Wednesday, June 30, 2021

Mid Year 2021 Portfolio Review

It has been a surprisingly great start to the year, a continuation of an almost straight line up from November -- my personal account returned 38.27% during the first six months, for a reference point the S&P 500 had a total return of 15.25%.  The biggest positive performance contributors in the first half of 2021 were DigitalBridge Group (fka Colony Capital), MMA Capital, NexPoint Strategic Opportunities and PhenixFIN, the only significant detractor to performance in the first half was CIM Commercial Trust. 

Despite the headline overvaluation in markets, the current environment seems ripe for special situation investing.  There is a post-recovery mess to be cleaned up, companies will look around in the changed operating environment and likely need to be consolidated or otherwise restructured, split up, taken private, etc.

Thoughts on Current Positions

  • After my update post on MMA Capital (MMAC), I kept thinking as long as MMAC's capital partner was willing to continue contribute to the Solar Ventures after the February ERCOT storms, their problems were likely only temporary.  I bought more thinking those with the most information regarding the problem assets were continuing to increase their exposure and might be a possible exit for MMAC.  On 5/24/21, MMAC announced that Fundamental Advisors (their capital partner) would be buying the company for $27.77/share in cash.  The company didn't run a full sale process, the merger agreement includes a 40 day go-shop period that expires next week, the deal premium to the prior day's trading price was certainly a nice surprise but the deal is being done at a fairly cheap multiple to book value.  Given the structure of the joint ventures however, it seems unlikely that someone else would make sense as a buyer, but I'm holding through the go-shop period at the off chance there is an overbid.
  • BBX Capital (BBXIA) has a current tender offer outstanding for $8/share, the 3/31 book value is a little over $16/share and likely reasonably higher than that when they report 6/30 after selling some real estate at a gain, bringing IT'SUGAR out of bankruptcy and just general covid beneficiary tailwinds of their businesses (mostly Florida real estate development).  For me this situation seems similar to others over the years, management's reputation to abuse minority shareholders causes the stock to trade at a considerable discount which then incentivizes management to continue to transfer wealth to insiders.  I won't be tendering shares this time around as I could see the stock trading higher after the tender is complete, it will be accretive to book value, and I doubt it will be the last time they attempt it.  For me, this situation is a combination of DVMT (reflexivity in how the market views management and it encouraging management to close the valuation gap for themselves), TPCA (tender offer on an illiquid OTC stock, afterwards shot up) and ASFI (family controlled, disliked management that eventually took a company private that had no business being public, essentially using cash on the balance sheet to do it).
  • For the next two I'm going to outsource to a couple other posts:
    • My thesis on ECA Marcellus Trust (ECTM) in the last portfolio review generated a little bit of chatter, my liquidation thesis turned out to be wrong and I got lucky with a natural gas rally which has turned the tiny trust right side up again.  Here's a great explanation of the current thesis here, I might exit after it flips to long term gains for me as the thesis changed and I'm not a great commodity investor, but that post is worth a read if you're interested in ways to invest in natural gas.
    • After the MMAC deal closes, Franchise Group (FRG) will be my second largest holding, it is not exactly an event-driven name anymore, it graduated to a jockey bet on Brian Kahn, who recently bought a million shares in the open market.  Modeling the company is a bit difficult as there's constantly moving pieces, but Michigan Value Investor over on Seeking Alpha did a nice job of presenting the current situation today.

Previously Unmentioned Positions

  • Capitala Finance Corp (CPTA) was another "ADL" suggestion, it rhymes with other ideas I've done well with over the years, a BDC (can be any externally managed YieldCo) that went astray with its previous manager, cut the dividend, the mostly retail investor base fled and it trades at distressed prices, new manager comes in to right the ship and eventually reinstates a market dividend.  With Capitala, the new manager is Mount Logan, an affiliate of BC Partners which manages Portman Ridge (PTMN), a BDC that was once KCAP Financial, BC Partners has gone on to consolidate three BDCs into PTMN over the last two years.  They have a playbook and have executed it reasonably well, this situation is slightly different as they're just taking over the management contract, possibly because this parallel tracked another PTMN acquisition in Harvest Capital (HCAP, I did own it for the arb).  But I think the results should mirror an acquisition (and might become a formal one at some point), albeit over time as they'll reinvest the portfolio much the same way PTMN is managed today.  CPTA trades at 55% of NAV, PTMN is around 80%, that discount probably narrows.

