Friday, December 30, 2016

Year End 2016 Portfolio Review

Time to wrap up 2016.  Thank you to all my readers, especially those who have reached out via email or commented on posts, the comment sections are often better than the posts themselves.  My portfolio returned 22.47% for the year, which by coincidence is near my 22.63% IRR since inception and comfortably ahead of the S&P 500's 11.95% gain for 2016, which is admittedly not a great benchmark to compare my strategy but a close enough proxy for a passive U.S. based investor.  The Russell 2000 (small cap index) did 19.48% in 2016, so less of an out-performance, but I'm still pleased with the absolute result.
The big winners this year were Leidos Holdings, Tropicana Entertainment, MMA Capital, Nexpoint Residential Trust, Green Brick Partners and the big losers were Verso, Par Pacific Holdings, and LiLAC Group, breakdown of the attribution is below:
Closed Positions:
  • I sold Crossroads Capital (XRDC) in October at $1.62 to book an early "tax loss" or so I told myself, more likely just me being impatient, which was before news was released that they had hired an investment bank to shop their assets and eventually ended up selling a couple positions.  Today it trades for $2.13 and NAV is over $3, I'd guess the liquidation takes another year or so but it remains an interesting idea.
  • Hawaii's Public Utility Commission blocked the merger between NextEra Energy and Hawaiian Electric (HE) which then cancelled the pending spinoff of their bank subsidiary, ASB Hawaii, which is the main reason I was interested in the first place (still want that bank!).  There could be another buyer out there, but I moved on at a small loss.
  • KCAP Financial (KCAP) was a small position I bought in the early spring as people were panicking, especially with risky credits in particular, but performance of bank loans that KCAP (and other BDCS) held were still chugging along just fine.  The market was pricing in a crisis that never occurred, pair that with the news that KCAP was shopping their CLO manager, and it seemed like a good way to play the bounce when the market returned to normal.  Markets returned to normal, the CLO manager sale didn't materialize (they actually just issued a new CLO), and with dividends I booked a nice gain.  KCAP still looks cheap at 73% of NAV and bank loan marks have only gone up since 9/30 as people pile into floating rate debt.
  • The Lockheed Martin exchange offer for Leidos Holdings (LDOS) turned out to be one for the ages.  I don't normally post about exchange or tender offers, but I liked this one because I'm familiar enough with the government services sector and thought Leidos was cheap with or without the exchange offer discount.  After the exchange offer ratio was finalized, LDOS stock price shot up, either because of a squeeze or possibly because it screened cheap after the deal due to extra leverage caused by the special dividend needed to qualify as a RMT.  After I received my shares, I ended up booking the quick profit but I still like the government services sector in a era where infrastructure and fiscal spending will be in vogue.
  • As hinted at in my mid-year post, I did end up selling the remainder of my Nexpoint Residential Trust (NXRT) holding around ~$20, still like the Class B apartment asset class but just don't trust management and it was close to fair value.
  • I'm not entirely convinced that Verso (VRS) won't end up working out reasonably well, but I didn't have the initial patience, basically got caught being a little bored and impulsive, without having conviction to hold or add to it as the former senior creditors sold out of the stock.  The other lesson here is to be more skeptical of management projections in disclosure statements, and of course most fairness opinions can be thrown out the window, investment banks just back into whatever valuation their clients want to hear.
  • The Zais Financial Corp (ZFC) tender offer worked out pretty much as planned, I ended up selling the Sutherland Asset Management (SLD) stub shortly after the deal closed to book a high single digit return in a little more than a month.  Sutherland is now back on my watchlist, they've announced a dividend, trade well below book value, and as former private REIT shareholders sell their shares it has created an opportunity.
Current Portfolio:
No cash was added or withdrawn in 2016.

My favorite ideas for 2017 are iStar Inc (STAR) and Resource Capital Corp (RSO), both are REITs that either don't pay a dividend, iStar, or pay an abnormally low dividend, Resource Capital, and have mixed portfolios that don't lend themselves to being valued properly by the public markets.  As both continue to recycle their capital and make their portfolios easier to understand, the market should reward them with higher valuations.  Two "buy complexity, sell simplicity" type ideas.

Disclosure: Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation which follows a more diversified low-cost index approach.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.


  1. How large is your portfolio? The LDOS trade was small whereas it seems to have made a large impact on your portfolio...

    1. There's always one of these guy with the glancing snide insinuation.

      -Spare Me The Platitudes

    2. Well, you can see in the post the model portfolio is 120,000 net.

      BTW what went wrong with LILAK and PARR? Are they better buys now?

    3. Yes, the LDOS exchange offer had a large impact on my portfolio, but I don't think it was a risk free trade that you can entirely discount away and many other people hedged and only received 1/3rd of the gain. Plus I've always disclosed that I'm just an individual investor, this is a hobby and I have a regular corporate job.

