Howard Hughes: Updated Thoughts After Investor Day

I wanted to bring Howard Hughes Holdings (HHH, fka HHC) ($4.1B market cap) back up front as they just had their investor day this past Monday where they laid out a $118/share NAV and its been 3.5 months since Pershing Square filed their 13D without much of an update.  I believe it is likely that Ackman takes it private at somewhere between $95-$105/share.

Below are management's NAV slides:

Note the use of the phrase "conservative sum of the parts" in the second bullet. I'm sure lawyers took a close look at this deck before it was published and the company will need to justify a discount to this number in a private sale transaction (which they can and will, not suggesting it'll go for $118).

The bulk of the NAV is in the land, which is a little squishy and unlikely to be valued properly by public market investors, it's not often that land banks trade at NAV.  However, as the below slide shows, most of their land value is located in Summerlin outside of Las Vegas, where land sales to homebuilders have been strong for some time and the MPC long reached critical mass.

The nascent MPC of Floreo in Arizona, where the land value is least stress tested, is only 7% of the MPC NAV.  Additionally, mortgage rates remain stubbornly high despite the Fed starting to ease short term interest rates, it doesn't seem like we'll get a quick snap back to where existing home inventory jumps back to normal levels in the near term.  Leaving the only game in town new inventory.

However, if you look under the hood (below), about 1/3rd of the MPC NAV is commercial acreage:

Howard Hughes has noticeably pulled back on development in last year or two due to near zero office demand and increased construction costs, but there's been minimal change to the asset value of their commercial land real estate, that doesn't quite add up.  Additionally, they've only just started their first office building in Bridgeland, commercial properties are years (decade?) off in Teravalis/Floreo, it's hard to square that math in my head even with healthy discount rates.

They also bumped up their Hawaii (and now also Woodlands) condo price per square foot up significantly as they've recently announced the last two buildings (located near the beach, would replace part of the land occupied by their sales center at the IBM building) as ultra luxury.  Just a few years ago, this price per square foot would seem unattainable, high rise development is a risky endeavor, keeping the discount rate constant while bumping up the price 60% doesn't immediately scream "conservative sum-of-the-parts" valuation to me.  But they've done extraordinarily well in Ward Village, breezed through several potential economic headwinds since development there started over 10 years ago.

For the operating assets, they do appear to be on the conservative side.

Their office assets are primarily located in growing desirable areas without some of the headaches of large gateway markets and their occupancy levels show that at 88%.  The lagger in their portfolio is Hughes Landing in the Woodlands, they're moving their headquarters once again, this time just inside the MPC from the Town Center to Hughes Landing in order to focus on it (there's also a luxury multi-family asset being built there) and free up the premium space they previously occupied in the OXY buildings.

So net-net, operating properties are probably a little undervalued, the commercial land and condos slightly overvalued given the timing of those cash flows and risks involved in development.  We know that Ackman can't pay $118/share, he's a fiduciary to his own investors who would be backing the deal, somewhere between $95-$105 seems right to me (no hard math, just a guess).  He owns 37.5% of the company, while there's likely a process ongoing to identify other bidders, its hard to imagine another bidder willing to pay more (otherwise they would have back in 2018-2019 when then HHC ran a similar strategic alternatives process, presumably without Ackman has a bidder since he didn't update his 13D at the time).

Ackman has an attachment to Howard Hughes (he's essentially the company's founder and has added to his ownership stake along the way, during Covid and through a 2022 tender offer more recently) that I think the market is underestimating, his Forbes cover is often mocked, but the byline to the 2015 article is about how he's going to turn Howard Hughes (not Pershing Square) into his version of Berkshire Hathaway.  He's been an outspoken supporter of President-Elect Donald Trump and Republicans in the 2024 election, with the red sweep he's likely confident in the economic climate going forward, possibly bulled up on animal spirits wanting to secure a big win.

In his fund's quarterly update call yesterday, he said, "..we don't think that Howard Hughes is going to develop a real franchise today as a public company."  He's really the only one who can change that with his ownership level and the structure of HHH, he'll take it private within 1-2 months and do well with it.

