This year in the markets wasn't fun. While I didn't participate in the headline driving speculative manias (growth stocks, SPACs, crypto, etc), I did get caught with a leveraged PA heavy in real estate and pre-arb/takeover situations which were hit by rising interest rates and M&A financing markets tightening up. I was down -35.31% for the year, versus the S&P 500 finishing down -18.11%, my worst absolute performance and relative result to the markets since beginning investing in individual stocks. My lifetime to-date IRR fell to 21.09%.
As usual, I wrote these intermittently over the last week, some of the share prices/valuations might be slightly stale. Presented in mostly random order:
- My largest holding by a fair amount -- partially because it has held up in price this year versus everything else falling -- is Transcontinental Realty Investors (TCI), TCI's joint venture with Macquarie recently completed the sale of their portfolio, including the holdback of seven properties by TCI. The book value of TCI jumped to approximately $90/share, but this possibly understates the value created in the JV sale transaction, the holdback properties were valued at market in the split between TCI and Macquarie, but remain at historical cost in TCI's book value. Reasonable people can argue where sunbelt multi-family would trade today (lower) versus earlier in the year when the JV sale was announced, but the likely fair value of TCI is more than $100/share while it trades for ~$43/share. Of course, TCI shareholders will never see that amount, but the larger the gap between fair value and the share price, the more likely it is that the Phillips family's incentives would align with a go-private proposal. The current stated plan for the JV cash is "for additional investment in income-producing real estate, to pay down our debt and for general corporate purposes." Optimistically, I view that as boilerplate language and doesn't rule out a go-private offer with the proceeds, however, if a portion of the proceeds get swept back to the Phillips family via their role as "Cash Manager", that will be the signal to exit as they'd be getting liquidity for themselves but not minority shareholders.
- In hindsight, lucky for Franchise Group (FRG) they got cold feet in their attempt to buy Kohl's (KSS) (I sold my position in KSS at a loss after the potential deal was called off), despite the upside potential due to extreme financial engineering. Following that pursuit, the current economic environment's grim reaper came for FRG's American Freight segment (liquidation channel furniture store concept where unlike their corporate name, they own and operate these locations). Management made the covid era supply chain mistake of buying anything they could get their hands on, when consumer preferences shifted, they were left with inventory that was no longer in demand. FRG remains bullish on American Freight, on the last conference call Brian Kahn stated in the context of his M&A appetite, ".. if we even pick what you might consider to be a low multiple of 5x, which not many businesses go for we can go investor our capital in opening more American Freight stores at less than 1x EBITDA." I'm guessing next year, Kahn will stay out of the headlines and refocus on the business. Most of FRG's problems are centered in the American Freight segment, their other two large segments, Vitamin Shoppe and Pet Supplies Plus, continue to perform well. Excluding their operating leases, using TIKR's street estimate of $375MM in NTM EBITDA, I have it trading for approximately ~5.5x EBITDA. June 2024 LEAPs are available, I bought some versus averaging down in the common stock.
- My valuation was sloppy on Western Asset Mortgage Capital (WMC), the hybrid mREIT recently announced that their current estimated book value is $16.82/share (not including the $0.40 dividend) versus $24.58/share at the time of my post. I called out that the $24.58 number was overstated and was going to come down, but didn't anticipate the magnitude. The company is currently up for sale, there will be an additional ~$3/share in a termination fee to the external manager, so if the current book is relatively stable, looking at ~$11-12/share value in a takeout after expenses and need to split part of the discount with the buyer. Surprisingly, the shares have traded up since the current book value disclosure, trading today for ~$10.00/share. I should probably sell given I'm surprised by that reaction, but my current inclination is to wait for a deal announcement. There should be plenty of buyers, there are always credit asset managers looking for permanent capital, and a deal shouldn't rely on the M&A financing window being open like an LBO (it'll be a reverse-merger like transaction). On the negative side, they have remaining commercial loan exposure to the albatrosses that are American Dream and Mall of America, their residential assets (the core of the portfolio) are high quality non-QM adjustable rate mortgages, but most are in their fixed rate period and thus susceptible to rate volatility.