Closed Positions

  • My biggest performance detractor this period was CIM Commercial Trust Corp (CMCT), the original thesis of a proxy battle being either conceded by management or won by activists has been thwarted as the company went ahead with a rights offering at ~40% of their own stated NAV (same NAV that serves as the fee basis amount for their management fee).  It shows incredible distain for minority shareholders, I can't imagine the board won't get sued.  The rights offering, along with getting booted out of the Russell may create some technical selling right now, so while I sold a few days after the rights offering was announced and still have a few days to go to avoid cancelling my tax loss, CMCT could be an attractive post-rights recovery swing trade if that's your thing and you can stomach the management team here.  Still surprised CIM damaged their reputation for this small sleeve of their overall business.
  • I did the buy-write (June expiration) strategy on Pershing Square Tontine Holdings (PSTH) that was suggested by Andrew Walker last December, it worked out largely as planned.  As everyone is well aware, Bill Ackman announced a complicated transaction with Universal Music Group that will also create two other securities.  I don't have a strongly held opinion on UMG, there is a lot of great analysis going on around it on Twitter and elsewhere, but for me how the trade was structured, I have short term gains from selling calls and now a loss on the PSTH shares.  It makes sense for my tax situation to sell PSTH to offset some of the income generated, then re-evaluate as we get closer to the transaction closing and the three pieces being distributed later this fall.
  • The Medley LLC (MDLQ/X) bankruptcy is getting dicey, it appears the proceedings have pivoted to a liquidation and wind down of the company versus trying to pursue a going concern restructuring with Medley Management (MDLY).  In an asset management business, there aren't a lot of assets with value other than the management contract revenue streams, with Medley's separately managed accounts fleeing and Sierra Income Corporation pursuing strategic alternatives (there is no termination fee on the Sierra contract), it appears there is a little value left at Medley LLC or Medley Management.  MDLY has some meme like day trading happening in it, I sold my baby bonds for a negligible gain on a day when MDLY spiked.  I'll still follow the situation, but mostly just for curiosity.
  • I have a few themes that I tend to like, one is when a clinical stage biotech misses on its primary candidate, sometimes the stock will drop below net cash and the company puts itself up for sale.  Often they'll do a reverse merger with another pre-revenue biotech, so by buying the cash shell you can get in before the "IPO pop" of the new exciting company.  That's essentially what happened with Catabasis Pharmaceuticals (CATB), Catabasis also got wrapped up in some of the speculative retail trading in the first quarter, but on 1/29/21 Catabasis announced the acquisition of Quellis Biosciences, the stock popped and I sold that morning (a bit too early, hard to put on my day-trader hat and time these perfectly right).  Unfortunately, the market has seemed to catch on to this trade and other failed biotechs haven't traded down quite as cheaply recently.
  • I exited Five Star Senior Living (FVE) over concerns about the RMR relationship, FVE has a lot of cash on its balance sheet for an asset-lite management company, wouldn't be surprised if RMR makes an acquisition within FVE to increase their revenue share agreement instead of doing a buyback or some other capital return that would benefit minority shareholders.  Management at FVE clearly had their hands full during covid, but a year on since the recapitalization and they still haven't really laid out a clear capital allocation plan.
  • Perspecta (PRSP) was a 2018 spinoff of DXC, basically a replay of CSRA, both of which got sold shortly after the two year spinoff window lapsed.  Last year, I sold PRSP common stock near the bottom in covid as it went down less than others due to the government link, but jumped back in with naked calls on the rumors it was being shopped, got lucky, Perspecta was taken private by Veritas Capital, a PE firm that already owned a significant stake.
  • I closed both sides of the Madison Square Garden (MSGS/MSGE) split in the last month.  MSGS is kind of cheap on an NAV basis, depending on how large of a "Dolan Discount" you think it should receive, but I'm just finding better more actionable opportunities.  Premier market sports teams are a scarce asset that should hold their value over time, public markets are volatile, might make sense to sell puts occasionally when the discount gets particularly wide.  MSGE is a grab bag of development assets that I typically like but I just can't get comfortable with the Sphere project.  It's a bet the company style project, it could work, but reminds me a bit of the mess with the Seaport for Howard Hughes, delays, might have to get repurposed and shift strategies part of the way through, etc., add in the strange deal with MSGN, I decide to exit. 
  • Macquarie Infrastructure Corp (MIC) worked out pretty quickly and about as expected, rather than wait around for the big distributions and potential headaches, I sold and moved on, might return if there is forced selling after the Atlantic Aviation deals closes and the company converts to a partnership.  If you run the IRR based on the expected distributions of $37.35 for AA and $3.83 for MIC Hawaii, you get a healthy upper teens IRR, so it could still be a good liquidation play depending on your tax situation.
  • Acres Commercial Realty Corp (ACR) also worked out pretty quickly, this was a strange mispricing potentially because of a name change, but similar to CPTA and others, it was a broken mREIT that got rescued with a new manager.
  • Ladder Capital (LADR) was another commercial mREIT recovery trade that has mostly played out.  The company was hyper conservative over the last year raising a lot of cash, letting their short duration loans roll off, while at times a bit frustrating as a shareholder, it validated the original thesis during the covid-crisis that their investment/loan book was high quality.  I'll continue to listen to their conference calls as Brian Harris runs a fun fireside chat format where he provides his views on all corners of the real estate market.
  • As mentioned in my year end 2020 post, I was selling calls against my Wyndham Hotels & Resorts (WH) position until it got called away, it did shortly after in February as the reopening trade has hotel franchise/management companies trading above where they were pre-pandemic.
Current Holdings

