Monday, December 31, 2018

Year End 2018 Portfolio Review

I'm ready to close the books on 2018, it was a difficult year for my personal account with a loss of -20.46% versus the S&P 500 at -4.38%.  The only significant winner was the DVMT tracking stock, otherwise it was mostly all losers with the worst of them being Green Brick Partners, Caesars Entertainment and Wyndham Worldwide (pre and post split).  Despite the poor results here, 2018 was a positive year both personally and professionally, thanks to everyone I've interacted with online and offline, Happy New Year.
Here are some thoughts on each one of my holdings, I think most of them are especially undervalued if we avoid a recession in the near term (some of the prices might be stale as I wrote this over the last week).

Thoughts on Current Holdings
Caesars Entertainment (CZR)
It all started with a nervous answer from Mark Frissora about hotel room demand in Las Vegas on an earnings conference call, but Caesars Entertainment has been cut in half in short order despite a few positive catalysts on the horizon: 1) the company is a rumored M&A target; 2) Mark Frissora, the much maligned CEO, is out as of 2/8/19; 3) legalization of sports betting rolling out nationwide, breathing fresh life into the company's regional casinos.  In October, Tilman Fertitta's Landry's made an offer to merge with Caesars at a $13 per share valuation, obviously that's a bit suspect as its more a reverse merger and the $13 is only apples-to-apples depending on how privately held Landry's valuation is determined.  But it showed interest/value in the mismanaged assets here, others have been rumored to be interested in Caesars although a deal might be too complicated to get to the finish line.  I'd like to see them pursue former Pinnacle Entertainment CEO Anthony Sanfilippo in the meantime, focus on refreshing their portfolio and pursuing the remaining low hanging fruit capex projects, but wouldn't mind a takeout, although not counting on it.  A word of warning, lots of leverage here via traditional debt (much of it floating) and their lease obligation with VICI Properties.

CorePoint Lodging (CPLG)
LaQuinta Holdings (LQ) was a nice small win earlier this year as I initially sold the lodging REIT spinoff, CorePoint Lodging (CPLG), on the day it hit my account for ~$28 ($14 pre-reverse split) per share.  I should have left it alone from there, but after CPLG's first quarterly earnings report came out and the stock traded down to about $20, I started buying and have been buying small amounts all the way down to where it trades today at $11.70 per share.  Why has it fallen so sharply?  I'm not entirely certain (which may be a red flag), 2018 results have been about in-line with what should have been expectations as the company recovers from the 2017 hurricanes and finishing up their repositioning efforts pointing to a strong 2019 recovery.  What at first looked like management sandbagging due to incentives to keep the price "down" on the first day of trading (in hindsight, more than double the current price, they'll end up paying a lot more in taxes than they should have), now just looks like a management team that doesn't know how to properly tell their story to investors (a big issue when you're a REIT and rely on raising capital to grow).  This is a strange asset for public markets, it has the second most rooms of any lodging REIT (behind industry behemoth Host Hotels (HST)) yet one of the smallest enterprise values.  The market is valuing their rooms at ~$40k, versus ~$150k and above for some of their peers in the limited service hotel segment.  It's trading at roughly 47% of fully depreciated book value, almost unheard of for an internally managed REIT with decent enough corporate governance.  If we conservatively estimate EBITDA at $215MM next year and exclude any remaining tax payments to be received from Wyndham Hotels or insurance recoveries, CLPG is trading at just 7.8x EBITDA versus peers a couple turns higher.  Again, this is a taxable spinoff without the two year safe harbor, if the share price doesn't turnaround quickly, I could see CPLG receiving pressure to put the company up for sale.

Donnelley Financial Solutions (DFIN)
We're up to 3 publicly unhappy shareholders (here, here and here) in "DFIN" (that's their new go-to-market brand to disassociate themselves from their former parent) as the market has grown impatient with their attempt to transition from a print based company to SaaS model.  Despite the market volatility, transactional volume in financial markets appears to be strong, several big unicorns are scheduled to come public in 2019 which should be positive for DFIN going forward.  Their top competitor in the print space, privately held Merrill Corp was sold in September, indicating there is an appetite for the declining side of the business.  Probably doesn't mean anything, but DFIN's sister spinoff, LSC Communications (LKSD), announced it is being purchased by Quad Graphics (QUAD) shortly after its safe harbor expired.  DFIN is trading at 5x EBITDA today and guided to being able to grow the topline low single digits over the next several years at their analyst day, if true, this business is trading too cheaply.