Disclosure: I own shares of HHH and some calls on HHH

Creative Media & Community Trust: Forced Selling After Preferred Conversion to Equity, Highly Speculative, Option-Like

Creative Media & Community Trust (CMCT, fka CIM Commercial Trust) (~$20MM market cap) is a tire fire of a REIT (externally managed by CIM Group) that owns a mixture of traditional office, "creative office", multi-family and a hotel, the majority of which are located in California.  I owned CMCT briefly back in 2021 as it was the target of an activist campaign, CIM Group eventually thwarted the activist by doing a dilutive rights offering (and backstopping the rights offering) at $9.25 (the shares trade for $0.23/share today) to cement voting control.  After the rights in 2021, management owned 45+% of the company.

As most know, the commercial real estate market has struggled significantly as the result of slow return-to-office trends, higher for longer interest rates and some location specific issues to the Oakland/Bay Area market where several of CMCT's chunkier assets are located.  

Here's a quick snapshot of the company's assets:

CIM Group had an ongoing preferred stock issuance program going at CMCT, it was a way to increase assets (and thus external management fees) without issuing common stock at below NAV and CIM also had an affiliate act as a placement agent to collect additional fees.  As the real estate asset value dropped at CMCT and preferred stock issuance didn't slow (CMCT was issuing preferred stock as recent as earlier this year), the common stock felt the pain and was upside down.  Additionally, their bank credit facility is no longer in compliance with its financial covenants.

Earlier this year, CMCT tried to sell a handful of assets in order to raise cash and payoff the credit facility, but the buyer wasn't able to close:

CMCT recently explored the sale of several high-quality assets to improve its common equity ratio. The offer CMCT received reflected what the Company believed to be the fair value of these assets, but the buyer was unable to close. As a result of this and the recent decline in interest rates, CMCT has decided to shift its focus to refinancing rather than a sale of these assets.

CMCT's preferred stock is convertible into common shares at the option of the issuer. Subsequentially to the failed asset sale, in September, CMCT decided to "improve its common equity ratio" by converting some preferred stock to common:

As part of its program to improve its common equity ratio, the Company is suspending its Series A1 Preferred Stock offering and announcing the redemption of approximately 2.2 million shares of Series A Preferred Stock and approximately 2.6 million shares of Series A1 Preferred Stock, with the redemption price to be paid in shares of common stock in accordance with the terms of the Series A Preferred Stock and Series A1 Preferred Stock, respectively. 

In total, they redeemed $118.9MM (~$345MM is remaining) of preferred stock with 60,526,804 common shares, or at a price of $1.96/share.

Preferred stock holders (probably RIA's in the HNW channel) naturally puked the stock out (they only had 22.8 million shares outstanding before the preferred conversion, nearly 4x'ing the shares outstanding to motivated sellers), when the price dropped due to the forced selling, it created tax loss selling and further spiraling down the drain to $0.23/share where it trades today.  The new plan, to refinance at the property level and repay the credit facility is outlined in the most recent 10-Q:

Management plans to address any possible future event of default under the 2022 Credit Facility by entering into new financing arrangements to repay amounts outstanding under the 2022 Credit Facility. The Company is in the process of obtaining refinancing for the Company’s hotel in Sacramento, California (the “Sheraton Refinancing”). If completed, the Company intends to use the proceeds of the Sheraton Refinancing to repay part of the amount outstanding under the 2022 Credit Facility and to pay for the Hotel Renovation described above. In addition, the Company is in the process of obtaining refinancing (the “Los Angeles Refinancing”) for three of its properties in Los Angeles, California. If completed, the proceeds of the Los Angeles Refinancing, along with a portion of the proceeds from the Sheraton Refinancing, are anticipated to be in an amount sufficient to repay all amounts outstanding under the 2022 Credit Facility, with the rest to be used for general corporate purposes. The Company expects that each of the Sheraton Refinancing and the Los Angeles Refinancing will close by the end of the first quarter of 2025.

