Year End 2021 Portfolio Review

Thank you for reading, hope you're having a good holiday season and thanks to those who have reached out with ideas, commented on write-ups, told me I'm stupid, or corrected me over the years, I genuinely appreciate it.  Again, I don't manage outside capital, the blog portfolio is my personal taxable account and is managed as such, my results aren't comparable to any professional's performance and I simply use the S&P 500 as a reference point, not a real benchmark.  I have a good stable day job, I don't live off of this portfolio (never pulled money from it, although I will likely have to withdraw funds early next year to pay taxes), so my risk tolerance is going to be naturally higher than others.  

With that preamble out of the way, my account returned 74.99% in 2021 versus 28.71% for the S&P 500, and an IRR since inception of 29.12%.  

Some of my biggest dollar weighted winners were BRG calls, LAUR (mostly also via calls that have since expired), and then holdover ideas written up in previous years like FRG, DBRG, and MMAC.  My biggest dollar weighted losers were LYLT (caught that falling knife post spin a little too quick), APVO and CMCT.

Surprised myself on how much I wrote/posted this year, maybe not exactly a good sign as its lead to a lot of turnover, possibly overdiversification, but I just found so many interesting special situations (or at least I thought so at the time) and continue to do so. It can't be this easy in the future, there's a lot of speculative activity in markets, some could (rightfully) accuse me of that as well.  Great results never really feel "real" until the next downturn, but I'll keep my strategy going and continue to push forward.

Thoughts on Current Holdings

I wrote these intermittently over the last two weeks, if some of the share prices/valuations are stale, I apologize but they should be directionally right, mostly just in random order in just quick elevator pitch style:

• BBX Capital (BBXIA) continues to look too cheap despite surly management, proforma for the recent private market purchase of Angelo Gordon's shares (slightly disappointing since they might have been keeping management honest here), I have the book value somewhere around $21/share and it trades for $10/share.  For that price, even after all the buybacks, you get ~$6.50 in cash plus another ~$4.80 in the receivable from BVH which should be money good, that more than covers the market price without all the Florida real estate and other businesses.  They recently put out a new investor presentation that shined light on the Florida real estate that's worth looking at, but again, market cap is covered by cash and securities here.
• Accel Entertainment (ACEL) is the best part of regional casinos, the slot machines without the worst part, all the capex and lease payments.  Their acquisition of Century Gaming unfortunately didn't close this year, to me it sounded like a management misstep or unfamiliarity with cross state border acquisitions.  But ACEL announced a big buyback ($200MM on a $1.2B market cap), it trades at roughly 8x EBITDA proforma for the acquisition, wage inflation should put more discretionary dollars in their client's pockets, a few more states are talking about legalizing VGTs, the shares seem pretty cheap to me.
• Howard Hughes Corporation (HHC) is my perennial value trap, but the pitfall of their diversified real estate model is also a benefit, the company is attempting to reposition the narrative back to a land developer for home builders and building sunbelt apartments.  They recently purchased a massive plot of land west of Phoenix that apparently has a 50 year development life and will add potentially logistics/warehouse and single family rentals (they're also building these in their Bridgeland MPC) to their product mix.  In disposition news, this week the Wall Street Journal is reporting that they've sold 110 N Wacker in Chicago for more than $1B (HHC has JV partners here, the property has debt, but that exceeded my expectations for a covid office sale).  They're still too heavy on office for my liking (about 50% of NOI) but have essentially stopped new development in that sector in favor of covid beneficiaries.
• PhenixFin (PFX) is frustrating to me, this company shouldn't exist, activists won control of the company last year (then called Medley Capital or MCC) and internalized the BDC.  Since then, they've mostly let their legacy investments roll off and invested the proceeds into mREITs.  My original thesis was me speculating that this would be sold to another BDC, that hasn't happened, in their recent FY22 results press release PFX announced the formation of an "asset-based lending business engaged in the gem and jewelry industry" and highlighted $490MM in net capital loss carryforwards for the first time that I can remember.  Neither is a sign that they're selling unfortunately, but I might be, this is no longer a strong conviction holding but not expensive at ~70% of book value (essentially unlevered, small net debt position).
• NexPoint Diversified Real Estate Trust (NXDT) is unfortunately still in the process of converting from a closed end fund to a REIT, the process has dragged on a bit longer than expected, but the backdrop for NXDT's assets continues to improve in the meantime and NAV continues to march slightly higher (~$23, trades for roughly 60% of NAV).  The thesis remains mostly the same, this will starting reporting as a REIT, be eligible for index inclusion (including broad indices, BDCs and CEFs are generally excluded from market indices since they're considered funds), and start attracting a REIT investor base and multiple.  On the negative side, this is another manager with a poor reputation, and potentially has some governance issues with NXDT owning other NexPoint affiliates and some fee double dipping.  NXDT continues to be one of my favorite ideas.
• Jackson Financial (JXN) has gone up in a straight line since its spin from Prudential PLC in September.  Jackson is the largest variable annuity provider in the U.S., it should have strong demographic tailwinds as baby boomers retire and rollover their 401(k)s, but the financials are a total black box and these annuity companies usually trade extremely cheap for that reason.  One way to get a valuation re-rating is via share repurchases and cash dividends, JXN was trading at just 28% of book value at the time of my write-up, since then they've bought back approximately $185MM in stock and announced a $0.50/share quarterly dividend (~5% yield).  I'm not a strong enough at accounting to figure out JXN's financials, the stock is up 55% since the spin (might be some more near term upside via index buying, this was a foreign-to-US spin), I'm not in a rush to sell it but I'm not a long term holder either.
• Orion Office REIT (ONL) is a shaky low conviction hold for me, the setup of being a merger-spin out of a heavily retail owned stock and the resulting forced selling tempted me enough to start a position.  A dividend initiation should help recruit a little wider investor base in the near future, but my current thought is I'm unlikely to own this for the long term as I'm still personally bearish about return to office.  There are countless examples, but near me, Allstate recently sold their suburban headquarters campus to investors who plan on turning it into logistics/warehouses  -- when old line type companies are making drastic switches away from large corporate campuses, makes me worried for the sector, especially with an average lease term under 3.5 years.
• Sonida Senior Living (SNDA) is a recent buy after they completed an out of court restructuring transaction, this is a bit of a jockey bet in that I like the Conversant Capital team and what they've done thus far at INDT, here they control the company and have started to implement their new business plan with the acquisition of two Indianapolis area senior housing properties.  Senior housing has a lot of operating leverage, if occupancy levels recover to normalized levels and the demographic wave finally materializes, Sonida could do very well over the next 3-4 years.
• My other senior housing play is the preferred stock of Regional Health Properties (RHE-A), which briefly attempted a similar out of court restructuring by proposing to exchange the preferred stock for common.  The largest preferred shareholder comically shot it down.  This company is a bit of a mess, they recently had the State of Alabama pull the license of one of their biggest tenants a couple weeks ago, looks like RHE might be taking over the management of another one of their facilities here shortly.  That temporary measure appears to becoming more permanent in their other managed facilities.  The company is in a tough spot, it is not bankrupt but the capital structure doesn't work and there's no easy way to fix it since the worthless common stock need to approve of an exchange.
• Unfortunately, as soon as I hit publish on my Altisource Asset Management (AAMC) write-up, the shares were delisted from the NYSE (no direct reason given) and have yet to trade since.  I'm a bit surprised/disappointed that the company hasn't made any public announcements regarding an attempt to regain NYSE (or other listing) eligibility.  One can only hope (pray?) that they're working behind the scenes on an acquisition and settlement with Luxor that would get the shares trading again.
• HMG/Courtland Properties Inc (HMG) is a nano cap liquidation where their largest asset is a newly developed Class A multi-family property in Fort Myers, FL.  The company recently released a proxy statement to approve the plan of liquidation and quoted a $20-$30/share liquidation value, the shares still trade in the middle of that range, but I think the value is closer to $30 (although I probably wouldn't recommend initiating a position here, the liquidation may take a long time).
• The only previously undisclosed holding I have are some recklessly speculative near term call options in Nam Tai Property (NTP).  Nam Tai has a long history, it pivoted from an electronics manufacturer to a property developer when Shenzhen experienced exploding growth.  IsZo Capital won their year long legal fight against prior management, they've put out a number of $40/share in intrinsic value, the stock trades at $11/share after prior management experienced a margin call and DB foreclosed on their shares.  IsZo by contrast has been adding to their stake.  There's a lot of risk here, China real estate is obviously shaky, excuse my gambling, again its a personal account, don't recommend this for others.
• Bluerock Residential Growth REIT (BRG) entered into a transaction with Blackstone to buy their multi-family properties and lending book for $24.25 per share, plus BRG is going to spinoff a single family rental REIT, "Bluerock Homes Trust", where BRG got a third party valuation firm to put a $5.60 NAV per share on it.  BRG is currently trading for $26.36, the deal with Blackstone is almost certain to close, thus the market is applying a pretty steep discount on the single family REIT.  It will revert to being an externally managed by Bluerock (BRG started as externally managed, later pseudo-internalized), who prior to this transaction didn't have a great reputation, but obviously this was a great result for shareholders and merger arb types might want to look at the spin (expected Q2 close).
• I wrote up the mess of a situation at Transcontinental Realty (TCI) and parent American Realty (ARL) earlier this week.  I had one big mistake, I thought the $134MM of notes receivable were just mortgage loans consolidated from Income Opportunity Realty (IOR), that's not the case, so the fair value of TCI is ~$15 higher than the $60/share I threw out there.  IOR is maybe the strangest little micro cap I've looked at, almost all of the assets of the company are a loan to Pillar, IOR's external advisor, not sure how that's okay legally and might be why it is being challenged in a shareholder lawsuit.  IOR is probably worth a closer look (won't take you long).
• There's not much to update on PFSweb (PFSW) which I wrote up in August, but only because the company hasn't filed its Q2 or Q3 financials due to "additional time and work needed to meet the SEC reporting and accounting requirements for its LiveArea divestiture."  That's not confidence inspiring, but this is like some of my other "informal liquidations" where they've sold one business unit, the other is for sale, the situation is fairly de-risked with a large cash position.  I continue to hold awaiting news but my conviction has lessened.
• Another informal liquidation, Laureate Education (LAUR), has mostly worked out to plan, the sale of Walden University closed and they've since paid out $7.59/share in special dividends.  They've also collapsed the dual share structure.  It is now a purer play on Mexico and Peru, my best guess is this is not the end state and we'll see a final sale of the remaining assets once covid subsides and/or the political climate in Latin America improves.  Most of my exposure rolled off earlier in December when my calls expired, now just hanging onto a smallish position to see how the rest plays out.
• Rounding out the informal liquidations, not much has changed at Advanced Emissions Solutions (ADES) since my write-up, the did report Q3 earnings and have an adjusted ~$5/share in net cash against a $6.50 stock price.  They state that strategic alternatives are continuing for the remaining activated carbon business, hopefully that means a sale and not some transaction involving ADES using the cash for an acquisition.
• Now to a formal liquidation, Luby's (LUB) has exceeded my expectations, shareholders received a $2.00 initial distribution on 11/1, which was most of my cost basis.  The most recent estimate of liquidation proceeds is $3.00/share, shares trade slightly below that estimate, others have suggested there's a fair amount of juice left (this author thinks a base case of $3.30, which sounds reasonable), I'm willing to just let it play out as the company has indicated it should be mostly wrapped up by mid-2022.
• I own two tiny natural gas trusts, with ECA Marcellus Trust I (ECTM) I got lucky and now have received over half my basis out of the partnership this year in distributions, it wasn't my original thesis of a liquidation, but I'm content for now letting it runoff via distributions much the same way as a liquidation.  With SandRidge Mississippian Trust I (SDTTU) the assets have all been sold back to SandRidge (SD) but there is a shareholder lawsuit holding up the final distribution of proceeds to unitholders.  The trust has since delisted and stopped filing with the SEC, so its fallen into that dark stage and trades erratically at irrational prices while we await final resolution.
• I found the Golar LNG (GLNG) pitch on Andrew Walker's podcast interesting, but probably not for me, but did make me think about my own holding that I've honestly sort of forgot about in Technip Energies (THNPY).  Technip Energies is the E&C for many of the largest LNG projects around the world, and should benefit from many of the same LNG as a transition fuel themes.  There are two remaining catalysts post spin, first parent FTI does still own ~12% of TE and plans to sell (removes the overhang once they do), and second, Technip Energies will be initiating a dividend next year (that was the plan all along) which could open it up to a wider shareholder base and semi-similar to JXN, cold hard cash might relieve some concerns around the complicated accounting.
• Logan Ridge Finance Corporation (LRFC) is similar to PFX in that it is a BDC that doesn't pay a dividend (I believe they're the only two credit BDCs that don't pay dividends).  BDCs aren't included in indices and if it doesn't pay a dividend, it is hard to attract regular yield-focused retail investors, so its limited to a small subset of investors willing to play in these ponds.  LRFC was recently taken over by BC Partners, they're in the process of repositioning the portfolio to generate yield and restore the dividend, that'll likely happen in the first half of 2022 and I expect the discount to NAV to decrease (trades for 58% of NAV today).
• Atlas Financial (AFHBL for the bonds) is a covid recovery play on taxis, limos and ride sharing drivers returning to work and a business change from a risk taking insurance provider to more of an asset-lite agency model.  I originally didn't like the RSA plan for the bonds, but the alternative plans don't seem to have gone anywhere, so I'm happy to change my mind and support the RSA here even though it bifurcated the creditor group.  The key line in the Q3 earnings release was "Our current in-force business is approximately 6% of what we underwrote as a carrier in 2018, and given current trends we feel there is considerable room to recapture business over time".  Even if they get only a portion of that business back, should make the bonds money good over time.  
• During the worst of covid, I bought some LEAPs on Marathon Petroleum (MPC) as a proxy for Par Pacific (PARR) since long dated options weren't available on the later.  Those MPC calls expire next month and I'll take profits, with PARR I've reduced my position throughout the year and might sell the rest early next year, I've owned it for 6-7 years and it has gone nowhere, they haven't touched the NOLs, just a difficult business that I probably don't understand as well as I should.
• I've held Liberty Broadband (LBRDK) through a few iterations, bought in prior to the General Communications deal with the old LVNTA as a merger arb, owned it through its time as GLIBA, I'll continue to hold.  Maybe this is the year CHTR cleans up their ownership structure and takes out Liberty Broadband?
• INDUS Realty Trust (INDT) will similarly just be in my tuck it away and forget about it pile for now, it is a logistics/warehouse REIT that has recruited much of the old Gramercy Property Trust (GPT) team, with the former CFO, Jon Clark, taking over at year end to round out things out.  The tailwinds are pretty clear, and with a relatively small asset base and experienced team, they can be "sharp shooters" as they describe it, pick and choose smaller deals the likes of Blackstone can't be bothered with to assemble a portfolio.
• Some of my bigger positions now are just semi-jockey plays in industries I semi-understand (start out as special situations but then "tripped into" a good management team), Green Brick Partners (GRBK) continues to grow like a weed, CEO Jim Brickman manages the business like a private company, he's not afraid to switch strategies, lately that means heavily investing in land in 2020 and building a lot of homes on speculation in 2021 to take advantage of rising prices.  With DigitalBridge (DBRG), there's continued M&A in the digital infrastructure space and its seems like CEO Marc Ganzi can raise unlimited amounts of money at this point, so I'm content to just to go along for the ride.  Franchise Group (FRG) has grown into my largest position, it is hard to believe that CEO Brian Kahn has created so much value in a short period of time, especially after his gaff with Rent-A-Center (RCII) when he forgot to send in an extension notice triggering the termination of that deal.  I'm content to just sit on these three for the longer term and defer the taxes.