GCI Liberty (GLIBA)
In 2019, we could see the merger of GLIBA and LBRDA (maybe a spin of the TREE stake at the same time?) that could set the table for the inevitable but long awaited merger of Liberty's publicly traded Charter Communication stakes back into CHTR itself.  The GCI piece of GCI Liberty received some bad news earlier this fall when the FCC decided to reduce a subsidy payment GCI receives for providing communication services to health care facilities in the Alaskan Bush, a $27.8MM reduction that has a similar cut to EBITDA.  Much of the discount quoted for GCI Liberty assumes that GCI is worth what Liberty Ventures paid for it, however that might be a faulty assumption given Liberty Venture's need for an asset to complete their conversion away from the tracking stock structure (reasonably makes sense to have overpaid) and this news from the FCC.  But I continue to hold, Charter should have a good 2019 from a FCF standpoint as the merger integration of Time Warner Cable and Bright House Networks is completed and the capex spending subsides paving the away for more buyback activity.

Green Brick Partners (GRBK)
Even Dallas, Green Brick's home market, is now showing significant signs of a slowing housing market after years of growth, however GRBK's earnings are up 62% year-over-year, but that doesn't matter at the moment and the stock is down 37% year-to-date.  Green Brick is responding by pivoting to building more entry level homes in the Dallas area as millennials continue to move out of the basement and start families, but interest rates and student loan debt are impacting affordability.  The NOL is essentially gone opening up some M&A possibilities (no Section 382 restrictions), it is now David Einhorn's 3rd largest position (when formed GRBK was a rounding error for Greenlight Capital) and it trades for about 7x fully taxed trailing earnings or 80% of book value.  If the housing market is in for more of a pause than a true downturn like the previous cycle, then GRBK should do quite well from here.

Hamilton Beach Brands (HBB)
We'll know more about Hamilton Beach's progress after their 4th quarter earnings release, but HBB is one of those cases where a poorly performing business (in this case, retail chain Kitchen Collection) is masking the true profitability of the core small appliance business.  HBB as a whole is trading at 14-15x trailing net income, but if they could full extract themselves from the Kitchen Collection business, the core small appliances segment is trading at more like 11x trailing earnings which they expect to "increase substantially" in 2018 over 2017.  HBB has been actively managing Kitchen Collection's leases to the point where all their leases will soon be a year or less in term (essentially pop up stores) and they'll be able to reduce their fixed costs and get their losses under control.  There are some legitimate concerns about Amazon Basics/Alexa empowered devices entering this market, plus this is a family controlled company, so I'm not convinced HBB is an immediate take out target after their two year safe harbor period expires in September, but HBB is cheap enough to overcome these risks and if management executes on their long term growth plan it could be a significant long term winner.

Howard Hughes Corporation (HHC)
The slowdown in housing has hit Howard Hughes (WSJ reported on a Las Vegas slow down recently), its stock price is down over the last several years and it once again appears really cheap (similar to early 2016 when the oil downturn really hit Houston) at $95 per share.  HHC's net asset value is a bit abstract (I'd peg it at about $150-170) but it has almost certainly grown over the years and should continue to grow into the future as their assets mature.  The Seaport should begin to show its worth in 2019, I'd expect HHC to do some kind of transaction to monetize the asset, perhaps sell 49% to a partner in order to mark the asset for investors (e.g., Chelsea Market was bought by Google for $2.4B) and de-risk their asset concentration.  Management here is also incentivized to get the stock price moving, CEO David Weinreb put up $50MM of cash out of his own pocket to buy warrants exercisable at $124.64 per share on 6/15/22, or 30% higher than where it trades today.

KLX Energy Services (KLXE)
KLXE has gone on a wild ride since their spinoff from KLXI as oil prices took another leg lower threatening their business if O&G exploration companies back off their drilling plans.  Management here also abandoned their debt free balance sheet which initially appealed to me and levered up with $250MM of expensive 11.5% coupon debt in order to make an acquisition (reminder, same management built their energy business in 2013-2014 through a series of untimely deals before the bottom fell out in oil).  But I still like the incentives at play, management is taking their salaries in shares, its a taxable spinoff, KLXE has tax attributes that should shield much of their income, and they've guided to $190MM in 2019 EBITDA.  That puts their current multiple a bit above 3x, now that's somewhat misleading as another deal must be in the works, you don't raise 11.5% debt and only put half of it to work, but either way KLXE is exceptionally cheap if results pan out.  I've received a lot of feedback from people smarter than me in the energy space (low hurdle) that this is a bad business, people don't like their assets, it's a tourist trap for event-driven investors, etc.,  as a result I'm continuing to keep this one a small piece of my portfolio.

