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- 2014 - February - 17th -

Shareholder suggestion led to Fidelity's tracking stock

By Mark Basch, Contributing Writer

Fidelity National Financial Inc. has never had any trouble coming up with radical ideas on its own. After all, this is the company that spun off a business as a separate public company and then bought it back seven years later (that, of course, was Lender Processing Services Inc).

You can also look at the title insurance company’s investments in completely unrelated businesses, such as restaurant chains.

However, the Jacksonville-based company’s latest twist, the creation of a tracking stock for its non-real estate-related businesses, came from outside the company.

“It’s an interesting concept that really came to us from an existing shareholder,” Fidelity Chairman Bill Foley said during the company’s quarterly conference call with analysts last week.

“I won’t mention who it is. I don’t have permission to do that. But it was a terrific idea and we implemented the idea, or are in the process of implementing the idea, and the more we get into it, the more excited we are about the tracking stock,” Foley said.

We can certainly take a guess as to who that shareholder is, since two activist hedge fund managers bought shares in Fidelity last year.

Corvex Management LP, run by Keith Meister, acquired a 6.6 percent stake and even said in its Securities and Exchange Commission filings that it was having discussions with Fidelity management about options for “enhancing shareholder value through various strategic alternatives.”

The other hedge fund manager buying shares of Fidelity was Daniel Loeb of Third Point LLC, who never made any public statements about his interest in the company.

Under the tracking stock plan, Fidelity will put its investments such as the restaurant chains and auto parts company Remy International into a new subsidiary called Fidelity National Financial Ventures (FNFV) and distribute shares of a tracking stock – which tracks the performance of FNFV – to Fidelity shareholders.

The creation of FNFV will completely separate Fidelity’s investment activities from the title operations, Foley said.

“Once the tracker is distributed, all future noncore acquisitions will be funded by FNFV, while FNF’s free cash flow will be used to reinvest in our core businesses, repay debt, pay dividends and repurchase shares,” he said.

Fidelity, of course, won’t be sitting still after it creates the tracking stock, including the possibility of an initial public offering of one of the businesses contained within FNFV, Foley said.

“We’ll continue to look at all opportunities, and we have gotten a few inquiries on particular businesses after we announced the formation of the tracking stock. Nothing has come to fruition as of yet,” he said.

Meanwhile, Fidelity reported adjusted fourth-quarter earnings of 43 cents a share, down from 72 cents the previous year. Revenue fell 7 percent to $2.07 billion, as a decline in refinance title orders affected business volume.

The earnings beat the average forecast of 35 cents by analysts surveyed by Thomson Financial.

Janney Capital Markets analyst Ryan Byrnes said after the earnings report that he continues his “buy” rating on Fidelity’s stock.

“We think the FNF story continues to improve. With the announcement that the non-core assets will be put into a tracking stock, we think investors will be attracted to FNF’s leverage to the improving US real estate market. We also believe that LPS gives FNF a recurring revenue stream and a core asset to invest free cash flow into going forward,” Byrnes said in a research note.

Regency Centers looks to grow

Regency Centers Corp. ended 2013 in good shape, putting the Jacksonville-based shopping center developer in position to invest in more properties going forward, Chairman and CEO Martin “Hap” Stein said in the company’s conference call last week.

“In 2013, we reached two crucial landmarks. First, we increased the percent leased in the operating portfolio to 95.2 percent. Second, same-property NOI (net operating income) growth was 4 percent for the second consecutive year,” Stein said.

“The current health of the portfolio and balance sheet enables us to pivot from being a net seller towards placing more emphasis on growing core earnings. While we will continue to sell lower-growth assets, the primary rationale will be as a source to fund investments,” he said.

“The end result of this net investment activity will be an even higher quality portfolio with an enhanced future NOI growth rate,” he said.

Regency, which owned 328 retail properties at year-end, reported fourth-quarter core funds from operations of 66 cents a share, up from 63 cents the previous year.

Funds from operations are basically earnings excluding depreciation and amortization expenses and are considered the key metric for evaluating real estate companies.

Regency also projected 2014 funds from operations of $2.66 to $2.72 a share.

The fourth quarter results and 2014 forecast were in line with the average analysts’ forecast of 64 cents for the fourth quarter and $2.69 for 2014, according to Thomson.

Robert W. Baird analyst Jonathan Pong, who had actually expected funds from operations of 67 cents a share, said he is remaining “neutral” on the stock after the earnings report.

“We consider three scenarios that would make us incrementally positive on shares — further macroeconomic ‘fear’ which could drive investors to hide in relative safety (yield, defensive grocery anchored landlords, low leverage), further maturation of the development pipeline, and a pullback in relative valuation,” Pong said in a research note.

SunTrust Robinson Humphrey analyst Ki Bin Kim is also maintaining a “neutral” rating.

