Friday, June 2, 2023

12 months Finish 2022 Portfolio Evaluation

This 12 months within the markets wasn’t enjoyable.  Whereas I did not take part within the headline driving speculative manias (development shares, SPACs, crypto, and so on), I did get caught with a leveraged PA heavy in actual property and pre-arb/takeover conditions which had been hit by rising rates of interest and M&A financing markets tightening up.  I used to be down -35.31% for the 12 months, versus the S&P 500 ending down -18.11%, my worst absolute efficiency and relative outcome to the markets since starting investing in particular person shares.  My lifetime to-date IRR fell to 21.09%.

Present Positions Updates
As traditional, I wrote these intermittently over the past week, a number of the share costs/valuations is likely to be barely stale. Offered in principally random order:

  • My largest holding by a good quantity — partially as a result of it has held up in worth this 12 months versus every little thing else falling — is Transcontinental Realty Buyers (TCI), TCI’s three way partnership with Macquarie not too long ago accomplished the sale of their portfolio, together with the holdback of seven properties by TCI.  The ebook worth of TCI jumped to roughly $90/share, however this probably understates the worth created within the JV sale transaction, the holdback properties had been valued at market within the break up between TCI and Macquarie, however stay at historic price in TCI’s ebook worth.  Cheap folks can argue the place sunbelt multi-family would commerce at the moment (decrease) versus earlier within the 12 months when the JV sale was introduced, however the probably truthful worth of TCI is greater than $100/share whereas it trades for ~$43/share.  In fact, TCI shareholders won’t ever see that quantity, however the bigger the hole between truthful worth and the share worth, the extra probably it’s that the Phillips household’s incentives would align with a go-private proposal.  The present acknowledged plan for the JV money is “for extra funding in income-producing actual property, to pay down our debt and for normal company functions.”  Optimistically, I view that as boilerplate language and would not rule out a go-private supply with the proceeds, nevertheless, if a portion of the proceeds get swept again to the Phillips household through their function as “Money Supervisor”, that would be the sign to exit as they’d be getting liquidity for themselves however not minority shareholders.
  • In hindsight, fortunate for Franchise Group (FRG) they acquired chilly toes of their try to purchase Kohl’s (KSS) (I bought my place in KSS at a loss after the potential deal was referred to as off), despite the upside potential due to extreme financial engineering.  Following that pursuit, the present financial setting’s grim reaper got here for FRG’s American Freight section (liquidation channel furnishings retailer idea the place not like their company identify, they personal and function these places).  Administration made the covid period provide chain mistake of shopping for something they may get their arms on, when shopper preferences shifted, they had been left with stock that was now not in demand.  FRG stays bullish on American Freight, on the final convention name Brian Kahn acknowledged within the context of his M&A urge for food, “.. if we even choose what you may contemplate to be a low a number of of 5x, which not many companies go for we are able to go investor our capital in opening extra American Freight shops at lower than 1x EBITDA.”  I am guessing subsequent 12 months, Kahn will keep out of the headlines and refocus on the enterprise.  Most of FRG’s issues are centered within the American Freight section, their different two giant segments, Vitamin Shoppe and Pet Provides Plus, proceed to carry out properly.  Excluding their working leases, utilizing TIKR’s road estimate of $375MM in NTM EBITDA, I’ve it buying and selling for about ~5.5x EBITDA.  June 2024 LEAPs can be found, I purchased some versus averaging down within the widespread inventory.
  • My valuation was sloppy on Western Asset Mortgage Capital (WMC), the hybrid mREIT not too long ago introduced that their current estimated book value is $16.82/share (not together with the $0.40 dividend) versus $24.58/share at the time of my post.  I referred to as out that the $24.58 quantity was overstated and was going to return down, however did not anticipate the magnitude.  The corporate is at present up on the market, there will probably be an extra ~$3/share in a termination charge to the exterior supervisor, so if the present ebook is comparatively steady, ~$11-12/share worth in a takeout after bills and want to separate a part of the low cost with the customer.  Surprisingly, the shares have traded up because the present ebook worth disclosure, buying and selling at the moment for ~$10.00/share.  I ought to most likely promote given I am stunned by that response, however my present inclination is to attend for a deal announcement.  There must be loads of patrons, there are all the time credit score asset managers searching for everlasting capital, and a deal should not depend on the M&A financing window being open like an LBO (it’s going to be a reverse-merger like transaction).  On the adverse facet, they’ve remaining industrial mortgage publicity to the albatrosses which are American Dream and Mall of America, their residential property (the core of the portfolio) are prime quality non-QM adjustable fee mortgages, however most are of their fastened fee interval and thus inclined to fee volatility.
