Wednesday, March 6, 2024

BankFinancial: Shareholder Discontent, Activist Added to Board

BankFinancial (BFIN) is a small ($1.5B assets, $125MM market cap) community bank with 18 branches scattered across the Chicago suburbs.  It was a mutual holding company conversion way back in 2004, unlike many former mutual conversions, BankFinancial is primarily a commercial bank with big chunks of their loan portfolio in Class B/C suburban multi-family properties, commercial working capital lines and equipment leases.  Their deposit costs are surprisingly low at just 1.26% (Q4), over a full percentage point below the average bank, despite the strong deposit franchise, the bank struggles to turn a profit with an ROE in the 5%-7% range due to a high expense base.  The stock trades for a hair under $10/share with a book value of $12.45/share (not mark-to-marking their loan portfolio, all of their securities portfolio is AFS), admittedly not the cheapest community bank.

With regional bank tremors popping up again, BankFinancial doesn't have the same problems plaguing others.  The bank doesn't lend to high rises or do significant construction lending, there's minimal office exposure, multi-family is in Class B/C which isn't as susceptible to overbuilding and they have a strong diverse deposit base.  What they do have is an entrenched CEO, Morgan Gasior has been the CEO since the mutual conversion, and remarkably, at the age of 60, has served as a director at Bank Financial since 1983.


Not entirely sure how that's possible, would have made him 19 at the time, in 1988 he became EVP/COO at 24, BankFinancial is Morgan Gasior and Morgan Gasior is BankFinancial.  I'm guessing there's some nepotism involved, but going back to the original conversion docs, couldn't find any previous relationship ties.  I would be curious to hear the origin story.  Despite being a bank executive for nearly 40 years, he only owns 2.5% of the shares yet collect $600+k in annual compensation.

This story isn't too uncommon in the community bank world, but what caught my attention (in addition to this being a local bank for me) was the Q4 earnings call which quickly went off the rails (courtesy of BamSEC):

Operator

And our next question will come from the line of [ Stephen Buckman ] from [ Buckman ] Capital.

Unknown Analyst

I have been a shareholder that took part in the conversion 18, 19 years ago. And I have a more holistic question as well. And that is what is the role of the Board of Directors? And I'm going to refer you to a conference call comment you made on May 2, 2022. And what you said, I'm quoting, is, "Well, first of all, I think we're in a position now where our goal for the third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So I'm going to try to hit that $1 per share in our third quarter and fourth quarter." This is 2022. And then beginning next year, the goal would shift to getting into the $0.30s or somewhere between $0.30 and $0.34. I could go on, but the fact is, 18 years later, the only guy who's made out here is you. Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the Board of Directors in terms of your underperformance during this time?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

No, this is the investor conference call. We're here to discuss earnings.

Unknown Analyst

I'm quoting you directly from May 2, 2022 [indiscernible] take a look at the conference call.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I'll just say that, if you want to discuss this offline, we're happy to.

Unknown Analyst

No. No. I'd rather this be in a public forum.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, we're going to leave it there. I don't think that this is -- that's the right forum for this. If you want to...

Unknown Analyst

Well, your underperformance for 19 years is a matter of public record. And so do you want to address it publicly or do you want to pretend that it doesn't exist?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I think we're going to leave it where I said. This is the investor conference call. If you'd like to talk about it off-line, we're happy to do so. But I mean...

Unknown Analyst

And I find that your cowardice in addressing issues that affect all public shareholders is severely -- is staggering. I'll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic alternatives. I'll leave it at that.

And another one:

Unknown Analyst

Morgan, this is [ Charles Winnik ]. On February 5, 2013, you were asked questions on your last call, you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you. Well, I definitely can't disagree with your assessment, especially considering the performance over the last few years. I don't really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved, your full earnings capacity still generates returns much less than your cost of capital, which, in effect, destroys shareholder value. Your efficiency ratio is just too high. And while loan growth is always right around the corner, you admit on every call that competition is intense, which I agree, which really just justifies the fragmented nature of the markets and need consolidation. And so, yes, we have improved outlook and hefty capital, but all negatives really speak for themselves.

So, my question really is -- you've got most of your credit issues behind you now. Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction?

And finally from Jason Stock, whose fund owns just under 10% of the shares:

Jason Stock

As you know, we've been long-term investors in BankFinancial, and we're generally not the type of investor who likes to be much of a nuisance. But as owners of over 9% of the company, I think it'd be probably irresponsible of me to not pipe in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity.