Liberty Latin America (LILA/K)
The perennial wait until next year stock, Liberty Latin America looks cheap at just ~7 EV/EBITDA with much of the hurricane recovery/noise behind them in Puerto Rico and FCF hopefully inflecting positive.  The story here generally remains the same as its always been, cable in the Caribbean/Latin America is under-penetrated along with a fragmented market featuring sub scale operators, while incomes are growing and the middle class is expanding.  Will 2019 be the year LILAK stops becoming a running joke and actually starts to work?  Let's hope so.

MMA Capital Management (MMAC)
At the beginning of the year, MMA Capital announced the sale of their management company and some other assets to Hunt with the publicly traded shares becoming an externally managed vehicle focused on ESG debt investments that resembles a BDC.  The remainder of the year was spent finalizing the transformational transaction and cleaning up the portfolio to free up additional capital to make additional solar energy loans.  Additionally, the company recently won shareholder approval to change their corporate structure from an LLC to a C-Corp which should make it eligible for index inclusion next year (a positive of not being a BDC as they're generally excluded from index funds).  I would also suggest a name change is in order, since the "capital management" company was sold and they are moving away from the tax credit business (MMA was the stock symbol under old the MuniMae name), something that signals green or ESG and less cage fighting is probably better to market the shares.  Either way, shares remain cheap at $25.25 when book value is approximately $35, the company and management themselves continue to buyback stock as well.

(They announced a name change today, they should have gone further with something that describes the new business strategy.)

Par Pacific Holdings (PARR)
Par Pacific's stock performance has been a head scratcher for me in recent months, it closed on a game changing acquisition of the only other refinery in Hawaii, an isolated market, for pennies on the dollar because they were the only available buyer for the asset.  Shortly after announcing the Hawaii deal they announced the acquisition of another refinery and related logistical assets in Washington state that would link their current two markets (Hawaii and Wyoming) together and provide additional opportunities for bolt on M&A going forward.  All while they've maintained profitability for many quarters in row now, seemingly hitting an inflection point in their roll-up strategy and have signaled to the market that their $1.4B NOL will finally be put to good use once the dust settles, yet it's trading at near multi-year lows.

Perspecta (PRSP)
Perspecta seems to be a recent victim of the government shutdown and could be an excellent opportunity for an investor looking to buy a cheap stock in an industry relatively insulated from the general economy.  PRSP is currently trading for 7.5x EBITDA, peers trade for 9-11x, the one risk most investors focus on is their largest contract ("NGEN") is being split in two by the U.S. Navy, management on the most recent earnings call mentioned they expect the services side of the contract will be as large as the current contract is today.  That reassurance plus general growth in government budgets should provide a floor to Perspecta's business as it moves forward as an independent business in an increasingly consolidating industry.

It looks like Shopko is going to file bankruptcy in the near future, possibly soon after the books officially close on the holiday season.  In November, SMTA took out $165MM in non-recourse financing against the previous unencumbered Shopko properties to "put a floor" under the valuation which looks smart now and they must have known something was in the works (their $35MM B-2 term loan will likely be worthless, but one rationale for providing that financing was to receive timely financials).  In their spinoff investor presentation, they laid out a $12.80 per share "NAV" for the MTA equity minus the preferred share that's likely still close to reality given where the other net lease REITs have traded in the meantime.  If Shopko is going to liquidate and the boxes SMTA owns end up being turned over to the lucky new lender, the reason for SMTA existing will be gone.  SMTA will owe a termination fee of ~$1.80+ per share if things are wrapped up within 18 months of the spin, but SMTA also has ~$2.40 per share in unrestricted cash after the special dividend.  There's potentially a fair amount of upside on a stock that trades around $7.25 today even in a Shopko bankruptcy scenario.

Spirit Realty Capital (SRC)
The parent and external manager of SMTA, Spirit Realty Capital (SRC), is now a vanilla triple net lease REIT primarily focused on single tenant retail properties.  Its portfolio looks very similar to peers like Realty Income (O), National Retail Properties (NNN) and STORE Capital Corp (STOR), its valuation however does not, SRC trades for just under 10x FFO, while those other three trade for 15-19x FFO.  SRC is less than half the size of the smallest of those (STOR), it might make sense for one of them scoop up SRC at a nice discount using their own shares as a currency.  If it decides to go it alone, at 13x FFO, it's a $47 stock, 35% upside compared to where it trades today around $35 (FYI -- SRC recently did a reverse split).