  • In distinction, Acres Business Realty Corp (ACR) is a clear mREIT with minimal legacy credit score issues, all floating fee property and floating fee debt (through CRE CLOs) that ought to reduce rate of interest threat.  A majority of their loans are to the multi-family sector, cheap folks can argue that multi-family is being overbuilt in lots of areas of the nation at the moment, however these are usually not building loans to future class A properties which are at increased threat for oversupply, however reasonably to transitional properties which are present process some type of repositioning, value-add cycle.  ACR is buying and selling for an absurd 32% of ebook worth, principally due to its small measurement ($70MM market cap) and lack of a dividend.  As a substitute of paying a divided, ACR is utilizing their NOL tax asset generated by prior administration to protect their REIT taxable earnings (thus not being required to pay a dividend) to repurchase inventory at a reduction.  First Eagle and Oaktree are giant shareholders, two properly regarded credit score outlets, that may preserve administration trustworthy.  If the shares do not totally rerate by the point the NOLs are burned off, I might see the same state of affairs to WMC the place it is smart to promote, regardless of needing to pay the exterior administration termination charge.
  • One mistake I made in 2021 that carried over into 2022 was oversizing my preliminary place in Sonida Senior Dwelling (SNDA).  SNDA was an out of court docket restructuring sponsored by Conversant Capital, which controls SNDA now, that resulted in an injection of money, however nonetheless a really levered entity (SNDA would not have leases, they personal their properties).  After the shares have been greater than lower in half this 12 months (probably as a result of inflation/shortages hitting their labor price construction and slower than anticipated occupancy restoration), the market cap is roughly 10% (pre-convertible most popular inventory conversion) of the general enterprise worth.  SNDA options each excessive monetary leverage and excessive working leverage, occupancy sits at round 83%, if occupancy strikes one other 5-6% increased to normalized ranges, SNDA is probably going a multi-bagger.  However the reverse might be true additionally.  I am sitting on a giant loss, however sticking it out with the unique thesis that occupancy ranges will normalize as Covid-fears subside and getting old demographics shift of their favor.
  • PFSweb Inc (PFSW) not too long ago distributed the money ($4.50/share) from their 2021 sale of LiveArea, what stays is a third-party logistics (“3PL”) enterprise that’s subscale however has navigated the present setting higher than you’d count on from a Covid-beneficiary, signing up new shoppers and estimating 5-10% income development in 2023.  Whereas traders had been probably dissatisfied that PFSW hasn’t bought the 3PL enterprise to-date, they did re-iterate on their Q3 earnings name that completing a transaction is their top priority and extended their executive team’s incentive comp structure based mostly on a sale by way of 2023.  I’ve acquired PFSW buying and selling for about ~4.6x 2023 EBITDA (utilizing the TIKR estimate), extraordinarily low cost for a enterprise that ought to have a number of 3PL (there are dozens of them) strategic patrons, simply want the M&A window to open again up.  I am comfy seeing that course of by way of to completion.
  • The rose is off the bloom with DigitalBridge Group (DBRG), shares have retraced most of their positive aspects because the summer season of 2020 when the transition to an infrastructure asset supervisor was in its infancy.  That transition is essentially utterly, they nonetheless personal a slug of BrightSpire Capital (BRSP) — probably low cost by itself, trades at 61% of ebook — and fairness positions in two knowledge middle firms that they are within the technique of transferring to managed automobiles.  Multiples probably want to return down for beforehand high-multiple digital infrastructure investments in a non-zero rate of interest world, it is onerous to know the way correct their marks are inside their funds and the way the present setting is impacting future fund elevating.  I tried to catch a backside too early, buying Jan 2024 LEAPs which have a post-split adjusted strike worth of $20/share.  Shares at present commerce for $10.45/share, properly wanting my LEAPs and properly wanting CEO Marc Ganzi’s $100MM pay day at $40/share.  Activist investor Legion Companions Asset Administration has recently pushed DBRG to put itself up for sale if shares do not get well.