Closed Positions since 6/30

• I briefly owned Loyalty Ventures (LYLT) for a month or so following the spinoff from ADS and got sliced up trying to catch the falling knife, it ended up being my biggest single performance detractor for the year.  But it is too early to tell if I completely misjudged the business quality but the stock was punished early, sold off from nearly $50 in the when issued market until below $30.  The CEO has been buying shares, I'll revisit it at some point.
• I also only briefly owned Franklin BSP Realty (FBRT) following their reverse merger with Capstead Mortgage Corp (CMO), my math was wrong and the upside was too small in the first place.  FBRT is probably an interesting buy for some income investors, the management team has a good reputation and has managed the REIT well privately, but for me it was too small of a position and I moved on.
• Condor Hospitality Trust (CDOR) worked out well but I probably could have traded around it better.  After only selling their assets to Blackstone, there was a trading day or two there where some uncertainty existed around the true net asset value per share.  And then this week it traded at near the liquidating dividend, I sold a couple weeks ago, but those that bought this week might end up with a free look at whatever is remaining once the corporate shell wraps up.
• CorePoint Lodging (CPLG) didn't work out very well, I made a mistake and missed the IRS payment that had to come off the top as well as that the new buyer would want to rid themselves of the Wyndham (WH) management agreement.  I'm sort of glad this will be private again as I've had it wrong now multiple times.
• LGL Group (LGL) got caught up in the "high redemption, low float SPAC" trend that lasted a few weeks.  LGL was invested in the SPAC sponsor of DFNS, DFNS had options available on it and when 90+% of the SPAC's shareholders redeemed for trust value, the newly public IronNet (IRNT) became a meme stock due to limited float and options/gamma squeeze possibilities.  I sold my warrants I held into that madness for a gain.  The company is doing a spinoff of their operating business in Q1, I plan to revisit early next year and might re-take a position.
• Communications Systems Inc (JCS) also seemed to get caught up in some strange day trading dynamics on the day it announced their initial pre-merger $3.50 dividend that well known to anyone following the company.  But the stock spiked from $6.79 the day before to over $9 the next day and got as high as $10 the week after that.  I didn't top tick it or anything, but did take advantage of that bit of luck and sold my shares.  The company still hasn't complete its merger with Pineapple Energy, having recently moved their outside merger date to 3/31/22.  The shares trade pretty cheaply today if things go to plan (but thus far they haven't), I plan to revisit it again early in 2022.
• Retail Value (RVI) I sold shortly after the large liquidating dividend as I didn't feel like I had a good grasp on the remaining value of the stub.  There's been some good discussion in the comments section that has continued, which I always appreciate and I might revisit this one as well as the liquidation is near its end.
• The MMA Capital Holdings (MMAC) deal closed as anticipated.

Performance Attribution

Current Portfolio

Additionally, I own CVRs or non-traded liquidation trusts in BMYRT, OMED, IDSA, PRVL

No money was added or withdrawn during the year (but I will likely need to withdraw funds in 2022 for taxes).  My leverage is particularly high at the moment, not a market call, more a result of trying to delay some gains into the new year for tax planning purposes.  On average, I was probably 115-120% long in 2021.

Disclosure: Table above is my taxable account/blog portfolio, I don't manage outside money, and this is only a portion of my overall assets (I also have a stable job, not living off this money).  As a result, the use of margin debt, options, concentration doesn't fully represent my risk tolerance.

BRT Apartments: Another Sunbelt Multi-Family REIT with Governance Issues

I didn't mean for this to be a mini-series, but as I was looking through ARL/TCI I remembered another REIT that I looked at years ago, BRT Apartments (BRT), that fits as an addition to the "sunbelt multi-family M&A craziness" themed basket.  BRT Apartments is primarily a class B, value-add, garden style apartment portfolio in the southeast and Texas (35 properties, ~9500 units, ~$1150/month rents, loosely similar to NXRT's portfolio).  

BRT also shares some similarities to TCI but thankfully is a little simpler, it owns both apartment buildings directly and through unconsolidated joint ventures which makes the accounting a bit challenging to untangle (typical REIT investors shun complexity), and it is also family owned with the Gould family owning ~25% of the stock.  The founder, Fredric Gould is 85 and still a member of the board, his two sons hold executive positions including one that is the CEO, and a cousin is also involved as an EVP.  The governance issues here don't seem as egregious as ARL/TCI but maybe on par with BRG.  The Gould family does have a shared services agreement with their family office that provides "investment advice and long-term planning" and other services to the company (sounds like something an internal REIT shouldn't need to outsource), which has averaged about $1.4MM in each of the last several years.  BRT also uses a property manager for some of their properties that is wholly owned by the Gould family.  The Gould's also previously managed the company via an external asset manager "REIT Management" but this is now technically an internally managed REIT.

While I haven't seen any press leaks regarding BRT running a sales process, I'm just going on the assumption that every smallish sunbelt apartment REIT is receiving inbound calls from bankers and private equity shops kicking the tires, effectively all are probably evaluating strategic alternatives.  I'm going to keep this one quick (BRT has a long history, was previously a lender to multi-family pre-GFC, foreclosed on properties, became the owner, etc, but now pretty clean, just sunbelt multi-family apartments), but if you break out the two baskets:

The left side is the 8 apartment complexes they own outright with the NOI being Q3 annualized numbers and the right side is the 27 apartment complexes they own through various joint ventures and their proportional NOI and mortgage debt as disclosed in their supplement package.  The quirk I'm a bit unsure of is for the unconsolidated properties I'm using a 5.0% cap rate just for complexity/limited disclosure of these JVs (there is minimal other obvious difference between the portfolios).  BRT has been trying and occasionally been successful buying out their joint venture partners and presumably a financial buyer would need a little extra juice to go through a similar process although it's not uncommon for non-100% interest in properties to trade.  The problem/lack of disclosure is in how these JVs are structured, for example BRT might own 80% of the joint venture's equity but their minority partner might get a preferred return and these terms are only disclosed at a very high level (if anyone is familiar with the details, please let me know):  

Joint Venture Arrangements

The arrangements with our multi-family property joint venture partners are deal specific and vary from transaction to transaction. Generally, these arrangements provide for us and our joint venture partner to receive net cash flow available for distribution and/or profits in the following order of priority (in certain cases, we are entitled to these distributions on a senior or preferential basis): (i) a preferred return of 9% to 10% on each party's unreturned capital contributions, until such preferred return has been paid in full; and (ii) the return in full of each party's capital contribution. Thereafter, distributions to, and profit sharing between, joint venture partners, is determined pursuant to the applicable agreement governing the relationship between the parties. Generally, as a result of allocation/distribution provisions of the applicable joint venture operating agreement, the allocation and distribution of cash and profits to BRT is less than that implied by BRT's percentage equity interest in the venture/property.

If you gross up the JVs (BRT owns ~67% of the equity on average), that works out to about a ~$171k/unit acquisition price, versus BRG at about ~$300k/unit, although BRG's rentals are a little more premium at $1400/month.  To spot check that math, they recently bought out their joint venture partner in a Nashville, TN complex for $165k/unit.