- In contrast, Acres Commercial Realty Corp (ACR) is a clean mREIT with minimal legacy credit problems, all floating rate assets and floating rate debt (via CRE CLOs) that should minimize interest rate risk. A majority of their loans are to the multi-family sector, reasonable people can argue that multi-family is being overbuilt in many areas of the country today, but these are not construction loans to future class A properties that are at higher risk for oversupply, but rather to transitional properties that are undergoing some kind of repositioning, value-add cycle. ACR is trading for an absurd 32% of book value, mostly because of its small size ($70MM market cap) and lack of a dividend. Instead of paying a divided, ACR is using their NOL tax asset generated by prior management to shield their REIT taxable income (thus not being required to pay a dividend) to repurchase stock at a discount. First Eagle and Oaktree are large shareholders, two well regarded credit shops, that might keep management honest. If the shares don't fully rerate by the time the NOLs are burned off, I could see a similar scenario to WMC where it makes sense to sell, despite needing to pay the external management termination fee.
- One mistake I made in 2021 that carried over into 2022 was oversizing my initial position in Sonida Senior Living (SNDA). SNDA was an out of court restructuring sponsored by Conversant Capital, which controls SNDA now, that resulted in an injection of cash, but still a very levered entity (SNDA doesn't have leases, they own their properties). After the shares have been more than cut in half this year (likely due to inflation/shortages hitting their labor cost structure and slower than anticipated occupancy recovery), the market cap is roughly 10% (pre-convertible preferred stock conversion) of the overall enterprise value. SNDA features both high financial leverage and high operating leverage, occupancy sits at around 83%, if occupancy moves another 5-6% higher to normalized levels, SNDA is likely a multi-bagger. But the opposite could be true also. I'm sitting on a big loss, but sticking it out with the original thesis that occupancy levels will normalize as Covid-fears subside and aging demographics shift in their favor.
- PFSweb Inc (PFSW) recently distributed the cash ($4.50/share) from their 2021 sale of LiveArea, what remains is a third-party logistics ("3PL") business that is subscale but has navigated the current environment better than you'd expect from a Covid-beneficiary, signing up new clients and estimating 5-10% revenue growth in 2023. While investors were likely disappointed that PFSW hasn't sold the 3PL business to-date, they did re-iterate on their Q3 earnings call that completing a transaction is their top priority and extended their executive team's incentive comp structure based on a sale through 2023. I've got PFSW trading for approximately ~4.6x 2023 EBITDA (using the TIKR estimate), extremely cheap for a business that should have multiple 3PL (there are dozens of them) strategic buyers, just need the M&A window to open back up. I'm comfortable seeing that process through to completion.
- The rose is off the bloom with DigitalBridge Group (DBRG), shares have retraced most of their gains since the summer of 2020 when the transition to an infrastructure asset manager was in its infancy. That transition is largely completely, they still own a slug of BrightSpire Capital (BRSP) -- likely cheap on its own, trades at 61% of book -- and equity positions in two data center companies that they're in the process of moving to managed vehicles. Multiples likely need to come down for previously high-multiple digital infrastructure investments in a non-zero interest rate world, it's hard to know how accurate their marks are inside their funds and how the current environment is impacting future fund raising. I attempted to catch a bottom too early, purchasing Jan 2024 LEAPs that have a post-split adjusted strike price of $20/share. Shares currently trade for $10.45/share, well short of my LEAPs and well short of CEO Marc Ganzi's $100MM pay day at $40/share. Activist investor Legion Partners Asset Management has recently pushed DBRG to put itself up for sale if shares don't recover.
- INDUS Realty Trust (INDT) and Radius Global Infrastructure (RADI) have similar characteristics, each have high overhead expenses compared to their asset bases as they look to develop/originate new assets. Both have been hurt by rising rates this year as they're focused on low cap rate asset classes with long term leases (RADI thus far hasn't been able to flex its CPI-linked resets, possibly an unfair criticism as they're on a lag), but both have relatively recession proof cash flows. The weakness in their share prices is almost entirely rate driven. Both companies still have reasonably long growth runways without needing to raise capital, but looking out, both might benefit from being in private hands where the cost of capital might be lower or at least less volatile. INDT has a public $65/share bid from Centerbridge outstanding and RADI has been the constant target of deal speculation throughout the year, the latest firm said to be interested is infrastructure manager EQT. I underestimated how high interest rates would rise this year and hope one or both of these holdings is successful in shopping themselves early in the new year.
