Thursday, February 17, 2022

Regional Health Properties: Revised Pref Exchange Offer

Last June, Regional Health Properties (struggling skilled nursing real estate company) proposed an exchange offer where the company's Series A preferred stock holders (RHE-A) would receive 0.5 shares of common stock (RHE) for each share of preferred stock.  At the time of my post, RHE was trading at $12/share, today it trades sub-$5 as all speculative trading sardines have generally come down substantially over the past several months.  Last Friday after hours, with no corresponding press release this time, Regional Health snuck in a new exchange proposal whereby Series A preferred stock holders could exchange their shares for new Series B preferred stock.  The Series A preferred stock trades for $4.50/share.

The proposed Series B preferred stock has some interesting terms that I haven't seen before:

  • First to nudge Series A holders to exchange, if the proposal passes (need 2/3rds) then anyone who rejects the exchange or is just too lazy to exchange gets pretty severely penalized.  The Series B becomes senior to the Series A, the liquidation value of Series A goes from $25 to $5 and all the accumulated but unpaid dividends get erased.
  • The headline dividend rate is 12.5%, but it will not be payable or start accruing until the fourth anniversary of the issuance/exchange date.
  • The liquidation preference starts at $10 and increases back up to $25 at the fourth anniversary.  If all Series A holders exchange, the liquidation preference will initially drop to $28.1MM, there's $55MM of debt ahead of the preferred stock, last June I estimated the value of their owned real estate at $87MM (9.5% cap rate), so that might cover the preferred stock at a $10 liquidation preference.
  • Instead of the typical 6 quarters of missed dividends penalty to nominate a preferred stock board member, since the Series B won't be paying a dividend for the first four years, the Series B terms call for a "cumulative redemption" where Regional Health has to repurchase or redeem a certain amount of preferred each calendar year.  It starts with 400,000 shares in 2022, then 900,000 shares by year end 2023 (again, cumulative, so an additional 500k shares in 2023), then 1,400,000 shares by year end 2024, and then finally 1,900,000 shares by year end 2025.  If they fail to do so, then the preferred shares will have director nomination rights.
  • Additionally, if Regional Health doesn't redeem or repurchase 1,000,000 with 18 months, Series B holders get common shares in a pro-rata fashion to make up the difference.  Interestingly for both this penalty and the cumulative redemption penalty, the threshold is a specific Series B share amount, so if only 2/3rds of the shares are exchanged, each of these milestones becomes a greater percentage of the Series B.
  • They then throw in a little game theory to encourage Series B holders to participate in early repurchases or redemptions, once there are less than 200,000 Series B preferred shares outstanding, the liquidation preference drops back down to $5 (for reference, there are 2,811,535 Series A preferred shares currently outstanding).
  • Like the last exchange offer, this offer requires both the preferred (2/3rds) and common shareholders (majority) to approve.  The common vote might be hard to obtain, they didn't get many shareholders to vote in the last annual shareholder meeting, these shares are likely mostly in retail hands.
Regional Health's plan following this exchange is to grow their way out of this mess, issue new stock, attempt to take advantage of the distress following covid (similar to SNDA, but without the creditable board/support) in the senior housing sector and redeem the preferred over time along the way.  My initial thoughts are this is a pretty attractive deal for the Series A owners, certainly better than the initial offer.  In my typical fashion, just penciling out what the returns might look like if Regional Health actually kept to that redemption schedule.
Now this is far too simplistic, but assuming that everyone exchanges (unlikely given that this hasn't paid a dividend in many years and is probably sitting in the forgotten corners of retail brokerage accounts), and Regional Health keeps that redemption schedule at the liquidation value (I had to average the liquidation value table since they don't line up perfectly) pro-rata for all shareholders which they probably won't and instead try to repurchase shares or tender at a discount, then they orphan it again afterwards and its worthless (which it wouldn't be).  The cash flows won't look like this, it is just a sketch out of the redemption schedule, but I get a 30+% IRR if all works out.  The biggest assumption is management can actually get out from under this, raise equity, gain creditability, etc. and that's pretty unclear, but it is a situation that deserves a second look.