If my math isn't wildly off (it might be), shares are still reasonably undervalued using market cap rates despite jumping last week after the BRG buyout (I'm not alone in thinking BRT Apartments could be next).  At a certain point taking advantage of the public-to-private valuation arbitrage available in these apartment REITs outweighs the benefits of keeping it public to the Gould family.  Similar to BRG, since this is really a "will they or won't they sell" bet, I'm going to play the idea through call options, this time I just went out to June '22 and bought the at-the-money $22.50 strikes hoping this is a replay.

Other thoughts:

• They have used their ATM offering this year, which isn't exactly a sign they're shareholder friendly or think their shares trade at a huge discount as I suggest, but BRG did similar things with the preferred share exchanges there.  Some of the ATM issuances were before inflation talk really heated up and we saw a lot of activity in the space, but it is still worth mentioning as a negative.
• The Gould family also runs another REIT, One Liberty Properties (OLP), that's mostly an industrial net lease, attentions and salaries could potentially be repositioned there as that sector also has covid tailwinds.  At BRG they found a creative way to keep their jobs by spinning out the SFH rentals, here they could just all move over to their already established REIT.
• I also noticed the Gould family has created a cannabis investment firm, Rainbow Realty Group, could be the seeds of a future cannabis mREIT or other lending structure that have become popular ways to invest in cannabis on U.S. regulated exchanges (e.g., I noticed the old Fifth Street Asset Management (FSAM) team popped up at AFC Gamma (AFCG)).  Maybe cash out here and reinvest in that hot theme?

Disclosure: I own BRT June $22.50 call options (and ARL, BRG calls)

American Realty Investors: TCI Multi-Family JV Portfolio for Sale

*Disclaimer: This is another closely held, illiquid micro cap*

Last week, Bluerock Residential Growth REIT (BRG) agreed to be acquired by Blackstone (excuse the small victory lap) for a healthy sub-4% cap rate on their multi-family portfolio, surprisingly Blackstone was willing to take BRG's (possibly non-arm's length) lending portfolio which I thought might be an impediment to a deal happening.  We know the multi-family sector is getting crazy (especially in sunbelt markets) when even a REIT with a poor governance structure sells out versus grifting on related party deals to the end of time.  The natural next question, what other poor governance structure multi-family stocks are out there and could something like this deal happen again?  Which brings me to Transcontinental Realty Investors (TCI) and its largest shareholder American Realty Investors (ARL).  I've add this complex to my hairy "hidden" multi-family real estate bucket alongside HMG and BBXIA.

TCI is one of the original REITs (it converted to a c-corp many years ago due to ownership concentration limitations), it goes back several decades and could be described as pioneer in poor governance situations (almost like an RMR REIT before RMR).  Back in 2001, the Wall Street Journal ran a front page story on Gene Phillips, the controlling investor in a series of real estate companies that had (and still have) cross ownership interests and related party transactions: Income Opportunity Realty Investors (IOR), Transcontinental Realty Investors (TCI) and American Realty Investors (ARL).  There's even a Bill Ackman reference in the article, his old fund Gotham Partners, went activist on TCI.  Gene Phillips died in August 2019, the trust for his 7 children are now the controlling shareholders via Realty Advisors, Inc ("RAI" - not publicly traded).

These three companies still exist, their relationship is a bit of Russian nesting doll, RAI owns 90% of ARL, ARL owns 78% of TCI (RAI owns another 7% in TCI directly) and TCI in turn owns 81% of IOR (RAI owns another 2% in IOR directly).  Each step of the way, there is an external manager, Piller Income Investment Management (wholly owned, by you guessed it, RAI), that collects a 0.75% of assets annually, 7.5% of net income and 10% of asset sale capital gains above an 8% hurdle.  None of these entities pay a dividend, they pretty much solely exist as fee revenue streams for the Phillips' heirs at this point.  The accounting is confusing because there are intra-complex loans outstanding and ARL consolidates TCI and TCI consolidates IOR, it's one big mess to untangle.

Most of the assets are at the TCI level (to get even more confusing, technically "Southern Properties Capital" or "SPC" in their filings is the wholly owned subsidiary of TCI that owns most of the assets and secures the Israeli bonds), where it gets interesting today is in 2018, TCI sold the vast majority of their multi-family portfolio (53 buildings in the sunbelt, now 51) into a JV (named Victory Abode Apartments or "VAA") entered into with Macquarie.  On 11/21, the two announced an agreement where they would sell the properties in the JV (with TCI essentially taking back/buying 7 of them) in early 2022.  The JV portfolio is held on TCI's (and ARL's) book using the equity method of accounting, there's also an odd mezzanine loan that is equally owned by the JV partners that should be treated as equity, either way, the carrying value of the portfolio is understated on the balance sheet, likely by a wide margin.  From the latest TCI 10-Q:

To mark-to-market the JV, here's the Q3 operating results:

If we annualize Q3 NOI, I get about a $69MM run-rate, at a 4% cap rate that's an asset value of $1.726B, there's $856MM mortgage, TCI owns 49% (Macquarie has 49%, and then TCI's former CEO strangely still manages the JV and has 2%), for a $426MM pre-tax, pre-fees value to TCI.  Out of that number, TCI owes Macquarie $34MM left on an earnout that the two went to arbitration over (probably a marginally net negative readout, there were 10 properties under construction included in the JV portfolio, guessing to-date these didn't stabilized as expected when the contract was struck, but the environment is different now, even marginal properties are likely performing well).  And then external manager Pillar is going to get a cut of the sale proceeds and there will be taxes to pay since TCI is a c-corp and not a REIT.  But even after all that (I'm honestly not even sure how to estimate it) there still seems to be plenty of margin of safety here given that TCI's market cap is only $337MM (using a $39 share price).  And again, TCI is buying 7 of the properties from the JV, so they're not going to get ~$400MM cash dropped in their lap, it'll be some fraction of that.

On top of the VAA JV, TCI owns real estate directly in three buckets: multi-family, commercial and development land.

Similarly annualizing the Q3 NOI ("Profit from segment" here seems analogous NOI) for the multi-family segment and putting a 4.5% cap rate on it (moving it up a touch for fun/since its not on the market) and I get about $145MM in asset value.  For the commercial side (mostly office, one retail property), using a 7% cap rate, I get about $135MM in asset value.  These feel too conservative as it is a bit below the depreciated book value (if we ex-out the land below) on the balance sheet.

Then I'm always a sucker for development assets and raw land, here TCI acquired a big plot (~2900 acres at the time) of land ("Windmill Farms") outside of Dallas back in 2011 through some convoluted restructuring:

On November 1, 2011, we acquired 100% of the membership interest in Bridgeview Plaza, LLC. On September 21, 2010, we sold our investment in EQK Bridgeview Plaza, Inc. to Warren Road Farm, Inc. (“WRF”), a related party under common control, for a sales price of $8.3 million to be paid via an assumption of debt of $6.2 million and seller-financing of $2.1 million. On October 4, 2010, WRF filed a voluntary petition seeking relief under Chapter 11 of the bankruptcy code. The approved bankruptcy plan was effective November 1, 2011, whereby TCI, for its contribution to the plan, was given 100% equity ownership in the entity. During the period of time that WRF owned the equity interest, it had also acquired 2900 acres of land known as Windmill Farms land located in Kaufman, TX, previously held by ARL, for a sales price of $64.5 million. ARL provided $33.8 million in seller-financing with a five-year note receivable. The note accrues interest at 6.0% and is payable at maturity on September 21, 2015. WRF assumed the existing mortgage of $30.7 million, secured by the property.

