Thursday, December 31, 2020

Year End 2020 Portfolio Review

What a traumatic and unpredictable year, certainly it has been tragic for those directly impacted by the virus or who have suffered the death of a loved one.  From a pure financial standpoint, I am in a lucky position where I'm able to work from home and didn't need to tap into savings or my brokerage account to make it through the year.  Being in that fortunate position, and also not managing outside capital, allowed me to hold through difficult times and not capitulate.  However, especially after November and December there are now signs of excess everywhere and I'm having a hard time squaring overheated speculation in certain areas with the never ending list of bargains I'm finding.  Confusing times in the market.
I finished the year up 24.34%, which is well shy of some others investors performance this year but still above the S&P's 18.40% -- fully acknowledging that the large cap index is not a good benchmark for my portfolio, on the surface I take more risk, but it's more of an opportunity cost bogey and widely quoted.  My lifetime-to-date IRR of this portfolio is 24.52%.  Positive attribution winners this year included Green Brick Partners (GBRK), Colony Capital (CLNY), Five Star Senior Living (FVE) and Franchise Group (FRG); negative attribution losers were MMA Capital Holdings (MMAC), Liberty Latin America (LILA/K) and some undisclosed special situations (MCK/CHNG splitoff, MGM tender) that went haywire in the spring meltdown.

