Friday, February 3, 2023

Magenta Therapeutics: Trading Well Below Cash, Strategic Alternatives

This will be a relatively quick one, thank you to Writser for pointing me in this direction.

Magenta Therapeutics (MGTA) (~$47MM market cap) is another addition to my growing basket of failed biotechnology companies that are pursuing strategic alternatives like a reverse merger or liquidation.  Magenta is a clinical stage biotech focused on improving stem cell transplantation.  Their primary product, MGTA-117, initially had positive data readouts in December for their ongoing Phase 1/2 trial, but shortly after, patients using higher doses started experiencing adverse effects, culminating with the death of one trial participant and the subsequent shutdown of the MGTA-117 clinical trial.  Then yesterday afternoon, Magenta announced they were going to explore strategic alternatives, the press release is rather vague and generic.  But similar to SESN and others, I anticipate Magenta first trying to explore a buzzy reverse merger with a more promising biotech, if that doesn't work, pursue a liquidation.

Magenta's balance sheet is fairly simple, they had $128.3MM in cash and treasuries as of 9/30, no debt other than subleased space in a Cambridge, MA office/lab complex.

Since we're getting close to half way through Q1, I annualized the Q3 burn rate for two quarters.  The company hasn't given any initial indication of eliminating their workforce (as of the last 10-K, they had 75 people), but I expect that to follow shortly, along with breaking their lease.  Cambridge is a biotech hot spot, Magenta or the primary lessee shouldn't have too much trouble finding a new tenant.  Feel free to make your own assumptions, but I come up with MGTA trading at about a 40% discount to proforma net cash even after spiking on the news today.  In terms of other assets, Magenta does have $247.2MM in NOLs and two other early stage product candidates (one has a Phase 2 trial ongoing), but as always, difficult to put a value on those.

The primary risk here could be the company deciding to double down on their two other early stage products, but the discount is wide enough here to warrant an add to the basket.

Disclosure: I own shares of MGTA

Wednesday, February 1, 2023

Advanced Emissions Solutions: Recut Deal w/ Arq, Torpedoes Shareholder Vote

Typically, I don't like to write about stocks that I don't own but I'm going to break that soft rule here, as mentioned in the Year End post, I sold my shares in Advanced Emissions Solutions (ADES) ($59MM market cap).  My original post outlining the thesis from November 2021 is here, as usual, the comment section is worth going through for a blow-by-blow of the events.

This afternoon, ADES published a press release announcing their merger with Arq Limited had been completed.  That required a double take and a quick click since the merger as originally constructed required a shareholder vote to complete, and no such vote was held.  

To take a step back, in May 2021, ADES announced it was pursuing strategic alternatives as the run off in one segment was generating a lot of cash, but that business was coming to an end due to the expiration of a tax credit, leaving just their Activated Carbon business (Red River plant) which is subscale for a public company.  According to the background section in the original deal's S-4 filing, ADES received several non-binding indications of interest from private equity firms shortly after publicly announcing a process for their remaining Activated Carbon business for between $30-$50MM.  However, ADES flipped to being a buyer and in August 2022, finally entered into an agreement with Arq Limited for a reverse merger where ADES would acquire Arq for cash and stock.  It was a very SPAC-like deal (here's the SPAC deck) with a pre-revenue startup and rosy revenue outlook several years out.  Shareholders who were expecting a liquidation type transaction revolted, sending the shares from $6.41 immediately prior to the deal announcement (to be fair, it had spiked over the previous week after ADES management indicated a deal was near on their Q2 earnings call) to a $3.86 on the close, then drifting all the way down to $2.20/share in December.  For context, as of 9/30 the company had $86MM of cash or $4.50/share, if they sold the Activated Carbon business to one of the PE firms, shareholders could have netted somewhere in the area of $6.50/share.  Much lower than I originally penciled out, but well ahead of where shares trade today.

With that value discrepancy, you'd expect an activist to come in and attempt to break the deal, force a quick sale of the Activated Carbon business, distribute all the cash and reap a nice tidy profit.  However, that was impossible because ADES has a rights agreement preventing anyone from crossing the 5% ownership threshold in order to maintain their NOLs and tax credits.  That 5% ownership limit in combination with the small market cap prevented most funds from owning shares (its individual investors who are getting screwed here).  In a strange twist, the original transaction with Arq Limited would qualify as an ownership change, therefore eliminating the NOLs and tax credits, but the rights agreement protecting those tax assets was still in place.  Despite that, there was some hope that shareholders would vote the deal down (like MTCR that was discussed in my SESN post comments) or it would be terminated before to save the embarrassment, forcing the company into a liquidation.

That brings us back to today, ADES recut the merger with Arq presumably to circumvent the shareholder vote by issuing a new series of preferred shares (this kind of rhymes with the shenanigans over at AMC with the APE preferred shares) to Arq shareholders as consideration.  

