Friday, January 7, 2022
Friday, December 31, 2021
- BBX Capital (BBXIA) continues to look too cheap despite surly management, proforma for the recent private market purchase of Angelo Gordon's shares (slightly disappointing since they might have been keeping management honest here), I have the book value somewhere around $21/share and it trades for $10/share. For that price, even after all the buybacks, you get ~$6.50 in cash plus another ~$4.80 in the receivable from BVH which should be money good, that more than covers the market price without all the Florida real estate and other businesses. They recently put out a new investor presentation that shined light on the Florida real estate that's worth looking at, but again, market cap is covered by cash and securities here.
- Accel Entertainment (ACEL) is the best part of regional casinos, the slot machines without the worst part, all the capex and lease payments. Their acquisition of Century Gaming unfortunately didn't close this year, to me it sounded like a management misstep or unfamiliarity with cross state border acquisitions. But ACEL announced a big buyback ($200MM on a $1.2B market cap), it trades at roughly 8x EBITDA proforma for the acquisition, wage inflation should put more discretionary dollars in their client's pockets, a few more states are talking about legalizing VGTs, the shares seem pretty cheap to me.
- Howard Hughes Corporation (HHC) is my perennial value trap, but the pitfall of their diversified real estate model is also a benefit, the company is attempting to reposition the narrative back to a land developer for home builders and building sunbelt apartments. They recently purchased a massive plot of land west of Phoenix that apparently has a 50 year development life and will add potentially logistics/warehouse and single family rentals (they're also building these in their Bridgeland MPC) to their product mix. In disposition news, this week the Wall Street Journal is reporting that they've sold 110 N Wacker in Chicago for more than $1B (HHC has JV partners here, the property has debt, but that exceeded my expectations for a covid office sale). They're still too heavy on office for my liking (about 50% of NOI) but have essentially stopped new development in that sector in favor of covid beneficiaries.
- PhenixFin (PFX) is frustrating to me, this company shouldn't exist, activists won control of the company last year (then called Medley Capital or MCC) and internalized the BDC. Since then, they've mostly let their legacy investments roll off and invested the proceeds into mREITs. My original thesis was me speculating that this would be sold to another BDC, that hasn't happened, in their recent FY22 results press release PFX announced the formation of an "asset-based lending business engaged in the gem and jewelry industry" and highlighted $490MM in net capital loss carryforwards for the first time that I can remember. Neither is a sign that they're selling unfortunately, but I might be, this is no longer a strong conviction holding but not expensive at ~70% of book value (essentially unlevered, small net debt position).
- NexPoint Diversified Real Estate Trust (NXDT) is unfortunately still in the process of converting from a closed end fund to a REIT, the process has dragged on a bit longer than expected, but the backdrop for NXDT's assets continues to improve in the meantime and NAV continues to march slightly higher (~$23, trades for roughly 60% of NAV). The thesis remains mostly the same, this will starting reporting as a REIT, be eligible for index inclusion (including broad indices, BDCs and CEFs are generally excluded from market indices since they're considered funds), and start attracting a REIT investor base and multiple. On the negative side, this is another manager with a poor reputation, and potentially has some governance issues with NXDT owning other NexPoint affiliates and some fee double dipping. NXDT continues to be one of my favorite ideas.
- Jackson Financial (JXN) has gone up in a straight line since its spin from Prudential PLC in September. Jackson is the largest variable annuity provider in the U.S., it should have strong demographic tailwinds as baby boomers retire and rollover their 401(k)s, but the financials are a total black box and these annuity companies usually trade extremely cheap for that reason. One way to get a valuation re-rating is via share repurchases and cash dividends, JXN was trading at just 28% of book value at the time of my write-up, since then they've bought back approximately $185MM in stock and announced a $0.50/share quarterly dividend (~5% yield). I'm not a strong enough at accounting to figure out JXN's financials, the stock is up 55% since the spin (might be some more near term upside via index buying, this was a foreign-to-US spin), I'm not in a rush to sell it but I'm not a long term holder either.
- Orion Office REIT (ONL) is a shaky low conviction hold for me, the setup of being a merger-spin out of a heavily retail owned stock and the resulting forced selling tempted me enough to start a position. A dividend initiation should help recruit a little wider investor base in the near future, but my current thought is I'm unlikely to own this for the long term as I'm still personally bearish about return to office. There are countless examples, but near me, Allstate recently sold their suburban headquarters campus to investors who plan on turning it into logistics/warehouses -- when old line type companies are making drastic switches away from large corporate campuses, makes me worried for the sector, especially with an average lease term under 3.5 years.