Then a week after, Ben Mackovak of Strategic Value Bank Investors, a fund that specializes in community banks was added to the board after accumulating a 5.2% position.  From the 13D filing:

The Reporting Persons acquired the Common Stock reported on this Schedule 13D for investment purposes. The Reporting Persons purchased the shares based on the belief that the shares, at the time of purchase, were undervalued and represented an attractive investment opportunity. The Reporting Persons believe significant opportunity exists to enhance shareholder value by simplifying the business, improving operations, resolving certain non-performing loans, and evaluating strategic alternatives.

Mackovak follows a similar strategy of other community bank activists, he's on the board of some 10 small banks, pushes them to make operational changes, if that doesn't improve the multiple, then pushes for an M&A transaction to unlock value.  He recently went on Meb Faber's podcast and sounds like a smart, sober, capable board member that could crack the BFIN nut.  I don't anticipate an immediate M&A deal here (they have $52.8MM of mark-to-market losses on the loan portfolio an acquirer would need to realize), the bank does have some shorter duration loans that are coming off the books this year that they can put to work at higher rates improving profitability, but the pressure is on as a high expense base is much easier to fix (by selling out) than a flightly deposit base, long duration securities portfolio or credit issues, none of which really apply to BFIN.

Disclosure: I own shares of BFIN 

Friday, March 1, 2024

Limoneira: Citrus Farmer, Pursuing Strategic Alternatives

Limoneira Company (LMNR) ($330MM market cap) is a California based citrus farmer (primarily lemons, secondarily avocados) packager and part-time real estate developer that announced on 12/1/23, they were pursuing strategic alternatives.  From the press release:

Scott S. Slater, Chairperson of the Board, stated, “Over Limoneira’s 130-year history it has grown into one of the leading, sustainable agribusiness companies in the world with over 11,100 acres of valuable lands, real estate properties, and senior water rights. Over the past 18 months, we have developed a strategic roadmap intended to enhance near and long-term shareholder value. Today, we consider ourselves to be in a strong financial position, having recently reduced our net debt position and rightsized the balance sheet through our ongoing strategic shift towards an asset-lighter business model. Given the Board’s belief that there is a disconnect between Limoneira’s public market value and the intrinsic value of our Company’s underlying assets, the Board believes it is the right time to explore all strategic options to prioritize the Company’s growth and stockholder value.”

Last summer, the company hosted an investor day where they laid out their estimated fair market value of LMNR's real estate and other assets:


Today, the stock trades for roughly $18/share, or a 40% discount (60% upside) to the low end of the above NAV (which they cite is based on recent agriculture transactions).  I waited a little while to buy this one (the price has also come in from the post-announcement excitement) as it strikes me as a potentially difficult business to sell leading to an extended timeline:
  1. Agriculture/farming operations aren't know as fantastic businesses, they're price takers not price makers and as a result, can be very cyclical.  They're also capital intensive, although Limoneira is trying to be more of a farm management and packaging company, as seen above, the value is in the land and related assets.
  2. Part of the value is in higher or better uses of the real estate, such as difficult to monetize water rights.
  3. This is a old company, main employer in town (many of their employees live on property in housing owned by Limoneira), as a result, it's probably hard from a personal relationship perspective to be the management team that sells to outsiders.  Easier to maintain the status quo.
But there is reason to believe management does intend to sell, shortly after the strategic alternatives announcement, they let 13D holder Peter Nolan on the board:
Limoneira Chairperson of the Board, Scott S. Slater, stated, “... We are pleased to welcome Peter and believe he will be a valuable asset in guiding the Company as we continue to execute against our strategic roadmap to enhance near and long-term value and commence the exploration of potential strategic alternatives aimed at maximizing value for our stockholders.”

Peter Nolan, Chairman of Nolan Capital, Inc. commented, “I am excited to be joining the Board of Limoneira as it enters this phase of exploring ways to unlock additional value for stockholders.”

Peter Nolan, a former PE executive, owns 6% of the company and his family office has some past experience with real estate and agriculture businesses.  The two events of Nolan showing up on the shareholder registry and strategic process seem related, hopefully he can help engineer a sale here.

