Year End 2017 Portfolio Review

Time to close the books on 2017; it was a great year in the markets and for my personal account which was up 31.25% compared to the S&P 500's total return of 21.83%.

My significant winners were Pinnacle Entertainment, MMA Capital, Tropicana Entertainment and NACCO Industries/Hamilton Beach Brands, my only significant loser was New York REIT.  Below is my performance attribution for 2017:

Soon to be Closed Positions:

• Pinnacle Entertainment (PNK) recently announced they are being acquired by rival Penn National Gaming (PENN) for $20 in cash plus 0.42 shares of PENN, a great ~3x outcome 20 months after PNK did their OpCo/PropCo split transaction with Gaming & Leisure Property Trust (GLPI).  If I had to sum up the reasons why this idea worked: 1) leverage, PNK was levered 5-6x coming out of the GLPI deal; 2) strong economic tailwinds, people are spending money on experiences (including gaming) instead of things which drove EBITDAR up high single digits; 3) a well timed buyback, PNK bought back over 10% of its stock in the first few months after spinning off from GLPI when the price was $10-$13; 4) expanding multiples in the gaming industry. PENN is citing a 7.7x EBITDAR multiple post synergies on the deal where Boyd Gaming (BYD) might be the biggest winner, snapping up 3 PNK properties to appease regulators at 6.25x EBITDAR pre-synergies.  Proforma for the deal, I have new PENN trading for 7.2-7.7x EBITDAR (with and without synergies) and still believe in the regional gaming tailwind story (good reason to own CZR as well), but I'm going to sell my position shortly after the new year and set a Google alert for wherever the PNK management team lands next.
• I bought pre-spin January 2018 calls in Hilton Worldwide (HLT) prior to the spinoff of Hilton Grand Vacations (HGV) and Park Hotels & Resorts (PK); HLT has done extremely well over the past year as it moves towards an asset-lite model plus a plan to grow its hotel count by 1/3 while shrinking its share count by 1/3.  I plan to sell in the new year, and potentially roll those proceeds over into other hotel stocks (Hyatt, Wyndham's split and LaQuinta's split come to mind).

Closed Positions:

• The IEP tender offer for Tropicana Entertainment (TPCA) played out mostly during the first half of 2017, but the offer closed in mid-August at $45 per share.  As a long term shareholder of TPCA, I was too quick to sell into the tender, as shares now trade for $56 and interestingly many people I talked to thought the shares would fall after the tender as it would become more illiquid and Icahn threatened to put a 2 year freeze on additional tenders.  The tender offer was a tremendous short term event idea, the shares were trading at a discount almost all the way up to the expiration date with little chance of it being oversubscribed, but that was never my thesis for owning it, and I should have paid more attention to the post-tender entity's investment case.
• My only significant loser this year was New York REIT (NYRT), like many others I relied too much on Michael Ashner's original activist presentation and the value it placed on One Worldwide Plaza.  The other issue with NYRT in hindsight was the tight cap rate environment in New York paired with leverage, tiny adjustments in the cap rate have a magnified impact on the valuation when you're talking 4-5% cap rates.  The conference calls after the Winthrop team took over have been comical (much funnier if I didn't own it) and I'm thankful I listened to people smarter than me and sold before things really got ugly.  This was a classic "do your own work" mistake.  The other lesson might be to throw up a caution flag the next time an attractive liquidation comes up, there's a reason why liquidations are rare, they're unlikely to be worth the time, effort, and expense compared to selling a company outright.
• My post on the NACCO Industries (NC) split received quite a bit of attention, in retrospect the initial thesis had some flaws which thankfully ended up getting fleshed out in the comment section (thank you readers) by the time the spinoff actually occurred.  After the spinoff, shares of the parent company (NC) traded below $25 for a brief period and I was able to snatch up some additional shares that I eventually sold a couple months later around $47.  My original thesis was to sell the spinoff, Hamilton Beach Brands (HBB), and hold NC, but I ended up doing the opposite as the price of NC rose while HBB fell.  I have a poor track record when reversing my initial thoughts on which piece of a spinoff to hold, but hopefully HBB continued to gain traction in higher end higher margin kitchen appliances this holiday season and will make an attractive acquisition target for one of the big consumer appliance/brand rollups.
• My thesis on Vistra Energy (VST) was rather simple (arguably too simple), it was a bankruptcy reorg that was traded over the counter at the time and had limited liquidity.  Since then, Vistra uplisted and then entered into a deal to merge with Dynegy (DYN) in a big all stock deal that will increase Vistra's diversification and also its leverage.  Not knowing the power industry well enough, I figured the idea had played out enough for me and sold shortly after the deal announcement at a similar price to where it trades today.
• Inotek Pharmaceuticals (ITEK) was another simple thesis, it was a busted biotech that was trading below cash and pursuing strategic options.  ITEK ended up doing a reverse merger with Rocket Pharma that should close next year, the stock price shot up, but I sold relatively early and missed out on some of those gains.  Still happy, made money, and don't have many regrets as traditional biotech investing isn't my strong suit at this point.
• I initially thought Merrimack Pharmaceuticals (MACK) was a combination of some the other busted biotech/CVR themes, but management's own thesis changed a couple times for the negative as the second half of 2017 played out.  First they settled a lawsuit with their convertible bondholders which reduced the net cash position, and then they raised capital which effectively diluted the CVR like nature of their future milestone payments in the Ipsen deal.  At this point, I wouldn't be surprised if management went back on their word to pass any milestone payments to shareholders in the form of special dividends.  I sold at a small loss.
• All the small CVR (GNVC, MRLB, INNL) related deals I purchased this year closed as expected, now we just wait for if/when milestones to be met.  The Perfumania (PERF) offer also closed as expected.

Previously Unmentioned New Positions:

• I try to post about every position, but sometimes I don't have anything intelligent to add or everything has been said about an idea by people smarter than me (see Andrew Walker's post on GNCMA/LVNTA: http://www.yetanothervalueblog.com/2017/07/liberty-ventures-gci-merger-set-to.html), but I bought General Communications (GNCMA) in late July as a way to get a discount on a discount on a discount in Charter Communications (CHTR).  The deal to merge GNCMA into LVNTA should close in the first quarter and hopefully eliminates some of the tracking stock discount at LVNTA while providing cash flow from GNCMA to continue Malone's typical levered equity strategy.
• Another position I didn't get around to posting is Molson Coors Brewing Company (TAP).  I did lead the pitch of TAP at a recent meeting I moderate (notes here: https://specialsituationsresearchforum.wordpress.com/2017/10/30/molson-coors-brewing-company-tap/).  Elevator pitch: Molson Coors is trading within a whisper of 52 week lows, significantly cheaper the big beer peers/other consumer staples, just completed a transformational merger from a forced seller at a good price, levered, stable mature business (even if off-trend on craft/spirits).

Current Holdings:

*Additionally I have CVRs related to GNVC, MRLB and INNL

I hope to find some time to update thoughts on long held positions like MMA Capital Management (MMAC) Green Brick Partners (GRBK), iStar (STAR) and Resource Capital (RSO), all of which I continue to like going into the new year.  I don't have any insightful macro thoughts other than I'll probably continue to focus more on near term event like opportunities in 2018.  Thank you to everyone who has reached out, shared ideas, commented on my posts, its all appreciated and makes sharing ideas fun and entertaining.

Happy New Year.

Disclosure: Table above is my blog/hobby portfolio, I don't manage any outside money, its a taxable account, and only a portion 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.