  • INDUS Realty Belief (INDT) and Radius World Infrastructure (RADI) have comparable traits, every have excessive overhead bills in comparison with their asset bases as they appear to develop/originate new property.  Each have been damage by rising charges this 12 months as they’re targeted on low cap fee asset courses with long run leases (RADI so far hasn’t been capable of flex its CPI-linked resets, probably an unfair criticism as they’re on a lag), however each have comparatively recession proof money flows.  The weak point of their share costs is nearly solely fee pushed.  Each firms nonetheless have fairly lengthy development runways with no need to lift capital, however searching, each may profit from being in personal arms the place the price of capital is likely to be decrease or no less than much less unstable.  INDT has a public $65/share bid from Centerbridge outstanding and RADI has been the fixed goal of deal hypothesis all year long, the latest firm said to be interested is infrastructure manager EQT.  I underestimated how excessive rates of interest would rise this 12 months and hope one or each of those holdings is profitable in purchasing themselves early within the new 12 months.
  • NexPoint Diversified Actual Property Belief (NXDT) lastly did totally convert to a REIT from a closed finish fund.  Nonetheless, the shares have not reacted a lot to that change, the corporate did put out common manner SEC financials for his or her 9/30 10-Q, however disappointedly have not hosted an earnings name or put out a supplemental that will make the tangled net of holdings extra digestible.  I get a whole lot of questions on my present ideas on NXDT, and the “no change” reply might be unsatisfying, however I am content material holding this for an additional a number of years and letting the story slowly (just a little too slowly proper now) unfold.  There’s a whole lot of wooden to cut, that is a kind of stability sheet to earnings assertion tales that’ll take time, I might see it being a triple from right here (~$11.50/share) over the subsequent 3 years.
  • Howard Hughes Corp (HHC) continues to be a price lure, anybody who spends time doing the bottoms up evaluation comes away saying it’s undervalued but it surely’s simply by no means going to be totally appreciated by public markets (as a result of complexity, Ackman, growth/capital allocation threat, and so on., take your choose).  In October, Pershing Sq. (Ackman’s funding automobile) tried to reap the benefits of this worth disconnect by launching a young supply at $60/share, later elevating it to $70/share, and nonetheless acquired only a few takers.  James Elbaor on Andrew Walker’s implausible podcast provided some hypothesis that Ackman could do a reverse merger of Pershing Square into HHC in order to redomicile.  Pershing Sq. at present owns ~30% of it and it is a double low cost contained in the publicly traded PSH because the fund trades at a large low cost as properly.  Possibly Ackman does one thing considered one of these years, however within the meantime, I am emotionally vested to proceed to carry.
  • BBX Capital (BBXIA) is basically the publicly traded household workplace of the disliked Levan household.  Shares commerce for ~$9.40/share and the 9/30 ebook worth was $20.72/share, included within the $20.72/share is roughly $11.63/share of money, securities and their word from associated celebration Bluegreen Trip Holdings (BVH).  Moreover, they personal a spattering of multi-family actual property in Florida, an actual property developer, door maker Renin (barely financially distressed) and sweet retailer IT’SUGAR (you have most likely seen these is airport terminals).  Administration is not to be trusted right here, however much like my hopeful thesis in TCI, the low cost between the share worth and truthful worth is so large that administration’s greed is type of on the shareholders facet in the intervening time.  BBXIA recently completed a $12MM tender offer for 1.2 million shares, that makes the proforma ebook worth ~$21.70/share.  Shares commerce for simply 43% of that worth, and nonetheless have $11.75/share in money/securities to buyback extra inventory.  As a result of the shares commerce beneath that quantity, every repurchase beneath that line are literally accretive to the money/securities per share metric.  Whereas it’s onerous to see a agency catalyst to get the shares a lot increased within the close to time period, the low cost appears too extreme to promote into their periodic tender gives.
  • A inventory that probably will not point out once more for 3 years, I purchased again into Rubicon Expertise Inc (RBCN) this month because the inventory has bought off significantly, presumably sellers getting out earlier than the corporate stops reporting right here quickly (may commerce with expert-market standing), following the transaction with Janel Company (JANL).  To recap, Janel effectively paid $9/share for RBCN’s NOLs in the tender offer, they’re restricted from buying extra RBCN for 3 years, however now the shares commerce for ~$1.40.  There’s loads of room in there for JANL to pay a premium in three years and get a implausible deal for themselves.  The primary remaining threat is JANL going bust within the meantime.