Thoughts on a few Current Positions
  • While not a high conviction idea, I still do like Accel Entertainment (ACEL), the largest distributed gaming provider in Illinois.  The thought here is that slot players are going to go hyper local post-covid, why drive an hour or two to a depressing rundown regional casino when you can drive five minutes to a depressing rundown strip mall?  These VGT locations are essentially mini-casinos first and a bar or restaurant second, the bar/restaurant piece is often regulatory arbitrage to allow for the VGTs and not the other way around.  Regional casinos make the vast majority of their money from slot machines, ACEL is the slot machine revenue without the capex and overhead of actually running a casino.  Currently there are no VGTs in the city of Chicago, but with covid destroying the budget even further, wide spread tax increases seemingly difficult to push through in the current economy, legalizing VGTs within the city limits could be on the table providing an easy growth opportunity for ACEL.
  • Despite a good run in 2020, Five Star Senior Living (FVE) is still a cheap stock, with an enterprise value of just $150MM ($96MM of cash, $7MM of debt, and I'm capitalizing an RMR termination payment of 2.875x annual fees) and another $96MM of owned real estate on the balance sheet, against $30-35MM of EBITDA, trading under 4.5x EBITDA for a company that is now mostly an asset-lite management company.  Tucked away inside of FVE is a high growth rehabilitation concept, Ageility, that is growing quickly and only requires $20-30k of upfront start up costs per new location, it could be quick to scale.  What happens to all the cash?  Management clearly has their hands full operating the business this year, but once covid passes, what will be the capital allocation plan?  It hasn't been well articulated at this point.
  • My obligatory bullish comments on Howard Hughes Corporation (HHC) -- Their diversified model should help them versus pure play REITs, in the coming years I picture HHC being more focused on residential land development than on office/multi-family new construction they were pre-covid, their big land banks are in Las Vegas and Houston, maybe not as hot as Austin and Miami but they're both low cost-of-living and no state income tax markets that should have the wind at their backs.  While not in the same markets, Green Brick Partners (GBRK) should continue to benefit from similar migration trends to Texas as well as their shift in focus to entry level homes which are benefiting from incredibly low mortgage rates.  Rounding out a real estate discussion, "new" BBX Capital (BBXIA) should still have some upside despite the obvious problems, their assets are primarily cash, a note to a timeshare operator (good reopening/stimulus trade) and Florida real estate which should have continued tailwinds.  It's trading at just 35% of book value, even if the right number is 50% of book value, that represents an additional 42% upside.
  • MMA Capital Holdings (MMAC) has been a frustrating hold since they went to an external structure, I won't pretend that I've spent more than a few minutes on Hannon Armstrong Sustainable Infrastructure Capital (HASI), it appears to be a better and more diversified business, but it trades at over 4.75x book value and MMAC trades at 0.65x.  Just reading through the HASI 10-K and investor presentations you get all the good ESG vibes that MMAC should be putting out, but still aren't, maybe with the recent CEO we'll see a change, with all the money flowing into ESG products, MMAC has to take full advantage.  Even from a skeptical external manager point of view, you'd assume Hunt wants a piece of what could be a decade long theme.
  • Colony Capital (CLNY) was a significant winner for me this year, thank you to those that encouraged me to take a closer look at the common after my post on the preferred stock near the bottom of the crisis.  I doubt I'll have much to add on CLNY going forward, the business is a bit above my head, but willing to give Ganzi some room and will continue to hold.  I found this write-up well done and helpful in modeling the path forward from here.  Even if you're not sold on CLNY, I think it is worth of monitoring because of the number of transactions that revolve around it (hopefully CLNC), there will opportunities that arise in the next few years.
Previously Unmentioned Positions
  • Back in the spring, I puked out of my position in Perspecta (PRSP), a 2018 spinoff of DXC that provides IT services to the government, but since then activist fund JANA Partners has taken a liking to it after PRSP passed its 2 year safe harbor post-spin making it able to be acquired without jeopardizing the tax free spinoff.  In November, Bloomberg reported that PRSP had hired advisors to pursue a sale.  The original thesis was that PRSP could be a replay of CRSA (also a DXC government services spinoff) which was sold for 12x EBITDA to General Dynamics, that thesis might still hold, 12x PRSP's ~$600MM EBITDA would be approximately $30 per share. 
  • ECA Marcellus Trust I (ECTM) is a 2010 vintage oil and gas trust that were a popular structure a decade ago, an E&P company would sell producing wells to the trust and the trust in turn sold shares to retail investors promising high dividend payments.  Unsurprisingly, these didn't go quite as promised, ECTM is now a tiny nano-cap that is pushing closer to tripping a clause in its trust indenture that would force a liquidation of the trust, returning any proceeds to unit holders.  ECTM shut off the dividend and if the royalty payments fall below $1.5MM for the trailing twelve months the trust will liquidate, royalty payments were $1.12MM through 9/30 putting it very close to tripping for the year.  Greylock (successor to the original sponsor ECA) projects the royalty to exceed the threshold this upcoming quarter (however that was before natural gas prices started to fall on fears of a warm winter), even if it does, it appears this trust will trip it sometime next year forcing the liquidation.  The trust has 17,605,000 units outstanding, trading at a price of $0.17, for a total market cap of just ~$3MM against a book value of $17MM.  Most of that book value is the estimated fair value of the royalty interests which can be pretty squishy, Greylock has the right of first refusal buying the royalty interests back and there's a bit of uncertainty around if ECTM is entitled to get 100% of that payment or 50% (I read it as the 50% clause applies only on the formal trust termination date of 3/31/30 but I could be wrong).  Either way, pretty attractive upside that should be non-correlated with much of the market, but again, only a small PA type trade.
