It has been a surprisingly great start to the year, a continuation of an almost straight line up from November -- my personal account returned 38.27% during the first six months, for a reference point the S&P 500 had a total return of 15.25%. The biggest positive performance contributors in the first half of 2021 were DigitalBridge Group (fka Colony Capital), MMA Capital, NexPoint Strategic Opportunities and PhenixFIN, the only significant detractor to performance in the first half was CIM Commercial Trust.
Despite the headline overvaluation in markets, the current environment seems ripe for special situation investing. There is a post-recovery mess to be cleaned up, companies will look around in the changed operating environment and likely need to be consolidated or otherwise restructured, split up, taken private, etc.
Thoughts on Current Positions
- After my update post on MMA Capital (MMAC), I kept thinking as long as MMAC's capital partner was willing to continue contribute to the Solar Ventures after the February ERCOT storms, their problems were likely only temporary. I bought more thinking those with the most information regarding the problem assets were continuing to increase their exposure and might be a possible exit for MMAC. On 5/24/21, MMAC announced that Fundamental Advisors (their capital partner) would be buying the company for $27.77/share in cash. The company didn't run a full sale process, the merger agreement includes a 40 day go-shop period that expires next week, the deal premium to the prior day's trading price was certainly a nice surprise but the deal is being done at a fairly cheap multiple to book value. Given the structure of the joint ventures however, it seems unlikely that someone else would make sense as a buyer, but I'm holding through the go-shop period at the off chance there is an overbid.
- BBX Capital (BBXIA) has a current tender offer outstanding for $8/share, the 3/31 book value is a little over $16/share and likely reasonably higher than that when they report 6/30 after selling some real estate at a gain, bringing IT'SUGAR out of bankruptcy and just general covid beneficiary tailwinds of their businesses (mostly Florida real estate development). For me this situation seems similar to others over the years, management's reputation to abuse minority shareholders causes the stock to trade at a considerable discount which then incentivizes management to continue to transfer wealth to insiders. I won't be tendering shares this time around as I could see the stock trading higher after the tender is complete, it will be accretive to book value, and I doubt it will be the last time they attempt it. For me, this situation is a combination of DVMT (reflexivity in how the market views management and it encouraging management to close the valuation gap for themselves), TPCA (tender offer on an illiquid OTC stock, afterwards shot up) and ASFI (family controlled, disliked management that eventually took a company private that had no business being public, essentially using cash on the balance sheet to do it).
- For the next two I'm going to outsource to a couple other posts:
- My thesis on ECA Marcellus Trust (ECTM) in the last portfolio review generated a little bit of chatter, my liquidation thesis turned out to be wrong and I got lucky with a natural gas rally which has turned the tiny trust right side up again. Here's a great explanation of the current thesis here, I might exit after it flips to long term gains for me as the thesis changed and I'm not a great commodity investor, but that post is worth a read if you're interested in ways to invest in natural gas.
- After the MMAC deal closes, Franchise Group (FRG) will be my second largest holding, it is not exactly an event-driven name anymore, it graduated to a jockey bet on Brian Kahn, who recently bought a million shares in the open market. Modeling the company is a bit difficult as there's constantly moving pieces, but Michigan Value Investor over on Seeking Alpha did a nice job of presenting the current situation today.
Previously Unmentioned Positions
- Capitala Finance Corp (CPTA) was another "ADL" suggestion, it rhymes with other ideas I've done well with over the years, a BDC (can be any externally managed YieldCo) that went astray with its previous manager, cut the dividend, the mostly retail investor base fled and it trades at distressed prices, new manager comes in to right the ship and eventually reinstates a market dividend. With Capitala, the new manager is Mount Logan, an affiliate of BC Partners which manages Portman Ridge (PTMN), a BDC that was once KCAP Financial, BC Partners has gone on to consolidate three BDCs into PTMN over the last two years. They have a playbook and have executed it reasonably well, this situation is slightly different as they're just taking over the management contract, possibly because this parallel tracked another PTMN acquisition in Harvest Capital (HCAP, I did own it for the arb). But I think the results should mirror an acquisition (and might become a formal one at some point), albeit over time as they'll reinvest the portfolio much the same way PTMN is managed today. CPTA trades at 55% of NAV, PTMN is around 80%, that discount probably narrows.
- My biggest performance detractor this period was CIM Commercial Trust Corp (CMCT), the original thesis of a proxy battle being either conceded by management or won by activists has been thwarted as the company went ahead with a rights offering at ~40% of their own stated NAV (same NAV that serves as the fee basis amount for their management fee). It shows incredible distain for minority shareholders, I can't imagine the board won't get sued. The rights offering, along with getting booted out of the Russell may create some technical selling right now, so while I sold a few days after the rights offering was announced and still have a few days to go to avoid cancelling my tax loss, CMCT could be an attractive post-rights recovery swing trade if that's your thing and you can stomach the management team here. Still surprised CIM damaged their reputation for this small sleeve of their overall business.