The land is located in Kaufman County, TX, which is southeast of Dallas and not the most desirable part of the metroplex, but as Dallas continues to heat up, the sprawl has moved towards TCI's land.  By my math, they're down to 1,420 acres currently, here are the recent sales prices from the last few years:

During the nine months ended September 30, 2021, we sold a total of 134.7 acres of land from our holdings in Windmill Farms for $19.0 million, in aggregate, resulting in gains on sale of $9.2 million.

During the year ended December 31, 2020, we sold a total of 58.8 acres of land from our holdings in Windmill Farms for a total of $12.9 million, resulting in a total gain on sale of $11.1 million.

I don't want to get all HHC/JOE math on people, but the carrying value for all their development land is $42MM, and the average price they've transacted with homebuilders the last two years is $165k/acre, now we don't know how much development capex or time it would take the sell the remaining 1,420 acres, but the value is certainly more than $42MM.

And then there's the 81% stake in IOR, IOR's loan book is full of related party transactions (similar to BRG's loan book) used to fund TCI's apartments and development activity, it was probably intended to be a true mortgage REIT, but now is just a nano cap that is unlevered and houses most of the loan book on TCI/ARL's balance sheet.  Again, no dividend, only exists to generate fees.  But the book value is $107MM, so 81% of that is $87MM (IOR trades for less than half book value, could be interesting on its own if the complex does fold up?).

On the right side of the balance sheet there's $185MM of Israeli bonds (they do report on IFRS there, others have translated the filings to come up with similar findings) and $178MM in direct mortgage debt, for a total of $363MM in long term debt at the TCI level.  There are other assets, cash, loans that aren't in IOR, related party deals, but they're hard to untangle and I'd probably get it wrong, so very high level swag:

• $350MM for the VAA JV after fees and taxes (some of this is the retained value of the 7 properties)
• $280MM in owned properties
• $150MM in land
• $87MM in IOR
• ($363MM) of long term debt

Or about $500MM to TCI, or ~$60/share (probably conservative here, there a lot of unknowns), it trades for $39/share with a clear catalyst the JV sale in the first half of 2022.  

Another way to play TCI -- I've reluctantly chose this path -- is via the even more illiquid ARL.  ARL's market capitalization is $187MM, the only significant asset they own is an 80% stake in TCI, so buying via ARL you're effectively buying TCI equity for $230MM (I could be wrong here, there are intracompany loans, hard to tell what's what, but I think they net out (minus some minority interest leakage)?).  Now there are more risks to ARL, you're one step from TCI and are counting on the discount being closed by the whole complex being collapsed (ARL has no reason to exist after all).  

That is unlikely to happen, I'm probably too bulled up on sunbelt apartments, but with the family patriarch gone, the kids don't appear to be closely involved here, craziness in the multi-family sector, maybe the JV sale is the catalyst to just collapse the whole thing or use the cash to take out minority investors via a go-private offer.  The grift is egregious here, but it's really only on the minority shareholders and that's a relatively small piece of the pie (90% of ARL * 78% of TCI = 70% + 7% directly owned = 77% look through ownership of the multi-family portfolio), selling out at the top is probably worth more than stealing from ~23% of outside shareholders throughout the complex.  If a sale or going-private deal doesn't happen, its probably just an okay investment, it'll still trade a huge discount, but should bump up a touch, versus owning TCI probably reacts better in the base case scenario that the JV sells for going markets rates and TCI just reinvests the proceeds to keep the scam going.

Other thoughts:

• TCI did receive a $44/share buyout offer, but the proposal hasn't gone anywhere and was probably just for publicity anyway.
• TCI's book value is ~$41/share, given how mis-marked the VAA JV is on the balance sheet, and that GAAP accounting often understates real estate value (historical cost minus depreciation), its rare that a multi-family company would trade at a discount.  Both highlights the undervaluation and the markets skeptical view that it ever gets resolved.  Similarly, ARL book value is $21/price versus a $11.50/share price.
• Buying back the 7 properties is kind of a "bad fact" to a full sale/liquidation thesis, but with the cash, might end up getting a low-ball going private offer that still results in a satisfactory result.  If that's the case, probably best to own TCI directly (talking myself out of ARL right now).  My best guess is these are some of original development properties that might not be fully stabilized and won't fetch full value in a competitive auction.
• Macquarie is the adult in the room, will want to maximize value and reduces any related party risks to the actual sale of the JV, but the management grift factor remains elsewhere in the complex.
• Brad Phillips, Gene's son, is the president of a life insurance firm.  There are 58 people according to LinkedIn that work at Pillar Income Asset Management, it appears they don't manage considerable assets outside of ARL/TCI/IOR.  One article I found lists Gene Phillips' estate at $3.5B, so there might be other assets outside of this mess, presumably they could take out minority shareholders and run this as a family office, not that they will of course.

Disclosure: I own shares of ARL (might add TCI directly too), (and still holding HMG, BBXIA, BRG calls)

Vector Group: Douglas Elliman Spin (Watchlist)

*Just a watchlist item for now, think it is fairly valued unless you have a divergent view on DOUG*

Last month, Vector Group (VGR) announced the long speculated spinoff of its real estate brokerage business, Douglas Elliman (DOUG), to shareholders before year end (quick!).  The distribution date is now set for 12/29 (tomorrow).  This situation is sort of a "classic" spinoff where the two businesses operate in completely separate industries and should have completely separate shareholder bases.  The spinoff is a brokerage that supports high-end real estate agents and the parent is basically the complete opposite, a discount cigarette manufacturer, can't get much different.  These are usually more interesting to me than an industrial splitting into two or three, here no one is owning pre-split VGR because they want exposure to the high-end real estate sales cycle, it's a tobacco business and thus untouchable to many investors for ESG or other reasons.  Spinning off DOUG opens the spin up to a much wider shareholder base and it should logically trade at a valuation above where the combined VGR does today.

Vector Group (VGR) (RemainCo)

The remaining business will be primarily a tobacco company.  Vector has approximately 4% market share in the U.S. cigarette market, well behind the larger premium branded players like Altria (MO) or British American Tobacco (BTI).  Vector's main brands include Eagle 20's and Pyramid, I'm not a smoker, but these don't seem like household type brands.  I did do a peek behind the register at my local Walgreens and found them on the bottom, near the floor, not the best product placement.  Traditional cigarettes are obviously in long term decline (although revenue continues to increase thanks to price increases), they're gross and kill their customers, while others have been moving into smokeless nicotine alternatives -- Vector briefly flirted with e-cigs before closing the unit -- they instead just focus on their discount and deep-discount niche (typically priced 15%-35% below brand names).

The tobacco segment did $360MM of LTM EBITDA, there's minimal capex, but obviously these businesses don't trade at high multiples and cigarettes has been a bit of a covid beneficiary (stimulus payments, more time spent at home, about the last place you're allowed to smoke, etc) and actually saw growth in volumes for the first time in a couple decades.  I'm going to give the core tobacco business a 7x multiple on $340MM (some of the covid bump reverts and adjusting for corporate overhead) and get an EV of $2.4B for this part of the business.

