Keros Therapeutics: Pre-SA Broken Biotech, Large Cash Position

Keros Therapeutics (KROS) (~$420MM market cap) is a what I'm labeling a pre-strategic alternatives broken biotech, the company in two separate press releases (here and here) announced the halting of all dosages in their Phase 2 clinical trial of Cibotercept (KER-012) due to observations of pericardial effusions, which is a condition where excess fluid accumulates in a membrane that surrounds the heart.  What I find interesting in this situation is:

1. KROS has a significant cash position, my estimates put it around $650MM for a reverse merger, much higher than beaten up biotechnology companies I usually highlight
2. KER-012 is described as KROS's second program, their most advanced asset, Elritercept (KER-050) was out licensed to Takeda for $200MM plus milestone payments, so this failure might be obscuring the larger story here
3. KROS doesn't screen like a classic broken biotech because of the Takeda payment and their liberal use of their at-the-market equity offering program

Below is my basic back of envelope math on a potential liquidation value (again, not predicting a liquidation, more as a base case valuation for a potential merger/reverse merger):

The company has not declared a review of strategic alternatives, hasn't recently announced a reduction in force related to the failed KER-012 trials, etc., so this a riskier situation than others, but I think the absolute cash amount and sale of their primary asset makes this an interesting broken biotech to watch.

Other thoughts:

• My ATM estimate is using their 10/31 sharecount, based on their previous cadence, they likely issued more shares well above the current price into their December data disappointment, so the above NAV might be conservative
• The Takeda deal for KER-050 includes $370MM in development milestones and $720MM in sales milestones (plus a tiered royalty structure), how much is that worth today?  I'm not including any value in my liquidation NAV

Disclosure: I own shares of KROS

Howard Hughes: Pershing Square's Offer

I'm a couple days late on this post and turned into a bit of a "reply guy" on Twitter/X (you can follow me @ClarkinM) spewing some incoherent thoughts on the proposed Pershing Square offer, humor me a bit as I try to more intelligently spell out the current situation and where it might go from here.

On Monday, Bill Ackman's Pershing Square issued a letter to the Howard Hughes board outlining a proposed transaction that would see Pershing Square use the $1B they raised from outside investors at the management company level to buy 11,764,706 shares of HHH for $85/share in a tender offer.  Then simultaneously, HHH would issue an additional $500MM in debt to repurchase 5,882,353 more shares at $85/share.  As part of this transaction, Pershing Square would formally take over management of Howard Hughes Holdings and turn the company into a diversified investment HoldCo with Howard Hughes Corporation (the real estate business) as one of HHH's investments.  Pershing Square would charge a 1.5% base management fee for their services with no incentive fee.

To get it out of the way, Bill Ackman will probably get his way, maybe there's a bump, but this transaction has been teed up for a while (even the 2023 HoldCo corporate restructure in hindsight points to this being the end game).  I don't expect a third-party white knight to come in save minority shareholders, the best HHH shareholders can probably expect is a small bump in the tender offer and/or a discount in the external management fee.  Bill Ackman's fiduciary duties are to his management company investors and no longer HHH since he resigned from the board, he wants to keep this company public (rather than raise a fund privately to buy it) for a permanent capital vehicle that would justify the $10.5B valuation he raised capital at last year.  It's clear now, there's no scenario where he takes HHH fully private.

But here are my list of problems with this transaction:

1. Bill Ackman states, "When we filed our 13D on August 6th of last year, HHH's closing share price the previous day was $61.46 per share.  Including the market value of the Seaport Entertainment spinoff, this $16.62 increase represents a 35% total return over the last 14 years, or a 2.2% compounded annual return, and the Company has paid no dividend since its inception.  The Company's stock price performance is obviously extremely disappointing.."  Make no mistake about this, Bill Ackman founded Howard Hughes, it was his design in the GGP reorganization, he was the Chairman of the Board from the 2010 spinoff until April 2024 when he stepped down (presumably to setup this deal), not to mention he sat down for his infamous Forbes Baby Buffett article in 2015 touting HHH (HHC at the time) as the next Berkshire.  It's very disingenuous to now throw stones at the company with the solution being he needs to be brought back and paid handsomely to turn this around.  Why didn't he implement this strategy before?  The answer comes back to his management company is really the "next Berkshire" for him and not HHH.
2. This proposed transaction goes against HHH's two major strategic shifts in the last 4-5 years.  After the failed strategic alternatives process in 2019, Ackman got on a conference call and pledged to cut costs and refocus the company (even highlighted how the cost cuts should be capitalized and improve NAV).  This transaction clearly goes against this strategy as it will saddle the company with a significant G&A (~$60MM/annual) burden due to the external management fee.  The second strategic shift was the simplification of the business, becoming more of a pure play master planned community developer.  They've jettisoned almost all of their assets outside of their MPCs, sold the more cyclical and management heavy hotels within the MPCs, spun off Seaport Entertainment Group (SEG), all in an effort to simplify the business (and all those decisions were made while Ackman was the Chairman).  Ackman then files his original 13D/A a week after the spinoff, not giving HHH a chance to re-rate following the hiving off of the cash sucking Seaport business.  Now his plan is to allocate the free cash flow from HHC and invest in private businesses (hasn't he always been a public market investor?), going back on the Seaport spin rationale, just doesn't make sense and can't have it both ways.
3. The tender price is simply too low, management put out a "conservative" NAV of $118/share, in order to compensate remaining shareholders (any tender would likely be pro-rated) for the additional burden, the price needs to be higher than $85/share.  We've seen in the past, REITs that went to an external management structure, the asset manager directly compensates shareholders for the switch.  Here its indirect and insufficient.  Post transaction, the new externally managed HHH will trade at a significant discount to NAV.  Yes, the levered buyback will bump up NAV a bit since it will be done at a discount, but I would still anticipate an externally managed HHH to trade $70 or below in the current environment.  Could he bring in PIPE investors to backstop the tender?  Or some special dividend with a PIPE similar to biotech reverse mergers?  Something to show that outside investors at the HHH level are willing to go along with this transaction and not just investors in his management company.  When has an externally managed HoldCo actually worked?

The only other option for HHH would be to turn him down but given his ownership interest, he could bring in more friendly directors (presumably the board is already friendly) at the next annual meeting to get something done here.  Seems like the dye is cast, but doesn't mean its a feel good deal, feels a bit like Michael Dell and DVMT to me.  I'm still a little bitter about that one, guessing I will be about HHH for a while too.

Disclosure: I own shares of HHH

Income Opportunity Realty Investors: TCI Tender Offer, Potential Squeeze Out

Disclaimer: This is very illiquid and only appropriate for small PA's like mine

Income Opportunity Realty Investors (IOR) ($75MM market cap) is the smallest piece of the ARL/TCI/IOR Russian nesting doll, in a previous life it was akin to a mortgage REIT (although its a c-corp), today they only own one mortgage, their main asset is a receivable from Pillar Asset Management, the external manager and affiliate of the majority owner of ARL/TCI/IOR.  IOR has no reason to exist, TCI and an affiliate (RAI) own 89.78% of IOR and are currently conducting a tender offer (deadline just extended to 1/29/25) at $18.00/share to push that ownership level above 90% in order to squeeze-out the remaining minority shareholders.

Plans for IOR.

 

Except as disclosed in the Offer to Purchase, TCI does not have any present plan or proposal that would result in the acquisition by any person of additional securities of IOR (except TCI may purchase additional Shares if available at attractive pricing or TCI may purchase all Shares tendered in the Offer if more than 100,000 Shares are tendered), the disposition of securities of IOR, an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving IOR, the sale or transfer of a material amount of IOR Shares (except TCI reserves the right to consider any such transactions in TCI’s discretion), any material changes to IOR’s present dividend policy, indebtedness, capitalization, corporate structure, business or any material change to the composition of IOR’s management or the IOR Board.

 

It is expected that, initially following the conclusion of the Offer, the business and operations of IOR will, except as set forth in this Offer to Purchase, be continued as a stand-alone business unit substantially as they are currently being conducted. TCI will continue to evaluate the business and operations of IOR during and after consummation of the Offer and will take such actions it deems appropriate under the circumstances then existing. Thereafter, TCI intends to continue to work with IOR’s management as a part of a comprehensive review of IOR’s business, operations, capitalization and management with a view to optimizing development of IOR’s potential in conjunction with TCI’s business.

 

After completion or termination of the Offer, TCI may seek to acquire additional Shares through open market purchases, privately negotiated transactions, or a tender offer or exchange offer or otherwise upon terms and at prices as TCI determines, which may be more or less than the price paid in the Offer. If TCI does not acquire sufficient Shares in the Offer, including any subsequent offering period, to meet the Minimum Condition which would then put TCI (assuming it acquires the Shares held by its Affiliate) under the short-form merger provisions of the Nevada Revised Statutes, without a vote of IOR’s remaining stockholders, TCI will likely seek to acquire additional Shares to place it in a position that the Minimum Condition would have been satisfied.