- I did the buy-write (June expiration) strategy on Pershing Square Tontine Holdings (PSTH) that was suggested by Andrew Walker last December, it worked out largely as planned. As everyone is well aware, Bill Ackman announced a complicated transaction with Universal Music Group that will also create two other securities. I don't have a strongly held opinion on UMG, there is a lot of great analysis going on around it on Twitter and elsewhere, but for me how the trade was structured, I have short term gains from selling calls and now a loss on the PSTH shares. It makes sense for my tax situation to sell PSTH to offset some of the income generated, then re-evaluate as we get closer to the transaction closing and the three pieces being distributed later this fall.
- The Medley LLC (MDLQ/X) bankruptcy is getting dicey, it appears the proceedings have pivoted to a liquidation and wind down of the company versus trying to pursue a going concern restructuring with Medley Management (MDLY). In an asset management business, there aren't a lot of assets with value other than the management contract revenue streams, with Medley's separately managed accounts fleeing and Sierra Income Corporation pursuing strategic alternatives (there is no termination fee on the Sierra contract), it appears there is a little value left at Medley LLC or Medley Management. MDLY has some meme like day trading happening in it, I sold my baby bonds for a negligible gain on a day when MDLY spiked. I'll still follow the situation, but mostly just for curiosity.
- I have a few themes that I tend to like, one is when a clinical stage biotech misses on its primary candidate, sometimes the stock will drop below net cash and the company puts itself up for sale. Often they'll do a reverse merger with another pre-revenue biotech, so by buying the cash shell you can get in before the "IPO pop" of the new exciting company. That's essentially what happened with Catabasis Pharmaceuticals (CATB), Catabasis also got wrapped up in some of the speculative retail trading in the first quarter, but on 1/29/21 Catabasis announced the acquisition of Quellis Biosciences, the stock popped and I sold that morning (a bit too early, hard to put on my day-trader hat and time these perfectly right). Unfortunately, the market has seemed to catch on to this trade and other failed biotechs haven't traded down quite as cheaply recently.
- I exited Five Star Senior Living (FVE) over concerns about the RMR relationship, FVE has a lot of cash on its balance sheet for an asset-lite management company, wouldn't be surprised if RMR makes an acquisition within FVE to increase their revenue share agreement instead of doing a buyback or some other capital return that would benefit minority shareholders. Management at FVE clearly had their hands full during covid, but a year on since the recapitalization and they still haven't really laid out a clear capital allocation plan.
- Perspecta (PRSP) was a 2018 spinoff of DXC, basically a replay of CSRA, both of which got sold shortly after the two year spinoff window lapsed. Last year, I sold PRSP common stock near the bottom in covid as it went down less than others due to the government link, but jumped back in with naked calls on the rumors it was being shopped, got lucky, Perspecta was taken private by Veritas Capital, a PE firm that already owned a significant stake.
- I closed both sides of the Madison Square Garden (MSGS/MSGE) split in the last month. MSGS is kind of cheap on an NAV basis, depending on how large of a "Dolan Discount" you think it should receive, but I'm just finding better more actionable opportunities. Premier market sports teams are a scarce asset that should hold their value over time, public markets are volatile, might make sense to sell puts occasionally when the discount gets particularly wide. MSGE is a grab bag of development assets that I typically like but I just can't get comfortable with the Sphere project. It's a bet the company style project, it could work, but reminds me a bit of the mess with the Seaport for Howard Hughes, delays, might have to get repurposed and shift strategies part of the way through, etc., add in the strange deal with MSGN, I decide to exit.
- Macquarie Infrastructure Corp (MIC) worked out pretty quickly and about as expected, rather than wait around for the big distributions and potential headaches, I sold and moved on, might return if there is forced selling after the Atlantic Aviation deals closes and the company converts to a partnership. If you run the IRR based on the expected distributions of $37.35 for AA and $3.83 for MIC Hawaii, you get a healthy upper teens IRR, so it could still be a good liquidation play depending on your tax situation.
- Acres Commercial Realty Corp (ACR) also worked out pretty quickly, this was a strange mispricing potentially because of a name change, but similar to CPTA and others, it was a broken mREIT that got rescued with a new manager.
- Ladder Capital (LADR) was another commercial mREIT recovery trade that has mostly played out. The company was hyper conservative over the last year raising a lot of cash, letting their short duration loans roll off, while at times a bit frustrating as a shareholder, it validated the original thesis during the covid-crisis that their investment/loan book was high quality. I'll continue to listen to their conference calls as Brian Harris runs a fun fireside chat format where he provides his views on all corners of the real estate market.
- As mentioned in my year end 2020 post, I was selling calls against my Wyndham Hotels & Resorts (WH) position until it got called away, it did shortly after in February as the reopening trade has hotel franchise/management companies trading above where they were pre-pandemic.