- Crossroads Capital (XRDC) is soliciting a shareholder vote to convert to a liquidating trust, cash makes up about $1.40 of the $2.05 current share price, it may take a few years to fully liquidate but I assume much of the cash will be distributed to shareholders (technically unit holders) shortly after the liquidating trust conversion reducing the basis and pulling some of the potential return forward. I added a little more since I first discussed the idea, there might be some indiscriminate selling from those who don't want the illiquidity of a non-tradeable security ahead of the conversion.
- Another current position I recently added to is CSRA (CSRA) which is the U.S. government services spinoff of Computer Sciences Corp (CSC). I had the original idea right that CSRA should be sold after the spin and CSC held as it was the buyout candidate of the two (HPE is doing an Reverse Morris Trust with CSC) but ended up calling a poor audible and holding CSRA instead for tax reasons. CSRA is down 25-30% for little reason since then. The U.S. government has a budget for the first time in years and most government agencies (including the Department of Defense) have seen funding increases. Leidos (LDOS) is buying the services business of Lockheed Martin (LMT) later this year in a Reverse Morris Trust transaction (could be an interesting split off special situation) for 10x EBITDA, no reason that CSRA should trade for a couple turns below that.
- NexPoint Residential Trust (NXRT) has had a nice run recently on minimal news and is basically at my estimation of fair value in its current external management form. I want to continue to hold as I like the strategy and their target markets in the Southeast and Southwest but it's hard to fully commit to an external management structure (despite significant insider ownership) as the principal-agent problem is strong and management's best interests are often at conflict with shareholders. I've sold a little bit and will likely continue to do so, just being slow about it to hedge against Highland selling the company outright in the $20-22 range.
- The spread has come in on the American Capital (ACAS) deal with Ares Capital Corp (ARCC), but in the wrong way with ARCC falling since the deal was announced. After letting the deal settle in my head, I decided merger arbitrage isn't my strong suit so I sold around $16 and moved on.
- I ended up selling Gramercy Property Trust (GPT) this month around $9 after owning it for nearly five years, at that time it was a busted commercial mortgage REIT that held the junior debt and equity in three CRE CDOs that were in various levels of distress. The old board brought in Gordon DuGan and team in the summer of 2012 to transform the company into a net lease REIT focused on industrial and office properties. New management grew the company quickly through several large acquisitions and corresponding capital raises which was topped by the merger with Chambers Street late last year. The market didn't initially respond well to that deal, likely because of Chambers Street's previous private REIT status and corresponding messy asset base and unsophisticated retail investors. REIT mergers are great because of the scalability of the business, once a management team is in place, there's significant operating leverage. Gramercy was able to eliminate most of the Chambers Street expense structure and recycle the random assortment of office and industrial properties into a more streamlined portfolio that public REIT investors would assign a premium valuation. That process is far enough along and investors are once again giving Gramercy credit, I have the shares trading for about a ~6.5% cap rate, and given it's new larger size and wider coverage, just don't see a lot of additional alpha remaining.
- Sycamore Networks (SCMR) drew me in with it's large NOL asset and two activist investors who were looking to stop the ongoing liquidation and preserve the tax asset. However, the company is set on a liquidation and made an additional distribution during the first half of the year, making it even more unlikely that the tax asset can be monetized (and as we see with Par Pacific and others, even with management focused on the tax asset, not always easy to actually make a dent in it quickly). It was already a small speculative position for me and after the liquidation distribution it was even smaller, wasn't worth mental effort any longer and I sold for a small loss.
Disclosure: Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation (most of which is restricted) which follows a more diversified low-cost index approach. The use of margin debt/options/concentration doesn't represent my true risk tolerance.
I see in your portfolio shows IRR of 21.51%...Is this the same as CAGR?
ReplyDeleteif not what is the difference?
They're substantially the same. In the first two years I was periodically adding funds to the account and IRR makes it easy to accurately track inflows and outflows without striking a daily NAV. For the last 3+ years I haven't made any deposits or withdrawals so those values would be the same either way.
DeleteAny new thoughts or revised view of GRBK? The company has disappointed at many levels. Botched guidance, operational missteps along with high labor costs have impacted the stock. I see that they have made some new development announcements which is good but will this company ever generate good cash flow and ROIC? It is entirely unclear to me - how about you?
ReplyDeleteWMIH management and Board appears to be doing nothing at all other than shuffling capital back and forth and charging the company fees... I think these PE funds really rape companies, masquerading as shareholders. This is why I am skeptical of PARR. The likes of Zell will always find a way to get value out of these situations ahead of minority shareholders by tapping into other parts of the cap structure.
