Wednesday, February 24, 2021

Technip Energies: FTI Spinoff, Forced Selling, Asset-Lite Business

Technip Energies (THNPY, ADR in the U.S.) is a recent spinoff of TechnipFMC (FTI). Technip Energies is an engineering firm that specializes in large downstream energy infrastructure project management, think multi-billion dollar LNG facilities in remote areas, floating LNG megaships and refinery buildouts. This is far from my area of expertise (if I really have any), I've had a few missteps in energy related spins before, but I think it presents an interesting special situation opportunity because:

  • Forced selling by both index funds (FTI was dropped from the S&P 500 index earlier in February ahead of the spinoff) and U.S. domestic oriented managers that can't hold the Paris listed/headquartered Technip Energies.  One data point around forced selling, the shares closed today at €11.26 in Paris, but $12.01 in the U.S. ADR.
  • Complicated percentage of completion accounting that makes the business difficult to analyze that may lead to some valuation errors, or obscure the attractive economics of the business.
  • Technip Energies is a surprisingly asset-lite "people business" despite the cyclicality of mega projects, their backlog (€13B) for the next several years is in place, they're guiding to mid-single revenue digit growth over the medium term and thus have no immediate concerns about growth trailing off, yet it trades for a ~15+% FCFE yield with what's essentially a zero net debt balance sheet.
Pre-spin TechnipFMC was the result of a merger between U.S. based FMC Technologies (original FTI) and French based Technip in 2017, primarily done to formally combine the two's subsea business that they had previously tied together in joint venture. That subsea business is now the parent, TechnipFMC, which retains the name and FTI symbol, along with the dual listing between the U.S. and Paris. The spinoff, Technip Energies, is almost entirely a legacy Technip business and will be headquartered and primarily traded in Paris. Originally, the spin was only going to trade overseas, but in the end the company decided to also include a sponsored ADR that would be distributed to U.S. holders of FTI. But the ADR shares will trade over-the-counter and generally won't be eligible for U.S. based indices. I've covered some merger-spin combination in the past, they tend to be interesting, might be worthwhile to frame this in a similar way even though the spin was 4 years after, but strategically its similar.

Following the spinoff, TechnipFMC retained 49.9% of the ownership of Technip Energies with the intention to monetize that stake over the next 18 months to reduce debt and shore up the parent's balance sheet. While there will be some short term overhang, it also highlights that the parent didn't want to saddle the spin with debt as is typical lately in order to pay a dividend back to the parent -- FTI wants the spin to trade well to maximize the eventual sale proceeds.

To give some scale to the types of projects Technip Energies works on, here's their flagship Yamal LNG, one of the largest construction projects ever in the Artic. It was built to transport LNG from a remote Siberian peninsula, which didn't previously have road or sea access, to China.

Another is the Shell Prelude, a mega floating LNG facility that is longer than the Freedom Tower is tall, WSJ had an article about it last summer highlighting some of the difficulties of operating something the size of a mini-floating city during a pandemic.

With multi-year projects of this size comes some complicated accounting, Technip Energies operates with a large (~$3B) negative net working capital position.  Their clients pay them partially upfront but mostly along the way as milestones are met, but each periodic milestone payment is always ahead of work to be completed.  As a result, the company has a large "net contract liability" line item on the balance sheet that makes it difficult to analyze the company, one could take a view that as long as the company is growing that the NCL should be semi-permanent and give the company credit for much of the cash on the balance sheet.  I'm guessing some data sites and screeners will take this approach when coming up with an enterprise value for Technip Energies.
But for simplicity and conservatism, I'm going to say the balance sheet is basically in a zero net debt position, now if they stopped accepting new business tomorrow and put the business in run off that would be a bit too aggressive, but at the same time it is probably too conservative of a stance given their backlog and projected growth.

To put a valuation around the company, I took a free cash flow to the equity (FCFE) approach to neutralize the cash vs NCL:

15+% FCFE yield for a near zero net debt company with a strong backlog seems too high, I haven't spent a ton of time on comparables, but I think for an asset lite business like this it should be more around 10% FCFE yield, which works out to a $18+ stock price (for the ADR in USD).