The preferred shares feature a 8% coupon and are convertible to common stock at a $4/share conversion price if approved by common stock holders.  Common stock holders have no reason not to approve the conversion, saves the 8% coupon the company can't afford (it will be cash flow negative for the next couple years, even under their rosy projections) and it would convert at an above market price.  The debt financing is also to a related party, a board member of Arq (will also be on the new ADS board) that pays 11% cash coupon, plus a 5% PIK.  

While the deal is optically better for ADES shareholders (not saying much, presumably does preserve the tax asset, but questionable whether the combined company ever generates significant taxable income), it likely would still get voted down, after hours trading reflects this as well, shares were down ~16% as of last check.  Hard to speculate on motivation, but management owns little stock and probably wants to keep their well paying jobs.  Apologies to anyone that followed me into this situation, I hope I'm missing something.  None of this smells right.

Disclosure: No position

Thursday, January 26, 2023

Sesen Bio: Plan A Reverse Merger w/ Carisma, CVR; Plan B Liquidation

Sesen Bio (SESN) (~$130MM market cap) is another failed biotech themed investment idea.  Sesen Bio has one late-stage product candidate, Vicineum, a treatment for a type of bladder cancer, where a biologics license application (BLA) was filed with the FDA, but Sesen was sent back to the drawing board when the FDA issued a CRL (not a denial, but a "needs work") in August 2021 citing deficiencies in the original application that would require Sesen to complete a new (and long/expensive) Phase 3 trial before refiling.  Sesen believes that Vicineum still has a path to approval, but the stock traded well below net current asset value on the news, limiting Sesen's capital raising ability to move forward alone with a revised Phase 3 trial.  The company then announced they were pursuing strategic alternatives, which in failed biotech language usually means a reverse merger, if that doesn't work out, a liquidation.

In September 2022, Sesen's board went with Plan A, by announcing a reverse merger with Carisma Therapeutics, another cancer focused biotech with a supposedly promising platform ("CAR-M") but very much early/clinical stage.  The original deal was for 34.4% net ownership of Carisma and a CVR that would pay $30MM or ~$0.15/CVR out if Roche initiates a Phase 3 trial on EBI-031 (Sesen was f/k/a Eleven Biotherapeutics); Roche currently has Phase 2 trials ongoing with an estimated completion date of September 2024.  Importantly, none of the cash was to be return to shareholders and the combined Carisma would receive any proceeds from other asset sales.  Later it was first adjusted to include a special dividend of up to $25MM, based on the excess cash over $125MM delivered to the new merger entity from Sesen.

Shareholders disliked the deal, the stock promptly dropped on the news.  As an heathcare/biotech outsider, it can be difficult to tell which reverse mergers will pop and which will fail, often it seems to be timing, where the market's risk appetite is at any given moment.  But here, going from a liquidation candidate (similar to the situation over at ADES) to the board approving investing shareholder cash into a clinical stage company was a poor read of the room.  An investor in Sesen could sell their shares and invest in countless other similar science experiments, didn't need Sesen's board to do that for them.  What makes things worse here, management and the board own very little stock themselves.

Two investors came forward (dubbed "Investor Group", they own 8.5% of SESN) against the deal, instead pushing for Plan B, a liquidation.  Some back and forth went on behind the scenes, thanks to the activists, Sesen and Carisma recut the deal but it still is insufficient according to the Investor Group, who are still planning on voting against the reverse merger on the upcoming 3/2 shareholder meeting (if approved, deal will close shortly after).

Here's the new recut deal, for context, shares trade for $0.62/share today:

  1. $75MM or $0.34/share special dividend
  2. CVR that would receive the sale proceeds from Vicineum and other pipeline assets (no good guess here, but possibly a meaningful amount), plus the $30MM ($0.14/share) milestone payment from Roche if Roche initiates a Phase 3 trial for EBI-031 prior to 12/31/26
  3. 25% ownership in Carisma Therapeutics (CARM will be the new ticker), at the stated deal value of $357MM, that's $0.41/share of value to SESN shareholders.  This is the value pre-closing financing partners (which includes a few blue chips names like AbbVie and Merck) are purchasing shares in Carisma ($30MM at $15.60 per share, 37.7924 exchange ratio into pre-reverse split SESN shares) which should have some haircut applied
Investor Group is still pursuing a liquidation, claiming that Sesen could return $140MM in the near term, or $0.70/share with the remaining legacy assets monetized over the three years it would take to wind up the entity in Delaware.  Sesen struck back, saying they could only make an initial distribution of $0.40-$0.60/share.  I'm sort of indifferent to the outcome, could make arguments for both sides, a liquidation would provide a low floor/low ceiling return and the reverse merger also seems pretty protected on the downside here (assuming Vicineum does indeed have some value) with the immediate $0.34/share cash return but with upside of the CARM stub as the market begins to heat back up.  Luckily for me, I don't have to make a voting decision as the record date has already been set as 1/17, before I purchased shares.  I bought some shares this week to follow along with the drama, welcome others thoughts on this situation.