  • I did jump into the SPAC arb trade with Pershing Square Tontine Holdings (PSTH) thanks to a great post by Andrew Walker.  Instead of selling puts, I did a buy-write trade, just fits my eye a little better.  I see the downside as pretty minimal, Bill Ackman is an incredible marketer (I'm generally a fan of him despite his flaws) and if a deal is announced in the next few months that would close before 6/18/21, I have a hard time imaging it would trade significantly below the trust value after it de-SPACs.  Ackman will get on TV, etc., and he'll also be investing a significant sum alongside PSTH in a pre-committed PIPE at $20 further providing support to the transaction value.  Selling pre-deal SPAC call options might be a theme for me next year.
Closed Positions
  • On 10/19, Front Yard Residential (RESI) announced that it would be acquired by a consortium of private equity (Ares and Pretium) for $13.50 per share, I sold that day, and then several weeks later on 11/23, the offer was bumped up to $16.25 after a better offer came to light.  This could be the start of similar deals where post-covid the entity will be too subscale (MCC and CLNC are two potential examples) and there is plenty of private equity money out there willing to buy cheap real assets.
  • I've mostly reduced my exposure to hospitality plays, Extended Stay America (STAY) has weathered the storm nicely as their rooms feature kitchens (limiting interaction between guests) and acts as temporary residences rather than true leisure travel.  It also drummed up some rumors of PE interest, I sold to put money to work in other places, but it could be worth monitoring as it still is the only remaining major hotel chain that is both the brand manager and the owner of its hotels (plus the weird paired share structure), eventually that will change.  Similar idea with Hilton Grand Vacations (HGV), it probably still gets sold at some point to Apollo (who will pair it with DRII before coming back to the public markets), but I sold to put money to work elsewhere, HGV might be interesting as a re-opening trade.  I could see stimulus checks going towards downpayments on timeshares, people will want to "live a little", prioritize vacations again, plus timeshares are similar to extended stay, often feature a kitchen and more space that might be desireable in a post-covid environment.  Lastly, I have been selling calls over and over on Wyndham Hotels & Resorts (WH), the implied volatility (not that I really know what that means) seems to be too high to me and so I've been rolling covered calls until the day when the shares get called away from me.  WH is almost a pure franchising play on economy and midscale hotels, which have held up better than the upscale business or destination focused hotels, but its trading at a fairly full 12x 2019 EBITDA and who knows when it'll get back to 2019 EBITDA levels?  I like the business, but feels like its been bid up as a reopening play alongside MAR/HLT when it shouldn't necessarily as its business model is significantly different enough.  These three all skew away from the traditional business traveler which will likely be the last to return in full, so all three could be attractive depending on your view of the reopening trade.
  • Another one where there is probably a little more upside but I've needed cash for other ideas is Gaming & Leisure Properties (GLPI), their primary tenant is Penn National Gaming (PENN), PENN's stock as 20x since the bottom and presumably has unlimited access to capital right now thanks to Barstool Sports and the online sports gambling theme.  PENN starts to pay cash rent again here next month which should allow GLPI to reinstate a cash dividend (dividends have been a combination of cash and stock this year) and should fully recover to the mid-to-high $40s. 
  • I finally let go of Liberty Latin America (LILA/K) this month (at least temporarily), I did fully participate in the recent rights offering and the stock responded well after that, but had a sizeable tax loss that just became too valuable for me this year.
  • I sold about 2/3rds of my Avenue Therapeutics (ATXI) position after getting long term capital gains treatment, unfortunately, I should have sold it all as I ended up taking a loss on the remaining 1/3rd when ATXI failed to secured FDA approval for IV tramadol.  Their merger partner has moved to terminate the deal while ATXI is trying to fix their FDA submission, I'm far out of my comfort zone in trying to handicap the situation but could be an interesting idea for others more inclined.
  • The Marchex (MCHX) tender offer was bumped up and I exited, haven't followed it much since then but did have several people reach out to me saying their call analytics software is best-in-class so there might be something there to those interested in small cap software businesses.
  • Maybe it was a bit of "quarantine brain", but I did a lot of small merger arb or other quirky special situations throughout the year that I didn't get to writing about or didn't have anything more to add to the discussion -- more than I normally would -- these included CETV, SKYS, BREW, DLMV, SPAC warrant exchange offers for BIOX and ATCX.  One positive to the SPAC mania this year is its likely to result in a lot of interesting special situation opportunities in the coming years.  Screw ups included the MCK/CHNG exchange offer where I was unhedged and loss a fair amount of money and to a lesser extent miscues with the MGM and AMCX tender offers.
  • Two old CVRs came up empty, INNL and GNVC, BMYRT appears to be the same way, I still want to like these but it is important to be selective, think through the structure of each CVR and the counterparty.  On the positive side I did receive interim distributions from IDSA and MRLB -- although curiously MRLB hasn't paid its final milestone payment despite the sales threshold being met several months ago, if you know the story there, please reach out.
Performance Attribution

