Friday, June 29, 2018

Mid Year 2018 Portfolio Review

It's halfway through 2018 already, time to check the scoreboard, and its not pretty, during the first half of the year my personal account dropped -6.44% compared to a positive 2.56% for the S&P 500.  I have nothing too insightful to say, made some mistakes, waiting on a few situations to fully play out and just going to keep moving forward.
Updated Thoughts:
  • Green Brick Partners (GRBK) looks pretty cheap again.  To recap, Green Brick is a homebuilder that did a reverse merger with an NOL shell in 2014, its essentially controlled by Greenlight Capital and is run by veteran Dallas based developer Jim Brickman, who is a close business friend of David Einhorn.  To begin 2018, Green Brick had only $67MM in NOLs remaining and will likely come close to burning it off this year, if not early 2019.  Once the NOL is gone, the reason GBRK exists as a public entity will cease and restrictions around its ownership will no longer limit the company's strategic options to either be acquired or use its stock and merge with another homebuilder.  Third Point, who had owned ~17% of the company, recently did a secondary to sell their position and the news took GRBK's stock down from the low-to-mid $12s to the low-to-mid $9s.  Initially the company planned to raise capital alongside Third Point, but then reversed that idea when the secondary priced at $9.50.  Why the company would want to raise equity capital is a bit of a head scratcher, every quarter management puts out a slide showing how their leverage is lower than everyone elses and how they plan to add leverage but that curiously never happens.  Green Brick will earn at least $1/share (GAAP) this year and likely more, meaning the shares trade at a sub 10 P/E despite a high growth rate, strong balance sheet, and operating in blistering hot job markets.  It doesn't seem that Jim Brickman is ready to retire for a second time, but given Greenlight's performance woes, they might need a win and push the company to be sold once the NOLs are gone.  One lesson learned here so far, stay away from NOL shells that are trying to become the next mini-Berkshire and instead look for ones that make one acquisition that instantly generates taxable income.
  • Earlier this year iStar (STAR) made what looked like a weak effort at evaluating strategic options and has opted to accelerate the divestment of their more liquid legacy assets and continue to grow their core businesses of CRE loans and net leases (which is basically status quo, but with more effort!).  The one interesting thing to note is they've all but announced a dividend, stating several times that they're evaluating one and even amended their bank debt to remove previous dividend restrictions.  iStar has been disappointing so far, CEO Jay Sugarman seems overly distracted by their ground lease vehicle SAFE which only makes up a small fraction of iStar but seemingly takes up far more of his time.  Additionally, we've gone through a couple CFOs over the past two years and disclosures remain opaque making it hard for the market to value their assets.  It's still stupid cheap on a sum of the parts basis, but hard to know when that narrative will change, I thought it would by now, but we could be in the same situation in another 2-3 years still talking about monetization of legacy assets.
  • I've owned Dell Technologies Class V (DVMT) shares, which are meant to track VMWare (VMW), since Dell completed the purchase of EMC in 2016.  In early February, news broke that Dell was considering its either going public itself or doing a complicated merger with VMware that might or might not include the DVMT tracking shares.  The market reaction was all over the place, the craziness fired up my animal spirits and I bought some July options that will likely expire without much fanfare as the negotiation drags out between Dell, VMW and DVMT holders on how the tracker discount will get divided up.  I'd still fall on the side of Dell being somewhat fair to DVMT holders (maybe a 20% discount to VMW) as his reputation and that of is his PE partners is still important, plus you've got activists lining up on both sides of the DVMT/VMW trade ready to sue if either side feels too much pain.
  • Earlier in June, the SEC approved a rule that will change the default notification option for mutual fund investors from physical mail to email starting in 2021 (sounds further away than it is in reality).  Donnelley Financial Solutions (DFIN) is one of the largest printers of mutual fund materials and stands to lose a fair amount of business once this rule takes effect, its not unexpected as it was discussed in detail at their recent analyst day (guided to a ~$12MM hit to EBITDA if the rule passed), but its just another in a series of setbacks for this spinoff as they try to stabilize themselves as a standalone company.  Shortly after, Groveland Capital and Denali Investors appeared on the scene with strikingly similar letters (here and here) to the board of directors asking DFIN to explore strategic alternatives as the market is valuing DFIN at a 6x EBITDA multiple.  October 1st will mark the two year anniversary of the spinoff, opening up a few more options for DFIN, but I'm skeptical anything will happen as management seems set on pursuing (attempting?) the difficult print to SaaS company transition.
Closed Positions:
  • Exantas Capital (XAN), formerly known as Resource Capital (RSO), was one of my favorite ideas for a while but the more I tried to do the math, the less confident I became that XAN could trade at book value, at least anytime soon.  XAN's manager, C-III, also did a couple of unfriendly things with their management agreement: 1) they locked in a fixed base management fee for 2018 after redeeming the preferred shares and 2) they reset the incentive fee hurdle which was previously all but out of reach. The base management fee reverts back to a bps calculation at the end of 2018 does put a little fire under management, they've changed the corporate name, are out there giving investor presentations and have a new CRE CLO in warehouse.  But I still struggle with how this gets close to a 10% ROE at its current size given the risk profile of their assets and the expense drag, I recently sold.
  • La Quinta Holdings (LQ) worked out almost perfectly as expected, I sold the REIT spinoff CorePoint Lodging (CPLG) the day following the spin at $28, only wish I would have sized this idea up more and look forward to what Wyndham Hotels & Resorts (WH) can do with the LQ brand -- I'm still very optimistic on both WH and WYND despite them trading poorly after the spinoff (maybe S&P 500 selling pressure?).
  • I sold LGL Group (LGL), they hinted at an acquisition of their operating business around the same time as the rights offering, that didn't come to pass and their disclosures around the process seemed woefully absent, so I sold for about my cost basis.  This is hopefully my last "micro cap NOL shell that's pursuing acquisitions to utilize their tax asset" idea, seen enough of these flounder to have had enough.
  • Along with being 'done' with NOL shells, I think the same could be said for reverse morris trusts (RMTs), I was originally attracted to Entercom Communications (ETM) for the RMT and related discount through CBS, but stayed for the free cash flow story management was spinning along with the incredible insider buying that continues to this day by the founding Field family.  But I don't actively listen to terrestrial radio, if I do its a much more passive experience, with streaming/podcasting options I'm getting exactly what I want which is what makes it more valuable to advertisers.  Even with sports or news, many will point to this being an issue in today's divisive society, but I can listen to a podcast that matches my view, whether its a sports team or a political view, that kind of targeting is hard to compete with in traditional radio.  I should have stuck with my gut on it and sold after the deal was completed, but instead I got punished by thesis drift, this is a heavily levered company that will likely report poor earnings again for Q2, might be more interesting to re-enter then?  But yes, RMTs, less attractive than spinoffs, they seem to be even more levered that spins as they need to keep the 51/49 ownership structure and then a common misconception seems to be that former CBS holders are indiscriminately selling here but CBS holders elected to take ETM stock, it didn't just appear in their account like a normal spinoff.  Entercom might turn out well, but I decided to sell and move on to other opportunities.
  • VICI Properties (VICI) is a the REIT that was created out of the Caesar's Entertainment (CZR) bankruptcy, my thesis was simple, it traded slightly cheap to gaming REIT peers because it was listed over-the-counter and wasn't yet paying a dividend.  Both of those have changed and its bounced around a bit to actually trading expensive to peers do to its perceived independence compared to MGP which is controlled by MGM.  I made out with a small profit.
  • The management buyout of ZAIS Group (ZAIS) was completed and I was cashed out of that position for a nice profit.  
Current Holdings:
*Additionally I have CVRs related to GNVC, MRLB and INNL 
Disclosure: Table above is my blog/hobby portfolio, I don't manage outside money, its a taxable account, and only a portion of my overall assets.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.