No Stockholder Approval Required.

Under the Nevada Revised Statutes, if TCI acquires, pursuant to the Offer or otherwise (including by acquisition of the Shares held by its Affiliate), at least 90% plus 1 of the outstanding Shares, TCI believes it could, and may in the future, effectuate a merger under the short-form merger provisions of the Nevada Revised Statutes without a vote of the IOR stockholders. If TCI does not ultimately acquire at least 90% plus 1 Share of the outstanding Shares, any merger or consolidation involving IOR and TCI would need to seek the adoption and approval thereof by a vote of IOR’s stockholders. Thus, assuming that the Minimum Condition is satisfied, upon consummation of the Offer, TCI (together with its Affiliate) would own sufficient Shares to enable TCI, without the vote of any other IOR stockholder, to satisfy the requirements to approve any merger or consolidation without a vote of IOR stockholders. 

Shares currently trade above the $18/share offer price, meaning we could see a bump to shake out some more shares prior to the squeeze-out.

The "receivable from related parties" is simply a cash sweep back to Pillar Asset Management, when some investors make the comment that management uses a company as their own personal piggy bank, that's literally what is happening here.  Pillar is taking a loan out from IOR without a maturity date, the interest rate used to be prime + 100, but somehow got amended to a flat SOFR (some 3% above prime typically) last year.  So that's the type of people we're dealing with here.

The squeeze-out is supposed to be done at "fair value", given we're talking about near cash and its a current asset (the receivable from related parties asset is governed by a "cash management agreement"), book value should be pretty close to fair value.

Book value is ~$29.71/share as of 9/30, it'll have moved up above $30/share at year end.  Now, I don't expect TCI/Pillar to pay full book, but somewhere between $18 and $30 leaves a lot of room for management to take advantage of minority shareholders while still providing some upside to a dormant stock.  The other big risk here is timing, although this seems pretty well spelled out of the eventual path, guessing the squeeze-out happens within 9-12 months after the tender closes.

Disclosure: I own shares of IOR

Soho House & Co: Go-Private Transaction

Another one shared by a reader and similar to 23andMe, Soho House (SHCO)(~$1.5B market cap) is a 2021 vintage IPO that failed to live up to lofty expectations and now after receiving some bad press and investor skepticism, management along with an unnamed consortium want to take it private.  Seems to be a mini-trend (MAPS is another one that was shared).

Soho House is a private social club that was founded in 1995 in London by Nick Jones (he still owns 5.2% of the company, presumably part of the go-private transaction), it now has 45 social clubs around the world, their growth strategy is to target opening 2-4 houses per year.  The clubs (~$4800/year dues) have a fashionable bend to them, cater to younger creative types rather than a stodgy country club crowd, many of the clubs have rooftop pools, gyms, bars, other amenities that young professionals enjoy.  The company has expanded to some ancillary business lines like beach resorts and even furniture sales.  Soho House counts around 200+k full members with another 100+k on the waiting list.  But this business does have its negatives, its hard and costly (heavy maintenance capex business) to keep up an exclusive luxury image and goes counter to the grow story that was pitched during the IPO.

Back in 2012, billionaire media/consumer investor Ron Burkle bought a majority stake in the company via his Yucaipa private-equity vehicle.  After taking the company public, Burkle remains the Chairman of the Board and owns ~47% of the stock, plus more of the vote due to super-voting Class B shares (the publicly traded stock is Class A).  Burkle is a pretty eccentric guy, he reportedly has ties to some Hollywood scandals, bought Michael Jackson's Neverland Ranch and Bob Hope's Palm Springs house, also owns a minority stake in the Pittsburgh Penguins among other private investments.  Soho House likely has some vanity and/or social identity appeal for Burkle; it must be fun to be the owner of Soho House and socialize with their celebrity clientele.

Last February, the company came under fire when GlassHouse Research published a short report with a target price of $0.  The primary arguments were persistent unprofitability, broken growth story, aggressive depreciation schedules and rising debt levels.  Following the report, the company put out a press release announcing they previously had formed a special committee to "evaluate certain strategic transactions, some of which may result in the Company becoming a private company."  Then a couple weeks after (3/18/24), Ron Burkle published an open letter to shareholders:

Dear Shareholders

This is my first note to shareholders since we bought control of the company over a decade ago.