- NexPoint Diversified Real Estate Trust (NXDT) finally did fully convert to a REIT from a closed end fund. However, the shares haven't reacted much to that change, the company did put out regular way SEC financials for their 9/30 10-Q, but disappointedly haven't hosted an earnings call or put out a supplemental that would make the tangled web of holdings more digestible. I get a lot of questions about my current thoughts on NXDT, and the "no change" answer is probably unsatisfying, but I'm content holding this for another several years and letting the story slowly (a little too slowly right now) unfold. There's a lot of wood to chop, this is one of those balance sheet to income statement stories that'll take time, I could see it being a triple from here (~$11.50/share) over the next 3 years.
- Howard Hughes Corp (HHC) continues to be a value trap, anyone who spends time doing the bottoms up analysis comes away saying it is undervalued but it's just never going to be fully appreciated by public markets (due to complexity, Ackman, development/capital allocation risk, etc., take your pick). In October, Pershing Square (Ackman's investment vehicle) attempted to take advantage of this value disconnect by launching a tender offer at $60/share, later raising it to $70/share, and still got very few takers. James Elbaor on Andrew Walker's fantastic podcast offered some speculation that Ackman could do a reverse merger of Pershing Square into HHC in order to redomicile. Pershing Square currently owns ~30% of it and it's a double discount inside the publicly traded PSH as the fund trades at a wide discount as well. Maybe Ackman does something one of these years, but in the meantime, I'm emotionally vested to continue to hold.
- BBX Capital (BBXIA) is essentially the publicly traded family office of the disliked Levan family. Shares trade for ~$9.40/share and the 9/30 book value was $20.72/share, included in the $20.72/share is approximately $11.63/share of cash, securities and their note from related party Bluegreen Vacation Holdings (BVH). Additionally, they own a spattering of multi-family real estate in Florida, a real estate developer, door maker Renin (slightly financially distressed) and candy store IT'SUGAR (you've probably seen these is airport terminals). Management isn't to be trusted here, but similar to my hopeful thesis in TCI, the discount between the share price and fair value is so wide that management's greed is sort of on the shareholders side at the moment. BBXIA recently completed a $12MM tender offer for 1.2 million shares, that makes the proforma book value ~$21.70/share. Shares trade for just 43% of that value, and still have $11.75/share in cash/securities to buyback more stock. Because the shares trade below that number, each repurchase below that line are actually accretive to the cash/securities per share metric. While it is hard to see a firm catalyst to get the shares much higher in the near term, the discount seems too severe to sell into their periodic tender offers.
- A stock that likely won't mention again for three years, I bought back into Rubicon Technology Inc (RBCN) this month as the stock has sold off considerably, presumably sellers getting out before the company stops reporting here soon (might trade with expert-market status), following the transaction with Janel Corporation (JANL). To recap, Janel effectively paid $9/share for RBCN's NOLs in the tender offer, they're restricted from purchasing more RBCN for three years, but now the shares trade for ~$1.40. There's plenty of room in there for JANL to pay a premium in three years and get a fantastic deal for themselves. The main remaining risk is JANL going bust in the meantime.
- My energy tourist hedge is Par Pacific Holdings (PARR). PARR is a rollup of niche downstream energy businesses in remote locations (Hawaii, Washington, Wyoming, soon to be Montana). Their thesis is these refineries are overlooked by the large players but also have a defendable market position because of cost advantages in their local markets due to their remote locations (high transportation costs for competitors). 2022 was finally the year when stars aligned, crack spreads widened out significantly and PARR's refineries were running at near fully capacity with no significant downtime for maintenance capex projects. In Q3 for example, PARR reported $214MM in adjusted EBITDA, roughly their mid-cycle guidance for an entire year. Similar to other energy businesses, this year's cash flows allowed PARR to clean up their balance sheet and now are positioned to once again buy another refinery, this time Exxon's Billings refinery. The deal should close in the first half of 2023, just maybe PARR is turning a corner and has gained enough scale to finally start significantly chipping away at their large NOL (that was my original thesis 8 years ago).