10 comments:

  1. For DFIN, given declining revenue and EBITDA, what multiple do you think is appropriate? Do you think it's a steady decline at this point or a realistic shot at flattening it off?

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    1. I think it has a reasonable shot at flattening off, the mutual fund driven printing will still continue for a couple years until the rule is fully implemented, IPOs are hot again which should benefit DFIN this year, it all comes down to whether they can thread the needle of offsetting their print business with the growth in the SaaS business. Tough to do, and likely tougher to do with the scrutiny in the public markets. This is a low conviction idea for me at this point, I've questioned why I still own it several times, but at 6x EBITDA, not a lot of good news baked into the price. I think the activists are probably right, a private owner would love to pay 8x EBITDA, they'd make out well in the end.

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    2. Thanks. I think broadly you're right that it gets taken out at 8x. I'm going to sit a little longer and see how it trades. Also, this is my first year in iStar - does it issue a K-1 or can I hold it in retirement accounts?

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    3. iStar is a REIT, so no K-1

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  2. Just curious: with call options, do you make money on the whole? Specifically with options, what have you found doesn`t work and you now avoid? Any readers of the site -- please feel free to chime in for the benefit of all. When Greenblatt made 40 - 50% per annum, I think a major part of that was options skill.

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    1. I make a little money on call options, probably on par with my overall results, doesn't stop me from trying to hit a few home runs occasionally but I usually feel guilty/regret after buying them. Pulls your attention away from the bigger picture and focuses you more on a short term price movements.

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  3. Not so fast! DVMT!

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    1. Maybe I reversed jinxed myself, although it looks like Michael Dell got the best of us (not surprising) as the discount we're accepting is pretty huge. I'll take it, lucky timing.

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    2. Do you think this is worth buying all the way up to the $109 implied price?

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    3. Unlikely, but I haven't done the work yet on what valuation they're putting on the Class C shares, clearly the market doesn't believe the number.

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