Current Portfolio
My leverage is a bit higher than I'm comfortable with right now, but given personal circumstances, didn't want to realize gains in 2020 versus 2021, so I might be trimming early in 2021 (anecdotally I'm not the only one) some winners to make room for new ideas.  As always, thank you for reading and especially to those that I've interacted with either via the comment section or via email/DM, I'm not always quick to respond but I do appreciate the networking and the sharing of ideas has made me a better investor.  Happy New Year and stay safe, there's light at the end of the tunnel.

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 fully represent my risk tolerance.

26 comments:

  1. Thanks for the post, I hope to get some interesting investment ideas from here.

    About the performance attribution table, I have a doubt.
    I saw that in December 2019 you had open positions in BFFI, BREW, IDSA and PRSP, which you seem to have sold during the first half of 2020. However, they do not appear in the 2020 performance attribution table.
    Is there a specific reason for this? Maybe I missed something.

    Thanks in advance.


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    1. PRSP is in there, I did sell my common shares in the spring and then rebought some calls recently speculating on a transaction happening.

      BREW I mentioned in my last year-end review I would be selling on the first trading day of 2020 for tax reasons, so there was no material impact on 2020 attribution. I did buy it back in the summer when there was some doubt if the merger with BUD would close, made a few basis points on that included in the catch-all bucket. IDSA liquidated at YE2019 so any distributions are now included in the catch-all, BFFI similar, included in the catch-all bucket. I think MDIA is another one I included in there as well, not meaningful contributors one way or another.

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  2. MDC, congratulations on your performance. Thanks for the amount of detail you have provided; tremendous accountability on your part. One question that I had was you indicated that you use leverage, and I was wondering whether that contributed to your performance? What are your thoughts on the use of leverage, and how do you manage it?

    Best of luck for the coming year!

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    1. Thanks for the kind words.

      I do use leverage, I could probably do a better job of tracking what my unlevered performance would be but that's challenging given that it changes regularly. I view it as flexibility, if I find something interesting, I don't need to sell something else and potentially realize taxable gains, etc. And again, this is just a PA, if I were managing other people's money I wouldn't manage it in the same way. I'm also not living on this money, I have a full time job, fully funded retirement accounts, etc., so I can afford to take a few more risks here than maybe others can that want to hold net cash. Hard to really unpack how all those puts and takes impact performance, but I agree that the context is important.

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  3. I just wanted to thank you for this excellent blog. I found a couple of great ideas here this year (Colony capital preferred stock and the NHF REIT conversion). I really like this special situations style of investing, but I tend to be much more concentrated in a few positions which I guess may come back to bite me.

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    1. Thanks

      I sometimes get asked what my favorite idea(s) are for the next year -- I would say NHF, it won't be a clean story by this time next year, but should be a lot clearer and starting to get added to REIT/real estate indices, etc. I think it could be materially higher (50+%).

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  4. Thanks for this--super-interesting and useful, as always. I never thought I'd see anyone mention ECTM!

    Am looking at SOHO prefs. Have to see how solvency looks over the next few years, and consider what I think about hospitality in general. But my back of envelope thought is that if with the new financing (all in rate of around 20%! Which seems to be the new normal for smaller lodging names) they're a going concern, they repay new financing at the end of its initial 3 year term and take a further 2 years to work down liabilities before turning on the pref divs again, and it takes another year after that to return to par, you're looking at ~$39 (par+accum ~$14 in divs) in 6 years for ~$12 today as a base case, with a pretty simple/checkable thesis. Upside from quicker refi easy to imagine, as is downside. Have some SOHON already to get me to do the work to figure out exactly how this works.

    Am also interested in MDRRP, which I think may well stop paying divs once its escrow is exhausted. It is a very, very dinky issuer (prefs were sold below par!) and the recent seemingly-innocent debenture financing gives me some pause because of its terms. But the (allegedly) mandatory redemption in 2025 is an interesting feature, esp. if divs pause and the price plummets. Have to go through the cash flow again to see what they need to break even, and suspect I might pass because this is too hopelessly subscale (they made noises about growing their asset base with the debs), but interesting, possibly.