- Similar to PARR, I've owned Green Brick Partners (GRBK) for 8+ years and just sort of let it sit there. Despite new housing development hitting a wall in the back half of 2022 as mortgage rates briefly peaked above 7%, GRBK shares are actually up 20% since 6/30. It's fairly certain that tough times in housing will continue in the near term. But I'm guessing it won't last overly long, single family homes have been underdeveloped following the excesses of the GFC, politically overly tight mortgage conditions for a long time seems untenable, and millennials need homes. With attractive land in short supply, I don't see the large scale write-downs of the GFC reoccurring, maybe asset heavy homebuilders like GRBK will be seen to be attractive again versus asset-lite builders. Shares trade for a relatively undemanding 7x TIKR's NTM (trough?) earnings estimates.
- Another sloppy buy from me was Argo Group International Holdings (ARGO), shortly after my post the specialty insurer came out with disappointing results and dropped significantly despite being in the middle of a sale process (the initial interest from potential buyers was reported to be muted). I tax harvested my position and re-entered at lower prices. Management recently survived a proxy contest from activist Capital Returns, now appears to have found religion and reiterated time and time again they're committed to their restarted sale process. My conviction is pretty low here, hoping for a sale in 2023. It trades well below peers on P/B, optically for a P&C insurer tourist like myself, a sale should make sense for both a buyer and ARGO.
- Mereo BioPharma Group (MREO) similarly faced a proxy contest in the fall, instead of fighting like ARGO, MREO saw the writing on the wall and let activist Rubric Capital on the board. Rubric's stated strategy for MREO is to monetize/liquidate much of the company's assets, we've yet to see movement on that (I'd argue it is still early, but others might disagree). Despite the potential for a strategy change, shares have dropped roughly in half as money burning biotechnology companies continue to be out of favor in a rising rate in environment. MREO is an option like equity at this point, could be a multi-bagger or shareholders could get significantly diluted.
- Another pick of mine that is down significantly despite little news is Digital Media Solutions (DMS). DMS has an a $2.50/share bid from a consortium of management and PE sponsors that own 75% of the DMS shares. No news has come out since 9/8/22 non-binding offer, shares have fallen all the way to ~$1.30/share today. There's a great discussion in the comment section of my post speculating on various scenarios, anyone interested should sift through them.
- I don't have any original thoughts on either Jackson Financial (JXN) -- seems like most of the index buying has happened -- or Liberty Broadband Corp (LBRDK), others are going to speak more intelligently than me. Each are buying back a significant amount of stock, optically cheap, could be coiled springs if recession fears break, but both also have challenging/complex business models in their own respects. I might sell one, both, or none to fund new ideas early in 2023.
- Nothing has really changed in the last two weeks for Sio Gene Therapies (SIOX), it is a failed biotech liquidation, which likely will be a continued theme for me in 2023. Other liquidations I continue to hold include Sandridge Mississippian Trust I (SDTTU), Luby's (non-traded) and HMG Courtland Properties (non-traded). One old 2019 liquidation, Industrial Services of America (non-traded), recently made its final distribution and ended up being a disappointing low-single digit IRR. To round out the miscellaneous stuff, I own the Atlas Financial Holdings bonds (CUSIP 049323AB40) which don't appear to have traded since the exchange offer, and remaining CVRs in Prevail Therapeutics, Applied Genetic Tech, OncoMed and the BMYRT potential ligation settlement.
- One of the most puzzling M&A transactions of 2022 has to go to Advanced Emissions Solutions (ADES). Management dragged shareholders on a long strategic alternatives process in which it was widely assumed that ADES would be a seller and return their cash to shareholders. Instead, ADES flipped around and became a buyer of an early stage venture company, destroying value in the process. Shares traded for $6.28 the day before the deal announcement and now trade for $2.23, I don't know how this deal even closes. If it weren't for the poison pill to protect the NOL (which I believe is being disqualified in this transaction anyway), I'd assume an activist would come in here and block the deal.