“While we have a favorable view on Regency’s asset quality and management team, at current levels we believe these shares are trading at fair value and prefer names such as DDR Corp. that has more growth potential and is attractively priced,” Kim said in his research note.

PHH considering a split

You can add PHH Corp. to the list of companies considering a split of its two distinct business units.

PHH operates a mortgage banking and a fleet management services business. The mortgage business operates out of its New Jersey headquarters and a second operations center in Jacksonville.

As it reported fourth-quarter earnings last week, PHH said it has retained investment bankers “to assist in exploring ways to maximize shareholder value through the separation or sale of the company’s fleet business, mortgage business, or both.”

Rumors of a split surfaced on Wall Street last fall, but PHH shot those down.

“Despite a fairly detailed review of the disadvantages of separating fleet and mortgage on their third-quarter earnings call, the company has hired bankers to explore just this sort of transaction,” Sterne Agee & Leach analyst Henry Coffee pointed out in a research note last week.

Analysts think a split would be a good idea.

“Although a split would likely take some time, this is a strong positive step for PHH as investors believe that the parts are worth more than the whole. Additionally, management is undertaking other strategic initiatives to maximize shareholder value, which could benefit valuation in coming quarters,” FBR Capital Markets analyst Paul Miller said in a research note.

PHH’s stock was trading in the $24 range before the announcement, but Miller places the value of the two businesses separately at about $28, and said the company could fetch $28 to $32 in a buyout proposal.

Coffee values PHH at $28 to $35 in a possible split.

Compass Point analyst Kevin Barker expects to hear about a deal sooner rather than later.

“The company specifically mentioned they will have their review of strategic alternatives completed by the end of the second quarter, so any potential transaction or change in outlook for a transaction may be imminent,” Barker said in his research note.

“Ultimately, we believe the best option for shareholders and simplest transaction to execute would be a sale of the entire company,” he said. Barker thinks PHH could be worth $31 to $35 a share if sold.

PHH reported core fourth-quarter earnings of 28 cents a share, down from 81 cents the previous year, but well above the average analysts’ forecast of 7 cents, according to Thomson.

Buffett may acquire business from Graham

Could Warren Buffett end up owning Jacksonville television station WJXT TV-4?

In a Securities and Exchange Commission filing last week, Buffett’s Berkshire Hathaway Inc. said it is discussing a deal with management of Graham Holdings Co. to possibly exchange its shares in the company for one or more of Graham Holdings’ business assets.

Graham Holdings, which changed its name from The Washington Post Co. after selling off its flagship newspaper last year, currently owns WJXT and five other television stations. Its other businesses include a cable television business and its Kaplan education company.

Berkshire owns about 1.7 million Class B shares of the company, making Buffett the second-largest stockholder behind the Graham family.

The SEC filing said Berkshire and Graham Holdings have been discussing a possible deal in which Berkshire would give up its shares in exchange for “an as yet unformed subsidiary” of Graham Holdings “which would own a business and would own certain other assets to be determined but which may include shares of Berkshire common stock” currently owned by Graham Holdings.

At least one report last week, from Bloomberg News, speculated that Buffett may be interested in the television holdings.

Graham Holdings issued a statement acknowledging the discussions but giving no other details.

Crowe retires from Landstar board

Landstar System Inc. said in an SEC filing that its former CEO, Jeffrey Crowe, is retiring from the Jacksonville-based trucking company’s board of directors.

Crowe served as Landstar’s chairman and CEO from 1991 until 2004, when Henry Gerkens was promoted to CEO. Crowe remained chairman of the board of directors until 2010, when Gerkens took on the additional responsibilities of chairman.

Crowe had been serving as chairman emeritus since 2010. The company said in the SEC filing that Crowe, who was listed at 66 in last year’s proxy statement, was retiring from the board for personal reasons.

Former Body Central chairman leaves board

John Haley, who briefly served as Body Central Corp.’s chairman, resigned from the company’s board “to further focus on other interests,” the company said in an SEC filing.

Haley served as chairman from July 2012 through May 2013 as the Jacksonville-based women’s fashion retailer went through a management shakeup amidst slumping sales.

Body Central appointed Jennifer Crites Salopek to replace Haley on the board of directors. Salopek has extensive experience with fashion companies, having served as chairman of Charlotte Russe Holdings Inc. and in executive positions with Tommy Hilfiger and Calvin Klein.

Atlantic Coast Financial hires new CFO

Atlantic Coast Financial Corp. said in an SEC filing last week that it is hiring John Lent as executive vice president and chief financial officer.

Lent is former CEO of Union Savings Bank in Connecticut and most recently was serving as president of investment advisory firm Temenos Advisory.

Lent will succeed James Hogan, who was named to the company’s board of directors and as interim CFO in September.

Atlantic Coast Financial has been operating under a consent order from the U.S. Office of the Comptroller of the Currency, which must approve Lent’s hiring.

mbasch@baileypub.com

(904) 356-2466

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