With all that’s gone on recently and my understanding that there has been leaked confidential information from the special committee process, I thought I’d proactively share my thoughts with you directly in the event confidential information is indeed leaked.

I’ve made hundreds of investments in my life, but none with a business model I like better than Soho House. It’s hard to read that we aren’t profitable when our Houses are very profitable and create tremendous long-term value as an in-place network. I feel the real focus should be on mature Houses that are in their second 5-year period of their growth curve, when the profitability and durability of the units really kicks into gear. With approximately half our Houses still less than five years old, we have substantial embedded value that will grow as those Houses mature, even before adding a single new House. Our post five-year Houses contribute on average 35% plus House-Level margin, with some of our oldest Houses well above that, making the network more valuable with time. This a unique and really compelling feature of the business model.

Public companies always have a tug of war over short term vs. long term profits. I’d again emphasize that this (to me) should be about value creation more than anything. Today Soho House is a public company. The Board and its affiliates alone controls approximately 75% of the stock, there aren’t many shares in the public’s hands. We have bought back so much of the small float that at today’s stock price the company can almost go private without any of us writing a check.

When we went public I believed the market would reward growth, but it seemed to quickly switch to rewarding free cash flow and profit over our top-line growth. So at this point in time we have all the costs of being a public company with few benefits. The recent negative write up caused the company to have an outside audit firm be hired by an independent law firm. It’s expensive to be a public company, this year it will be even more for a forensic audit that confirmed there are absolutely no issues and took critical management time away from the business.

...

There has always been a lot of investor interest in Soho House, and now is no exception. It is one-of-a-kind. It’s not a hotel company and it’s not a food and beverage company. It’s a membership company with a lot of demand and very low attrition (which provides a large and growing base of recurring revenues in the multiple hundreds of millions).

The public market doesn’t seem to understand or fully appreciate the value of Soho House, and the interest from the special committee process has shown private buyers may be willing to step-up and close the gap. However, it’s not for me to opine on the fairness or the appropriate value of the company’s stock, especially if I am not intending to be a seller.

In closing, given the mere potential of leaked information involving the special committee process, I wanted to go the extra step to share with you directly how I see the Company, any proposal and the process.

Sincerely,

Ron Burkle 

Despite the usual complaints about being public and the strategic process, Soho House announced in May, it was unable to come to agreement with the third party despite the offer "reflecting a substantial premium over the current trading price".  The special committee was dissolved, process over.  

However, six months later in December, alongside a delayed Q3 earnings (to make things even more murky, this company has some accounting / controls issues) announced that a new third-party consortium offered $9/share and importantly, had the support of Burkle and his affiliates to roll their equity interest into the go-private transaction.

The offer, which is supported by Ron Burkle and Yucaipa, was the result of a thorough strategic review undertaken by Yucaipa and its financial advisors to enhance shareholder value, as Yucaipa believes the inherent value of the Company is not reflected in its current share price.

Given the strong language and management/board's 75% ownership block, seems like this is the best that minority shareholders can hope for here.  The accounting is extremely convoluted making it hard to value, insiders clearly have an advantage and this could be a take under.  But shares trade for $7.60/share, offering ~18% upside to the non-binding offer.  Management isn't really incentivized here to promote a stink bid (although, I don't like that the third party consortium isn't named), there is a share buyback plan in place, management hasn't been selling into it, why would they artificially raise the price?  Absent the stock trading a premium, seems like the natural course here would be for management to eventually squeeze out minority shareholders as Burkle suggests in his letter.

Unlike 23andMe, this is an actual business and not a science project, reasonable people can debate how much it is worth, but it doesn't have a shot clock on it in the same way.  Less upside, but it seems reasonable that the 75% ownership block finds a way to get this out of the press and public eye which can't be good for business.

Disclosure: I own shares of SHCO

23andMe Holding: Busted SPAC, CEO Wants Go-Private Transaction

I put out the call for reader ideas and as usual, received many good ones.  A couple intrigued me enough to start small positions, one of those is 23andMe Holding (ME) ($100MM market cap).  23andMe is a well known direct-to-consumer DNA kit company that went public in 2021 via a Richard Branson SPAC at a $3.5B valuation.  It came public with lofty expectations and a lot of hoopla, but it failed to create a sustainable business model beyond the one time novelty nature of getting your DNA sequenced.  The stock price has fallen 95+%.

