The Intelligent Investor

1. The Intelligent Investor The Practical Approach to Successful Investing Hesham Gad, Managing Partner Gad Partners Funds www.gadcapital.com sham@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 GADCAPITALMANAGEMENTwww.gadcapital.com

3. Warren Buffet’s Rules of Investing Rule 1: Don’t Lose Money Rule 2: Don’t Forget Rule 1 GADCAPITALMANAGEMENTwww.gadcapital.com

4. Six Characteristics for Investing Intelligently (& Profitably) • A sound investment philosophy • A good search strategy • Ability to value business & assess quality of management • Discipline to say no • Patience • 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 GADCAPITALMANAGEMENTwww.gadcapital.com

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! GADCAPITALMANAGEMENTwww.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. GADCAPITALMANAGEMENTwww.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. GADCAPITALMANAGEMENTwww.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 GADCAPITALMANAGEMENTwww.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 GADCAPITALMANAGEMENTwww.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 GADCAPITALMANAGEMENTwww.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 < 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% GADCAPITALMANAGEMENTwww.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 GADCAPITALMANAGEMENTwww.gadcapital.com

16. Thank you. Contact Info: Gad Capital Management 1260 S Milledge Ave, Ste. C Athens, GA 30606 +1.706.340.4817 sham@gadcapital.com GADCAPITALMANAGEMENTwww.gadcapital.com