I am still wary of what's going on at Pershing and how it could impact HHC. The fund appears to be in full meltdown mode. I think sometimes we, on the outside, give big fund managers too much credit for being in charge of their destiny. Big funds can evaporate in days/weeks.
Great performance BTW; Congratulations.
GRBK - I'm bullish on single family homes and housing formation, especially in the sunbelt, I think it's going to be hard to mess up GRBK too badly given their concentration in two of the hottest markets in Dallas and Atlanta, should be a significant tailwind. But you're right to an extent, they talk a lot about underwriting their capital investments to 20% unlevered returns, they need to start delivering that soon or lose more credit with investors. I like GRBK long term more than say NXRT, at least you know you're mostly on the same side of the table as management generally.
DeleteWMIH - Did you have a chance to listen to the annual meeting webcast? It got a little awkward around the lost bid and how expensive it was, management there seemed pretty defensive. I'm losing my enthusiasm for NOL heavy companies, especially in this heated M&A environment, it's hard to enough to get a good deal in the first place, and then to buy something cheap that can quickly generate taxable income - there's probably just not a lot of opportunities out there like that in 2016. Especially ones with the potential to chew up $6B in NOLs over time. I just have a small position, just going to wait and see what they come up with.
PARR - Fair point on tapping other parts of the capital structure, seeing that with the convertible note they just raised for the Wyoming Refining acquisition. Similar to WMIH, just not that easy to buy healthy businesses that generate a lot of taxable income, it's a long long process.
HHC - With over half of Pershing's capital as "permanent" via the listed entity and internal money, I don't see it likely that Ackman would be forced to sell HHC (his longest held and smallest position) at fire sale prices. I more worry about his actual stewardship as Chairman, he's showed a lot of poor decision making and stubbornness in the past two years, what if he tried to save his reputation (what's left of it) and swung for the fences with HHC capital? Something like that makes more nervous than Pershing collapsing and doing permanent damage to HHC.
Thanks for commenting as always, and thanks on the performance, I hope to keep it up.
take a look at STAR, istar financial. I believe NAV should be closer to $20 then current price.
ReplyDeleteThanks for the idea, I'm just getting around to looking at iStar, looks interesting and checks a lot of boxes.
DeleteJust a general comment. Given valuations and anemic growth, this seems to be a terrible time to be long stocks with the exception of some beaten down sectors. Most stocks are incredibly expensive and if there is a massive pullback, all these so called special sits will be had at a fraction of current trading prices. Institutional investors have a mandate to be invested, most individuals don't with the exception of desperate retirees who need income. Now may be a great time to take stuff off the table.
ReplyDeleteIt's certainly an odd time in the markets, but I don't share your dire views. I try to stay away from large macro-timing trades when it comes to my portfolio, because you have to be right twice, when to sell and then when to buy back into the market. Often even if you're right, you might have made more money in the long term by just continuing to pursue pockets of opportunity than to sit in cash. I'm also aware that as an individual who doesn't manage other people's money, that's easier said than done, I don't have investors to answer to that can redeem at the worst times.
DeleteJust curious, what beaten down sectors are you looking at?
But valuation does matter. Most special sits theses go like this: comps are trading at X and my stocks are trading at a discount to X because they are misunderstood, forced-sold, under-the-radar etc etc. But relative valuation argument falls apart when there is market multiple compression. I hear you on timing though - - to each his own. I am looking at energy, financials, basic materials.
ReplyDeleteHow do you feel about WMIH nowadays? I will tell how I do.
ReplyDeleteBook value of thirty cents per share, most of the economics was already favorable for KKR and now with potential corp tax cuts that diminish value of NOLs and rising interest rates that would be unfavorable to financing an acq
... I think this stock is going back to fifty cents and I dont see any prospect whatsoever for a transaction now.
I've certainly lost my enthusiasm for NOL shells over the past 12-18 months, but I'm skeptical that much will change in the tax code, at least quickly or that would be enough to make WMIH's tax asset worth substantially less. Lower corporate taxes would also impact the valuation of pass through entities like REITs and MLPs, it'll be interesting to see what actually gets done, but that doesn't stop everyone from speculating. But back to WMIH, it seems to me that people are just growing impatient and getting fatigued, the $6B NOL might be too big, limits their opportunity set to such a small number of targets that nothing gets done. Someone else commented on an old GRBK post, but I think that might turn out to be the best NOL shell of the era, one big acquisition, immediate taxable earnings, and doesn't need to continue to make deals in the name of monetizing the NOL. But time will tell.
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