    Congratulations on the great returns, and I hope you have more of same this year.

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    1. Thanks! I always appreciate your comments and willingness to share your ideas here, adding these to my research list. Happy new year.

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  5. hey, check out https://www.marketberries.com/ if your looking for text notifications for special situations / event-driven trades. Really helpful to avoid missing any nuggets

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  6. Any reason why you're benchmarking to the S&P500 especially when you have zero stocks in the index?

    Other than that, great year, hope it keeps up!

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    1. Thanks! I agree with you, splitting hairs but I wouldn’t say I’m benchmarking to the S&P, maybe just using it as a reference for the market, approximately what a passive investor would earn. Plus is widely quoted and understood. Feel free to compare me to whatever you feel is appropriate. My long term goal is a 20% IRR.

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  7. Another great year (and a great post). Keep up the good work, love your work.

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    1. Thanks! Glad to have connected with you more this year, Happy New Year to you and your family.

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  8. Congratulations on another great year. I admire your work a lot.

    Quick question - Are your returns shown pre or post taxes? I was recently thinking about how much one would need to outperform the S&P500 on a pre-tax basis to outweigh the less favorable tax treatment of investing in shorter duration event driven ideas.

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    1. Pre-tax, calculating post tax would be a little difficult in isolation and also not comparable to others. Everyone's tax situation is different, for example, I have a low effective tax rate (married, one income, 3 kids), but I do make decisions with taxes in mind. This year I wanted to minimize gains, I ended the year with essentially no capital gains tax liability but next year plan to take some gains, all personal cash flow reasons that are unique to me.

      It would be better to do this strategy in a retirement account, I don't really have that option, and a taxable account gives me a little more flexibility anyway in what the gains are eventually used for.

      Thanks for reading.

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  9. ECTM - Is it really interest in Greylock's interest to let the trust liquidate? Thoughts on any conflict of interests?

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    1. I don't know how much Greylock can really influence it, these are mature wells at this point and the trust indenture stipulates the trigger for a liquidation. They would likely buy the royalty interests back from ECTM, might be beneficial for them to buy it at these depressed prices.

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  10. How do you think about Perspecta's finance leases? I'm assuming you are using mgmt provided EBITDA but they have $160 mm of finance lease payments.

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    1. I would include the financing leases in the EV, in the post I just sort of gave a swag of $30 roughly equates to 12x EBITDA, but it does depend on how you account for their non traditional debt.

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  11. Do you see yourself getting into the Dell VMW spin off?

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    1. Probably. The bad feelings from the DVMT mess has mostly left my brain, but guessing I won't get involved for a few months here until the spin is closer.

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    2. What happened with DVMT?

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    3. When DELL was still private, they purchased EMC in 2016, EMC owned 80% of VMW, due to DELL's leverage they couldn't quite swallow the whole thing, so they included a tracking stock, DVMT, that was intended (sold to investors at the time) as tracking DELL's economic interest in a portion of their VMW stake. DVMT traded a significant discount to VMW for a couple years before DELL engineering a way for the them to go public through DVMT and the consideration was well below the economic interest in VMW that DVMT was intended to track. In that go public transaction for DELL, they didn't even really mention the supposed to connection to DVMT and VMW, their docs allowed them to do it, so while not technically illegal, was certainly not in the original spirit of DVMT. Michael Dell has a fairly long history of abusing minority shareholders.

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  12. Congrats to a great year and thanks for the idea regarding ECTM! Have you tried to estimate a fair value of the royalty assets today? It looks value today could be perhaps materially lower from 2019 with decline rates of c. 10 % pa 2) Sales price per Mcf >30 % lower than 2019

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    1. I haven't, the spread between the market cap and the book value is wide enough for their to be some room in my opinion. But they do test for impairments quarterly, so some of those decline rates should be contemplated within the financial statements, but when this gets liquidated, hard to know what the final value will be.

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