  • My power vacationer hedge is Par Pacific Holdings (PARR).  PARR is a rollup of area of interest downstream power companies in distant places (Hawaii, Washington, Wyoming, quickly to be Montana).  Their thesis is these refineries are ignored by the massive gamers but in addition have a defendable market place due to price benefits of their native markets as a result of their distant places (excessive transportation prices for rivals).  2022 was lastly the 12 months when stars aligned, crack spreads widened out considerably and PARR’s refineries had been working at close to totally capability with no important downtime for upkeep capex initiatives.  In Q3 for instance, PARR reported $214MM in adjusted EBITDA, roughly their mid-cycle steerage for a whole 12 months.  Just like different power companies, this 12 months’s money flows allowed PARR to scrub up their stability sheet and now are positioned to as soon as once more purchase one other refinery, this time Exxon’s Billings refinery.  The deal ought to shut within the first half of 2023, simply possibly PARR is popping a nook and has gained sufficient scale to lastly begin considerably chipping away at their giant NOL (that was my authentic thesis 8 years in the past).
  • Just like PARR, I’ve owned Inexperienced Brick Companions (GRBK) for 8+ years and simply type of let it sit there.  Regardless of new housing growth hitting a wall within the again half of 2022 as mortgage charges briefly peaked above 7%, GRBK shares are literally up 20% since 6/30.  It is pretty sure that powerful occasions in housing will proceed within the close to time period.  However I am guessing it will not final overly lengthy, single household houses have been underdeveloped following the excesses of the GFC, politically overly tight mortgage situations for a very long time appears untenable, and millennials want houses.  With engaging land briefly provide, I do not see the massive scale write-downs of the GFC reoccurring, possibly asset heavy homebuilders like GRBK will probably be seen to be engaging once more versus asset-lite builders.  Shares commerce for a comparatively undemanding 7x TIKR’s NTM (trough?) earnings estimates.
  • One other sloppy purchase from me was Argo Group Worldwide Holdings (ARGO)shortly after my post the specialty insurer got here out with disappointing outcomes and dropped considerably regardless of being in the course of a sale course of (the preliminary curiosity from potential patrons was reported to be muted).  I tax harvested my place and re-entered at decrease costs.  Administration not too long ago survived a proxy contest from activist Capital Returns, now seems to have discovered faith and reiterated time and time once more they’re dedicated to their restarted sale course of.  My conviction is fairly low right here, hoping for a sale in 2023.  It trades properly beneath friends on P/B, optically for a P&C insurer vacationer like myself, a sale ought to make sense for each a purchaser and ARGO. 
  • Mereo BioPharma Group (MREO) equally confronted a proxy contest within the fall, as a substitute of combating like ARGO, MREO noticed the writing on the wall and let activist Rubric Capital on the board.  Rubric’s acknowledged technique for MREO is to monetize/liquidate a lot of the corporate’s property, we have but to see motion on that (I might argue it’s nonetheless early, however others may disagree).  Regardless of the potential for a method change, shares have dropped roughly in half as cash burning biotechnology firms proceed to be out of favor in a rising fee in setting.  MREO is an choice like fairness at this level, might be a multi-bagger or shareholders might get considerably diluted.
  • One other choose of mine that’s down considerably regardless of little information is Digital Media Options (DMS).  DMS has an a $2.50/share bid from a consortium of administration and PE sponsors that personal 75% of the DMS shares.  No information has come out since 9/8/22 non-binding supply, shares have fallen all the way in which to ~$1.30/share at the moment.  There’s an amazing dialogue within the comment section of my post speculating on varied eventualities, anybody ought to sift by way of them.
  • I haven’t got any authentic ideas on both Jackson Monetary (JXN) — looks like a lot of the index shopping for has occurred — or Liberty Broadband Corp (LBRDK), others are going to talk extra intelligently than me.  Every are shopping for again a big quantity of inventory, optically low cost, might be coiled springs if recession fears break, however each even have difficult/advanced enterprise fashions in their very own respects.  I’d promote one, each, or none to fund new concepts early in 2023.
  • Nothing has actually modified within the final two weeks for Sio Gene Therapies (SIOX), it’s a failed biotech liquidation, which probably will probably be a continued theme for me in 2023.  Different liquidations I proceed to carry embody Sandridge Mississippian Belief I (SDTTU), Luby’s (non-traded) and HMG Courtland Properties (non-traded).  One old 2019 liquidation, Industrial Providers of America (non-traded), not too long ago made its ultimate distribution and ended up being a disappointing low-single digit IRR.  To spherical out the miscellaneous stuff, I personal the Atlas Monetary Holdings bonds (CUSIP 049323AB40) which do not seem to have traded because the alternate supply, and remaining CVRs in Prevail Therapeutics, Utilized Genetic Tech, OncoMed and the BMYRT potential ligation settlement.