Disclosure: I own shares of RHE-A

Wednesday, February 16, 2022

Bally's Corp: Standard General Go-Private Offer

Bally's Corporation (BALY) is the old Twin River Worldwide Holdings (old ticker, TRWH) that began with two casinos in Rhode Island, then really starting in 2019 through an aggressive series of complicated acquisitions created a sprawling omni-channel gaming company that appears well positioned to benefit from the long term growth in iCasino and online sports betting.  The architect of this transformation is Soo Kim of Standard General, he is the Chairman of the Board and his investment firm owns more than 20% of the shares.  On 1/25/22, Standard General submitted a non-binding offer to buy Bally's for $38 per share (shares trade for $35-$36).  

The offer appears very opportunistic as the economy is reopening, the pieces of Bally's serial acquisitions are starting to come together but before their true earnings power are fully apparent, all while the market has sold off gaming stocks.  Likely Kim is simply highlighting the shares are cheap, he's best positioned to understand the value of the company, and nothing further comes to fruition on the management buyout front.  However, now that the acquisition strategy is maturing and the need for a public currency might not be as important, he could actually want to take it private and negotiate a higher price with the board.  But at current prices, I agree shares are cheap and would be happy to own the stock absent a deal.

Here's a slide from their investor presentation showing the pace of acquisitions, almost all of the regional casinos were acquired in 2019-2020, many the result of forced divestures when larger gaming peers consolidated.  This allowed Bally's to pick properties up on the cheap and build a nationwide footprint in which to standup a mobile gaming presence.  I generally prefer the regional casinos to destination ones as they're more stable and proved that throughout covid.  Bally's Corp bought the "Bally's" brand name from Caesars (CZR), they're in the process of rebranding all of their regional casinos to the Bally's brand, the old CZR's owned Bally's in Las Vegas (the original MGM Grand) is being rebranded to a Horseshoe property (and Bally's Corp is buying the Tropicana Las Vegas from GLPI).

The two non-physical casinos deals really worth calling out are:
  • On 11/19/20, Bally's entered into an agreement with Sinclair Broadcast Group (SGPI) to rebrand their regional sports networks (the 21 they acquired from FOXA in the DIS deal) from Fox to Bally's, in exchange Sinclair got stock and warrants in Bally's, Bally's also must commit a certain percentage of marketing spend on Sinclair's networks.  The cord cutting trend is well known, RSN valuations are down  (Sinclair's RSN's debt trade at distressed levels), sports is generally the reason cited for cord cutting because their content is so expensive.  But from Bally's angle, this deal puts their brand right in the face of the most engaged sports fans, even if RSNs are losing subscribers, they're unlikely to be losing the ones that Bally's is targeting.  While Caesars, MGM or Draft Kings are spending big on the NFL at the national level, Bally's has instead targeted the more engaged local fan, one that might have a more frequent/year-round betting cadence than just the NFL season.
  • On 4/13/21, Bally's announced a combination with Gamesys Group (GYS in London) for cash and stock, the deal closed on 10/1/21.  Gamesys is a UK based online gaming company (casino strategy versus sports betting, mostly UK and Asian markets) that does both bingo and iCasino games, the idea is to pair the successful Gamesys iCasino offering (where legal in the U.S.) with the Bally's sports betting/Sinclair offering to create an integrated experience.  Generally you need a physical presence in a state to get an online license, so in order for Gamesys to fully access the U.S. market they needed to partner with someone like Bally's who thanks to their acquisition spree, have a presence in most of the desirable gaming jurisdictions.  To fund the rollout of iCasino and online sports betting in the U.S., both the existing Gamesys international business and the U.S. regional casino business are highly cash generative.  Bally's expects to spend 20% of FCF for the next several years on the rollout, but they're taking a more measured pace than other competitors when it comes to promotions, etc.
Interestingly, the CEO of Gamesys became the CEO of Bally's, signaling an emphasis on bringing the successful Gamesys model to the United States.  Also, the management of Gamesys elected to take stock in the merger instead of cash, at current prices that appears to be a mistake as the value of those shares is roughly half what the cash offer was a few months ago, but shows their confidence in being able to replicate their success here.

Valuing Bally's is a little tricky, it was a covid beneficiary but hard to tell how much (margins will come in as service levels are restored to pre-covid levels), the capital structure is messy due to their acquisitions and the net leases on some of their physical casinos, and we've yet to see the inflection point in their omni-channel strategy.  All reasons why Soo Kim is probably best positioned to value the company versus outside investors.  Here's Kim explaining his offer on CNBC.