No cash was added or withdrawn during the period.  

Potential Changes
Going forward, the format and transparency of these portfolio updates could change, when I started writing no one read the blog and now that my personal and professional circumstances have evolved, it might not make sense anymore.  I also may finally move away from Blogger, similar to other Google properties, it has been neglected for years now and Google is discontinuing the email feature in July which I'm guessing is how most people receive my posts.  TBD on the next direction there, if any.

But as always, thank you to anyone who has reached out, offered an idea to look at, pushed back or commented on a post, I genuinely appreciate it, it is the primary reason I keep active.  Always looking for more ideas, currently kicking around HFRO, RMRM, FWP, AAMC, WHLRD, SOHO prefs, CVEO and a few others .  Enjoy the holiday weekend.

Disclosure:  Table above is my taxable personal account.

35 comments:

  1. When you say a biotech that drops below net cash, are you using the “cash/share” figure or something else?

    Personally I check just check the site periodically and don’t rely on email updates. Hope to see you continue in some form or fashion.

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    1. Yes, a net cash per share number, usually with a little cushion for expenses as these are typically pre-revenue and burning a lot of cash. CATB originally was around 50-60% of cash on the balance sheet.

      And thanks for the feedback, I'm going to continue posting, just not sure if I have to move off of Blogger or not. I like having the history and don't want to lose the engaged comment section either, or get lost in a new format.

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    2. Thank you. Is there a typical wording that they use when halting work on their primary drug so I can search filings or is the best route to just keep an eye on the daily top losers? Also are you on Twitter?

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    3. I haven't found a better method than the largest daily losers. I am on twitter, but more of a lurker, occasional tweeter -- @ClarkinM

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  2. Steven WoodhouseJuly 1, 2021 at 5:46 AM

    A crazy idea I'm sure you've seen is RENN (https://seekingalpha.com/article/4406707-renren-shareholders-claim-huge-sofi-stake-via-little-noticed-legal-fight).

    I don't think I would buy at the current price but I bought a small position below $9. My reasoning was that the court case is the catalyst that will really move the stock (up or down) and that won't happen until next year. Until then I can sell covered calls and take advantage of the extremely high implied volatility. Has worked out nicely so far, but again it's a small position and I guess this strategy won't scale very well with position size.