Unlike other situations, management doesn't appear to be an obstacle here; this article from the VC Star provides some interesting background on the company, including how it came public after they tripped the SEC shareholder count number and had to list in 2010.  They haven't gained much from being public, probably makes sense for them to be private again.  CEO Harold Edwards is quoted, "The value the market perceives we have versus what we believe is the intrinsic value - there's always been a big difference between those two things.  The idea is that maybe there's a better way for us to operate.  Maybe there's a better ownership structure that isn't public.  Maybe it's private, or maybe it's merging together with another public company."  Guessing we just have to be patient on a sale, maybe mid-to-late summer is reasonable.

Disclosure: I own shares of LMNR

Wednesday, February 14, 2024

Merrimack Pharmaceuticals: Ipsen Milestone Achieved, Liquidation

Merrimack Pharmaceuticals (MACK) ($220MM market cap) is essentially a publicly traded CVR in a c-corp form, I owned the stock briefly in 2017 after the company sold Onivyde to Ipsen and committed to passing through any future milestone payments related to Onivyde to shareholders.  Unfortunately, it didn't have the same protections of a CVR and management ended up diluting shareholders of those future milestone payments by raising equity to pursue their remaining development stage pipeline.  In 2019, the company officially gave up development of new drugs, management was removed and it has been little more than a shell since as the company awaited any milestone payments from Ipsen.

Seven short years later, Ipsen announced that Onivyde was approved by the FDA for metastatic pancreatic ductal adenocarcinoma ("mPDAC"), a particularly awful form of pancreatic cancer.  This approval triggers a $225MM milestone payment to Merrimack, the remaining milestones for Onivyde and another asset sale (to Elevation) are not expected to be reached.  Merrimack waited little time to announce they were formally liquidating pending a shareholder vote in May, with the liquidation distribution range of $14.65 to $15.35/share.

We'll have to wait for the proxy to see how conservative this estimated range is, but to my eye, it looks pretty conservative, with the actual distribution likely to be at the top of the range or even just above.  Below is my math, as usual, it might be wildly off (and any variance to these numbers can swing the expected IRR quite violently), I'm particularly wary of my tax estimate, any tax wizards out there please feel free to chime in below in the comment section.

The company has $215MM in NOLs which virtually matches the Ipsen windfall, but taxes are still due under section 453A of the IRS code, which in my novice read imposes an interest penalty on deferred sales like a milestone payment.  The interest rate applicable has varied across the last 7 years, since I'm just a retail guy, I didn't build out a full model, but I think my number is roughly right, maybe a touch low.  The $0.03 distribution is simply a 50% haircut of my estimated escrow amount to account for any expenses during the liquidating trust lifecycle.

The board at MACK has been controlled by investors/owners since 2019, they've been prepping and preparing for this day since, I don't anticipate any large surprising expenses or much of an escrow.  Congratulations to that team, I've followed at a short distance but never felt fully comfortable betting on an FDA approval.

Disclosure: I own shares of MACK

Thursday, February 8, 2024

Enzo Biochem: Asset Sale, Cheap RemainCo Likely for Sale

Enzo Biochem (ENZ) (~$65MM market cap) in July 2023, closed on the sale of their clinical laboratory division to Labcorp (LH) leaving their subscale but growing Enzo Life Sciences ("ELS") division and a slug of cash at the RemainCo.  Rhyming with other similar setups (most recently PFSW), the company is likely dressing up the ELS division for sale to complete the two-step liquidation of the company.  The ELS segment makes products (picks and shovels for biotechs) for drug development and clinical research, it does about $32MM in sales annually making it an after-thought in the large but mid-to-high single digit growing industry.  Today ELS is roughly breakeven before corporate overhead, while that should improve, after corporate overhead, ENZ as a whole, is burning cash and has little reason to exist.

Comparables of similar size (most are profitable mid-large caps) are a bit hard to come by for the ELS segment (there might be obvious ones that I'm missing, if so, please point them out in the comments), but they do own the real estate for the business (about 56,000 square feet of manufacturing/research space in Farmingdale, NY), just throwing a basic 1x TTM revenue multiple on the ELS business itself and adding the PPE, gets me about a value of $45MM for the remaining business.  Adding in the current NCAV and accounting for further cash burn, I get a proforma value of approximately $1.75/share.