Wyndham Destinations (WYND)
What a roller coaster year for the timeshare industry, at one point all these stocks traded for 10-12x EBITDA, now its more like 6-7x EBITDA, amazing what a shift in market sentiment can do to an incredibly economically sensitive sector.  We always fight the last recession, but timeshares have remodeled their business to where they look less like a real estate developer and more like a hotel management company.  I expect these businesses to do better through the next recession, but the stocks will likely get hammered anyway.  I did some trading around my WYND position, bought some LEAPs and then sold my shares at a loss 31 days later to tax loss harvest.  If sentiment improves, shares could move up 50% if EBITDA multiples return to 8-9x for the sector, seems like a good bet if we avoid recession.

Wyndham Hotels & Resorts (WH)
Wyndham Hotels is the steadier business of the two Wyndhams, it features more of a franchise model compared to a franchise and management model of their larger peers like Marriott (MAR) and Hilton (HLT).  In the franchise model they take a percentage of revenue, in the management model it's a combination of revenue and operating profit, thus the franchise model should be more resilient to changes in economic conditions.  WH trades for under 10x EBITDA when it's closest peer in Choice Hotels (CHH) trades for 12.5x.

Mitek Systems (MITK), Northstar Realty Europe (NRE) and Voltari Corporation (VLTC) are all new additions and not much has changed since their original posts.

Portfolio as of 12/31/18:
Performance Attribution:
Closed Positions:
  • BBX Capital (BBX): I rushed into this one without fully appreciating how awful management has been, the BXG IPO was also a signal the timeshare multiples were at their peak.  I sold to free up some capital for other ideas, good timing, as the stock went a lot lower, but so did the rest of my portfolio.  An activist is now having fun with Levan and team over at, worth a read if you haven't seen it yet.
  • Dell Technologies Class V (DVMT): Enough ink has been spilled about Dell's unfair treatment of the tracking stock in Dell's recently completed Class V Transaction.  It was by far my biggest winner of the year, but still left a bad taste in my mouth of what could have been if Michael Dell had any integrity at all.  DELL shares might be cheap, but I have enough exposure to overly leveraged companies elsewhere in my portfolio, I closed out a few weeks prior to the deal closing.
  • iStar (STAR): Someone asked me about iStar in my NRE post, but to summarize here, I've soured a bit on the company, might come back to it at some point as it is extremely undervalued on an asset basis but hard to know when or how that asset value gets realized with the current management.  Also a bit concerning here is the commercial real estate finance book, much of it is construction and development loans to hotel/condo developers in formerly hot coastal markets like New York City and Miami.  A better way to own similar cheap exposure to the net lease and land development without the CRE loan book might be to barbell something like SRC and HHC together, both have managements I trust a lot more than iStar.
  • Tropicana Entertainment (TPCA): The deal with Eldorado Resort (ERI) and GLPI closed on 10/1, Icahn ended buying the Aruba property himself limiting the upside on the "uncertain amount" aspect to this merger arb, hard to say if he gave us a fair shake or not, but guessing not.  Either way, it worked out well and closed a couple months sooner than initially expected.
Disclosure: Table above is my blog/hobby portfolio, I don't management outside money, its a taxable account, and only a portion of my overall assets.  The use of margin debt, options, concentration doesn't fully represent my risk tolerance.

Wednesday, December 19, 2018

Voltari Corp: Tiny NOL Shell, Icahn Taking it Private

Voltari Corp (VLTC) is a tiny nano-cap (~$5MM today) and not actionable for many people, but it was once a mobile internet advertising company that pivoted to a triple net lease real estate strategy in 2015 after a rights offering where Carl Icahn gained control of the company.  Why was Icahn interested in the company?  They had somehow managed to rack up almost $500MM in federal NOLs and several hundred million in state NOLs.  Entities controlled by Icahn own 52.7% of the common stock and 98% of the preferred stock.  That preferred stock accrues interest at 14% (13% prior to 1/1/18) and has been paid-in-kind since inception, today the redemption value has grown to over $65MM, essentially wiping out the common equity over the last 3+ years.  Additionally, an Icahn entity is the lender on a $23MM revolving note used to finance the company's triple-net acquisitions, which there have only been three: 1) JPM Chase branch in Long Branch, NJ; 2) a 7-Eleven store in Flanders, NY; 3) and a more sizable office building leased to McClatchy in Columbia, SC.