- Sonida Senior Living (SNDA) is a recent buy after they completed an out of court restructuring transaction, this is a bit of a jockey bet in that I like the Conversant Capital team and what they've done thus far at INDT, here they control the company and have started to implement their new business plan with the acquisition of two Indianapolis area senior housing properties. Senior housing has a lot of operating leverage, if occupancy levels recover to normalized levels and the demographic wave finally materializes, Sonida could do very well over the next 3-4 years.
- My other senior housing play is the preferred stock of Regional Health Properties (RHE-A), which briefly attempted a similar out of court restructuring by proposing to exchange the preferred stock for common. The largest preferred shareholder comically shot it down. This company is a bit of a mess, they recently had the State of Alabama pull the license of one of their biggest tenants a couple weeks ago, looks like RHE might be taking over the management of another one of their facilities here shortly. That temporary measure appears to becoming more permanent in their other managed facilities. The company is in a tough spot, it is not bankrupt but the capital structure doesn't work and there's no easy way to fix it since the worthless common stock need to approve of an exchange.
- Unfortunately, as soon as I hit publish on my Altisource Asset Management (AAMC) write-up, the shares were delisted from the NYSE (no direct reason given) and have yet to trade since. I'm a bit surprised/disappointed that the company hasn't made any public announcements regarding an attempt to regain NYSE (or other listing) eligibility. One can only hope (pray?) that they're working behind the scenes on an acquisition and settlement with Luxor that would get the shares trading again.
- HMG/Courtland Properties Inc (HMG) is a nano cap liquidation where their largest asset is a newly developed Class A multi-family property in Fort Myers, FL. The company recently released a proxy statement to approve the plan of liquidation and quoted a $20-$30/share liquidation value, the shares still trade in the middle of that range, but I think the value is closer to $30 (although I probably wouldn't recommend initiating a position here, the liquidation may take a long time).
- The only previously undisclosed holding I have are some recklessly speculative near term call options in Nam Tai Property (NTP). Nam Tai has a long history, it pivoted from an electronics manufacturer to a property developer when Shenzhen experienced exploding growth. IsZo Capital won their year long legal fight against prior management, they've put out a number of $40/share in intrinsic value, the stock trades at $11/share after prior management experienced a margin call and DB foreclosed on their shares. IsZo by contrast has been adding to their stake. There's a lot of risk here, China real estate is obviously shaky, excuse my gambling, again its a personal account, don't recommend this for others.
- Bluerock Residential Growth REIT (BRG) entered into a transaction with Blackstone to buy their multi-family properties and lending book for $24.25 per share, plus BRG is going to spinoff a single family rental REIT, "Bluerock Homes Trust", where BRG got a third party valuation firm to put a $5.60 NAV per share on it. BRG is currently trading for $26.36, the deal with Blackstone is almost certain to close, thus the market is applying a pretty steep discount on the single family REIT. It will revert to being an externally managed by Bluerock (BRG started as externally managed, later pseudo-internalized), who prior to this transaction didn't have a great reputation, but obviously this was a great result for shareholders and merger arb types might want to look at the spin (expected Q2 close).
- I wrote up the mess of a situation at Transcontinental Realty (TCI) and parent American Realty (ARL) earlier this week. I had one big mistake, I thought the $134MM of notes receivable were just mortgage loans consolidated from Income Opportunity Realty (IOR), that's not the case, so the fair value of TCI is ~$15 higher than the $60/share I threw out there. IOR is maybe the strangest little micro cap I've looked at, almost all of the assets of the company are a loan to Pillar, IOR's external advisor, not sure how that's okay legally and might be why it is being challenged in a shareholder lawsuit. IOR is probably worth a closer look (won't take you long).
- There's not much to update on PFSweb (PFSW) which I wrote up in August, but only because the company hasn't filed its Q2 or Q3 financials due to "additional time and work needed to meet the SEC reporting and accounting requirements for its LiveArea divestiture." That's not confidence inspiring, but this is like some of my other "informal liquidations" where they've sold one business unit, the other is for sale, the situation is fairly de-risked with a large cash position. I continue to hold awaiting news but my conviction has lessened.