- My original thesis for ALJ Regional Holding (ALJJ) centered around the NOLs being monetized following a couple asset sales, thus the reason for the vehicle existing was gone and Jess Ravich would take out minority shareholders with the new liquidity on the balance sheet. That didn't happen, instead Ravich delisted ALJJ and went on a mini-buying spree, turning ALJJ into a family office. I moved on after that.
- Ballys Corp (BALY) was a tax harvesting casualty for me (despite the terrible performance, I still realized gains in 2022, mostly holdovers from very early in the year), I still like the company and follow it. The Chicago casino project will be a home run, likely the same for whatever they do with the old Tropicana on Las Vegas Blvd strip. It is cheap and worth a look.
- WideOpenWest (WOW) was another sloppy mistake, the M&A financing environment changed and I didn't change my framework as quickly, thought that an LBO could get done, but with the limited free cash flow, it just didn't make sense. Despite the few rumors around it, nothing got done, if the M&A market reopens, WOW could be one of the early targets.
- I sold Regional Health Properties (RHE-A) recently to harvest the loss, the company's preferred exchange offer failed to get enough of the common stock to vote in favor of the unique proposal. Shares have drifted significantly lower since, the company's fundamentals are still strained, their operators are suffering under the same labor issues as SNDA, RHE has been forced to takeover management of these underperforming nursing facilities. The asset value appears to still be there in a liquidation like scenario, but not sure how that gets initiated, the preferred stock is in a tough spot. I might re-enter a position, there's a commenter on my RHE posts looking for others to exchange notes on where the preferred stockholders should go from here.
- LMP Automotive Holdings Inc (LMPX) and Imara (IMRA) were my two big winners this year, both situations played out very quickly. IMRA didn't pursue a liquidation, but rather a reverse merger, I exited shortly after that, still making a large quick gain, but missed the run up to the top by a good margin. Still working on when to sell these when day traders get ahold of them.
These are companies that I'm actively researching, many I'll never buy but are currently interesting to me in one way or another, if you have strong thoughts about any of them, please reach out to swap notes, or use them as additions to your watchlist:
- STAR/SAFE, BHM, SRG, AAIC, ACEL, SCPL, ABIO, ANGN, SFE, ADMP, MBI, NWSA, TV, MACK, FPH, AIV, ILPT, CMRX, ADMP, SCU
As usual, thank you to everyone who reads, comments, shoots me an email. I apologize if I don't get back to you quickly, but I do appreciate all the feedback, it helps me as an investor.
Happy New Year, excited to turn the page to 2023.
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/growing career, don't need this money anytime soon). As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.
Thanks for this and hope 2023 is better.ReplyDelete
On your watchlist, what would you consider the top 3 - 5 most interesting?
What's your hesitance re NWSA and CMRX?
Thanks, and I hope 2023 is better too!Delete
I would say MBI, NWSA, MACK are my top, maybe a basket of the tiny broken biotechs like ABIO, ANGN too. I like ABIO a bit because they hired Ladenburg Thalmann as their advisor, I've seen a couple of their reverse mergers go parabolic.
On NWSA, I like their assets, I owned it shortly after the spin, but I have a hard time picturing what a deal looks like between them and FOXA would look like that would be close to fair value for NWSA shareholders. FOXA is only a little bigger, trades cheaply, NWSA might only get a token premium in the transaction. I also don't believe that Murdoch would sell Dow Jones/WSJ to Bloomberg, that's his crown jewel, no way he parts with it. Maybe they do distribute the REA shares to NWSA prior to the merger, that could be a way of unlocking some value in the transaction.
CMRX, I need to do more work, but it is similar to MREO, Rubric Capital banging the drum for a liquidation/monetization strategy.
Happy New Year!Delete
What is the thesis on MBI now?
