticket on biotech.

[cameronfen]

Don't know much about this company but know a decent amount about Newark real estate. Broad street is very interesting area. Prudential has it's HQ there, and recently built a second tower there, and a whole foods open on the street. But there have been many efforts to develop housing and office there, and they have all struggled. While they have built nice places to work or live, Newark still has a stigma, and honestly, rightfully so. It's not the best place to walk during the day, and certainly not at night. Most of the nicer office space for Newark is very close to Penn Station, about 3-4 blocks away from Broad Street. There has been a resurgence in renovating and new construction in Newark, but I still don't see many companies lining up to move their HQ there. So in summary, the building being vacant is a red flag and not something I'd see as being filled quickly. There is a lot of available office space in Newark.

 

Thanks.  I didn't know that.