Management of the Company believes that its plans to repay amounts outstanding under the 2022 Credit Facility are probable based on the following: (1) the Company has executed term sheets with the respective lenders under the Sheraton Refinancing and the Los Angles Refinancing; (2) the Company expects that both the Los Angeles Refinancing and the Sheraton Refinancing will close by the end of the first quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties that are the subject of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Company’s plans and efforts to date to obtain additional financing to be secured by two properties that it owns (in addition to the Sheraton Refinancing and the Los Angeles Refinancing), and the favorable LTVs of these two properties. Management’s plans are intended to mitigate the relevant condition that would raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the interim financial information contained in this Quarterly Report on Form 10-Q is issued. The accompanying consolidated financial statements have been prepared assuming that the Company will continue its operations as a going concern and do not include any adjustments that might result from the outcome of events described in this paragraph.

Potentially there's some value here if the company is able to switch from recourse to non-recourse debt and ride out any real estate recovery.  CMCT does have a series of potential development sites, (through CIM) access to co-investors for project specific capital (so they won't need to raise it at the CMCT level, because they can't), there's a world where they don't file for bankruptcy and they can limp along far enough to make to the other side of their transition to "creative office" and multi-family.  The underlying asset value of the company haven't changed much since the preferred conversion (likely only improved slightly as short-term rates come down and more companies call employees back into the office) and they're going to save roughly $8 million per year in preferred dividends as a result of the conversion.  Yet the stock is down ~90% from the conversion price.  Could this be a potential January effect beneficiary?  Again, super speculative, but I think it might.

In attempt to determine how much if any value is here, one way is to back into an implied cap rate of 5.8% based on the last-twelve months of net operating income, not particularly cheap.  Howard Hughes (HHH) just had an investor day where they laid out their NAV using an 11% cap rate for their office properties.

Another way, CMCT pays CIM Group a base management fee based on the NAV which is determined by a third party, they used to disclose NAV, but I haven't seen it called out for year-end 2023.  But based on the quarterly fee (0.25% of Net Asset Value Attributable to Common Stockholders) you can back into the NAV.

Of course all the normal caveats apply to the NAV, there's an inherent conflict of interest to inflate it when your management fees are calculated off it.

The bet here is that CMCT is indeed able to refinance their properties and extract value embedded in their assets, reinvest those cash flows into new multi-family buildings and no longer be a bankruptcy candidate.  Any slight positive change in the outlook for California commercial real estate could make this turnout to be a multi-bagger, the opposite is true as well, if CRE continues to stink it up, this will be a zero or effectively so through more dilution of the remaining preferred shares.

Risks/Other thoughts:

• This very likely could be a zero, it is a call option disguised as common stock on commercial real estate values improving and interest rates continuing to fall.
• CMCT could convert more preferred to common and crash the stock again.
• CMCT pays their dividend in shares now, so don't get excited over the appearance of a big dividend yield.
• They have a small SBA lending operation that lends into the mom and pop owner/operator hotel market, this along with their hotel they've called out as being non-core and potentially look to sell those assets to reinvest in more multi-family developments.
• After the conversion, management now only owns 15% of the company.  Remember, they were buyers at $9.25, odd that they tanked their own position to such a degree, but now with less ownership, might be even more likely to do it again to save their management fee income.

Disclosure: I own shares of CMCT (about a ~2% position, and sworn to myself I won't average down)

Singular Genomics Systems: Exclusivity Period w/ Deerfield, Spread Remains

Singular Genomics Systems (OMIC) ($60MM market cap) is an early stage medical device company, they have one commercial product (G4) and one in development (G4X) that is a promising next generation genome sequencer.  The company burns quite a bit of cash, approximately $25MM a quarter, but with the commercial launch of G4X in Q2 2025, OMIC could be coming to an inflection point with revenues coming in 2025.  Prior to bidders appearing, the stock traded at a massive discount to cash.