Risks/Other Thoughts:
  • Building mega projects is an inherently difficult business, the work is often performed in remote areas, takes many years to complete and your clients tend to be politically exposed state run entities.
  • Some of their contracts are fixed price, which means Technip Energies takes a significant amount of risk in the projects coming in under budget and on time.
  • Client concentration is also high as you'd expect with projects of this size, 5 clients make up 73% of their backlog.
  • With TechnipFMC retaining a significant ownership position in Technip Energies, there could be a share overhang, so we might be only be partially through two of the three forced selling events.  First was the S&P 500 deletion pre-spin, then the ADR selling off from spin dynamics and U.S. mandate deletion, third will be when TechnipFMC fully exits their stake.  TechnipFMC has pre-sold €200MM worth of Technip Energy shares to BPI based on an initial VWAP, an investor in the business already.
Disclosure: I own shares of THNPY

Thursday, February 18, 2021

Acres Commercial Realty: Yet Another Name Change, fka XAN, fka RSO

Acres Commercial Realty (ACR) is the new name for Exantas Capital (XAN) which was previously the new name for Resource Capital (RSO), which I wrote up back in 2016. The situation is somewhat similar to back then, while not a home run, there's a fairly clear path to a 20-30% near term return. Acres is similar to other commercial mortgage REITs, they provide transitional CRE loans so that borrowers can reposition a property (the risk is somewhere between a stabilized loan and a construction loan), traditional banks have largely been pushed out of this market.

Back in 2016, C-III Capital took over RSO and rebranded it Exantas, C-III cleaned up much of the messier non-CRE assets that were in RSO back then and for a while the company was a clean transitional CRE lender that used the securitization market via CRE CLOs to finance their loans on a non mark-to-market basis. Later, C-III then expanded into CMBS (transitional loans are typically shorter term, CMBS usually has stabilized loans underneath and adds some duration to the portfolio) which they financed through daily mark-to-market lending facilities, unfortunately the CMBS market saw a steep market value drop in March/April 2020 as liquidity dried up. Like many other mREITs, Exantas faced margin calls and was forced to liquidate much of that portfolio at a significant loss. While not the intended strategy, after the CMBS portfolio was largely liquidated, the company is back to a straight forward transitional CRE lender.

Oaktree and Mass Mutual came to the company's aid in July, provided rescue financing via 12% 7 year senior notes that also came with common stock warrants for a penny. At the same time C-III exited stage left and sold the management contract to ACRES Capital (Oaktree owns a stake in ACRES) who took over as the external manager. The ACRES team is mostly former Arbor Realty talent, Arbor primarily focuses on multi-family lending, which I anticipate being the primary focus going forward for ACR, the portfolio is already roughly 50+% multi-family so it shouldn't be a significant transition for the portfolio.

Earlier this week, the company completed the rebranding process to Acres Commercial Realty and simultaneously executed on a 3-for-1 reverse split. Oddly, the rebranding, corresponding reverse-split and ticker change to ACR, appears to have triggered a bit of a selloff in the company's shares for no apparent reason other than maybe market participants didn't follow the change from XAN to ACR. The new ticker doesn't show up in some of the more popular free data sites, while it sounds odd, the shares have dropped from above $13 to below $11 (~16%) in the couple days when the rest of commercial mREITs have been essentially flat.

The capital structure is very levered, most of the debt is CRE CLO financing, the first two CLOs have an attractive weighted average interest rate of about 1.50%, the one they did last September is at 3.28% when issuance was just restarting in the securitization market. Spreads have improved since then, whenever they do their next deal, I expect it to come in significantly.  The company did pause their preferred dividend for a couple quarters, but are now current again.
How the business model works on the debt side, Acres will originate new CRE loans utilizing the secured financing facility (5.75% interest rate, roughly what they earn on their assets) and once they build up a large enough portfolio, they'll obtain term financing via the CRE CLO market at significantly better terms. Now that Mass Mutual (financing lender) is also a shareholder via the warrants, makes sense that the new origination channel will open and available to Acres to continue new loan production and grow the business again. Back of the envelope, I have the earnings power at about ~$1.50/year to the common, and since the company has stopped paying the common dividend, book value should have built since 9/30.

Additionally, the company put in place a $20MM share repurchase program (roughly 15% of the market cap) that will be put to use quickly:
On November 2, 2020, the board of directors (the “Board”) authorized and approved the continued use of the Company’s existing share repurchase program in order to repurchase up to $20 million of the currently outstanding shares of the Company’s common stock over the next two quarters. Under the share repurchase program, the Company intends to repurchase shares through open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934 (the “Exchange Act”).

Putting it together, book value has likely come up since 9/30 via earnings power and share repurchases, debt markets should be wide open to them as the new issuance CRE CLO market is surprisingly strong, especially to multi-family heavy portfolios.  I'm viewing this as more of a few month swing trade as the market "finds" ACR and their story, to potentially a bit longer if I want to stick around for a dividend reinstatement.  I'd put a target price at around $14-14.50, roughly 80-85% of where book value is likely to settle out.

Disclosure: I own shares of ACR

Tuesday, February 9, 2021

Aptevo Therapeutics: Positive Trial Results, Tang Capital Offer, Proxy Fight

This write-up is incomplete, it is a strange situation I don't fully understand but figured it was worth sharing in case any readers have a better idea of what's going on here, please comment.