- Another informal liquidation, Laureate Education (LAUR), has mostly worked out to plan, the sale of Walden University closed and they've since paid out $7.59/share in special dividends. They've also collapsed the dual share structure. It is now a purer play on Mexico and Peru, my best guess is this is not the end state and we'll see a final sale of the remaining assets once covid subsides and/or the political climate in Latin America improves. Most of my exposure rolled off earlier in December when my calls expired, now just hanging onto a smallish position to see how the rest plays out.
- Rounding out the informal liquidations, not much has changed at Advanced Emissions Solutions (ADES) since my write-up, the did report Q3 earnings and have an adjusted ~$5/share in net cash against a $6.50 stock price. They state that strategic alternatives are continuing for the remaining activated carbon business, hopefully that means a sale and not some transaction involving ADES using the cash for an acquisition.
- Now to a formal liquidation, Luby's (LUB) has exceeded my expectations, shareholders received a $2.00 initial distribution on 11/1, which was most of my cost basis. The most recent estimate of liquidation proceeds is $3.00/share, shares trade slightly below that estimate, others have suggested there's a fair amount of juice left (this author thinks a base case of $3.30, which sounds reasonable), I'm willing to just let it play out as the company has indicated it should be mostly wrapped up by mid-2022.
- I own two tiny natural gas trusts, with ECA Marcellus Trust I (ECTM) I got lucky and now have received over half my basis out of the partnership this year in distributions, it wasn't my original thesis of a liquidation, but I'm content for now letting it runoff via distributions much the same way as a liquidation. With SandRidge Mississippian Trust I (SDTTU) the assets have all been sold back to SandRidge (SD) but there is a shareholder lawsuit holding up the final distribution of proceeds to unitholders. The trust has since delisted and stopped filing with the SEC, so its fallen into that dark stage and trades erratically at irrational prices while we await final resolution.
- I found the Golar LNG (GLNG) pitch on Andrew Walker's podcast interesting, but probably not for me, but did make me think about my own holding that I've honestly sort of forgot about in Technip Energies (THNPY). Technip Energies is the E&C for many of the largest LNG projects around the world, and should benefit from many of the same LNG as a transition fuel themes. There are two remaining catalysts post spin, first parent FTI does still own ~12% of TE and plans to sell (removes the overhang once they do), and second, Technip Energies will be initiating a dividend next year (that was the plan all along) which could open it up to a wider shareholder base and semi-similar to JXN, cold hard cash might relieve some concerns around the complicated accounting.
- Logan Ridge Finance Corporation (LRFC) is similar to PFX in that it is a BDC that doesn't pay a dividend (I believe they're the only two credit BDCs that don't pay dividends). BDCs aren't included in indices and if it doesn't pay a dividend, it is hard to attract regular yield-focused retail investors, so its limited to a small subset of investors willing to play in these ponds. LRFC was recently taken over by BC Partners, they're in the process of repositioning the portfolio to generate yield and restore the dividend, that'll likely happen in the first half of 2022 and I expect the discount to NAV to decrease (trades for 58% of NAV today).
- Atlas Financial (AFHBL for the bonds) is a covid recovery play on taxis, limos and ride sharing drivers returning to work and a business change from a risk taking insurance provider to more of an asset-lite agency model. I originally didn't like the RSA plan for the bonds, but the alternative plans don't seem to have gone anywhere, so I'm happy to change my mind and support the RSA here even though it bifurcated the creditor group. The key line in the Q3 earnings release was "Our current in-force business is approximately 6% of what we underwrote as a carrier in 2018, and given current trends we feel there is considerable room to recapture business over time". Even if they get only a portion of that business back, should make the bonds money good over time.
- During the worst of covid, I bought some LEAPs on Marathon Petroleum (MPC) as a proxy for Par Pacific (PARR) since long dated options weren't available on the later. Those MPC calls expire next month and I'll take profits, with PARR I've reduced my position throughout the year and might sell the rest early next year, I've owned it for 6-7 years and it has gone nowhere, they haven't touched the NOLs, just a difficult business that I probably don't understand as well as I should.
- I've held Liberty Broadband (LBRDK) through a few iterations, bought in prior to the General Communications deal with the old LVNTA as a merger arb, owned it through its time as GLIBA, I'll continue to hold. Maybe this is the year CHTR cleans up their ownership structure and takes out Liberty Broadband?