Disclosure: I own shares of SESN 

Tuesday, January 17, 2023

Vertical Capital Income: Carlyle Deal, Transitioning to CLO Equity Fund

Last week, Vertical Capital Income Fund (VCIF) ($98MM market cap) announced a proposed manager and strategy change, if approved, Carlyle Group (CG) will assume management of the closed end fund and transition the portfolio from residential whole loans to CLO equity and debt.  To encourage the proposal passing, Carlyle will make a one-time payment to VCIF holders of $10MM or $0.96/share.  Then to ensure alignment, Carlyle will tender for $25MM at NAV and invest an additional $25MM in the fund through a private placement done at NAV.  Following these transactions, Carlyle will own ~40% of the fund.

CLO stands for collateralized loan obligation, these are securitized pools of below-investment grade senior secured bank loans made to corporations (largely PE sponsored).  CLO equity sits at the bottom of the securitization's capital structure and receives the residual cash flow after all expenses and interest is paid to senior noteholders in the transaction.  CLO notes feature term financing with no mark-to-market, meaning CLOs can withstand volatility in the underlying bank loan market and often the manager can "build par" to offset any losses in the portfolio by purchasing loans at a discount and holding them through repayment at par.  CLO equity is generally underwritten to a mid-teens IRR.  There are several publicly traded CLO equity funds today, two prominent ones are Eagle Point Credit Company (ECC) and Oxford Lane Capital (OXLC), both trade roughly inline with NAV or slightly ahead (NAV is lagging, loans are up 1.80% to date, CLO equity values are likely up a bit).

Carlyle is one of the largest CLO managers, by taking over this fund, the PE giant will have a permanent source of equity capital for future CLOs.  This is important for future fund formation and why Carlyle is willing to pay $10MM to holders directly.  Fees to fund holders are going up in the transition as well (but roughly on par with similar funds/BDCs), VCIF currently pays 1.25% of assets, now will pay 1.75% of assets plus a 17.5% incentive fee above an 8% hurdle rate.  Carlyle does get to double dip a bit, they'll likely purchase Carlyle Group managed CLOs where they also earn a management fee.

VCIF currently trades for $9.38/share against a 12/31 NAV of $10.25/share, or an 8.5% discount (without factoring in the $0.96/share payment).  The vote is mostly secured at this point, 36% of shareholders have signed a support agreement.  I quickly sketched out what the return stream might look like in the next six months (the deal is set to close in the first half of 2023):

The biggest assumptions I'm making:
  • NAV is constant, the portfolio is marked monthly, the current holdings are mortgages with interest rate sensitivity, it'll move inversely with rate expectations (mortgage rates are flat-to-slightly down YTD).  As part of the transaction, current management has committed liquidating to cash at least 95% of the gross assets in the portfolio, thus reducing the NAV risk.
  • Only the January distribution is made and it doesn't erode NAV.  Additional interest income we'll assume goes to pay for any deal expenses the fund is expected to pay.
  • All holders participate at 100% in the tender offer.  If less than 100% participate, it improves the realized IRR.
  • Following the transition, the shares trade at a 15% discount to NAV.  In the last 12 months, the fund's shares have traded at an average discount of 12% and as mentioned earlier, the prominent CLO equity funds trade roughly in line with NAV.

I come up with a ~18% IRR for the 5+ months it'll take to close this deal (feels like it should happen sooner pushing the IRR above 20%) and might hold after closing when it will be rebranded as Carlyle Credit Income since CLO equity is reasonably cheap today.

Disclosure: I own shares of VCIF 

Tuesday, January 10, 2023

MBIA Inc: Puerto Rico Exposure Cleaned Up, Sale Next?

MBIA Inc (MBI) ($680MM market cap) is now a shadow of its former self, prior to the 2007-2009 financial crisis, MBIA was the leading financial guarantee insurer in the U.S., where MBIA would lend out its AAA rating to borrowers for an upfront fee.  This business model probably never made sense, it assumed the market was consistently mispricing default risk, the fee MBIA charged had to make it economical to transform a lower rated bond to a higher rated one.

In the early-to-mid 2000s, MBIA was leveraged over 100 times, they guaranteed the timely payment of principal and interest on bonds that were 100+x that of their equity, only a small number of defaults would blow a hole into their balance sheet.  When the business was first founded, MBIA focused on municipal debt through their subsidiary National Public Finance Guarantee Corp ("National"), with the thesis being that even if some municipal bonds weren't formally backed by taxpayers, there was an implied guarantee or a government entity up the food chain that would bail out a municipal borrower.  That has largely proved true (minus the recent quasi-bankruptcy in Puerto Rico), however MBIA was greedy and grew into guaranteeing securitized vehicles (via subsidiary MBIA Corp) prior to the GFC.  MBIA and others (notably AIG Financial Products) got caught, finding themselves on the hook for previously AAA senior tranches of ABS CDOs and subprime-RMBS that went on to suffer material principal losses.  There was no one up the chain to bail out a Cayman Islands special purpose vehicle with a P.O. box as a corporate address.  A lot has happened in the 15 years since 2008, MBIA Corp stopped writing new business almost immediately, National continued to write new business on municipal issuance but stopped in 2017 after Puerto Rico went further into distress, National had significant exposure to island.  The business has been in full runoff since then.  