Recent Events:

• Back on 9/12, long time investor in OMIC and large health care fund, Deerfield Management, made a $10/share bid for OMIC.  Shares traded for approximately $5.60/share before the offer.
• Following Deerfield's bid, on 9/19, our friend Kevin Tang lobbed in his own $12/share bid, he owns just under 15% of the company.
• Presumably there was a fairly competitive bidding process (and likely at least one additional bidder other than Deerfield or Tang, Tang doesn't really want the IP normally it seems which would cap him out here) following 9/14 because on 11/4, we found out that Deerfield's latest bid is a whooping $24/share and has entered into an exclusivity period with OMIC to finalize a definitive agreement.

From Deerfield's latest 13D:

As previously disclosed, on September 5, 2024, Deerfield Private Design Fund IV, Deerfield Mgmt IV and Deerfield Management (collectively, “Deerfield”) submitted a non-binding proposal (the “September 2024 Proposal”) to the special committee of independent directors of the Company (the “Special Committee”). The September 2024 Proposal related to a proposed acquisition through a special purpose vehicle to be established by Deerfield of all of the outstanding shares of Common Stock not already owned by Deerfield or any other stockholders or members of management that Deerfield invites to “rollover” their current equity shares. Following negotiations with the Special Committee in a competitive process, Deerfield proposed an increased purchase price of $24.00 per share (the Original Proposal, as so modified, the “Modified Proposal” and the transaction contemplated thereby, the “Modified Transaction”), and following such proposed increase, on October 31, 2024, the Company and Deerfield entered into an exclusivity agreement to facilitate completion of Deerfield’s due diligence and the preparation and negotiation of definitive agreements in respect of the Modified Transaction.

Downside could be pretty considerable here, but we do have a high quality counterparty in Deerfield, competitive process and despite the sharp increase in the bid, I still have Deerfield picking up OMIC below an estimated NCAV at deal close  if you exclude the leases.

Including the operating lease, NCAV is closer to $20/share.

To me this is a similar trade to Asensus Surgical (ASXC), a cash burning business being led into the arms of a creditable buyer that knows it well.   I bought shares around $21.50, or a 11.6% spread to the $24.00 current bid.  Depending on where this trades it might not be actionable.  I'd probably be a buyer below $22.00, we'll see where the price settles in anticipation of the next piece of news.  There's a slight chance of another bump, but not counting on that.

Disclosure: I own shares of OMIC

Athira Pharma: Perceptive Working on a Reverse-Merger?

Athira Pharma (ATHA) ($24MM market cap) is a biotech focused on treatments to restore neuronal health and slow neurodegeneration.  On 9/3, the company announced its Phase 2/3 trial of fosgonimeton for mild-to-moderate Alzheimer's Disase did not meet its primary or secondary endpoints.  Rather than waiving the white flag and launching a strategic alternatives process, two weeks after, they announced Athira was going to focus on its earlier stage ALS treatment, ATH-1105, along with a 70% workforce reduction-in-force.

But that doesn't mean that other discussions might be happening behind the scenes, a 70% RIF is pretty large and sort of signals you're a cash shell.  Perceptive Advisors (14% owner) revised their 13D last week (thanks for the tip from a commenter), and included the line:

Consistent with their investment intent, each Reporting Person may from time to time discuss with the Issuer’s management, directors, other shareholders and others, the Issuer’s performance, business, strategic direction, capital structure, product development program, prospects and management, as well as various ways of maximizing stockholder value. Representatives of the Reporting Persons are engaged in discussions with the Issuer’s management and other third parties with respect to a potential extraordinary transaction involving the Issuer and other third parties. There is no assurance that any such transaction will develop or materialize, or if it does, as to its timing or whether the Reporting Persons will participate.

This sure sounds like Perceptive is trying to arrange a reverse merger transaction with Athira Pharma as the shell.  This idea is a little riskier, Athira hasn't declared strategic alternatives and has some pretty significant cash burn, time isn't on Perceptive's side to a get a deal done.  If we get well into 2025 and there's no deal, the cash burn might push the company to raise equity and pursue the original plan.

Here's my back of the envelope math on Athira:

The fairly small cash balance available to a reverse merger candidate could be an issue (I typically don't look at ones much smaller than this one), but as we saw with ATVE, some of these deals have been structured in a way where the reverse-merger candidate is really only interested in the public listing shell and legacy cash can be paid out as a special dividend to original shareholders.  