- INDUS Realty Trust (INDT) will similarly just be in my tuck it away and forget about it pile for now, it is a logistics/warehouse REIT that has recruited much of the old Gramercy Property Trust (GPT) team, with the former CFO, Jon Clark, taking over at year end to round out things out. The tailwinds are pretty clear, and with a relatively small asset base and experienced team, they can be "sharp shooters" as they describe it, pick and choose smaller deals the likes of Blackstone can't be bothered with to assemble a portfolio.
- Some of my bigger positions now are just semi-jockey plays in industries I semi-understand (start out as special situations but then "tripped into" a good management team), Green Brick Partners (GRBK) continues to grow like a weed, CEO Jim Brickman manages the business like a private company, he's not afraid to switch strategies, lately that means heavily investing in land in 2020 and building a lot of homes on speculation in 2021 to take advantage of rising prices. With DigitalBridge (DBRG), there's continued M&A in the digital infrastructure space and its seems like CEO Marc Ganzi can raise unlimited amounts of money at this point, so I'm content to just to go along for the ride. Franchise Group (FRG) has grown into my largest position, it is hard to believe that CEO Brian Kahn has created so much value in a short period of time, especially after his gaff with Rent-A-Center (RCII) when he forgot to send in an extension notice triggering the termination of that deal. I'm content to just sit on these three for the longer term and defer the taxes.
- I briefly owned Loyalty Ventures (LYLT) for a month or so following the spinoff from ADS and got sliced up trying to catch the falling knife, it ended up being my biggest single performance detractor for the year. But it is too early to tell if I completely misjudged the business quality but the stock was punished early, sold off from nearly $50 in the when issued market until below $30. The CEO has been buying shares, I'll revisit it at some point.
- I also only briefly owned Franklin BSP Realty (FBRT) following their reverse merger with Capstead Mortgage Corp (CMO), my math was wrong and the upside was too small in the first place. FBRT is probably an interesting buy for some income investors, the management team has a good reputation and has managed the REIT well privately, but for me it was too small of a position and I moved on.
- Condor Hospitality Trust (CDOR) worked out well but I probably could have traded around it better. After only selling their assets to Blackstone, there was a trading day or two there where some uncertainty existed around the true net asset value per share. And then this week it traded at near the liquidating dividend, I sold a couple weeks ago, but those that bought this week might end up with a free look at whatever is remaining once the corporate shell wraps up.
- CorePoint Lodging (CPLG) didn't work out very well, I made a mistake and missed the IRS payment that had to come off the top as well as that the new buyer would want to rid themselves of the Wyndham (WH) management agreement. I'm sort of glad this will be private again as I've had it wrong now multiple times.
- LGL Group (LGL) got caught up in the "high redemption, low float SPAC" trend that lasted a few weeks. LGL was invested in the SPAC sponsor of DFNS, DFNS had options available on it and when 90+% of the SPAC's shareholders redeemed for trust value, the newly public IronNet (IRNT) became a meme stock due to limited float and options/gamma squeeze possibilities. I sold my warrants I held into that madness for a gain. The company is doing a spinoff of their operating business in Q1, I plan to revisit early next year and might re-take a position.
- Communications Systems Inc (JCS) also seemed to get caught up in some strange day trading dynamics on the day it announced their initial pre-merger $3.50 dividend that well known to anyone following the company. But the stock spiked from $6.79 the day before to over $9 the next day and got as high as $10 the week after that. I didn't top tick it or anything, but did take advantage of that bit of luck and sold my shares. The company still hasn't complete its merger with Pineapple Energy, having recently moved their outside merger date to 3/31/22. The shares trade pretty cheaply today if things go to plan (but thus far they haven't), I plan to revisit it again early in 2022.
- Retail Value (RVI) I sold shortly after the large liquidating dividend as I didn't feel like I had a good grasp on the remaining value of the stub. There's been some good discussion in the comments section that has continued, which I always appreciate and I might revisit this one as well as the liquidation is near its end.
- The MMA Capital Holdings (MMAC) deal closed as anticipated.
Monday, December 27, 2021
I didn't mean for this to be a mini-series, but as I was looking through ARL/TCI I remembered another REIT that I looked at years ago, BRT Apartments (BRT), that fits as an addition to the "sunbelt multi-family M&A craziness" themed basket. BRT Apartments is primarily a class B, value-add, garden style apartment portfolio in the southeast and Texas (35 properties, ~9500 units, ~$1150/month rents, loosely similar to NXRT's portfolio).