The distinction between National (municipal bonds) and MBIA Corp (asset backed securities) is important, MBIA Corp and National are legally separate entities that are non-recourse to the holding company, MBIA Inc.  MBIA Corp's equity is way out of the money, completely worthless to MBIA Inc, the entity is being run for the benefit of its former policyholders.  National on the other hand has positive equity value, but when consolidated with MBIA Corp on MBIA Inc's balance sheet, results in an overall negative book value.  But again, these are two separate insurance companies that are non-recourse to the parent.  The SEC slapped MBIA Inc's wrist for reporting an adjusted book value based on the assumption that MBIA Corp's negative book value was no longer relevant to the parent, as some compromise, MBIA Inc stopped providing the end result, but still provides the components of their adjusted book value (not sure how that's significantly different, but whatever).  Here are the adjustments for Q3:

By making these adjustments, MBI's adjusted book value is roughly $28.80/share, today it trades for $12.50/share.  The last two items in the adjusted book value bridge are more runoff-like concepts, these are the values that MBIA Inc would theoretically earn over time as the bonds mature in their investment portfolio and erase any mark-to-market losses (largely driven by rates last year) and then any unearned premiums assuming their expected losses assumptions are accurate.

I've kind of skipped over Puerto Rico, I've passively followed it over the years via Reorg's podcasts, it is too much to go into here, but MBIA Inc's (via National) exposure is largely remediated at this point (announcing in December that they settled with PREPA, Puerto Rico's electric utility that was destroyed in Hurricane Maria), clearing the way to sell itself.  From the Q3 earnings press release:

Bill Fallon, MBIA’s Chief Executive Officer noted, “Given the substantial restructuring of our Puerto Rico credits, we have retained Barclays as an advisor and have been working with them to explore strategic alternatives, including a possible sale of the company.”

Essentially all of the bond insurance companies have stopped writing new business, the only one of any real size remaining in the market is Assured Guaranty (AGO) ($3.7B market cap).  Assured has significant overlap with National that would drive realistic synergies.  Street Insider reported that AGO and another company are in advanced talks with MBIA.  They're the only true strategic buyer (maybe some of the insurers that bid on runoff operations might be interested too), AGO also trades cheap at roughly 0.75x GAAP book value.  AGO would need to justify a purchase to their shareholders that would at least be on par with repurchasing their own stock (which they do constantly).

In my back of the envelope math, I'm only pulling out the negative book value associated with MBIA Corp from the adjusted book value, then slapping a 0.75x adjusted book value multiple on it.  Again, the other two items in MBI's adjusted book bridge seem more like market risks a buyer would be assuming and should be compensated for bearing the risk of eventually achieving.  AGO should be able to justify paying the same multiple for MBIA Inc since it will include significant synergies.  I come up with a deal target price of approximately $16/share, or 28% upside from today's prices.

I bought some shares recently (I know, another speculative arb idea!).

Disclosure: I own shares of MBI

Friday, December 30, 2022

Year End 2022 Portfolio Review

This year in the markets wasn't fun.  While I didn't participate in the headline driving speculative manias (growth stocks, SPACs, crypto, etc), I did get caught with a leveraged PA heavy in real estate and pre-arb/takeover situations which were hit by rising interest rates and M&A financing markets tightening up.  I was down -35.31% for the year, versus the S&P 500 finishing down -18.11%, my worst absolute performance and relative result to the markets since beginning investing in individual stocks.  My lifetime to-date IRR fell to 21.09%.

Current Positions Updates
As usual, I wrote these intermittently over the last week, some of the share prices/valuations might be slightly stale. Presented in mostly random order:

  • My largest holding by a fair amount -- partially because it has held up in price this year versus everything else falling -- is Transcontinental Realty Investors (TCI), TCI's joint venture with Macquarie recently completed the sale of their portfolio, including the holdback of seven properties by TCI.  The book value of TCI jumped to approximately $90/share, but this possibly understates the value created in the JV sale transaction, the holdback properties were valued at market in the split between TCI and Macquarie, but remain at historical cost in TCI's book value.  Reasonable people can argue where sunbelt multi-family would trade today (lower) versus earlier in the year when the JV sale was announced, but the likely fair value of TCI is more than $100/share while it trades for ~$43/share.  Of course, TCI shareholders will never see that amount, but the larger the gap between fair value and the share price, the more likely it is that the Phillips family's incentives would align with a go-private proposal.  The current stated plan for the JV cash is "for additional investment in income-producing real estate, to pay down our debt and for general corporate purposes."  Optimistically, I view that as boilerplate language and doesn't rule out a go-private offer with the proceeds, however, if a portion of the proceeds get swept back to the Phillips family via their role as "Cash Manager", that will be the signal to exit as they'd be getting liquidity for themselves but not minority shareholders.
  • In hindsight, lucky for Franchise Group (FRG) they got cold feet in their attempt to buy Kohl's (KSS) (I sold my position in KSS at a loss after the potential deal was called off), despite the upside potential due to extreme financial engineering.  Following that pursuit, the current economic environment's grim reaper came for FRG's American Freight segment (liquidation channel furniture store concept where unlike their corporate name, they own and operate these locations).  Management made the covid era supply chain mistake of buying anything they could get their hands on, when consumer preferences shifted, they were left with inventory that was no longer in demand.  FRG remains bullish on American Freight, on the last conference call Brian Kahn stated in the context of his M&A appetite, ".. if we even pick what you might consider to be a low multiple of 5x, which not many businesses go for we can go investor our capital in opening more American Freight stores at less than 1x EBITDA."  I'm guessing next year, Kahn will stay out of the headlines and refocus on the business.  Most of FRG's problems are centered in the American Freight segment, their other two large segments, Vitamin Shoppe and Pet Supplies Plus, continue to perform well.  Excluding their operating leases, using TIKR's street estimate of $375MM in NTM EBITDA, I have it trading for approximately ~5.5x EBITDA.  June 2024 LEAPs are available, I bought some versus averaging down in the common stock.
  • My valuation was sloppy on Western Asset Mortgage Capital (WMC), the hybrid mREIT recently announced that their current estimated book value is $16.82/share (not including the $0.40 dividend) versus $24.58/share at the time of my post.  I called out that the $24.58 number was overstated and was going to come down, but didn't anticipate the magnitude.  The company is currently up for sale, there will be an additional ~$3/share in a termination fee to the external manager, so if the current book is relatively stable, looking at ~$11-12/share value in a takeout after expenses and need to split part of the discount with the buyer.  Surprisingly, the shares have traded up since the current book value disclosure, trading today for ~$10.00/share.  I should probably sell given I'm surprised by that reaction, but my current inclination is to wait for a deal announcement.  There should be plenty of buyers, there are always credit asset managers looking for permanent capital, and a deal shouldn't rely on the M&A financing window being open like an LBO (it'll be a reverse-merger like transaction).  On the negative side, they have remaining commercial loan exposure to the albatrosses that are American Dream and Mall of America, their residential assets (the core of the portfolio) are high quality non-QM adjustable rate mortgages, but most are in their fixed rate period and thus susceptible to rate volatility.
  • In contrast, Acres Commercial Realty Corp (ACR) is a clean mREIT with minimal legacy credit problems, all floating rate assets and floating rate debt (via CRE CLOs) that should minimize interest rate risk.  A majority of their loans are to the multi-family sector, reasonable people can argue that multi-family is being overbuilt in many areas of the country today, but these are not construction loans to future class A properties that are at higher risk for oversupply, but rather to transitional properties that are undergoing some kind of repositioning, value-add cycle.  ACR is trading for an absurd 32% of book value, mostly because of its small size ($70MM market cap) and lack of a dividend.  Instead of paying a divided, ACR is using their NOL tax asset generated by prior management to shield their REIT taxable income (thus not being required to pay a dividend) to repurchase stock at a discount.  First Eagle and Oaktree are large shareholders, two well regarded credit shops, that might keep management honest.  If the shares don't fully rerate by the time the NOLs are burned off, I could see a similar scenario to WMC where it makes sense to sell, despite needing to pay the external management termination fee.
  • One mistake I made in 2021 that carried over into 2022 was oversizing my initial position in Sonida Senior Living (SNDA).  SNDA was an out of court restructuring sponsored by Conversant Capital, which controls SNDA now, that resulted in an injection of cash, but still a very levered entity (SNDA doesn't have leases, they own their properties).  After the shares have been more than cut in half this year (likely due to inflation/shortages hitting their labor cost structure and slower than anticipated occupancy recovery), the market cap is roughly 10% (pre-convertible preferred stock conversion) of the overall enterprise value.  SNDA features both high financial leverage and high operating leverage, occupancy sits at around 83%, if occupancy moves another 5-6% higher to normalized levels, SNDA is likely a multi-bagger.  But the opposite could be true also.  I'm sitting on a big loss, but sticking it out with the original thesis that occupancy levels will normalize as Covid-fears subside and aging demographics shift in their favor.
  • PFSweb Inc (PFSW) recently distributed the cash ($4.50/share) from their 2021 sale of LiveArea, what remains is a third-party logistics ("3PL") business that is subscale but has navigated the current environment better than you'd expect from a Covid-beneficiary, signing up new clients and estimating 5-10% revenue growth in 2023.  While investors were likely disappointed that PFSW hasn't sold the 3PL business to-date, they did re-iterate on their Q3 earnings call that completing a transaction is their top priority and extended their executive team's incentive comp structure based on a sale through 2023.  I've got PFSW trading for approximately ~4.6x 2023 EBITDA (using the TIKR estimate), extremely cheap for a business that should have multiple 3PL (there are dozens of them) strategic buyers, just need the M&A window to open back up.  I'm comfortable seeing that process through to completion.