Disclosure: I own shares of ATHA

ESSA Pharma: Another Broken Biotech

ESSA Pharma (EPIX) ($72MM market cap) is the latest addition to the broken biotech basket.  EPIX is a clinical stage pharmaceutical company that was previously focused on developing therapies for the treatment of prostate cancer.  On Thursday (10/31/24), the company announced they were terminating all of their clinical studies and an initiating a review of strategic alternatives.

In the press release the company gave us 9/30 cash numbers:

Liquidity and Outstanding Share Capital

 

·

As of September 30, 2024, the Company had available cash reserves and short-term investments of $126.8 million and net working capital of $124.3 million (unaudited figures). The Company has no long-term debt facilities.

·

As of September 30, 2024, the Company had 44,388,551 common shares issued and outstanding, and there were 2,920,000 common shares issuable upon the exercise of prefunded warrants at an exercise price of $0.0001.

This one is fairly clean, although we don't have a severance charge estimate (the company has 50 employees), EPIX hasn't been burning much cash, only approximately $7MM a quarter prior to the termination of their R&D program.  My back of the envelope math is pretty straight forward, I'm assuming about $20MM of the expenses to wind down the company from here or get it to a place where a reverse merger can be done, feel free to make your own assumptions.

My liquidation value is about 40% higher than where shares traded Friday following the news.

Disclosure: I own shares of EPIX

HomeStreet: Likely Deal Break w/ FSUN

Unfortunately, this year I'm getting crushed in a game of Battleship, every speculative merger or in this case announced merger gets blown up (TH & BOOM being the other recent ones).  An astute commenter on my original HomeStreet (HMST) post noticed that FirstSun Capital Bancorp (FSUN) left out any mention of their pending acquisition of HomeStreet in their Q3 earnings release that came out on Monday (10/28) as an ominous sign.  After the market closed on Tuesday (10/29), the two banks jointly announced the deal as-is will be rejected by FSUN's regulators:

DENVER & SEATTLE--(BUSINESS WIRE)-- FirstSun Capital Bancorp (FSUN) (“FirstSun”) and HomeStreet, Inc. (HMST) (“HomeStreet”) announced that, based on discussions FirstSun and its subsidiary, Sunflower Bank, N.A. (“Sunflower”) have had with the Federal Reserve and the Texas Department of Banking, that regulatory approvals necessary for the mergers with HomeStreet and its subsidiary, HomeStreet Bank to proceed have not been obtained and FirstSun and Sunflower have been asked to withdraw their merger applications. FirstSun and HomeStreet are discussing the pursuit of an alternative regulatory structure for the merger. The parties are also discussing terms on which they would terminate the merger agreement if no alternative structure is feasible. There can be no assurance that an alternative regulatory structure may ultimately be feasible.

Rewinding time six months, following Q1 earnings, the two re-traded their merger agreement due to HomeStreet not adequately hedging their loan book as interest rate expectations coming into the year were for many Fed Funds rate cuts, but those expectations were scaled back significantly.  In that revised deal, FSUN also disclosed they were changing the charter structure of the primary bank subsidiary, Sunflower Bank, to a Texas state chartered bank that would be regulated by the Texas Department of Bank versus the OCC. 

Presumably the motivation behind the change was to get easier treatment after the OCC was embarrassed following the failure of New York Community Bank (NYCB) this past spring due to their significant rent-controlled NY multifamily exposure that had fallen in value (HMST has a large Class B/C multifamily loan book in Los Angeles County).

In FSUN's own words:

Neal E. Arnold FirstSun Capital Bancorp – CEO, President, COO & Director

"Let me also briefly explain the regulatory shift for us. We will remain a Fed-regulated bank holding company as previous. However, we've also decided to proceed with an application to have the pro forma bank also be primarily regulated by the Federal Reserve and the state of Texas Department of Banking.

After discussion with our respective Boards, we decided this is a better long-term path for the combined organization. We believe the Fed and the state of Texas have a firm understanding of our business and the nature of our CRE risks.