BRT also shares some similarities to TCI but thankfully is a little simpler, it owns both apartment buildings directly and through unconsolidated joint ventures which makes the accounting a bit challenging to untangle (typical REIT investors shun complexity), and it is also family owned with the Gould family owning ~25% of the stock. The founder, Fredric Gould is 85 and still a member of the board, his two sons hold executive positions including one that is the CEO, and a cousin is also involved as an EVP. The governance issues here don't seem as egregious as ARL/TCI but maybe on par with BRG. The Gould family does have a shared services agreement with their family office that provides "investment advice and long-term planning" and other services to the company (sounds like something an internal REIT shouldn't need to outsource), which has averaged about $1.4MM in each of the last several years. BRT also uses a property manager for some of their properties that is wholly owned by the Gould family. The Gould's also previously managed the company via an external asset manager "REIT Management" but this is now technically an internally managed REIT.
While I haven't seen any press leaks regarding BRT running a sales process, I'm just going on the assumption that every smallish sunbelt apartment REIT is receiving inbound calls from bankers and private equity shops kicking the tires, effectively all are probably evaluating strategic alternatives. I'm going to keep this one quick (BRT has a long history, was previously a lender to multi-family pre-GFC, foreclosed on properties, became the owner, etc, but now pretty clean, just sunbelt multi-family apartments), but if you break out the two baskets:
Joint Venture ArrangementsThe arrangements with our multi-family property joint venture partners are deal specific and vary from transaction to transaction. Generally, these arrangements provide for us and our joint venture partner to receive net cash flow available for distribution and/or profits in the following order of priority (in certain cases, we are entitled to these distributions on a senior or preferential basis): (i) a preferred return of 9% to 10% on each party's unreturned capital contributions, until such preferred return has been paid in full; and (ii) the return in full of each party's capital contribution. Thereafter, distributions to, and profit sharing between, joint venture partners, is determined pursuant to the applicable agreement governing the relationship between the parties. Generally, as a result of allocation/distribution provisions of the applicable joint venture operating agreement, the allocation and distribution of cash and profits to BRT is less than that implied by BRT's percentage equity interest in the venture/property.
- They have used their ATM offering this year, which isn't exactly a sign they're shareholder friendly or think their shares trade at a huge discount as I suggest, but BRG did similar things with the preferred share exchanges there. Some of the ATM issuances were before inflation talk really heated up and we saw a lot of activity in the space, but it is still worth mentioning as a negative.
- The Gould family also runs another REIT, One Liberty Properties (OLP), that's mostly an industrial net lease, attentions and salaries could potentially be repositioned there as that sector also has covid tailwinds. At BRG they found a creative way to keep their jobs by spinning out the SFH rentals, here they could just all move over to their already established REIT.
- I also noticed the Gould family has created a cannabis investment firm, Rainbow Realty Group, could be the seeds of a future cannabis mREIT or other lending structure that have become popular ways to invest in cannabis on U.S. regulated exchanges (e.g., I noticed the old Fifth Street Asset Management (FSAM) team popped up at AFC Gamma (AFCG)). Maybe cash out here and reinvest in that hot theme?
On November 1, 2011, we acquired 100% of the membership interest in Bridgeview Plaza, LLC. On September 21, 2010, we sold our investment in EQK Bridgeview Plaza, Inc. to Warren Road Farm, Inc. (“WRF”), a related party under common control, for a sales price of $8.3 million to be paid via an assumption of debt of $6.2 million and seller-financing of $2.1 million. On October 4, 2010, WRF filed a voluntary petition seeking relief under Chapter 11 of the bankruptcy code. The approved bankruptcy plan was effective November 1, 2011, whereby TCI, for its contribution to the plan, was given 100% equity ownership in the entity. During the period of time that WRF owned the equity interest, it had also acquired 2900 acres of land known as Windmill Farms land located in Kaufman, TX, previously held by ARL, for a sales price of $64.5 million. ARL provided $33.8 million in seller-financing with a five-year note receivable. The note accrues interest at 6.0% and is payable at maturity on September 21, 2015. WRF assumed the existing mortgage of $30.7 million, secured by the property.
During the nine months ended September 30, 2021, we sold a total of 134.7 acres of land from our holdings in Windmill Farms for $19.0 million, in aggregate, resulting in gains on sale of $9.2 million.
During the year ended December 31, 2020, we sold a total of 58.8 acres of land from our holdings in Windmill Farms for a total of $12.9 million, resulting in a total gain on sale of $11.1 million.