  • The rose is off the bloom with DigitalBridge Group (DBRG), shares have retraced most of their gains since the summer of 2020 when the transition to an infrastructure asset manager was in its infancy.  That transition is largely completely, they still own a slug of BrightSpire Capital (BRSP) -- likely cheap on its own, trades at 61% of book -- and equity positions in two data center companies that they're in the process of moving to managed vehicles.  Multiples likely need to come down for previously high-multiple digital infrastructure investments in a non-zero interest rate world, it's hard to know how accurate their marks are inside their funds and how the current environment is impacting future fund raising.  I attempted to catch a bottom too early, purchasing Jan 2024 LEAPs that have a post-split adjusted strike price of $20/share.  Shares currently trade for $10.45/share, well short of my LEAPs and well short of CEO Marc Ganzi's $100MM pay day at $40/share.  Activist investor Legion Partners Asset Management has recently pushed DBRG to put itself up for sale if shares don't recover.
  • INDUS Realty Trust (INDT) and Radius Global Infrastructure (RADI) have similar characteristics, each have high overhead expenses compared to their asset bases as they look to develop/originate new assets.  Both have been hurt by rising rates this year as they're focused on low cap rate asset classes with long term leases (RADI thus far hasn't been able to flex its CPI-linked resets, possibly an unfair criticism as they're on a lag), but both have relatively recession proof cash flows.  The weakness in their share prices is almost entirely rate driven.  Both companies still have reasonably long growth runways without needing to raise capital, but looking out, both might benefit from being in private hands where the cost of capital might be lower or at least less volatile.  INDT has a public $65/share bid from Centerbridge outstanding and RADI has been the constant target of deal speculation throughout the year, the latest firm said to be interested is infrastructure manager EQT.  I underestimated how high interest rates would rise this year and hope one or both of these holdings is successful in shopping themselves early in the new year.
  • NexPoint Diversified Real Estate Trust (NXDT) finally did fully convert to a REIT from a closed end fund.  However, the shares haven't reacted much to that change, the company did put out regular way SEC financials for their 9/30 10-Q, but disappointedly haven't hosted an earnings call or put out a supplemental that would make the tangled web of holdings more digestible.  I get a lot of questions about my current thoughts on NXDT, and the "no change" answer is probably unsatisfying, but I'm content holding this for another several years and letting the story slowly (a little too slowly right now) unfold.  There's a lot of wood to chop, this is one of those balance sheet to income statement stories that'll take time, I could see it being a triple from here (~$11.50/share) over the next 3 years.
  • Howard Hughes Corp (HHC) continues to be a value trap, anyone who spends time doing the bottoms up analysis comes away saying it is undervalued but it's just never going to be fully appreciated by public markets (due to complexity, Ackman, development/capital allocation risk, etc., take your pick).  In October, Pershing Square (Ackman's investment vehicle) attempted to take advantage of this value disconnect by launching a tender offer at $60/share, later raising it to $70/share, and still got very few takers.  James Elbaor on Andrew Walker's fantastic podcast offered some speculation that Ackman could do a reverse merger of Pershing Square into HHC in order to redomicile.  Pershing Square currently owns ~30% of it and it's a double discount inside the publicly traded PSH as the fund trades at a wide discount as well.  Maybe Ackman does something one of these years, but in the meantime, I'm emotionally vested to continue to hold.
  • BBX Capital (BBXIA) is essentially the publicly traded family office of the disliked Levan family.  Shares trade for ~$9.40/share and the 9/30 book value was $20.72/share, included in the $20.72/share is approximately $11.63/share of cash, securities and their note from related party Bluegreen Vacation Holdings (BVH).  Additionally, they own a spattering of multi-family real estate in Florida, a real estate developer, door maker Renin (slightly financially distressed) and candy store IT'SUGAR (you've probably seen these is airport terminals).  Management isn't to be trusted here, but similar to my hopeful thesis in TCI, the discount between the share price and fair value is so wide that management's greed is sort of on the shareholders side at the moment.  BBXIA recently completed a $12MM tender offer for 1.2 million shares, that makes the proforma book value ~$21.70/share.  Shares trade for just 43% of that value, and still have $11.75/share in cash/securities to buyback more stock.  Because the shares trade below that number, each repurchase below that line are actually accretive to the cash/securities per share metric.  While it is hard to see a firm catalyst to get the shares much higher in the near term, the discount seems too severe to sell into their periodic tender offers.
  • A stock that likely won't mention again for three years, I bought back into Rubicon Technology Inc (RBCN) this month as the stock has sold off considerably, presumably sellers getting out before the company stops reporting here soon (might trade with expert-market status), following the transaction with Janel Corporation (JANL).  To recap, Janel effectively paid $9/share for RBCN's NOLs in the tender offer, they're restricted from purchasing more RBCN for three years, but now the shares trade for ~$1.40.  There's plenty of room in there for JANL to pay a premium in three years and get a fantastic deal for themselves.  The main remaining risk is JANL going bust in the meantime.
  • My energy tourist hedge is Par Pacific Holdings (PARR).  PARR is a rollup of niche downstream energy businesses in remote locations (Hawaii, Washington, Wyoming, soon to be Montana).  Their thesis is these refineries are overlooked by the large players but also have a defendable market position because of cost advantages in their local markets due to their remote locations (high transportation costs for competitors).  2022 was finally the year when stars aligned, crack spreads widened out significantly and PARR's refineries were running at near fully capacity with no significant downtime for maintenance capex projects.  In Q3 for example, PARR reported $214MM in adjusted EBITDA, roughly their mid-cycle guidance for an entire year.  Similar to other energy businesses, this year's cash flows allowed PARR to clean up their balance sheet and now are positioned to once again buy another refinery, this time Exxon's Billings refinery.  The deal should close in the first half of 2023, just maybe PARR is turning a corner and has gained enough scale to finally start significantly chipping away at their large NOL (that was my original thesis 8 years ago).