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    1. I did listen to the Andrew Walker podcast on it, but haven't dug into it at all, I'll add it to my research list, thanks.

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  3. Curious why you think the MMAC JV structure prohibits another entity from buying and participating going forward?

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    1. I don't think it prohibits, that's a strong word, but I just think its messy. MMAC manages the JV from a portfolio management perspective, they're the minority investor, just seems a bit messy for someone else to come in and buy it. But I get that minority interests like that trade all the time in private markets.

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    2. Didn't MMAC hold a narrow majority until the recent losses with the winter storm? Aren't these JVs just recurrent funding/warehousing vehicles? The origination team is MMAC, employed by Hunt Management because Falcone is limited. To me the value is in the capacity for loan origination, $1B+ last year, and that's grunt work done by MMAC. I think this is priced as a steal for Fundamental Advisors. That being said who is the buyer? A large credit fund? A pension fund (yah right but those Canadians)? The $27.77 is a starting bid at a discount to MMAC claims on solar assets in the JV...it guarantees Fundamental Advisors a 20+% absolute return on the solar assets alone albeit annualizing in low teens probably.....maybe this doesn't get another bid then what a good deal for Fundamental Advisors.

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    3. It was trending that way before the winter storm, think it was 60/40 before the storm, and because of the ERCOT loans being in workout, they weren't eligible in the credit facility even prior to the storm, the storm only made it worse, but they would have been in the same position. I agree that Fundamental is getting a great buy, they're the best positioned buyer of it clearly, it could attract another bid but I'm not counting on it.

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  4. Funny how often our portfolios overlap. I've owned quite a few of these names before you wrote them up.

    Lot of interesting companies out there still. $LIVE, $IWSH, $HMG (kinda), $JCS (get ~$6 in cash eventually own a solar company that investors are buying into for $3.4), $LTRX (pro forma for merger with JCS's division)

    $LSXMK discount could theoretically be closed very soon.

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    1. Thanks for the ideas, many of these are new to me, I'll add them to my research list.

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  5. If you're considering switching, Substack is great.

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    1. If I switch, Substack does seem like the obvious landing spot, thanks.

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  6. Curious as to why you chose to exit MIC? If you don't mind me asking, what specifically about the distributions would cause a headache?

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    1. It happened so quickly, a bit unexpectedly, I probably sold hastily. Sort of hedged in my comments above, I think its still attractive and might buy back in. The switch to a partnership could cause some issues, and you need to size it kind of large to make it work. Could be one of those liquidations where you size it big right before the first large distribution and the day after the stub trades up considerably.

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  7. What's your logic around using margin? Do you allocate margin equally among all your positions or just in the safest ones?

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    1. I think the allocation is all done behind the scenes at my broker, I don't manually allocate the margin. I like the flexibility of margin, don't feel forced to sell anything ever if I find another good idea, this is a taxable account for me so that's valuable, and then sure, it helps juice returns over time as well. Its mostly flexibility, I haven't come close to a margin call or anything, even in the worse of covid.

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  8. Love your blog, but please either switch to something with an email feature or put a link on twitter each time you have a new post.

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    1. Thanks - Yeah I'll try to figure out something to notify when I post something new

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  9. Congratulations on the continuing excellent performance. It does not seem accidental. And the blog is always a pleasure to read.

    In terms of new names…

    Funny, I just started to look at HFRO on Tuesday. Had assumed the CS litigation would end with the heat death of the universe, but maybe not!

    I had a decent-sized position in FWP going into the Feb (?) decision date but sold out with some nominal gain after the 2nd delay. Though a smarter friend seemed not so concerned about the DE/DK tax issues, they still spooked me. Plus I thought the best outcome on the panel decision would be a full denial, which would open the door to dissolution; a positive decision would delay any payday for years as they fought over royalties due. Still thought it was interesting, just that there were enough negative scenarios to make other opportunities more attractive.

    And have been in SOHO prefs for 6 months, though I did sell some SOHON at $22; I’m sure I don’t have anything to add on these, and they are still def interesting.