23andMe was co-founded by Anne Wojcicki, she has an interesting backstory as a high profile Silicon Valley founder who enjoyed the spotlight when the company was a venture darling.  I imagine the fall has been challenging, her identity is tied to the company.  Back in April 2024, Wojcicki disclosed in an amendment to her 13D that she was exploring taking the company private:

On April 13, 2024, Ms. Wojcicki notified members of the special committee (the “Special Committee”) of the Board that she is considering making a proposal to acquire the Issuer in a potential go-private transaction. Ms. Wojcicki indicated that she was working with advisors and intended to begin speaking to potential partners and financing sources. Ms. Wojcicki stated that any proposal by her would be conditioned irrevocably upon the approval of the Special Committee and a majority of the unaffiliated stockholders of the Issuer. Ms. Wojcicki also indicated that she wishes to maintain control of the Issuer and, therefore, will not be willing to support any alternative transaction. There can be no assurance that the foregoing will result in any transaction or any other strategic alternative and or whether or when any of the foregoing may happen.

In July, she submitted her non-binding proposal for $8/share (split adjusted, the company did a 1-for-20 reverse split in October, trades for $3.75/share today).  The WSJ reported "directors wrote in a letter few days later they were disappointed because it offered no share-price premium and lacked committed financing.  The directors threatened to engage a consultant to find a sustainable business model if she didn't revise her offer quickly."  Then in September, the drama (its not often a $100MM market cap company gets repeated coverage in the WSJ) ratcheted it up further when the entire board (other than Wojcicki) resigned in unison:

Dear Anne,

We, the independent directors of the 23andMe Board, hereby tender our resignations, effective immediately.

After months of work, we have yet to receive from you a fully financed, fully diligenced, actionable proposal that is in the best interests of the non-affiliated shareholders. We believe the Special Committee and the Board have provided ample time for you to submit such a proposal. That we have not seen any notable progress over the last 5 months leads us to believe no such proposal is forthcoming. The Special Committee is therefore unwilling to consider further extensions, and the Board agrees with the Special Committee’s determination.

While we continue to wholeheartedly support the Company’s mission and believe deeply in the value of the personalized health and wellness offering that you have articulated, it is also clear that we differ on the strategic direction for the Company going forward. Because of that difference and because of your concentrated voting power, we believe that it is in the best interests of the Company’s shareholders that we resign from the Board rather than have a protracted and distracting difference of view with you as to the direction of the Company.

We are proud of what 23andMe has achieved in pioneering direct access to genetic information, and we have been honored to have had the opportunity to be part of those efforts.

 A few weeks later, Wojcicki amended her 13D again to include the below language:

In response to a request from the then-current Special Committee of the Board, I stated that I would consider third party takeover proposals for 23andMe. Whether I would ultimately accept such a proposal remained within my discretion. In the interim period, based on subsequent developments, it has become even clearer to me that the best path forward for the Issuer is for me to take the company private. Accordingly, in order to update my prior statement and avoid any confusion in the market, I am no longer open to considering third party takeover proposals for the Issuer. I remain committed to completing an acquisition of 23andMe. Towards that end, the Issuer is working diligently to repopulate the Board of Directors so that any proposals to acquire the Issuer can be properly considered.

Wojcicki likes to tout that she's unconventional, but this is very direct language and surprising to see in an SEC filing.  To help facilitate this potential go-private offer, three new independent board members were appointed at the end of October, none of which appear to own any shares.

In November, 23andMe shut down their drug discovery and development business (one business model they've tried out is that of a regular-way biotech, they had two clinical trials running) and laid off 40% of their workforce in order to meet their goal of getting to cash flow positive in their traditional consumer DNA kit business.  Progress is being made, but potentially not fast enough, in their 9/30 10-Q, the company had a going concern disclosure, they need to raise capital in order to fund operations for the next 12 months.  This is a time sensitive trade, although 23andMe doesn't have any conventional debt (they do have a fairly big fancy operating lease), they're running out of cash quickly.

The bet here is that Wojcicki is able to take the company private with the re-constituted board presumably picked as friendly.  Dealing with public shareholders and the bad press associated with a stock down so substantially is bad for the brand (both her and 23andMe).  I'm sympathetic to the view 23andMe might have some valuable data, brand (they own one of countless online pharmacies getting into compounded GLP-1s) and IP that might be valuable to someone, especially in the current artificial intelligence hype cycle.