In a bullish scenario, maybe they can get upward of 2x revenue for the ELS segment and it could be a near double from current prices.  This isn't a unique idea, but as I've said before, I think investors tend to be impatient with these setups, it takes longer than investors would think to unwind the operations of segments that on the surface look separate.  As we come up on the first anniversary of the clinical labs sale, a second asset sale in the next quarter or two is a more reasonable timeline.

Other random thoughts:

  • Enzo's former clinical laboratory segment was subject to a ransomware attack last May prior to the close of their deal with Labcorp, lots of sensitive information was stolen including several hundred thousand social security numbers.  Enzo is facing some lawsuits, but hasn't provided any estimated liability at this point.
  • Enzo stopped doing earnings calls after the asset sale announcement, they haven't returned to conducting earnings calls, pointing to their current structure not being the long term model going forward.
  • Steven Pully is the new Chairman of the Board, he's a partner/co-founder of Speyside Partners, an advisory shop that specializes in businesses in transition, he's served on 29 boards, including several that ended up pseudo liquidating, similar to ENZ's presumed path.
  • What's the "ADES risk" here?  Said otherwise, what's the risk the company will be a buyer rather than a seller?  I think that's unlikely since the board and shareholder registry is filled with value and activist investors who have shown up in the last two years, are not emotionally tied to the business like a former founder or CEO.
  • Bradley Radoff, a private investor, owns 8+% of the stock and is on the board of directors.
  • CEO Kara Cannon was previously the COO, after the former CEO stepped down 9/6 she took on the interim CEO title that was later graduated to the permanent CEO.  Her contract will pay her a 0.75% Transaction Bonus on the any sale incentivizing her to go along with the two-step liquidation strategy.

Disclosure: I own shares of ENZ

Tuesday, January 23, 2024

Instil Bio: Stopping Clinical Development, Real Estate Value

Instil Bio (TIL) (~$70MM market cap) is a clinical stage biotech focused on developing tumor infiltrating lymphocyte ("TIL") therapies for the treatment of cancer.  Instil was an early 2021 IPO, at the time it had a melanoma treatment, ITIL-168, that was beginning a Phase 2 clinical trial.  They had ambitious dreams which included building a brand new laboratory and manufacturing facility in Tarzana, California to go along with leased manufacturing space in the UK.

ITIL-168 failed to impress and in December 2022, the company laid off 60% of their workforce and decided to put their remaining resources behind ITIL-306, a pre-clinical treatment for lung, ovarian and kidney cancers.  In early 2023, the RIF was further expanded that resulted in reducing their US workforce by 96% and their UK workforce by 42%.  Additionally, Instil scrapped plans to occupy the newly completed Tarzana facility.  A Phase 1 study was initiated in the UK, but earlier this month Instil announced another 61% workforce reduction in the UK alongside the closing of their UK facilities and a partnership with a Chinese firm that essentially outsources further early development of ITIL-306.

Two wrinkles with this idea:

  1. Instil hasn't fully put itself up for sale or declared strategic alternatives, while they have essentially laid off everyone in a series of RIFs, as far as I can tell Instil hasn't hired advisors to run a formal process at this point.
  2. Instil owns a 128,000 square foot, brand new, never occupied facility (18408 West Onxard St) in Tarzana, California that they've put up for lease or sale.  In the third quarter, they marked down the value of the facility to $132.5MM and have an $82.4MM mortgage loan out against it that matures in July 2027.
If Instil is able to get $132.5MM for the facility (welcome any thoughts from medical/industrial CRE experts) and assuming some further cash burn over the next 12 months, I get a stock that's trading less than half of NAV with no value to their IP.
Note: TIL did a 1-for-20 reverse split in December, some data providers have the old share count.
This company lacks much in terms of public disclosures, they don't hold quarterly conference calls or have much in the way of conference transcripts following their IPO.  Biotech venture firm Curative Ventures owns approximately 30% of the stock and Curative's founder, Bronson Crouch, is the CEO and Chairman of Instil.  While their execution has been poor, seems like they've found religion by prioritizing cash preservation, hopefully a sale or liquidation follows in due time.