MBI's PR exposure is wrapped up and they're pursuing a sale. Screens poorly because one of their segments (the old structured finance insurance business) has negative book value but its non-recourse to the parent. Hopefully AGO buys them.Delete
Where do you think MBI could be taken out?Delete
I know it’s a stupid platitude, but here we go: even though your year sucked the underlying process seems very solid to me! So, onwards and upwards.ReplyDelete
Thanks! Yeah, I'll keep muscling through and moving forward. Best to you and your family in the new year.Delete
Didn’t have the greatest year myself. Its awkward being richer 1.5 years ago. Don’t know if its ever taken this long for me to reach all time highs again. Though I’m still up significantly overall and especially since COVID.ReplyDelete
Some interesting names:
$ACOR won a lawsuit which gave them millions and will allow them to reduce their cost of goods sold for a biotech product. Trades for 1x ebitda with technical bankruptcy risk from a delisting possible but unlikely.
$TXMD sale of biotech product to become royalty company. Net cash position paying out 100% of the royalties received (minus low corporate overhead not unlike $MACK)
$TUSK perhaps finally getting paid from the PREPA Puerto Rico bankruptcy this year. Would likely be paid more than the current market cap which they will likely use to pay off debt. Their energy and infrastructure businesses finally appear to be the right place, right time.
Some floating rate preferreds of large banks are interesting. Possible 20% irr from these actually. If the fed reduces the fed funds rate to 2-3% in 3-4 years. And unless 3 month libor diverges significantly from future rate hikes the current yield could be 8%+ on not very risky preferreds.
$CNM is a distributor of fire and water system products for municipalities and other end users. They are acquisitive and are able to make purchases at a few times ebitda. They run their working capital unbelievably tight. Sort of trades at 60% of a lazy estimate of private market value with business growth and acquisitions potentially providing a multibagger return.
Other mentions: HGTXU, GFF, GRIL, CRAWA, CPPTL, RILY, SPOK
Thanks for the idea dump, unfamiliar with most of these, I'll dig through them. Appreciate it.Delete
My floating rate preferred bucket actually went up substantially. Many positions went up 20% in the month since posting. Going to probably sell the majority of them and/or collect a dividend and then sell. The market must have mistaken them for non-floating.Delete
I appreciate you continuing to share your ideas and thoughts on this blog especially in the tough years. Happy new year and better luck to you in 2023.ReplyDelete
Thanks, happy new year to you as well, thanks for sharing your thoughts across various posts.Delete
Thank you, as always, this year-in-review is always great to read. I noticed ILPT in your list at the bottom. Is your interest in that essentially a bet on the company selling off the properties/deleveraging and then returning to its dividend, or are you looking at it more in the context of historical valuations. Am looking at it, but some concerns about management too.ReplyDelete
It's managed by the RMR Group, so it would just be a trade. It's high octane, could come roaring back briefly, the assets are good, but as you mention the management is terrible.Delete
The likely scenario is that RMR finds a JV partner that buys assets at a low / mid multiple. The challenge is a real 3rd party will have to really pay up to wrest AUM from RMR. The conflict of interest looks very real.Delete
Hey, love reading your blog. First came across it while researching TCI. I have a few general questions. What methods do you use to decide position sizing? Do you calculate an efficient frontier or just freestyle? Do you have any research tips? Thanks for doing the blog. I enjoy reading it!ReplyDelete
Thanks, appreciate it. I'm probably a poor "portfolio manager", I don't put a lot of thought into position sizing, and/or I don't change position sizing very often, sometimes just let positions sit there. I guess to your question, mostly just freestyle. As for tips, I follow a lot of companies SEC filings and then have a lot of Google Alerts for keywords I'm interested in, network of likeminded investors, etc. I'm also thankful that a lot of smart people share ideas on my blog.Delete
Any particularly valuable key words/ phrases you track?Delete
As always, thanks! I hope the year has been a pleasant adventure for you, regardless of any misadventures in the capital markets.ReplyDelete
Thanks also for the idea list.
I see CPPTL mentioned above, that remains my largest holding. I’ve got a china risk-arb basket, haven’t yet convinced myself on MBI.
The last stocks I bought in 2022 were SI, and SBNY. I may be reaching into too competitive a game buying something as big as SBNY, but I do like just how horrified the market is about the near term prospects for these two banks.