Other thoughts/notes:

• Anne Wojcicki rolled over all of her equity into the SPAC, contributed $25MM to the PIPE at $200 (split adjusted) per share and hasn't sold any of her shares since.  She appears to be a true believer in the company and its mission, although she's likely fabulously wealthy after previously being married to Google co-founder Sergey Brin for years.
• She owns 22.8% of the stock and 49.9% of the vote due to the dual class share structure, Class A (the publicly traded class) has 1 vote and the Class B shares have 10 votes.  No other significant holders remain, Branson is long gone, etc. 

Disclosure: I own shares of ME

Year End 2024 Portfolio Review

Welp, it was bound to happen, but I underperformed the broad U.S. market by an embarrassing amount this year.  My portfolio lost -6.39% compared to the S&P 500's 25.02% gain in 2024, however my lifetime-to-date IRR is still hanging in just above 20%.

I spent the last couple weeks going back through my portfolio, reaffirming the thesis for each, below are the elevator style pitches for my current holdings (didn't have enough time to discuss closed positions, if you have any questions on those, feel free to comment):

Rumored M&A:

Coincidentally, these are all land bank companies where the strategic review processes are getting a little long in the tooth, creating varying levels of anxiety in each situation.

• CKX Lands (CKX) is an illiquid microcap that owns land in Louisiana that it primarily monetizes via oil and gas royalties.  About 500 days ago, the company announced a review of strategic alternatives and this past spring updated CKX had received interest from multiple parties, but that was close to 9 months ago now.  A commenter posted on 12/4, an email from Gray Stream (Chairman & President, who is working on an expired contract) confirming that CKX Lands is not involved in the Project Cypress sequestration effort, but also that strategic alternatives "efforts and discussions are still ongoing in earnest.  We hope to have a material update soon."  I do worry that a no deal announcement will significantly hurt the stock, it trades very little on a daily basis, is semi-popular in small cap value circles and a no-deal would signal a dead money stock for years to come.  If it doesn't get sold after this long process, when will it?  Let's hope something is in the works and announced soon.  My best guess is still something gets done, but my expectations are for a lower premium, something in the $15-17/share range.
• Howard Hughes Holdings (HHH) is now a pure-play master planned community real estate developer following the spinoff of Seaport Entertainment Group (SEG).  A week after the spinoff, Bill Ackman's Pershing Square Holdings (37.5% owner) updated their 13D to state their interest in taking the company private.  It's five months later, we don't have much of an update, Bill is busy discussing politics and his investments in Fannie and Freddie on Twitter, which is a bit concerning.  I thought something would be done by now (had some December call options that unfortunately expired worthless, still have a few January calls that are out of money), there's not going to be another bidder for the company that can pay a full price, management would be best to take a fair deal from Pershing Square versus continuing to trade at a discount into eternity.  My current best guess, they come to a deal for $90-95/share sometime in January.
• Limoneira (LMNR) is a lemon grower and packager that is increasingly moving acreage to avocados, but that will be a several year transition.  Limoneira also has a real estate development arm which has a JV developing homesites from their former agricultural land.  13 months ago, the company announced they were pursuing strategic alternatives, we haven't seen too much of an update, other than mentions of "significant interest".  In August, the company added a new incentive agreement with senior management to provide bonuses for a transaction over $28/share ("Base Share Price") with escalators up to $40/share ("Target Share Price"), and then even greater escalators above that.  Shares trade today below $25/share after the stock dipped a bit following 2025 guidance disappointed a bit, but the long term story seems in place.  I'm still anticipating a deal above $28/share, my only concerns is it could be a complicated deal (resulting in an attractive headline premium, but the market valuing it at a discount), management has mentioned exploring OpCo/PropCo structures as part of this process.

Spinoffs:

• Enhabit Inc (EHAB) is a mid-2022 spinoff of Encompass Health (EHC), like many spins, Enhabit was spun with too much debt and a management team that didn't appear ready for life as a public company.  They stumbled right out of the gate and attracted activist investors who pushed for a sale.  No sale appears on the horizon near term (insurers like UHC were previously buyers, but they're tangled up in other issues right now), but at ~8.5x EBITDA (when similar comps have been sold for mid-teens multiples or higher) it seems relatively cheap.  The home health and hospice sector should have similar tailwinds to senior housing with the aging population, but home health has the added benefit of being more cost effective and keeping seniors in their homes.  Enhabit has a lot of leverage, 4.8x EBITDA, would like to see that come down to more tolerable levels for public markets, this isn't my highest conviction idea, but does seem like a reasonable setup to outperform from the initial spin disappointment.
• Inhibrx Biosciences (INBX) is the spinoff of Inhibrx Inc, basically a restart of the development engine after selling INBRX-101 to Sanofi.  New INBX has two ongoing trials, the further along one, a registration-enabling phase trial for INBXR-109 should have a data readout in mid-2025.  I'm just along for the ride, no thoughts on the pipeline, just letting the spin play out over 1-2 years post Sanofi transaction.
• Seaport Entertainment Group (SEG) is the Howard Hughes spin, they did complete their rights offering and now we look forward to their first earnings call in March which will be their management's first chance to tell their story to the market.  There's a lot of wood to chop here, yes, SEG owns a full Manhattan block, but its extremely underutilized (seen plenty of pictures on Twitter of it near empty).  I do like the management team that was brought in to run SEG, but also cautious on the speed of change, my best guess is a mixed use tower at 250 Water in the Seaport District is the first development project undertaken.  With two mega resorts opening this year and a new casino/stadium complex being constructed at the former Las Vegas Tropicana site, assigning any value to the Fashion Show air rights seems a ways away.

Broken Biotech Basket:

• On 11/8/24, AlloVir (ALVR) announced a reverse merger agreement with privately held Kalaris Therapeutics, this proposed merger includes no oversubscribed PIPE, special dividend or CVR to current AlloVir shareholders which are features of deals that have recently gotten a post announcement pop.  Instead, AlloVir will be bring essentially all of the proforma cash ($100MM) to closing and receive 25% of the company, putting a fairly lofty valuation on Kalaris, which only just commenced enrollment in a Phase 1 trial.  $100MM cash on 115.5 million ALVR shares is roughly $0.86/share, despite that, shares currently trade for $0.42/share.  ALVR shareholders owning 29.4% have already pledged their support for the merger, the deal is expected to close in Q1, voting this one down might be difficult, but it seems too cheap to sell now.  There might be some tax loss selling happening and once the deal closes, maybe we get some uplift from continued shareholder rotation as the story gets out.  But now very low conviction.
• On 10/31/24, Aerovate Therapeutics (AVTE) announced a reverse merger agreement with privately held Jade Biosciences, unlike AlloVir, this merger includes a special dividend of virtually all of AVTE's remaining cash at close (estimated at $65MM or $2.25/share, but that might be conservative) and a large $300MM oversubscribed PIPE.  Post closing, AVTE shareholders will only own 1.6% of the combined company.  This is a liquidation that's structured as a reverse merger, the best kind of outcome.  The plan is to hold through the special dividend / merger and then exit shortly after as those that didn't get their full allocation in the PIPE might bid up the shares.
• ESSA Pharma (EPIX) recently announced the termination of their License Agreement, further solidifying their pursuit of a liquidation or reverse merger.  Other than that, nothing has really changed since my write-up in early November, the spread between my estimated liquidation value of ~$2.15/share is about 20% above where the $1.79/share it trades today.  Tang Capital and BML Capital are both just under 10% holders here, the cash pile here is a healthy $100+MM, this is probably my current favorite in the basket.
• Ikena Oncology (IKNA) snuck in a reverse merger transaction before year end, announcing on 12/23 a deal with Inmagene Biopharmaceuticals that includes a CVR plus an oversubscribed $75MM PIPE from both current IKNA investors and new names.  This reverse merger hasn't been well received by the market, I'm a bit surprised by that given the PIPE, but there will be limited return of capital here (maybe a token special dividend if the cash at close is above $100MM) compared to AVTE.  The PIPE values IKNA at approximately $120MM or $2.40+/share, despite that, shares currently trade at $1.64/share.  The deal is targeted to close in mid-2025, I would anticipate the price will rally a bit from here into the close as the shareholder registry turns over.
• Nothing has really changed at Athira Pharma (ATHA) since my early November write-up, shares are down mid-single digits since, it might be a bit more attractive now as we wait for a potential deal with 14% holder Perceptive Advisors.  This one is a little more risky, rather than waiving the white flag following a failed clinical trial, Athira has stated they're doubling down on their development pipeline.  Shares trade at $0.59/share, a wide discount to my estimated liquidation value of $0.86/share.
• HilleVax (HLVX) reported a failed clinical trial in July along with a vague intention to "explore the potential for continued development" of their pre-clinical assets, but on 12/5, we received further validation this situation is a regular-way broken biotech seeking strategic alternatives with the announcement HLVX was doing a 70% reduction in force, including three executive officers.  There's still work to do before this is a clean shell, cash burn is higher than I expected as R&D expenses didn't come down much in Q3 despite halting the trial in early July,  HLVX also still has yet to terminate their significant operating lease.  Shares still trade at a discount to my updated liquidation value of approximately ~$2.50/share.