In our discussions with the OCC in Washington, it became obvious that we would not gain near-term approval given their recent experience with multifamily and CRE positions. We believe their position also resided in the fact that they were not the primary regulator for HomeStreet. The Fed is taking a very different approach, in part due to the changes we have made through the transaction. Our belief is that CRE is not the same across all categories and all geographies. And it's particularly distinguished when comparing West Coast multifamily and East Coast, New York multifamily. We've had a significant interaction with the state of Texas and the Fed, and we believe there's a pathway for this merger application to be approved."

Following this news, HomeStreet stock is down by a 1/3rd today to $9.30 per share.  To be clear, HomeStreet is still a mess, the bank is zombie that is just treading water with minimal net interest margin that is fully eaten up by their non-interest expense.  However, the loan and securities book seems to be at least credit-good, they've had minimal losses and FSUN along with their advisors have had a few different looks at it and have agreed (from the 5/1 call) :

Robert A. Cafera FirstSun Capital Bancorp – Executive VP & CFO

"So Matt, thank you for the questions. And yes, we are reaffirming the credit mark here. We actually had an outside firm assist us independent third-party review the portfolio at HomeStreet, and actually a sizable percentage of the portfolio, 75-plus percent there. And we would echo, market had made some comments on the underwriting of the HomeStreet portfolio. We would echo those comments relative to everything that we found through the process, both upfront and post announcement in terms of the strength of the underwriting on the portfolio here.

So we remain encouraged by the performance here. And as a matter of process on the underwriting side at HomeStreet practices, there is sensitivity analysis. We actually utilized our independent third-party to revalidate the sensitivity analysis side of what the credits would look like in the current rising interest rate environment. And all that led us to the same conclusion on credit mark."

And in HomeStreet's most recent earnings release:

"In the third quarter our ratio of nonaccrual assets to total assets and our total loan delinquencies remained low at 0.47% and 0.69%, respectively. Our credit quality remains strong and we have not identified any potentially significant credit issues in our loan portfolio.”

And previously in the merger break press release:

“We are disappointed that the regulators are unwilling to grant the regulatory approvals necessary for the merger to proceed,” stated Mark Mason, Chairman, President and Chief Executive Officer of HomeStreet. “Importantly, HomeStreet has been advised by its regulators that there were no regulatory concerns specifically related to HomeStreet that would have prevented approval of the merger.”

So while the rate environment hasn't been kind to these loans, it doesn't appear on the face they're in any real trouble of permanent losses as long as HomeStreet is able to hold.  The multifamily loans have an approximate 2.5 year duration, some are reaching their pricing date, its not a super long duration portfolio that will leave them stuck for years.  In a slide deck, HMST provided the below update:

They've got a plan to sell some MF loans, hopefully prove out the marks, and the last bullet makes it fairly clear they'd be open to another M&A transaction.  I still think it makes an attractive acquisition target as they're in attractive retail/deposit markets and an acquirer could buy HMST at a significant discount to tangible book and enjoy that accretion over time as loans mature.

Other thoughts:

• HMST puts out an "estimated tangible fair value per share" metric that attempts to fair value the loans and their debt (I might exclude the debt) to give a more mark-to-market look at book, it was $18.52 at 9/30, or about 2x the current share price.  GAAP tangible book value is $28.13 per share.
• Mark Mason is still in charge, he's a controversial banking figure for good reason, so that adds some hair to situation, his capital allocation skills are bluntly terrible.  In reading the deal proxy, it also appears that an ongoing role for him was an important consideration.
• Presumably, activist Blue Lion Capital (1.3% owner) is still around, they've been vocal about the deal, especially around change of control payments to Mark Mason.
• FSUN did raise capital already to make the deal work, points to their commitment to make the deal work, I wouldn't fully count out another recut transaction that would be at a nice premium to today's share price.
• In the original strategic alternatives process, HomeStreet did receive two other legitimate offers that made to the final round of bidding, one for $15.19 per share in cash and the other for $13.50 per share in cash.  Again, validating the idea that others have due diligenced this portfolio and that there should be buyers for HomeStreet if the deal with FSUN expires in mid-January without a newly structured deal.