I'm intrigued by SI, don't think I want to step into that hornet's nest, but when I looked at their balance sheet their assets looked like a short term bond fund. I don't know about the AML/KYC risk. But yeah, decided its not worth the brain damage for me at least.Delete
Thanks for providing such a great performance review. It was a great read.ReplyDelete
One interesting stock for the next couple of years could be Ferrellgas Partners. It is a highly levered propane distribution business with a pretty complex capital structure. If they manage to call the B-units without dilution and pay down some debt, this could become a multi-bagger.
Maybe that's of interest for you. Seems risky, but with high potential...
Greetings and all the best for the new year.
Thanks for reading and the idea. I'll spend some time on it.Delete
What timing / scenario do you see playing out? When I looked at this briefly after emergence the conversion factor table and ~15% IRR redemption requirements made it look like the class B's are very expensive capital. Has the outlook improved since emergence?Delete
The class B-units are very expensive capital for sure. If they want to pay them down in the first five years, it would cost around 550 million USD. Last year they already paid 100m. It really depends on their financial performance, if they earn 300-350m in EBITDA per year, they should do fine, but it is a painful journey for sure.Delete
Why not buy the B’s? FGPRBDelete
Don't know this well but I thought the 2026 unsecured maturity actually looks concerning, although those bonds were quoted at 85 last I looked. In a few years they'll be hitting a step-up on the preferred coupon to 11.125%, have to deal with refinancing that bond (650mm?) with another slug coming in 3 years and creditors have the uncertainty that prefs can force a sale of the company. That all combines to it being tough to competitively do the tuck-in acquisitions to offset a presumable eventual organic decline in the business. Even the b's are too option-like for meDelete
Thanks for all your work and for being transparent on wins and losses. I always find some interesting nuggets. I was with you in ADES. I can't fathom how the board thought this was the best outcome. A liquidation was a far better deal. I am holding hope of a nixed deal for the token shares I still hold. They couldn't event structure the deal in a way to keep the NOLs. Pathetic.ReplyDelete
Right, they used the NOLs as a reason to limit an activist from accumulating shares, but in the end, do a deal that destroys the NOL. And the worst part is, I think the poison pill is still in effect.Delete
Thanks for another year of the blog, I read it religiously and have learnt a lot. Even after this year that is an impressive IRR.ReplyDelete
Thanks, appreciate the kind words, and thank you for reading.Delete
I came across the blog this year and have really enjoyed it. Appreciate your approach.ReplyDelete
I remember being interested in PARR a long time ago. I had totally forgotten about it. Planning on taking another look. I always wanted BOH to get cheap but it never gets there. Thanks for bringing it back to my attention.
Would you ever look at the MLP space? Still suffering from poor investor sentiment even though capital allocation has improved (by necessity through debt paydown) and the GP / LP structure has mostly been eliminated. There is also always potential for a takeout from an E&P parent (if one exists), which I feel would be up your alley. SHLX was a big winner for me this year from a risk / return perspective. They are mostly take unders, but you can still get a decent return. GPP, SMLP, ARLP, WES, GEL, NGL, PAA, KNTK, ARLP. Some way more riskier than others due to balance sheet issues but they are producing a lot of Operating Cash Flow and some have shown the willingness to consistently de-lever. The higher quality ones have good inflation protection through price escalators.
Also looking at some banks or bank-like companies that are getting free government capital through the CDFI bond Guarantee Program (Crossroads).
Others that may be less oriented towards your wheelhouse: LPRO, MED, ITIC (needs to get cheaper), HIFS,TPB, ATVI, EZPW, LEGH, CURN, VRRM, ALTG.
I missed the MLP take-private wave last year, mistake on my part, just never quite got around to looking at all of them. I don't know if PARR is a great buy here, tough for things to get much better in the refining space than 2022. The one potential catalyst out there is they own 46% of a nat gas exploration company (Laramie Energy) in Colorado. They've completely written it off the balance sheet, but it still could be worth something meaningful to the company, they've said they're exploring alternatives for it and any gain on sale would be offset by the NOLs. But for years I've been waiting for that catalyst.Delete
Glad you found my blog, appreciate your comments over the last year. Best in 2023.