  • Similar to PARR, I've owned Green Brick Partners (GRBK) for 8+ years and just sort of let it sit there.  Despite new housing development hitting a wall in the back half of 2022 as mortgage rates briefly peaked above 7%, GRBK shares are actually up 20% since 6/30.  It's fairly certain that tough times in housing will continue in the near term.  But I'm guessing it won't last overly long, single family homes have been underdeveloped following the excesses of the GFC, politically overly tight mortgage conditions for a long time seems untenable, and millennials need homes.  With attractive land in short supply, I don't see the large scale write-downs of the GFC reoccurring, maybe asset heavy homebuilders like GRBK will be seen to be attractive again versus asset-lite builders.  Shares trade for a relatively undemanding 7x TIKR's NTM (trough?) earnings estimates.
  • Another sloppy buy from me was Argo Group International Holdings (ARGO)shortly after my post the specialty insurer came out with disappointing results and dropped significantly despite being in the middle of a sale process (the initial interest from potential buyers was reported to be muted).  I tax harvested my position and re-entered at lower prices.  Management recently survived a proxy contest from activist Capital Returns, now appears to have found religion and reiterated time and time again they're committed to their restarted sale process.  My conviction is pretty low here, hoping for a sale in 2023.  It trades well below peers on P/B, optically for a P&C insurer tourist like myself, a sale should make sense for both a buyer and ARGO. 
  • Mereo BioPharma Group (MREO) similarly faced a proxy contest in the fall, instead of fighting like ARGO, MREO saw the writing on the wall and let activist Rubric Capital on the board.  Rubric's stated strategy for MREO is to monetize/liquidate much of the company's assets, we've yet to see movement on that (I'd argue it is still early, but others might disagree).  Despite the potential for a strategy change, shares have dropped roughly in half as money burning biotechnology companies continue to be out of favor in a rising rate in environment.  MREO is an option like equity at this point, could be a multi-bagger or shareholders could get significantly diluted.
  • Another pick of mine that is down significantly despite little news is Digital Media Solutions (DMS).  DMS has an a $2.50/share bid from a consortium of management and PE sponsors that own 75% of the DMS shares.  No news has come out since 9/8/22 non-binding offer, shares have fallen all the way to ~$1.30/share today.  There's a great discussion in the comment section of my post speculating on various scenarios, anyone interested should sift through them.
  • I don't have any original thoughts on either Jackson Financial (JXN) -- seems like most of the index buying has happened -- or Liberty Broadband Corp (LBRDK), others are going to speak more intelligently than me.  Each are buying back a significant amount of stock, optically cheap, could be coiled springs if recession fears break, but both also have challenging/complex business models in their own respects.  I might sell one, both, or none to fund new ideas early in 2023.
  • Nothing has really changed in the last two weeks for Sio Gene Therapies (SIOX), it is a failed biotech liquidation, which likely will be a continued theme for me in 2023.  Other liquidations I continue to hold include Sandridge Mississippian Trust I (SDTTU), Luby's (non-traded) and HMG Courtland Properties (non-traded).  One old 2019 liquidation, Industrial Services of America (non-traded), recently made its final distribution and ended up being a disappointing low-single digit IRR.  To round out the miscellaneous stuff, I own the Atlas Financial Holdings bonds (CUSIP 049323AB40) which don't appear to have traded since the exchange offer, and remaining CVRs in Prevail Therapeutics, Applied Genetic Tech, OncoMed and the BMYRT potential ligation settlement.
Closed Positions
  • One of the most puzzling M&A transactions of 2022 has to go to Advanced Emissions Solutions (ADES).  Management dragged shareholders on a long strategic alternatives process in which it was widely assumed that ADES would be a seller and return their cash to shareholders.  Instead, ADES flipped around and became a buyer of an early stage venture company, destroying value in the process.  Shares traded for $6.28 the day before the deal announcement and now trade for $2.23, I don't know how this deal even closes.  If it weren't for the poison pill to protect the NOL (which I believe is being disqualified in this transaction anyway), I'd assume an activist would come in here and block the deal.
  • My original thesis for ALJ Regional Holding (ALJJ) centered around the NOLs being monetized following a couple asset sales, thus the reason for the vehicle existing was gone and Jess Ravich would take out minority shareholders with the new liquidity on the balance sheet.  That didn't happen, instead Ravich delisted ALJJ and went on a mini-buying spree, turning ALJJ into a family office.  I moved on after that.
  • Ballys Corp (BALY) was a tax harvesting casualty for me (despite the terrible performance, I still realized gains in 2022, mostly holdovers from very early in the year), I still like the company and follow it.  The Chicago casino project will be a home run, likely the same for whatever they do with the old Tropicana on Las Vegas Blvd strip.  It is cheap and worth a look.
  • WideOpenWest (WOW) was another sloppy mistake, the M&A financing environment changed and I didn't change my framework as quickly, thought that an LBO could get done, but with the limited free cash flow, it just didn't make sense.  Despite the few rumors around it, nothing got done, if the M&A market reopens, WOW could be one of the early targets.
  • I sold Regional Health Properties (RHE-A) recently to harvest the loss, the company's preferred exchange offer failed to get enough of the common stock to vote in favor of the unique proposal.  Shares have drifted significantly lower since, the company's fundamentals are still strained, their operators are suffering under the same labor issues as SNDA, RHE has been forced to takeover management of these underperforming nursing facilities.  The asset value appears to still be there in a liquidation like scenario, but not sure how that gets initiated, the preferred stock is in a tough spot.  I might re-enter a position, there's a commenter on my RHE posts looking for others to exchange notes on where the preferred stockholders should go from here.
  • LMP Automotive Holdings Inc (LMPX) and Imara (IMRA) were my two big winners this year, both situations played out very quickly.  IMRA didn't pursue a liquidation, but rather a reverse merger, I exited shortly after that, still making a large quick gain, but missed the run up to the top by a good margin. Still working on when to sell these when day traders get ahold of them.
Performance Attribution
Current Portfolio
Current Research/Watchlist
These are companies that I'm actively researching, many I'll never buy but are currently interesting to me in one way or another, if you have strong thoughts about any of them, please reach out to swap notes, or use them as additions to your watchlist:
As usual, thank you to everyone who reads, comments, shoots me an email.  I apologize if I don't get back to you quickly, but I do appreciate all the feedback, it helps me as an investor.