I don't want to get all HHC/JOE math on people, but the carrying value for all their development land is $42MM, and the average price they've transacted with homebuilders the last two years is $165k/acre, now we don't know how much development capex or time it would take the sell the remaining 1,420 acres, but the value is certainly more than $42MM.
And then there's the 81% stake in IOR, IOR's loan book is full of related party transactions (similar to BRG's loan book) used to fund TCI's apartments and development activity, it was probably intended to be a true mortgage REIT, but now is just a nano cap that is unlevered and houses most of the loan book on TCI/ARL's balance sheet. Again, no dividend, only exists to generate fees. But the book value is $107MM, so 81% of that is $87MM (IOR trades for less than half book value, could be interesting on its own if the complex does fold up?).
On the right side of the balance sheet there's $185MM of Israeli bonds (they do report on IFRS there, others have translated the filings to come up with similar findings) and $178MM in direct mortgage debt, for a total of $363MM in long term debt at the TCI level. There are other assets, cash, loans that aren't in IOR, related party deals, but they're hard to untangle and I'd probably get it wrong, so very high level swag:
- $350MM for the VAA JV after fees and taxes (some of this is the retained value of the 7 properties)
- $280MM in owned properties
- $150MM in land
- $87MM in IOR
- ($363MM) of long term debt
- TCI did receive a $44/share buyout offer, but the proposal hasn't gone anywhere and was probably just for publicity anyway.
- TCI's book value is ~$41/share, given how mis-marked the VAA JV is on the balance sheet, and that GAAP accounting often understates real estate value (historical cost minus depreciation), its rare that a multi-family company would trade at a discount. Both highlights the undervaluation and the markets skeptical view that it ever gets resolved. Similarly, ARL book value is $21/price versus a $11.50/share price.
- Buying back the 7 properties is kind of a "bad fact" to a full sale/liquidation thesis, but with the cash, might end up getting a low-ball going private offer that still results in a satisfactory result. If that's the case, probably best to own TCI directly (talking myself out of ARL right now). My best guess is these are some of original development properties that might not be fully stabilized and won't fetch full value in a competitive auction.
- Macquarie is the adult in the room, will want to maximize value and reduces any related party risks to the actual sale of the JV, but the management grift factor remains elsewhere in the complex.
- Brad Phillips, Gene's son, is the president of a life insurance firm. There are 58 people according to LinkedIn that work at Pillar Income Asset Management, it appears they don't manage considerable assets outside of ARL/TCI/IOR. One article I found lists Gene Phillips' estate at $3.5B, so there might be other assets outside of this mess, presumably they could take out minority shareholders and run this as a family office, not that they will of course.
- Phil Frost is a 9.5% holder of VGR, he has a colorful history including being caught up in a pump and dump scheme. Overall management here seems a bit grifty and the whole idea of a tobacco company originally buying DOUG seems like a vanity acquisition, it is probably a lot of fun to be the CEO of DOUG.
- I tend to like quick spins, usually they're smaller companies and it shows they've been run separately and really only connected through corporate G&A, if a spinoff takes more than a year, usually means there's a lot of parts to untangle, more likely the company has a tough go of it early on as a newly public company.
Tuesday, November 30, 2021
Many readers will know this situation, Altisource Asset Management (AAMC) is a cash shell with approximately $80MM in the bank after their only asset management client, Front Yard Residential (RESI), terminated their external management agreement with AAMC resulting in RESI being internalized (AAMC was a 2012 spin, was trendy at the time to spin the management company). Front Yard later sold itself to private equity (Ares and Pretium) which likely will turn out to be a great deal (even after they hiked the offer) for the buyers given how single family rentals have traded since. Friend of the blog, Andrew Walker did an excellent podcast (and even answered one of my questions on it) with Thomas Braziel and Jeff Moore pitching AAMC. They go into some of the background, particularly on the controversial Bill Erbey, who was formerly an executive (back in the early-to-mid 2010s, Erbey ran Ocwen and a few satellite entities like AAMC), but now is *just* a 39% shareholder in AAMC after legal trouble forced him out of the day-to-day operations.