Aptevo Therapeutics (APVO) is an early clinical stage biotechnology company (~$165MM market cap) that was originally a spinoff of Emergent Biosolutions (EBS) in 2016, which is how it came on my watchlist.  Aptevo was spun with a few commercial assets that were designed to provide a source of funding to pursue their primary platform, called ADAPTIR, I won't pretend to know much about it, but Aptevo has since mostly monetized any legacy assets and focused on developing cancer treatments utilizing their ADAPTIR technology.

An interesting series of events happened in a two week timeframe back in November for Aptevo:

  • On 11/3/20, Aptevo announced positive news on their primary asset's (APVO436) ongoing phase 1 clinical trial, a patient went into complete remission.
  • On the same day, 11/3/20, Tang Capital Partners started from zero and began buying stock indiscrimately at prices from $9.65 to $23.87, not stopping until they had purchased 42.5% the company in the span of 4 trading days.
  • On 11/8/20, Aptevo adopted a poison pill plan (too late!).
  • On 11/9/20, Aptevo announced a second complete remission in the same APVO436 phase 1 trial.
  • Then on 11/18/20, Tang Capital Partners offers $50/share for the remainder of the company they hadn't bought up the previous week, wild stuff.  Aptevo acknowledged the offer but has been mostly silent since then.
  • In December, they did update their shelf registration that includes an at-the-money issuance program, the stock took that news negatively as a sign management might pursue a go-it-alone strategy, or it could be negotiating tactics.
Tang Capital and their founder Kevin Tang are life-science focused investors, Kevin Tang is the CEO of Odonate Therapeutics (ODT) and chairman of La Jolla Pharamceuticals (LJPC), and those are only a couple of his current roles, he's had a long history of investing in, building, and running biotech companies both publicly and privately.  Clearly he has some expertise in the field and thought enough of Aptevo's positive clinical news to rush in and swoop it up (again, on the same day results were announced).

Today (2/9/21), news came out that Tang Capital is going to run a proxy contest to add Kevin Tang and one of his lieutenants to the board of directors and get the company to run a sales process.  

TCP is seeking to: (i) nominate, and hereby nominates, each of Kevin Tang and Thomas Wei (together, the “Nominees”) as directors for election at the 2021 annual meeting of stockholders of Aptevo, and at any other meeting of stockholders held in lieu thereof, and at any adjournments, postponements, reschedulings or continuations thereof (the “Annual Meeting”); and (ii) put forward the following advisory proposal for stockholder approval at the Annual Meeting (the “Sale Process Proposal”):


RESOLVED, that Stockholders of Aptevo Therapeutics Inc. (“Aptevo”) request that, in light of the pending offer to acquire the outstanding stock of Aptevo for $50 per share, the Aptevo Board of Directors immediately commence a process to sell Aptevo to the highest bidder, consistent with its fiduciary duty to maximize stockholder value.

Management owns about 5% of the company, they did re-strike their options earlier in 2020 and $50 would put all of those in the money.  Clearly, Tang thinks it is worth more than $50, I doubt he could get out of the position without crushing the stock and thus his investment, pot committed at this point and isn't going away.  There's a lot of execution and financing risk if management tries to go it alone, but I can see the view that if you've spent the last 4+ years getting to this point, you want to see it through on your own terms.  But then again, you're a public company and have a fiduciary duty to your shareholders.  This one is worth following, it's highly speculative with considerable downside, but I started a small position in it recently.

**2/10/20 Edit
I asked for some feedback and got it (thank you!), couple things I missed in the write-up as I thought they weren't material but potentially are very material to the APVO story:
  • Aptevo has a 7-year 2.5% royalty on the Pfizer's sales of Ruxience (in the US, Europe and Japan), a biosimilar drug of Roche's cancer drug Rituxan (top 10 selling drug of all time), sales just begun in Q2 2020, and have the potential to be quite significant.  Some light Googling and some expect peak sales of Ruxience to hit $1B by 2026 (towards the end of Aptevo's royalty agreement), depending how you think of the ramp to that point (or if that's realistic at all) the NPV of that royalty stream could be substantial.
  • Aptevo also has a 15-year royalty on the Medexus Pharmaceuticals' sales of IXINITY, a hemophilia treatment, in the United States and Canada.  The company received $30MM upfront and estimates the total proceeds (inclusive of the $30MM) will be $100MM.  Again, depending how you run a scenario analysis on the NPV of those milestones/royalty fee streams, could be quite significant to a company the size of Aptevo.
  • Aptevo has 436,844 remaining warrants with a strike price of $18.20, which if exercised would raise the ~$8MM in cash, and put the share count at ~4.8 million shares assuming the company hasn't raised additional capital through their ATM.  Tang's ownership percentage would then be approximately 37%.
Disclosure: I own shares of APVO