      PARR - I'm less excited about it lately, the rights offering was small but it was great if you oversubscribed to it. I received twice the number of shares in the oversubscription than the regular rights offering and the stock was already trading up a couple bucks from the rights price, just surprised that others in PARR didn't fully exercise. But at today's price, I think you're paying about 6x their $150MM EBITDA mid-point estimate (Hawaii is near their midpoint, Wyoming crack is way below) + book value for the Laramie investment and nothing for NOL. It's been over 3 years since the Hawaii refinery acquisition and they haven't touched the NOL, the market is probably right to heavily discount that. I have no idea what Laramie is worth, so without a better understanding there, not tremendously excited to recommend PARR and I did cut my position in half after the rights offering.

      LILAK - Others understand it better than me, but from my point of view it looks like they paid too much for CWC (Malone on both sides of the deal, what do you expect?) and then how they structured it was a double edge sword. Yes, they didn't want to give up too much "cheap" LILAK stock (at almost double the current price) but they also created the same share overhang where Liberty Global shareholders got LILAK shares twice and dumbed them again, probably created some additional technical selling pressure.

  2. HNY!

    I know that we had closed the chapter (pun intended) on VRS but saw your comment above so here I am again talking about it. I have absolutely zero intention of investing in it but let's just watch this from afar as a test case. We know that management either lied or was grossly incompetent to have made such an error in its projections.

    CEO is gone and amazingly still no new CEO after all these months. I suspect many if not all credit funds who got the reorged stock are out of it now.

    If somehow the secular trend reverses, sure, VRS could double from here but based upon the information I have, this company is in a declining business and I dont see it reversing decline in the foreseeable future. A strong Dollar is another nail in its coffin as it makes imports more competitive.

    I suppose if the Trump admin puts a tariff on all imports, then VRS could get much wanted help but I have no idea how that's gonna pan out.

    Let's circle back on this particular name at the end of 2017.

    1. I think we're on the same page, just a case study for me too. Maybe it's a fault of mine, but when I make a mistake, sell, I never really consider re-entering.

  3. MDC, I really enjoy your blog.   You stated, "Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation which follows a more diversified low-cost index approach."  Comparing the returns of your hobby portfolio to that of a low cost index begs the question, "why this is only a small slice of your real portfolio?"

    You are finding values and special situations, yet you are not sizing them properly.  I know you have a regular corporate job, but you still make the time to do excellent analytical work on your hobby portfolio.  Why isn't more capital allocated to this portfolio? 

    Something wrong when your readers are making more than you!

    Happy New Year,

    1. Hi Jim,

      Fair question, mostly just my individual circumstances. But I've worked for the same company for 13 years, maxed out my 401k every year so that's grown a lot, have some deferred comp, other low basis taxable stuff too. I have one young child, another on the way in a few weeks, need to upgrade the housing situation so I've been saving outside this account for that. So partially work restrictions, partially tax reasons, partially life just coming at you. I hope one day to start funneling more resources this way again.

      Thanks and Happy New Year to you as well.

  4. Glad you like my STAR pick. I have another pick I think stock should at least double, however would depend mainly on natural gas price. CRK is the stock.

    1. Oh cool, great, I do like STAR, will check out CRK too.

  5. was wondering if you have had a chance to look at SLD (per your comment above)?

    1. I haven't just yet but the setup seems interesting to me, management isn't new, been at the small commercial loan space for a long time. This back door IPO is similar in a lot of ways to a spinoff, no big hoopla road show, shareholders that might be selling for uneconomic reasons (me included after the ZFC tender), etc.

  6. Great blog. Been following HHC thanks to your previous posts. For the last year it hovered around 105-115 or so. With the first earnings call coming up (minor catalyst?) and the progress made in HHC's major markets/projects, would you put any incremental capital in HHC today? Or do you still think STAR > RSO > HHC at today's valuations? Thanks!

    1. I'm intrigued/excited about today's first earnings call for HHC as well, maybe management is a little frustrated with the stock price over the last 2+ years? Maybe the new CFO is having some influence? Maybe their far enough down the development and eventual REIT conversion path (unlikely still for a while)? But I'll be tuning in this afternoon. I would put additional capital into HHC, obviously should have last February, but I like the progress they've been making in pruning the portfolio down to their key sizable projects. I forget which sell side firm, but someone put out a note recently on the Fashion Show Air Rights having an RFP out there for construction of a new casino/hotel which could be an additional major project. I'm also interested to see how they handle the warrants this year, some have already been exercised, and what incentive plan they put in place going forward?

      HHC is farther along their path than STAR. STAR has more leverage and probably more upside in my mind, but HHC's management is superior. RSO is a little different, more of a shorter term (~12-18 months) idea, if I had to handicap it over the next 12 months I'd probably say RSO > STAR > HHC, but HHC's value over the long term is the clearest in my mind (maybe skewed view since I've owned it for so long).

      Thanks for reading and the kind words.

    2. Appreciate the thoughtful response. I'm hoping the earnings call(s) will help bring some clarity and awareness as HHC continues converting from B/S to I/S.

      Not sure if you've looked at the NYRT liquidation - not as much upside as some of your other ideas but I like the risk/reward (downside very limited in my opinion - big question is if it's a 12-18 month process or longer).


    3. I like NYRT too, no good reason why I don't own it yet. Given that most of the properties are stabilized, I think 12-18 months seems reasonable.