Alongside the tobacco business, the parent is going to retain Vector Group's grab bag of investments in various real estate investments.  I won't pretend to know the entire back history here, but it appears the excess cash flow generated from the tobacco business (Vector has a regulatory cost advantage if their tobacco market share remains small, so reinvestment in tobacco doesn't make a lot of sense) was redirected to real estate projects and Douglas Elliman.  This kind of resembles what I picture the HMG private investments to look like, a bunch of random minority interests in real estate deals (some as little as 1% interests):

It's not going to show up well here, but it is page 61 of the latest 10-Q.  The table is a bit of a mess and likely impossible for an individual like me to go through and attempt to value each of these interests.  Many of these properties are luxury condos that have some appearances of synergies with the Douglas Elliman business, which does a lot of new development sales.  The carrying value of these assets are $83.7MM total, but due to equity method accounting and other GAAP rules, it's likely this value is understated but just impossible to say by how much without significantly more time for due diligence.  Additionally the remainco will have approximately $375MM (net of their tobacco MSA expense they usually pay in Q4) in cash and marketable securities/hedge fund investments.  Some of these investments strike me as odd as the tobacco operations do have $1.4B in debt, some of which is at a 10.5% interest rate, I doubt their investment grade securities portfolio or hedge fund investments are meeting that hurdle on a risk adjusted basis.

But valuing the cash, investments, real estate at book and the tobacco business at 7x, I get about a $9.40/share value for the post-spin shares.  I would be more interested in this business if the capital allocation was cleaner and it just either bought back stock regularly or paid out in dividends in the free cash flow. 

Douglas Elliman (DOUG) (SpinCo)

The spinoff is a high-end real estate brokerage firm that is positioning itself similar to Compass (COMP), where they're really in the business of servicing the top brokers in expensive coastal type markets in New York, LA or Miami versus say more of a franchise company like RE/Max (RMAX) or Realogy (RLGY) that target the mass market.  It's the brand you see on real estate broker reality shows, for example, Million Dollar Listing LA's Josh Altman and Josh Flagg are affiliated with Douglas Elliman.  They of course also do more upper-mass market type transactions, but the average house they sell is approximately $1.6MM.  DOUG is way overweight NYC with approximately 50% of their business coming from the New York metro area, but overall they are the 6th largest brokerage in the country.

To compete for these high end brokers, DOUG has invested in an agent portal offering, "PropTech" investments, and in ancillary services like mortgage origination, title insurance and escrow services.  All in an effort to attract the best talent, they even call their acquisitions "aqui-hires" because they're really paying for the people when they enter a new market.  Having their own direct equity currency versus being grouped with a tobacco company makes perfect sense if the plan is to use their equity to expand their footprint beyond the few gateway markets they service today.

I have a little trouble about how to think of this business, their revenue line is the gross commission received in the real estate sale, but about 75% of that goes to the agent off the top.  The rest is used to pay for marketing, operations, G&A overhead etc, so the bottom line looks quite skinny against the reported GAAP revenue number.  Covid obviously briefly devastated this business, being heavily focused on New York and subsequent shutdowns, Douglas Elliman did a lot of cost cutting and layoffs (25% of corporate staff, not renewing fancy offices, etc) in mid-2020 as business came to a standstill.  Like other industries, there's some debate on how much of the cost cutting will be permanent, but signs coming out of the lockdowns are much of their cost cutting initiatives are permanent and since this business has a lot of operating leverage, business has boomed.

From their investor deck:

And then the corresponding boom in EBITDA:

This is a good but super cyclical business, there's a lot of operating leverage plus there's a lot of net revenue leverage with the size and growth of the luxury high end market.  DOUG is almost a play on the continued wealth gap in America.  I could be really wrong about the multiple, COMP is a hotly debated company, but VGR has hinted at spinning off DOUG for 5-6 years, this is not a garbage barge spin and they expect it to trade higher than the combined entity.  They've expanded to markets like Texas and Colorado, it's difficult to parse out what "normalized" EBITDA would look like for this business and how much is covid related (they do actually hint that they've achieved these numbers "despite COVID-19 related headwinds", guessing they mean a lack of inventory and they expect this trajectory to continue).

For every two shares of VGR shareholders own, they'll receive one share of DOUG.  DOUG will also be spun debt free with $200MM in cash, they do guide to an additional $16.5MM in corporate overhead due to the spin (I'm probably double counting some corporate overhead on the VGR side below as DOUG is paying VGR for the office leases and other items).  Throwing a 10x EBITDA multiple on DOUG and I get a $14.25 share price.

Add it all up, and I get roughly today's share price, but still one to watch after the spin, especially if DOUG ends up getting removed from small cap indices.  As always, correct me if I'm missing something big here, slow holiday work week so decided to write it up anyway, I was hoping to like this one more.

Other thoughts:

• Phil Frost is a 9.5% holder of VGR, he has a colorful history including being caught up in a pump and dump scheme.  Overall management here seems a bit grifty and the whole idea of a tobacco company originally buying DOUG seems like a vanity acquisition, it is probably a lot of fun to be the CEO of DOUG.
• I tend to like quick spins, usually they're smaller companies and it shows they've been run separately and really only connected through corporate G&A, if a spinoff takes more than a year, usually means there's a lot of parts to untangle, more likely the company has a tough go of it early on as a newly public company.

Disclosure: No Position

Altisource Asset Management: Preferred Overhang, Cash Shell w/ Optionality

Many readers will know this situation, Altisource Asset Management (AAMC) is a cash shell with approximately $80MM in the bank after their only asset management client, Front Yard Residential (RESI), terminated their external management agreement with AAMC resulting in RESI being internalized (AAMC was a 2012 spin, was trendy at the time to spin the management company).  Front Yard later sold itself to private equity (Ares and Pretium) which likely will turn out to be a great deal (even after they hiked the offer) for the buyers given how single family rentals have traded since.  Friend of the blog, Andrew Walker did an excellent podcast (and even answered one of my questions on it) with Thomas Braziel and Jeff Moore pitching AAMC.  They go into some of the background, particularly on the controversial Bill Erbey, who was formerly an executive (back in the early-to-mid 2010s, Erbey ran Ocwen and a few satellite entities like AAMC), but now is *just* a 39% shareholder in AAMC after legal trouble forced him out of the day-to-day operations.

Long story short, Altisource has a large preferred overhang (originally $250MM, currently $150MM after two exchanges), the stock previously traded north of $1000/share (now for $17.90) and issued a zero coupon convertible preferred stock with a strike price of $1250.  The cash from the convertible preferred was used to buyback shares, presumably to boost the shares above the strike price making everyone happy, but instead the stock collapsed.  Now that piece of paper is hopelessly out of the money, it is basically a zero coupon bond with a mandatory redemption date of 3/15/44.  However starting in March 2020, every five years the preferred holders can request a full redemption:

(b)    Each holder, at its option, shall have the right, in its sole discretion, to require the Corporation to redeem all of its outstanding Series A Preferred Shares by providing written notice to the Corporation within fifteen (15) Business Days (but not more than thirty (30) Business Days) prior to a Redemption Date of its intent to cause the Corporation to redeem such holder’s Series A Preferred Shares on such Redemption Date (each, a “Holder Redemption Notice”) which will specify (i) the name of the holder delivering such Holder Redemption Notice and (ii) that such holder is exercising its option, pursuant to this Section 5, to require the Corporation to redeem shares of Series A Preferred Shares held by such holder. The Corporation shall, within fifteen (15) Business Days of receipt of such Holder Redemption Notice, deliver to the holder exercising its rights to require redemption of the Series A Preferred Shares a notice specifying the date set for such redemption, which date shall be no more than thirty (30) Business Days after the Holder Redemption Notice (the "Holder Redemption Date"). The Corporation shall redeem for cash on the Holder Redemption Date, out of funds legally available therefor, all, but not less than all, of the outstanding Series A Preferred Shares held by such holder at an amount equal to the Redemption Price.