    Agree that there are a lot of opportunities out there. I am also still drawn to the ridiculous and trying to give risk-adjusted prospective returns primacy, with mixed results. Recently bought a tiny bit of VRTA, which has traditionally been a way to enrich Michael Shustek. At under 10% of alleged book value and filings available on OTCM, it’s a bargain, or—likelier—a sandcastle.

    Will mention any new ideas that come across the desk if they're not too absurd.

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    1. Congratulations CSV with your excellent track record. Currently the best blog out there by a wide margin.

      ADL: if you don't mind me asking, do you have any thoughts on Mount Logan Capital? TSXV:MLC . It is the vehicle that will manage the CPTA portfolio going forward. Company looks somewhat cheapish with a solid balance sheet, has been raising some capital. I've been involved in this name in the past due to an issued CVR a couple of years ago.

      What I don't understand at all is how this vehicle fits in the 'bigger picture'. It's basically ran by a couple of guys from BC partners. Why do they need a separate microcap public vehicle to manage Capitala? Why not fold this small ball stuff into BC partners (which is already managing PTMN) or into a private company? Why do mini equity raises if a couple of big players are involved?

      I want to like this setup but I just can't wrap my head around the purpose / long-term plan here. I just don't see the point of this company existing - which makes me a bit wary. Curious if you have any thoughts about that given that you've looked at Capitala.

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    2. Oh, right! Mt. Logan is Marret is Cline Mining, if I recall correctly (who knows whether I do?).

      I had and have exactly the same concerns. I looked at MLC and it seemed, as you say...fine. No good reason to exist.

      My best stab at an explanation is that they're just asset gatherers. The more vehicles and subvehicles, the more stuff they have to sell. So while the vehicles are micro now, they dream of bigger things.

      In their presentation, CPTA is the "opportunistic" BDC and PTMN is the "Performing" BDC, and who knows what else they'll add. They're explicit, too, about how they want to be valued on fee income, not BV, so obviously that incentivizes them to do more of these deals.

      Basically, they want to juice their public market valuation (I can't imagine they'll retain their low-tier listing for long), and to do that they're adding assets and building a "story," I presume, of being a one stop shop. Brookfield aspirations...

      So it makes sense for them to have a few small things under their umbrella; they'll test each out (PTMN as rollup, CPTA as ???, the recent insurance float, etc.) to see what sticks. And they'll keep the public vehicle(s) because they can then arb between public and private valuations; if anything gets too silly in either, they can swap between private and public and changes marks accordingly.

      None of that is all that great for shareholders. Virtually every BDC is an annuity for management who tells a story of great opportunity and ends up scraping around the hurdle rate, if you're lucky. And never mind Brookfield; for every Nexpoint (and we could even argue about their success) there are a few Kingsways.

      But all that (too-long-windedly!) said, I'm fine with it. MLC has shown itself capable, possibly, of developing and executing strategies and appearing semi-aligned w/shareholders for the time being, and that's enough for now. If CPTA gets up to ~85% NAV with acceptable operating performance and reduced leverage, then it might need a compelling reason to remain in the portfolio, because that's approaching what you can expect from such a BDC. And MLC may end up a great bargain if their plans pay off and BC doesn't siphon away too much (big ifs!).

      p.s. can't recall if I ever got back in touch regarding AP Alternative asssets, but it turned out to be very good for problematic reasons. I got the final distribution but the ADRs still traded, so I was able to sell units in the (halted-in-Amsterdam) post-liquidation shell for around what I bought them for; an ethically-dubious double dip.

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    3. Thanks to both of you, great investors and I appreciate how active you are in my comment sections and generous with your thoughts/ideas.

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    4. Good to hear you made some money in AAA. Over the past few years I made some pretty decent trades in and out of the stub, but mostly on Euronext. No double dip there unfortunately! At some point I was the only person visiting their AGM. Even though I was completely stonewalled the CFO said what I was doing was 'pretty smart' or something along those lines, gave me some confidence there would be a final distribution at some point.