Disclosure: I own shares of TIL

Friday, January 19, 2024

Aclaris Therapeutics: Strategic Review for Broken Biotech, Big Discount to Cash

Aclaris Therapeutics (ACRS) (~$85MM market cap) is a clinical-stage biotech company focused on developing novel drugs for immuno-inflammatory diseases.  In November, the company announced their lead candidate, zunsemetinib, did not meet its primary or secondary endpoints in a Phase 2 trial for the treatment of moderate to severe rheumatoid arthritis, the stock dropped 80+% on the news.  Earlier this week, Aclaris announced their CEO was stepping down and the company was initiating a strategic review:

Concurrent with today’s announcement, Aclaris also announced that it is conducting a strategic review of its business to determine how to optimally deploy its capital to maximize shareholder return. On a preliminary unaudited basis, as of December 31, 2023, Aclaris’ aggregate cash, cash equivalents and marketable securities was approximately $182 million.

Aclaris also reiterates the following business plans:

  • ATI-1777: Aclaris is seeking a development and commercialization partner for ATI-1777, its investigational topical “soft” JAK 1/3 inhibitor. Aclaris recently reported positive top-line results from its Phase 2b trial in atopic dermatitis.
  • ATI-2138: Aclaris is assessing the most effective pathway including the lead indication for ATI-2138, its Phase 2 ready investigational oral covalent ITK/JAK3 inhibitor. Aclaris announced positive results from its Phase 1 MAD trial of ATI-2138 in 2023.
  • Discovery: Aclaris plans to continue to advance discovery programs through KINect®, its proprietary drug discovery platform.
I don't love the verbiage they use here, from the sounds of "optimally deploy its capital" and "reiterates the following business plans" it appears the initial desire is to continue their research and development pipeline.  However, this situation seems ripe for an activist, indeed Tang Capital and BML Advisors both own 6+% of the shares each.  Tang Capital could throw out an offer, similar to RPHM, and change the direction of the strategic review.

My back of envelope liquidation estimate:
As usually, these are very much swag estimates, ACRS does a nice job of breaking out their R&D expense by program, feel free to get more granular in your estimates.
On the positive side (from an investment perspective), the company did do a 46% reduction-in-force in December, halted zunsemetinib development and appear mostly in a standstill on ATI-1777 and ATI-2138 as they decide on next steps.  On the negative side, the co-founder is now the interim CEO, he might not want to sell and might rather continue on developing new drugs, but the activist shareholders and high cost of capital will hopefully change his mind.  This is on the riskier side of the broken biotech spectrum, but remains at a pretty attractive discount to net cash.

Disclosure: I own shares of ACRS

Tuesday, January 16, 2024

HomeStreet: BANC/PACW Style Merger with FirstSun, Cheap Proforma

This morning, FirstSun Capital Bancorp (FSUN) (~$850MM market cap) announced they were acquiring HomeStreet (HMST) (~$200MM market cap) in an all-stock transaction that includes a PIPE investment, lead by Wellington (being done at $32.50 per FSUN, or $14.12 per HMST), that neutralizes the mark-to-market impact of HomeStreet's balance sheet.  FirstSun is an insider controlled (69% insider ownership) C&I loan heavy bank that trades OTC with geographic concentration in Kansas, Texas, Colorado, New Mexico and Arizona.  FSUN will be the surviving entity, with FSUN management in charge (HMST's Mark Mason given a semi-ceremonial position as Vice Chair of the board) and be listed on the NASDAQ post "mid-2024" close, increasing the liquidity of their shares.

The credit quality of HomeStreet's assets has never really been in question, by re-marking them at current values, along with cost synergies, FirstSun will be able to enjoy outsized earnings in the early years of the deal.


HomeStreet shareholders will be receiving 0.4345 shares of FSUN for every share of HMST.  As I write this, there's actually a negative spread, likely because FSUN is OTC and illiquid, but the proforma entity is trading at approximately 5.9x next years estimated earnings, well below peer banks.

At 8x, still below peers but accounting for some of the overearning related to the marks, HMST would be worth $21/share.
I'm going to hang onto my shares, stick this in the same mental bucket as Banc of California (BANC) where a stronger bank takes over a weak one, extracts a lot of synergies and as we get closer to 2025, the market will start to recognize the new earnings profile of the combined bank.  I continue to like regional banks in today's market, for a few reasons:

  1. With short terms rates likely coming down in 2024, banks will attempt to quickly reduce their deposit costs (100% beta) to protect their NIMs;
  2. Commercial real estate exposure is generally overstated by the media/market, it will take a long time to play out giving bank's time to reserve and workout loans;
  3. We'll continue to see a lot of mergers, banks need more diversified deposit platforms to extend deposit duration.
Any other banks out there ripe for a similar transaction structure?

Disclosure: I own shares of HMST