The larger holders did indeed request redemption last year.  But the trick is AAMC has to redeem the entire class at once, and obviously they can't redeem the $150MM outstanding with only $80MM in net cash.  The preferred stock is closely held, two holders (Putnam and Wellington) have settled with AAMC and exchanged for either a combination of cash and stock in the case of Putnam or just cash in the case of Wellington.  Both worked out to approximately 11-12 cents on the dollar.   The remaining significant holdout is Luxor Capital which is pursuing litigation against AAMC.

I have never subscribed to the "preferred stock has no teeth" thesis, here is where my views differ (again, I'm often totally wrong):

• Luxor is not anchored in any way to the previous two settlements, they're the largest holder (basically the only remaining holder) of the preferred stock and still have leverage.  I'm a structured finance guy, they're almost the "controlling class" in this situation, without them the overhang isn't resolved.  Additionally, Putnam included a "most favored nation" clause in their settlement which effectively hitches their settlement to Luxor, it gets Putnam out of the lawsuit but also allows them to retain the optionality of a better deal.
• Altisource won't risk consummating a new business combination/merger before the preferred stock overhang is resolved.  If the deal is successful, then AAMC could potentially be on the hook for the full $150MM down the road or at a minimum increases the recovery rate for Luxor.  I don't see anything happening until Luxor settles, maybe there's a settlement and merger simultaneously but it feels highly unlikely that the preferred can just sit out there until 2044 (for either side).  So this is a game of chicken until then, and those situations can last longer than people want to believe (I would have thought RHE would have settled by now).

But the price has fallen considerably in the last several weeks to $17.90 today, at this price the thesis seems more interesting (basically back to where it was before Wellington settled) and allows some margin of safety in the circumstance that Luxor strikes a significantly better deal than either Putnam or Wellington did.

Here's the current situation, obviously the capital structure is upside down at full face for the preferred, I'm discounting the net cash for two quarters of cash burn, dealers choice there.

How I'm thinking about a post-settlement proforma: I'm assuming that the Putnam settlement is the best case.  Putnam held $81.8MM of the preferred stock and received 288,283 shares of stock and $2.863MM in cash (split in two payments), if we applied that ratio to the remaining $150MM outstanding, I get about a $25 NAV.

But if Luxor was going to settle for the Putnam deal, they would have already, so applying a multiple to that, let's say they negotiate a 25% or 50% better deal than Putnam, I get an NAV of $23.28 and $21.50 respectively.  Against a $17.90 stock, that seems like a reasonable discount, if you did a goal seek on the multiplier to get to the current price, Luxor would need to strike a deal more than 100% better than Putnam (also includes the incremental benefit to Putnam for MFN clause) to get to the current share price.

I'm not going to speculate on a deal target, the podcast interview I referenced does a bit of that if you're interested, but AAMC included in the below in their Q3 earnings release:

Mr. Thomas K. McCarthy, Interim Chief Executive Officer, stated, “The Company’s attention and focus continues to be the evaluation and pursuit of certain business opportunities and acquisition targets in which to focus the Company’s resources and enhance shareholder value. The Company has liquidated its equity holdings and is now in an all-cash position in preparation of an acquisition event.

During the third quarter, the Company also engaged the services of both an investment bank, Cowen and Company, LLC, and the law firm, Norton Rose Fulbright, LLP, to assist us in identifying and reviewing potential acquisition and merger opportunities. While no final decision has been made, the Company is in discussions with several potential acquisition or merger targets including cryptocurrency and brokerage related businesses”.

The company is probably mid-process, I'm guessing that a settlement with Luxor is announced at the same time (if they take shares, they could participate in the upside, removing the litigation overhang will likely cause the stock to bounce significantly), plus there are some "meme able" buzzwords in there and a relatively low float, I agree that something crazy could happen with this one and at today's price you're not paying much, if anything, for that optionality.  But there are hundreds of SPACs also competing for similar buzzy deals, so who knows, could be challenging to get a deal done and there could be a frustratingly long stretch with no news.

Disclosure: I own shares of AAMC 

Sonida Senior Living: Out of Court Restructuring, fka Capital Senior Living

Sonida Senior Living (SNDA, fka Capital Senior Living under the old symbol CSU) recently completed an out of court restructuring led by Conversant Capital, the same investor that has been instrumental in institutionalizing and providing growth capital to INDUS Realty Trust (INDT).  While clearly different, the industrial/logistics asset class has covid tailwinds versus senior housing having covid headwinds, the results could rhyme with each other longer term as this micro cap "grows up" (to steal a tweet from "Sterling Capital" @jay_21_, also h/t for the idea). Sonida is now positioned to use their reset balance sheet to take advantage of a fragmented senior housing market with plenty of distress (looking over at our friend RHE), but also with long anticipated demographic tailwinds finally being realized with an increasingly large population aging into senior housing.

Below is the standard investor relations overview slide.  Unlike some others in senior housing, SNDA is not a REIT (more similar to BKD), but owns and operates the vast majority of their facilities as they exited locations the company formerly leased from others (VTR, WELL, PEAK etc) in recent years.  There's embedded real estate value at SNDA as a result, which may someday lend itself to some kind of REIT transaction.  They also have a small management business that resembles Five Star's (FVE) business model (got there in a similar way too when SNDA restructured their leased properties) that helps offsets some G&A in the meantime.

The restructuring agreement took a few twists and turns, including heavy opposition from 12+% shareholder Ortelius Advisors, but was eventually approved by shareholders in October and closed earlier in November.

A total of $154.8MM (net $140.8MM) was raised through a combination of:

• $41.25MM in convertible preferred stock (11%, conversion price of $40) to Conversant plus an additional $25MM accordion to the convertible preferred stock if needed for growth capital 
• $41.25MM in common stock at $25/share to Conversant, plus warrants to purchased an additional 1 million shares at $40/share
• $72.3MM through a rights offering at $30/share to all company shareholders
• Conversant previously provided a $16MM rescue bridge loan to the company, it was repaid in full upon closing of the transaction on 11/3/21.

Most of the capital is going to be used to stabilize the company's balance sheet and take care of some deferred maintenance capex the company likely punted on the last two years.  The capital basically allows the company to recover and get back to some kind of normalized operating environment.  Senior housing has had the unfortunate position of getting hit by covid from both the revenue and expense side.  It's not fun to mention but obviously covid caused a lot of deaths in this age group and likely prevented a lot of move ins as family members stayed home and turned into caregivers to avoid subjecting love ones to senior housing during a pandemic.  On the expense side, first they had PPE expense and now a tight labor market which is squeezing their margins.

But attempting to look through to what their results could look like in a year or two as the world normalizes, the key numbers to run a scenario analysis are the occupancy and NOI margin (I'm going back to YE 2017, no good reason just seemed "normal", for their owned properties they did 88% and 38% respectively):

To be clear, they're a ways away from normal, as of their last earnings report, occupancy was 82.3% and NOI margin was 21%.

For the cap rate, it's a bit tricky too, senior living is similar to hotels where if you're the owner operator it's less of a real estate business and more of a service business.  But Ventas (VTR) recently purchased Fortress controlled New Senior Investment Group (SNR) for $2.3B:

"The transaction valuation is expected to represent approximately a 6% capitalization rate on expected New Senior Net Operating Income ("NOI").. the acquisition price implies a 20% to 30% discount to estimated replacement cost on a per unit basis.. the transaction price represents a multiple of <12 times estimated 2022 New Senior normalized FFO per share including full synergies."  

It's not an apples-to-apples comparable, New Senior didn't operate their properties, just leased them out which is arguably less risky (although a lot of senior housing REITs have had to take back properties) but at least allowed them to be a REIT and lower their cost of capital.

The proforma debt and share count is a little messy, I've probably made some errors here, so those who know better, please feel free to correct me.