Closed Positions

  • One of the puzzling M&A transactions of 2022 has to go to Superior Emissions Options (ADES).  Administration dragged shareholders on a protracted strategic alternate options course of through which it was extensively assumed that ADES could be a vendor and return their money to shareholders.  As a substitute, ADES flipped round and became a buyer of an early stage venture company, destroying worth within the course of.  Shares traded for $6.28 the day earlier than the deal announcement and now commerce for $2.23, I do not know the way this deal even closes.  If it weren’t for the poison capsule to guard the NOL (which I imagine is being disqualified on this transaction anyway), I might assume an activist would are available right here and block the deal.
  • My original thesis for ALJ Regional Holding (ALJJ) centered across the NOLs being monetized following a pair asset gross sales, thus the explanation for the automobile current was gone and Jess Ravich would take out minority shareholders with the brand new liquidity on the stability sheet.  That did not occur, as a substitute Ravich delisted ALJJ and went on a mini-buying spree, turning ALJJ right into a household workplace.  I moved on after that.
  • Ballys Corp (BALY) was a tax harvesting casualty for me (regardless of the horrible efficiency, I nonetheless realized positive aspects in 2022, principally holdovers from very early within the 12 months), I nonetheless like the corporate and comply with it.  The Chicago on line casino venture will probably be a house run, probably the identical for no matter they do with the outdated Tropicana on Las Vegas Blvd strip.  It’s low cost and price a glance.
  • WideOpenWest (WOW) was one other sloppy mistake, the M&A financing setting modified and I did not change my framework as shortly, thought that an LBO might get accomplished, however with the restricted free money movement, it simply did not make sense.  Regardless of the few rumors round it, nothing acquired accomplished, if the M&A market reopens, WOW might be one of many early targets.
  • I bought Regional Well being Properties (RHE-A) not too long ago to reap the loss, the corporate’s most popular alternate supply did not get sufficient of the widespread inventory to vote in favor of the distinctive proposal.  Shares have drifted considerably decrease since, the corporate’s fundamentals are nonetheless strained, their operators are struggling below the identical labor points as SNDA, RHE has been pressured to takeover administration of those underperforming nursing amenities.  The asset worth seems to nonetheless be there in a liquidation like state of affairs, however unsure how that will get initiated, the popular inventory is in a tricky spot.  I’d re-enter a place, there is a commenter on my RHE posts searching for others to alternate notes on the place the popular stockholders ought to go from right here.
  • LMP Automotive Holdings Inc (LMPX) and Imara (IMRA) had been my two huge winners this 12 months, each conditions performed out in a short time.  IMRA did not pursue a liquidation, however reasonably a reverse merger, I exited shortly after that, nonetheless making a big fast acquire, however missed the run as much as the highest by a superb margin. Nonetheless engaged on when to promote these when day merchants get ahold of them.

Efficiency Attribution

Present Analysis/Watchlist

These are firms that I am actively researching, many I am going to by no means purchase however are at present attention-grabbing to me in a technique or one other, in case you have sturdy ideas about any of them, please attain out to swap notes, or use them as additions to your watchlist:


As traditional, thanks to everybody who reads, feedback, shoots me an e-mail.  I apologize if I do not get again to you shortly, however I do respect all of the suggestions, it helps me as an investor.

Joyful New 12 months, excited to show the web page to 2023.

Disclosure: Desk above is my taxable account/weblog portfolio, I do not handle exterior cash and that is solely a portion of my general property (I even have a steady/rising profession, do not want this cash anytime quickly).  Consequently, the usage of margin debt, choices or focus doesn’t totally signify my threat tolerance.

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