REITs:

• ACRES Commercial Realty Corp's (ACR) share price performed surprisingly well (+60%) this year despite the slow motion train wreck that is commercial real estate.  ACR had a few foreclosures this year, but mostly sidestepped the worst of it, although 23% of their loan portfolio is rated 4 or 5, the quality loans can refinance out of their bridge loans but the junk can't.  This commercial mREIT is essentially in runoff at the moment, they haven't had much if any new origination this year and their CRE CLOs are outside of the reinvestment period.  They do have a handful of owned real estate positions where they've guided to monetizing at a profit over the next several quarters in order to soak up their tax assets.  Once the tax assets are exhausted, the plan is to turn the dividend back on, hopefully re-rate from ~$16/share somewhere closer to ~80% of the $27.92/share book value.  That's possibly a 2025 story.
• Creative Media & Community Trust Corp (CMCT) is a total dumpster fire caught up in a death spiral of preferred redemptions into common stock that then get puked out, which encourages others to puke it for the tax loss.  On the positive side, CMCT was able to refinance their hotel property which is one of the several assets they plan to put asset level debt on to repay their non-compliant credit facility.  We'll see if tax loss season ending will cause the stock to recover, from the action on 12/31, that might be the case, but a bit too early to tell.  My current plan is to own this a little longer than just for a January effect bounce, think the real juice could be if they are able to stabilize and show progress in the strategic shift to multi-family.

Miscellaneous Special Sits:

• Enzo Biochem Inc (ENZ) is a two-step liquidation, after selling their clinical lab division to Labcorp in mid-2023, they're left with a subscale unprofitable life sciences division.  The market seems to be losing in faith that ENZ will actually be able to monetize their remaining division and return cash to shareholders, in mid-December, ENZ released their fiscal Q1 results disclosing a 20% revenue decline due to "general continued headwinds in the life sciences tools space" without much other detail on the ongoing strategic process, which wasn't confidence inspiring.  On the positive side, ENZ did appoint Jon Couchman to the Board, he has previous liquidation experience.  Following my experience with PSFW, a similar two-step liquidation that took a long time to fully play out, I'm willing to give this one some space too.
• HomeStreet (HMST) is a zombie bank, their balance sheet is upside down as a result of the Fed taking rates up to combat inflation.  HomeStreet had a deal with FirstSun Capital Bancorp (FSUN) to be sold in a stock-for-stock deal that valued HMST at approximately $15/share, but regulators balked at the deal, especially as FSUN forum shopped their regulatory/charter structure from the OCC to a Texas state charter.  The primary concern of Texas regulators was HMST's commercial real estate exposure (they have a significant slug of Class B/C multifamily loans in the LA area, regulators have been spooked on that market since NYCB had their struggles this past spring).  The FirstSun deal broke, HMST has responded by selling $990MM of their commercial real estate portfolio (about 20% of the CRE exposure) to Bank of America for 92 cents on the dollar, which is 4 cents lower than where they've marked the fair value of their overall loans held for investment on their balance sheet.  The longer HMST stays standalone, the worse, hopefully they get pushed into the arms of a new merger dance partner here soon at a similar ~$15/share valuation.  Many are predicting 2025 as the year of regional bank mergers, hopefully HMST is one of the first taken out.

Legacy Positions:

• While significant holdings for me, Green Brick Partners (GRBK), Mereo BioPharma Group PLC (MREO) and to a lesser extent Par Pacific Holdings (PARR), these legacy positions are not really active actionable ideas in my mind.  Happy to chat with others fellow investors, but for now I'm just letting these investments play out and defer capital gains taxes.

Performance Attribution:

Current Watchlist:

As always, interested in hearing new ideas, please post in the comments, in the spirit of sharing, here's my current watchlist with a few notes on each.  The blue are the busted up biotechs that I've been looking at, but didn't make it into the portfolio yet for one reason or another.

Current Portfolio:

Additionally, I own a fifteen or so CVRs and non-tradeable liquidation stubs, most of these are marked at zero.  I withdrew funds from this account in the second half of the year to reallocate elsewhere in my personal balance sheet.  Despite the tough year, still love markets and discussing investment ideas with others.  Thank you as always for reading and happy new year.

Disclosure: Table above is my taxable account, I don't manage outside money and this is only a portion of my overall assets.  As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.

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