One could say he's been slowly squeezing the value out of the company for several years and on 12/7, he delivered the final blow to equity holders, offering to buy the remaining 47.3% of the company he doesn't own for $0.58 per share or for a total of about $2.5MM.  For that $2.5MM, he'll presumably gain sole access to the NOL and can start putting it to real use ( VLTC hasn't generated taxable income since Icahn gained control).  I'm far from a tax expert, but I'm guessing either his preferred stock or the passage of the 3 year look back is enabling this move without busting the NOL.

He has a history of doing this sort of thing, Cadus Corporation (KDUS) was another Icahn controlled nano-cap where he bought a dozen or so luxury homes in south Florida into an NOL shell, it generated no revenue during this period and Icahn offered to take out the equity for $1.30 per share prior to the first property sale, eventually bumping it twice to the final takeout of $1.61 per share.  We could see a similar bump with VLTC, what's a few hundred thousand more to secure access to a $500MM NOL?  But I'm also not counting on it, there are only 4 board members, 2 of which are affiliated with Icahn including the Chairman, although he's somehow considered independent despite being on many Icahn controlled boards and owns zero shares -- there are no friends to minority shareholders here to provide much resistance.  Also, the equity (placing no value on the NOL) isn't worth anything after deducting the revolver and preferred stock.  Despite all that, given Icahn's history and recent moves to clean up his empire, I think the offer will at least hold with a slight chance of a bump to secure it getting done.  Today it trades for $0.50 per share, offering an absolute return of 16% over 6-9 months it'll take to complete.

Disclosure: I own shares of VLTC

Tuesday, December 11, 2018

Mitek Systems: Elliott Bear Hug

Mitek Systems (MITK) is a small software company that a decade ago invented the image capture technology enabling check deposit now embedded in almost every bank's mobile app.  The product is loved by both banks and their consumers, for banks it is much cheaper to process a mobile deposit than to maintain the ATM/branch infrastructure and for consumers they can make a deposit instantaneously from anywhere without needing to stand in line.  While growing -- Mobile Deposit is 65-70% of Mitek's business -- mobile check deposits only make up a small percentage of the overall number of bank transactions, however paper checks continue to decline in use and Mitek needed a second act for its image capture technology.  They turned to mobile identification verfication; to open a bank account in the U.S., banks need to complete a series of steps to "Know Your Customer" (KYC) and that includes getting a government ID.  If banks or other regulated entities want to source customers through their mobile app, they need a way to verify their identity, opening up another growth path for Mitek.  The user takes a picture of their government issued ID and a selfie, Mitek's software compares to the two to confirm a match and also ensures the government ID is valid.

It's an interesting business and a nice little growth story, but what makes it especially interesting is Elliott Management (via a portfolio company called ASG Technologies) has made a hostile bid for the company, first at $10/share and now at $11.50/share in cash, MITK trades a touch over $10 today.  Elliott is of course a famous large activist investor known for getting their way, I personally recall how quickly American Capital (ACAS) changed course and folded to their demands a couple years ago before being pushed into the hands of a strategic buyer.  Mitek is a much smaller company at ~$370MM market cap, no debt, and no controlling shareholder.  Until recently, the company didn't have a CEO or a CFO, presumably that's when Elliott smelled blood and made their initial bid for the company.  Prior to the bid becoming public, but after it was made privately, Mitek did a strange thing and established a shareholder rights plan to protect the NOL, despite the NOL being only $27MM and thus insignificant to the value of the company.  More likely they were trying to prevent Elliott from acquiring a significant stake in the company in order to buy time and possibly end up in the arms of someone of their own choosing.  Mitek issued a statement regarding the most recent $11.50 offer, in it they disclosed that "other parties have expressed interest in Mitek" and also disclosed that Elliott is looking to replace the board with its own slate of directors.  With the shareholder base turning over quickly to arbs and others sympathic to Elliott, management is likely overmatched here.

At current prices you have low teens upside to Elliott/ASG's $11.50 offer, with the potential for more if the board is able to squeeze out a third bid from Elliott or able to quickly find a white knight strategic partner willing to pay an even higher premium.  If not, the stock probably falls temporarily but with the growing business providing some downside protection as mobile deposits continues to grow and identity verification gains traction.

Disclosure: I own shares of MITK