While HomeStreet is certainly a far lower quality bank than First Horizon (FHN), the situation rhymes a bit in that regulators are blocking the deal for reasons largely outside of the target's control, as a result, the stock is forced sold by arbitragers possibly creating an opportunity to pick up shares on the cheap.  I bought a few more shares today.  But full warning, this is much riskier than FHN.

Disclosure: I own shares of HMST (also short some Nov $15 calls I wrote a few months back)

Aerovate Therapeutics: Broken Biotech, Shell Company? Potential Liquidation

I'm a little late posting this one, but as mentioned in the comment section of my Mid-Year update, I did add Aerovate Therapeutics (AVTE) ($55MM market cap) to my broken biotech basket.  Back in June, Aerovate, a one-shot-on-goal biotech, announced poor topline results from the Phase 2b portion of their AV-101 study for the treatment of pulmonary arterial hypertension (PAH).  A few weeks later, the company announced they were laying off 78% of their staff, costing them $5.6MM, $3MM of which will hit in Q3 and Q4.  Then another week later, AVTE officially announced they were exploring strategic alternatives:

Aerovate has engaged Wedbush PacGrow as the company’s exclusive strategic financial advisor to assist in the process of exploring strategic alternatives, which may include but are not limited to, an acquisition, merger, reverse merger, business combination, liquidation or other transaction.

Notably, they listed a liquidation as a possible outcome, generally we don't see a liquidation called out in the initial strategic alternatives announcement.  One reason might be they don't have any other product candidates, from their latest 10-Q:  

Overview

We are a biopharmaceutical company. Our initial focus was on advancing AV 101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. On June 17, 2024, we announced topline results from the Phase 2b portion of our Phase 2b/Phase 3 Inhaled Imatinib Pulmonary Arterial Hypertension Clinical Trial of AV-101, or IMPAHCT. Topline data showed that, while AV-101 was generally well tolerated across all dose groups, the study did not meet its primary endpoint for improvement in pulmonary vascular resistance compared to placebo for any of the studied doses or show meaningful improvements in the secondary endpoint of change in six minute walk distance. We also reviewed data from several additional secondary endpoints of the Phase 2b portion of IMPAHCT, which also failed to show meaningful improvements. Based upon these results and in agreement with the independent study advisory committee, we halted enrollment and shut down the Phase 3 portion of IMPAHCT as well as the long-term extension study. AV-101 for the treatment of PAH was our only product candidate in development. At this time, we do not intend to resume development of AV-101 or any other product candidates. In July 2024, we announced the decision to conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. We also engaged Wedbush Securities Inc. (Wedbush PacGrow) as our exclusive strategic financial advisor to assist in the process of exploring strategic alternatives, which may include but are not limited to, an acquisition, merger, reverse merger, business combination, liquidation or other transaction.

I'm still trying to get my arms around how the new SEC shell company rule is going to play out after going effective July 1, 2024, but it appears that these one-shot-on-goal type biotechnology companies, like AVTE, without other assets might fall into the shell company bucket and could be pushed towards a liquidation as a result.  Others that are continuing development at the same time as pursuing strategic alternatives might make for better reverse merger candidates, which have generally worked out well this year.  But I'm not a lawyer, and thus not entirely sure if this new rule means much to this part of the market since biotechs generally don't make outlandish SPAC-like revenue projections regulators are trying to stamp out.  If others have more intelligent thoughts, as usual please share.

My back of envelope liquidation math:

AVTE is pretty clean, there are minimal dilutive securities outstanding, minimal operating lease remaining and likely the IP value is worthless.  I still struggle a bit with estimating wind down expenses, feel free to use your own estimate, but at today's price, AVTE seems to be relatively cheap compared to my estimate of liquidation value.

If they do go the reverse merger route, there's some nice option value, interestingly RA Capital owns ~32% of AVTE and engineered a successful reverse merger at ELYM with Tenet Medicines that's seen the stock go up almost 200% since that deal was announced in April.

Disclosure: I own shares of AVTE