Below are all the contingent equity securities that have been issued in conjunction with various acquisitions over the last two years (note the Gamesys acquisition shares are in the share count today, the others generally aren't in reported numbers):
Here are their Q3 2021 numbers annualized (Bally's hasn't reported Q4 numbers yet or provided 2022 guidance):
And to show possibly more normalized numbers, here are what the Bally's regional casinos did in 2019:
If we back out the corporate expense on the above for an apples to apples with the Q3 numbers, we get $317MM versus the $359MM (post rent) done in Q3, for simplicity, let's just say normalized is somewhere in between there, an average would be $343MM.  Add Gamesys (pretty consistent grower over time) and subtract the corporate expense gets us $633 of EBITDA against a $5.9B EV (using 68 million shares, $3.445B of debt excluding capitalized leases) for an 9.4x EBITDA multiple (or a 14% levered FCF yield using management's estimate) that gives no value to the mobile app opportunity in the U.S. (currently loss making).  Again, there are a lot of moving parts, I could be wrong, please double check, but I think that's a pretty reasonable price to pay for a company that is potentially in play and/or at an inflection point in their business model.

Disclosure: I own shares of BALY

Armstrong Flooring: Distressed Situation, Pursuing a Forced Sale

This is potentially a horrible idea, it is only a teeny tiny tracker position, it could go to zero, but I wanted to throw this out there in case others know more about situation and are kind enough to share.

Armstrong Flooring (AFI), the 2016 spin from Armstrong World Industries (AWI), designs and manufactures resilient flooring products and sells through distributors or you might walk by their vinyl tile displays in big box home stores like Home Depot.  Armstrong is a recognizable name but they're much smaller than market leaders Mohawk (MHK) and Shaw (owned by BRK), since the spin they've had a challenging time and now due to covid supply chain disruptions and resulting inflation (some of their raw material costs are up 100%), find themselves on life support.  

The company has tried to implement price increases to offset inflation but seem to be a step behind resulting in gross margins being squeezed to near zero and the company burning cash.  Their term loan lender, Pathlight Capital, recently extended Armstrong Flooring another $35MM to repay their ABL facility and shore up the near term balance sheet.  A stipulation of the term loan amendment was the company has to try to sell itself ASAP.  From the 8-K:

The Company also announced it retained Houlihan Lokey Capital, Inc. (“Houlihan”) to assist with a process for the sale of the Company and with the consideration of other strategic alternatives. Based on all the factors deemed relevant by the Board of Directors of the Company (the “Board”), the Board determined this process to be in the best interests of the Company and that a sale of the Company or another strategic transaction are the best means to maximize value for the Company’s stockholders and other stakeholders.

Houlihan is known for their restructuring business, so that's a bad sign and the "and other stakeholders" language at the end is another hint that a restructuring is a real possibility here.  Later in the same 8-K:

The Amended ABL Credit Facility includes certain milestones (“Milestones”) related to the Company’s consideration of a sale of the Company or other strategic alternatives. These milestones include: (i) a requirement that the Company deliver a confidential information memorandum regarding the sale process to potential buyers, investors and/or refinancing sources by January 14, 2022, (ii) a requirement that the Company cause Houlihan to provide a summary to the ABL Agent by February 18, 2022 of all written indications of interest regarding the acquisition of the Company or an alternative transaction that are received on or before that date, (iii) a requirement that the Company notify the ABL Agent by February 28, 2022 whether any binding letter of intent for the acquisition of the Company has been entered into prior to such date and, thereafter, providing copies of any such letter of intent entered into after such date (subject to any necessary redaction), (iv) a requirement that the Company enter into a definitive agreement for the acquisition of the Company by March 31, 2022 which provides for a purchase price in an amount sufficient to repay in full the outstanding loans under the Amended ABL Credit Facility and the Amended Term Loan Facility and otherwise be in form and substance reasonably satisfactory to the ABL Agent, and (v) a requirement that the Company consummate the sale of the Company or a similar transaction by no later than May 15, 2022.