Long story short, Altisource has a large preferred overhang (originally $250MM, currently $150MM after two exchanges), the stock previously traded north of $1000/share (now for $17.90) and issued a zero coupon convertible preferred stock with a strike price of $1250. The cash from the convertible preferred was used to buyback shares, presumably to boost the shares above the strike price making everyone happy, but instead the stock collapsed. Now that piece of paper is hopelessly out of the money, it is basically a zero coupon bond with a mandatory redemption date of 3/15/44. However starting in March 2020, every five years the preferred holders can request a full redemption:
(b) Each holder, at its option, shall have the right, in its sole discretion, to require the Corporation to redeem all of its outstanding Series A Preferred Shares by providing written notice to the Corporation within fifteen (15) Business Days (but not more than thirty (30) Business Days) prior to a Redemption Date of its intent to cause the Corporation to redeem such holder’s Series A Preferred Shares on such Redemption Date (each, a “Holder Redemption Notice”) which will specify (i) the name of the holder delivering such Holder Redemption Notice and (ii) that such holder is exercising its option, pursuant to this Section 5, to require the Corporation to redeem shares of Series A Preferred Shares held by such holder. The Corporation shall, within fifteen (15) Business Days of receipt of such Holder Redemption Notice, deliver to the holder exercising its rights to require redemption of the Series A Preferred Shares a notice specifying the date set for such redemption, which date shall be no more than thirty (30) Business Days after the Holder Redemption Notice (the "Holder Redemption Date"). The Corporation shall redeem for cash on the Holder Redemption Date, out of funds legally available therefor, all, but not less than all, of the outstanding Series A Preferred Shares held by such holder at an amount equal to the Redemption Price.
The larger holders did indeed request redemption last year. But the trick is AAMC has to redeem the entire class at once, and obviously they can't redeem the $150MM outstanding with only $80MM in net cash. The preferred stock is closely held, two holders (Putnam and Wellington) have settled with AAMC and exchanged for either a combination of cash and stock in the case of Putnam or just cash in the case of Wellington. Both worked out to approximately 11-12 cents on the dollar. The remaining significant holdout is Luxor Capital which is pursuing litigation against AAMC.
I have never subscribed to the "preferred stock has no teeth" thesis, here is where my views differ (again, I'm often totally wrong):
- Luxor is not anchored in any way to the previous two settlements, they're the largest holder (basically the only remaining holder) of the preferred stock and still have leverage. I'm a structured finance guy, they're almost the "controlling class" in this situation, without them the overhang isn't resolved. Additionally, Putnam included a "most favored nation" clause in their settlement which effectively hitches their settlement to Luxor, it gets Putnam out of the lawsuit but also allows them to retain the optionality of a better deal.
- Altisource won't risk consummating a new business combination/merger before the preferred stock overhang is resolved. If the deal is successful, then AAMC could potentially be on the hook for the full $150MM down the road or at a minimum increases the recovery rate for Luxor. I don't see anything happening until Luxor settles, maybe there's a settlement and merger simultaneously but it feels highly unlikely that the preferred can just sit out there until 2044 (for either side). So this is a game of chicken until then, and those situations can last longer than people want to believe (I would have thought RHE would have settled by now).
Here's the current situation, obviously the capital structure is upside down at full face for the preferred, I'm discounting the net cash for two quarters of cash burn, dealers choice there.
How I'm thinking about a post-settlement proforma: I'm assuming that the Putnam settlement is the best case. Putnam held $81.8MM of the preferred stock and received 288,283 shares of stock and $2.863MM in cash (split in two payments), if we applied that ratio to the remaining $150MM outstanding, I get about a $25 NAV.
But if Luxor was going to settle for the Putnam deal, they would have already, so applying a multiple to that, let's say they negotiate a 25% or 50% better deal than Putnam, I get an NAV of $23.28 and $21.50 respectively. Against a $17.90 stock, that seems like a reasonable discount, if you did a goal seek on the multiplier to get to the current price, Luxor would need to strike a deal more than 100% better than Putnam (also includes the incremental benefit to Putnam for MFN clause) to get to the current share price.
Mr. Thomas K. McCarthy, Interim Chief Executive Officer, stated, “The Company’s attention and focus continues to be the evaluation and pursuit of certain business opportunities and acquisition targets in which to focus the Company’s resources and enhance shareholder value. The Company has liquidated its equity holdings and is now in an all-cash position in preparation of an acquisition event.During the third quarter, the Company also engaged the services of both an investment bank, Cowen and Company, LLC, and the law firm, Norton Rose Fulbright, LLP, to assist us in identifying and reviewing potential acquisition and merger opportunities. While no final decision has been made, the Company is in discussions with several potential acquisition or merger targets including cryptocurrency and brokerage related businesses”.