      I'm still pretty pissed that AP AA sold their Athene stake in AAA back to Athene JUST BEFORE Apollo offered to buy Athene itself. It seems pretty clear to me that that was a huge conflict of interest and that Apollo threw the AAA stub holders under the bus. But whatcha gonnna do ..

      Thanks for your thoughts on MLC. I mostly agree. Very interesting situation - not sure it will be very rewarding though.

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    5. Also, you mentioned Kingsway - looks like pretty interesting situation currently. There's a decent recent write-up on VIC. Joseph Stilwell is still buying enthusiastically. Company started to reach out to investors again ( https://kingsway-financial.com/wp-content/uploads/2021/05/May-2021-Kingsway-Investor-Presentation-Q1-Update.pdf ). Kicking myself for not buying it last year - was 'obviously' cheap back then.

      As of now - still looks cheapish but I'm a simple guy, have a hard time figuring out whether the warranty segment really deserves the 12x - 15x EBITDA multiple they slap on it in their presentation. I doubt it will ever trade there as long as the company stays a complicated collection of random stuff.

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    6. Yup, agree. I do think it's interesting but have always struggled with how to value KFS, especially given the long history of boosters (within and without the company) insisting it's worth multiples of where it trades. I think certain people have been willing to put a "complexity premium" on it because finding the value in it is a fun mental exercise. Trying to stay away from anything where I can congratulate myself for being clever, because I know I'm not that clever.

      Though speaking of random collections, I have been kicking myself for not going even longer in IDT (which has suddenly becoming exciting to people), and am adding steadfastly to SNFCA (which will never be exciting). I can think of many criticisms of both!

      And, yeah, the actions on AAA were gross but unsurprising.

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  10. And just further to that, yeah, looks like they are basically creating "2nd Portman" that's entirely under MLC control, vs. "1st Portman" in which they just have a stake. The comps they give for themselves are amusingly aspirational. These big asset manager dreams don't normally go too far, but we'll see!

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  11. hi CSV, really enjoy the blog. Thanks for writing! Have you any new thoughts on CLNY/DBRG? Seems the picture is less muddled now, though still somewhat challenging in coming up with a concrete valuation. Seems it's still more or less a play on Ganzi?

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    1. I think that's about right, bet on Ganzi, still not a simple story to value, but at least the strategy is clear. I don't have strong thoughts on it, happy to let it run a bit, I'll probably "re-underwrite" it when I clear long term gains.

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  12. I would pay to read your blog FWIW if you choose to go the substack route. Congrats on the H1 performance

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    1. Thanks! No plans for a paid version, I don't think I'd enjoy the pressure of needing to pump out actionable unique ideas on a regular basis. Just more acknowledging that I should probably move off of Blogger.

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  13. HFRO (on your radar now?) is undoubtedly cheap on an asset basis but pretty sure management is going to continue running it into the ground via related party transactions and crummy investments. They back dated the record date to pre their announcement for voting on the change, not even clear to me one can vote against it on the proxy form without attending the meeting. It's a situation in need of an activist but I'm skeptical that will happen any time soon. Funny how their litigation upside play has ended up destroying value for shareholders by enabling management to convert from an open ended floating rate credit income fund into a closed end fund not focused on floating rate investments and now into a permanent capital "holding company" vehicle to buy PE stakes. Painful how they compare themselves to Berkshire in their conversion pitch.

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    1. I agree with your sentiment, although I think there might be an opportunity here. I've followed Highland/NexPoint/Dondero for a while, I laughed at the thought of this trading above NAV as well, I don't think it closes the discount. But I like the programmatic buybacks, shareholder disruption/churn, the assets seem decent to me, they'll get much of their NAV back in cash soon. I own NHF, similar story, but probably the "better" version of the story as a diversified holdco likely will continue to be valued off of NAV, while a REIT has a larger shareholder base, will be valued off of FFO, etc., I could see NHF trading well above $20-21 NAV in the future. Will be a tougher road for HFRO.

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    2. The programmatic buybacks looked less good reading the fine print, if I recall it seemed telling that management is only willing to buy any at even lower levels after the outside investor buyback has been exhausted.

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