While the company is bleeding cash, the balance sheet doesn't look terrible, they own almost of their real estate and manufacturing facilities.  Last March, they sold one of their production and warehouse facilities in South Gate, CA for $76.7MM (likely the one with the most significant value) which they partially used to pay down debt and then burned through the rest.  I read a comment somewhere that this company is great at selling assets, but not running the company, back in 2018 they sold their wood flooring segment for $90MM or 7.2x segment EBITDA at the time.  They went on to use most of the proceeds to do a Dutch tender offer at $11.10/share, the stock trades below $1.50/share today.

This is prior to the additional liquidity injection, but even proforma, AFI trades a significant discount to book value.

New management, Michel Vermette (formerly a division head at MHK), arrived on the scene in late 2019, started to implement a new strategy, invested heavily in a sales force, but they've run out of liquidity at the wrong time.  The brand name is worth something and so are the property, plant and equipment on the balance sheet, the flip side of inflation is the replacement cost of these manufacturing facilities must be significant and possibly in excess of what they're carried at on the balance sheet.  But AFI is not negotiating from a position of strength (no kidding!) and equity could get completely wiped out.  Equity holders are basically relying on the kindness of others (or PE flooded with dry powder) to bail them out.

Other thoughts:

  • Their old hardwood flooring segment, now called AHF Products, recently changed hands between PE sponsors (I didn't find a price or multiple disclosed anywhere), and the debt raised early this month was on less than favorable terms, SOFR + 625, which means the credit market is rather cautious on flooring companies today.
  • They previously guided to 10% EBITDA margins in a normalized environment, on LTM revenues that would be ~$60MM against a enterprise value of $114.5MM ex-pension liability or $168.7MM with the pension liability.
  • The market is moving towards "luxury vinyl tile" or LVT, MHK on a recent earnings call said they're going to invest $160MM this year to expand their LVT production capacity.  Two of AFI's owned manufacturing facilities produce LVT today, these facilities plus the brand could make it worth for MHK or another strategic buyer to take out AFI.
Again, this is a bad idea, do your own due diligence.

Disclosure: I own shares of AFI

ALJ Regional Holdings: Partial Liquidation Below Proforma NCAV

ALJ Regional Holdings (ALJJ) is likely a familiar name to many readers (and thanks to those that pointed it out to me), it was an NOL shell that Jess Ravish (former Drexel, Jefferies and TCW executive) used as a holding company to buy and sell several various unrelated businesses over the last 10-15 years to soak up the tax assets. The vast majority of the NOLs expire in 2022.  It has functioned as Ravich's mini-PE fund, he owns ~47% of the stock (management owns 56% as a group).  As of 9/30/21, ALJ had two operating businesses: 1) Faneuil, a business processing outsource provider and; 2) Phoenix Color, a specialty book printer that manufactures education materials, heavily illustrated books, etc.

Likely due to the upcoming NOL expiration, ALJ has made two significant asset sales in the last two months:

  • On 12/21/21, ALJ sold a large piece of the Faneuil business to TTEC Holdings (publicly traded as TTEC) for $140MM cash ($15MM of which will be escrowed) and a $25MM-earn out.  The remaining pieces of Faneuil are expected to generate normalized revenue of $80-$90MM.  The sale is expected to close in Q1, and TTEC gets a 3-year option to buy the remaining business.  The transaction is structured as an asset sale, so ALJ will receive all the economics of the business performance up until the closing date.
  • On 2/4/22, ALJ sold the entire Phoenix Color business to Lakeside Book Company (subsidiary of LSC Communications, the disaster spin from RRD) for $135MM cash.  The sale is expected to close in Q2.

Following the closing of both of these transactions, I estimate ALJ will have roughly $150MM in net current asset value plus the remaining business at Faneuil, versus a current market cap (including the conversion of converts and warrants) of $136MM:

The main reason the stock is cheap is Jess Ravich, the market doesn't trust him, one good example is he participated in a financing round during covid and got convertible debt at a $0.54 conversion price that PIKed for a year (further diluting minority shareholders) before it was amended.   Another is he's also been facing legal trouble over the last few years regarding his time at TCW.  Now that the NOLs are burned off and/or expiring, maybe he no longer wants to deal with public shareholders and uses the cash proceeds to take out the minority shareholders.  There is precedent, he did a large cash tender back in 2012 following the sale of a business, the Alpha Vulture blog covered it well back then.

Full disclosure, my cost basis is closer to $2.10, the stock ran up last week and I didn't have time to write it up but still think the shares are pretty cheap.

Disclosure: I own shares of ALJJ