The company is probably mid-process, I'm guessing that a settlement with Luxor is announced at the same time (if they take shares, they could participate in the upside, removing the litigation overhang will likely cause the stock to bounce significantly), plus there are some "meme able" buzzwords in there and a relatively low float, I agree that something crazy could happen with this one and at today's price you're not paying much, if anything, for that optionality. But there are hundreds of SPACs also competing for similar buzzy deals, so who knows, could be challenging to get a deal done and there could be a frustratingly long stretch with no news.
Disclosure: I own shares of AAMC
Wednesday, November 24, 2021
Sonida Senior Living (SNDA, fka Capital Senior Living under the old symbol CSU) recently completed an out of court restructuring led by Conversant Capital, the same investor that has been instrumental in institutionalizing and providing growth capital to INDUS Realty Trust (INDT). While clearly different, the industrial/logistics asset class has covid tailwinds versus senior housing having covid headwinds, the results could rhyme with each other longer term as this micro cap "grows up" (to steal a tweet from "Sterling Capital" @jay_21_, also h/t for the idea). Sonida is now positioned to use their reset balance sheet to take advantage of a fragmented senior housing market with plenty of distress (looking over at our friend RHE), but also with long anticipated demographic tailwinds finally being realized with an increasingly large population aging into senior housing.
Below is the standard investor relations overview slide. Unlike some others in senior housing, SNDA is not a REIT (more similar to BKD), but owns and operates the vast majority of their facilities as they exited locations the company formerly leased from others (VTR, WELL, PEAK etc) in recent years. There's embedded real estate value at SNDA as a result, which may someday lend itself to some kind of REIT transaction. They also have a small management business that resembles Five Star's (FVE) business model (got there in a similar way too when SNDA restructured their leased properties) that helps offsets some G&A in the meantime.
The restructuring agreement took a few twists and turns, including heavy opposition from 12+% shareholder Ortelius Advisors, but was eventually approved by shareholders in October and closed earlier in November.
- $41.25MM in convertible preferred stock (11%, conversion price of $40) to Conversant plus an additional $25MM accordion to the convertible preferred stock if needed for growth capital
- $41.25MM in common stock at $25/share to Conversant, plus warrants to purchased an additional 1 million shares at $40/share
- $72.3MM through a rights offering at $30/share to all company shareholders
- Conversant previously provided a $16MM rescue bridge loan to the company, it was repaid in full upon closing of the transaction on 11/3/21.
"The transaction valuation is expected to represent approximately a 6% capitalization rate on expected New Senior Net Operating Income ("NOI").. the acquisition price implies a 20% to 30% discount to estimated replacement cost on a per unit basis.. the transaction price represents a multiple of <12 times estimated 2022 New Senior normalized FFO per share including full synergies."
- I don't have the stats to back it up at my finger tips, but the dynamics in senior housing appear to be similar to those in single family residential. There was significant overbuilding of senior housing in the middle of the last decade, then it dropped off a cliff, now we're finally seeing the long promised demographic wave moving into the 80+ cohort which could cause supply to tighten and rent/occupancy to rise.
- I like the new board of directors. The new Chairman is Dave Johnson, he was previously the President of Wyndham Hotels (WH) and is a board member of Hilton Grand Vacations (HGV), two companies I've followed/respected for several years. Then to repeat the tie in with INDT, Conversant is bringing in Ben Harris as a board member, formerly the president of Gramercy Properties Trust (fka GPT) which was a blog favorite, most of the other key members of that team are at INDT now.
- While not as great of an inflation hedge as multi-family due to the greater percentage of variable/labor costs in senior housing, inflation should be able to be mostly passed onto to the residents. SNDA disclosed in a recent call that they were increasing rents by 5+% next year, VTR is targeting 8% in their owned properties, etc.
- Sonida has a fairly high concentration in Texas, Wisconsin, Indiana and Ohio. Their facilities tend to be smallish and on the older side, about an average age of 23+ years.
- The company recently announced they'd be managing an additional 3 properties for Ventas starting 12/1, while not material yet, perhaps the managed segment could be a growth business for Sonida. It's a fee business, not exposed to lease expense or capex of an operator, etc.
- The company is going to restart giving guidance for 2022, presumably with Q1 earnings, which could give some needed visibility to investors as I fully admit my back of the envelope math is mostly a guess at this point.
Disclosure: I own shares of SNDA (plus INDT and RHE-A still too)