Happy New Year, excited to turn the page to 2023.

Disclosure: Table above is my taxable account/blog portfolio, I don't manage outside money and this is only a portion of my overall assets (I also have a stable/growing career, don't need this money anytime soon).  As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.

Thursday, December 15, 2022

Sio Gene Therapies: Small Liquidation

In the IMRA post comments, I mentioned that Sio Gene Therapies (SIOX) (~$30MM market cap) was a likely liquidation candidate.  Sio Gene Therapies is one of the many pre-revenue biotechnology companies -- this one was originally focused on gene therapy for Parkinson's disease -- that has given up development and was pursuing strategic alternatives due to poor clinical results and/or tough capital raising conditions.  Often these broken biotechnology companies end up doing a reverse merger, but here the company never really had its own IP, they had licensed the IP from third parties and their NOLs are primarily domiciled in Switzerland where corporate taxes are low, thus limiting their value.  Other than a public shell, which isn't in much demand these days when SPACs are all liquidating and the IPO market is fairly quiet, SIOX has little value remaining outside of its cash.  This week, SIOX announced the board approved a plan of liquidation (requires shareholder approval).

The balance sheet is fairly simple at this point (9/30 10-Q):

They've already laid off most of their staff and gotten out of their office leases (no non-current liabilities are remaining), this should be a fairly straight forward liquidation.  The remaining cash burn should be limited to some remaining G&A and liquidation costs.  They do mention in the same 10-Q that "we continue to conduct one pre-clinical research and development program" but it must be small and likely easy to pause.  In addition to the above balance sheet, they do have a CVR-like payment of up to $7MM after their sale of Arvelle Therapeutics, while that's a nice lotto ticket, it also means the future liquidating trust might be around a while (unclear to me how long these milestone payments extend) which would lower the potential IRR.

The current market cap is about $30MM, versus a pretty liquid book value of $49MM ($0.66/share) as of 9/30, that gives plenty of room for G&A and liquidation expenses.  My guess (similar to a commenter in the IMRA post) is that we end up with ~$0.55/share, much of that returned early as there's really not a business here remaining.  I own a smallish/tracker position, may try to add more if it falls on a delisting, etc.

Disclosure: I own shares of SIOX