That compares favorably to today's share price of ~$32 per share, but that's an asset/takeout value (doesn't include corporate overhead, etc.) and assumes a full recovery.  But also doesn't include any additional growth or deal making which will likely come in the future, based on who they've brought in, the re-branding, it all signals that this is going to be more of a growth platform (similar to the GRIF to INDT rebrand).  

On sort of a going concern basis, using normalized numbers, including the convert but excluding the effects of the warrants, I have it trading at 12.5x normalized EBITDA (below where other senior housing companies trade, but to be fair, they'd trade lower on a normalized number too).  Not screaming cheap on an absolute standalone basis, they probably need additional scale to create some operating leverage on the G&A and corporate expenses.

Other thoughts:

• I don't have the stats to back it up at my finger tips, but the dynamics in senior housing appear to be similar to those in single family residential.  There was significant overbuilding of senior housing in the middle of the last decade, then it dropped off a cliff, now we're finally seeing the long promised demographic wave moving into the 80+ cohort which could cause supply to tighten and rent/occupancy to rise.
• I like the new board of directors.  The new Chairman is Dave Johnson, he was previously the President of Wyndham Hotels (WH) and is a board member of Hilton Grand Vacations (HGV), two companies I've followed/respected for several years.  Then to repeat the tie in with INDT, Conversant is bringing in Ben Harris as a board member, formerly the president of Gramercy Properties Trust (fka GPT) which was a blog favorite, most of the other key members of that team are at INDT now.
• While not as great of an inflation hedge as multi-family due to the greater percentage of variable/labor costs in senior housing, inflation should be able to be mostly passed onto to the residents.  SNDA disclosed in a recent call that they were increasing rents by 5+% next year, VTR is targeting 8% in their owned properties, etc.
• Sonida has a fairly high concentration in Texas, Wisconsin, Indiana and Ohio.  Their facilities tend to be smallish and on the older side, about an average age of 23+ years.
• The company recently announced they'd be managing an additional 3 properties for Ventas starting 12/1, while not material yet, perhaps the managed segment could be a growth business for Sonida.  It's a fee business, not exposed to lease expense or capex of an operator, etc.
• The company is going to restart giving guidance for 2022, presumably with Q1 earnings, which could give some needed visibility to investors as I fully admit my back of the envelope math is mostly a guess at this point.

Disclosure: I own shares of SNDA (plus INDT and RHE-A still too)

HMG/Courtland Properties: Microcap REIT Liquidation

*Disclaimer: Please note that is this a $18MM market cap that is closely held and illiquid*

HMG/Courtland Properties (HMG) is a tiny REIT that recently announced intentions to hold a vote early next year to approve a plan of dissolution and liquidate.  HMG was founded in 1974 by Maurice Wiener, he is 80 and is still the CEO of the company (technically this is an externally managed REIT, but there is no incentive fee), he controls 56% of the shares through various entities leaving little doubt the liquidation proposal will be adopted.  

The company's assets are a bit of mess (this liquidation will probably take several years), but the largest asset is a 25% equity ownership in a newly constructed Class A multi-family apartment building ("Murano at Three Oaks") in Fort Myers, FL.  Construction began in 2019, the building was completed in March and is already 97% leased as of the recently released 9/30 10-Q.  With inflation running hot and migration to the sun belt, cap rates on multi-family assets like this one are being quoted below 4%.  This is a hidden play on the craziness in multi-family M&A.  

Disclosure on the property is limited.  But checking the building's listing on apartments.com, it appears the going rate for their units is around $25 annually per square foot, there are 318 units and 312,000 square feet of rentable space.  Let's round down a bit for some vacancy to $7.5MM top line revenue, again back of the envelope, let's use 40% of gross rent goes to some combination of property management, operating expenses and taxes (I spot checked a few multi-family REITs for this, could be off!), that gets you an NOI of $4.5MM on the property.  

I'm sure I'll get the comment that this asset would go for less than a 4 cap but let's use that for now too, since it just started leasing this year, guessing there's not a lot of rents that need be reset to market as leases rollover like other properties.  There's a $39.5MM construction loan on the property, so the net value to the equity under my math is ~$73MM with HMG's share of that being $18.25MM, or roughly the market cap of the company.  Their equity investment in the apartment joint venture is held on the balance sheet at $3.3MM (HMG put in $3.6MM into the project, but due to equity method of accounting, HMG recognizes the proportional losses of the project has experienced since it has been in lease up mode).  Again, sounds a bit crazy, the asset was built for $54.1MM and now seemingly worth double that or more.  Given the debt here is a construction loan and the asset is freshly stabilized, even if the equity group doesn't sell it outright, they'll likely refinance and pull a decent amount of cash out that could be used for an initial liquidation dividend.

The rest of the REIT sort of looks like someone's personal portfolio/family office, in this case the CEO's:

• The external advisor's "Executive Offices" at 1870 South Bayshore Dr in Coconut Grove, FL.  This appears to be a single-family home (unclear if the CEO uses it as his primary residence) that has a Zestimate of $2.5MM, it has a tax assessment of $1.5MM and a book value of $590k (it was purchased in the 90s).  There's no debt on the property, let's call it $2MM net to HMG or roughly another $2/share in value.
• 28% interest in a 260 River Street in Montpelier, VT, carrying value of $870k.  Tricky to tell what this really is but they had some environmental abatement issues that are seemingly behind them, a new tenant took possession of the property in March.
• About $4MM in net cash (after subtracting out ~$800k of current liabilities)
• $2.8MM of marketable securities, much of which is equities and preferred stock in undisclosed large cap REITs

Then it gets a little strange (if it hasn't already), there's $4.85MM (as of 9/30) in carrying value in 46 individual private investments, it appears like most of these are real estate related (including some multi-family which could have embedded gains) but also includes non-real estate related stuff like technology and there's an energy investment hidden in here somewhere too.  Below is the breakout from the last 10-K, the carrying values have moved around a bit but gives you a sense of the asset classes.  

These investments are carried the lower of cost or fair value, there could be some diamonds in the rough, a few excerpts from recent monetization events: 

"During the nine months ended September 30, 2021, we received cash distributions from other investments of approximately $1.03 million. This included distributions of approximately $584,000 from our investment in a multi-family residential property located in Orlando, Florida which was sold during this quarter. We recognized a gain of $315,000 from this investment." 

And this one: 

In August 2021, one of our other investments in a private bank located in Palm Beach, Florida merged with a publicly traded bank, and we exchanged our original shares for shares in the publicly traded bank. Accordingly, we have reclassified this investment as marketable securities, and as of September 30, 2021 this investment with historical cost basis of $35,000 has an unrealized gain of approximately $128,000.

But also this one:

The other OTTI adjustment in 2020 was for $175,000 for an investment in a $2 billion global fund which invests in oil exploration and production which we committed $500,000 (plus recallable distributions) in September 2015. To date we have funded $658,000 and have received $206,000 in distributions from this investment. The write down was based on net asset value reported by the sponsor and takes into consideration the current disruptions in the oil markets because of the economic fall out of the pandemic.

Even stranger there are some ~$1.5MM in loans they've made, apparently mostly all to the same person.

On the minus side of the ledger, there's about a $1MM in annual expenses between the management fee and G&A, we should probably capitalize that for at least 4 years given it's going to take time to unwind all the mess here and I get approximately ~$30/share in value and it trades for about ~$17.25/share today.  

The key with any liquidation is the timing of the cash flows.  Here it could be a reasonably attractive IRR since the largest asset just stabilized and it would make sense to either sell or refinance cash out of it in the near term.  Once most of your basis is out of the stock, it's easier to be patient on later monetization events.

Disclosure: I own shares of HMG