Agree that the recipients of free capital are quite interesting, Jack. Have been buying BYFC, which is a not-especially-well-run (for many years) but arguably-improving (they recently bought another bank to get some better economy of scale and are allegedly improving ops) bank that got a massive slug of ultra low cost funding from Treasury (good thing, too, as they had to write down some of their bond portfolio bc of the rate environment). I don't have enough faith in them to not squander this to make it a full position yet, but am watching. Contrast the difference in stock-price reaction to the funding announcement of them vs MFBP, another not-great bank that I've owned for a few years for its unchanging (until now) cheapness.Delete
Also further to what you were saying re: MLPs, couple of possible 2023 catalysts I listed on Twitter; might/should update these throughout the year, but probably won't bc lazy:
I also agree re: CDFI banks. I own UBAB and CBOBA, to me these seemed the best candidates based upon size of capital injection combined with decent historical operating returns. Most of these banks look pretty bad from a shareholder perspective (though I’m sure they do a lot of good for the community).Delete
Thanks to you both. ADL, looks like we are thinking about MLPs the same way. I have a screen with the quickfs plugin if you want me to send it to you. What do you think about adding WES to your buyout list? The counter is that OXY stock is still cheap and buying back shares is still a better use of capital. On the dividend increase side, any thoughts on MMLP, GEL, PAA, ET (probably in order of risk)?Delete
Why is GPP so cheap? Looks like they are fine on the debt burden. High quality assets based on the ROIC. Maybe artificially high due to above market contracts with GPRE? Why wouldn’t GPRE try to fold it in at these levels? Is worry about ethanol regulation a factor?
Lastly, any thought on hedging out interest rates here? Spreads to BBB and BB bond indexes are currently well below long-term avg. and median spreads. If you normalize for “peak” Alerian yield, however, the spreads are above long-term trends. The LFCF yields / distribution coverage levels are so high (20%+ / 2x+ in most cases) that it shouldn’t even matter. It doesn’t take a genius to see that there are some high-quality assets with huge FCF yields that may not even be over-earning. Maybe the fear is rates and that we go back to terrible capital allocation policies from both E&Ps and MLPs that crushed these names over the past decade. I’m sure leverage is a key factor, but most of these companies have demonstrated the desire and ability to de-lever. Rig count relative to price remains rational and lack of easy capital for E&Ps going forward may be a good thing.
Sure, I'd love to see that. Had never heard of quickfs--seems very useful. aharonlevy / gmailDelete
I haven't looked at WES in years. My first-second impression is that it makes decent sense for OXY to buy, but I'm not sure which needles they want to push and so would have to spend a little while looking at OXY's goals and incentives. If I have any useful thoughts (doubtful) will get back to you.
MMLP: I get very excited about it a few times a year, then run a back-of-envelope adjusting their massive reported numbers to see how much cash I could comfortably count on, and come away with the impression that things are super-tight. With the capital required for the new JV, I have low confidence in distribution increase any time soon. My math is literally scrawled on an envelope and purposefully conservative 9and very approximate), so entirely possible I'm wrong, as w/everything here.
GEL: I check in on them ~2x a year; things not as rosy as they like to present them (as is typical in the space), but they have good medium-term drivers and seem to have switched from a semi-aggressive to semi-conservative stance (as is typical in the space) on capital returns. I have some calls which I roll; I think a distribution increase and market rerate (based on the diversity of their assets) seems likely in the medium term.
PAA: Own some PAGP (cost basis in the 6s), plus PAA/PAGP (bought when were in the 10s) calls. I like what they are doing--positioning themselves for a global rerate of equity and debt, though a slow and steady approach--and imagine we'll see more of it. Massive dist hikes are not part of that picture, but steady increases are.
ET: haven't looked at this in a while. Own calls; check in every so often to make sure they haven't blow anything up. Seems like a standard and ongoing recovery/reversion. Should probably do a comparison between them and PAA to see who's giving more relative value now.
GPP is so cheap! Assets are super-stranded w/o GPRE, tho; who'd want a contract-severed GPP? I guess many integrated-with-parent MLPs suffer from monopsony problems, but the problem here--maybe--is the parent. GPRE has been talking up its non-ethanol biz for a while, and so the end game of them folding these facilities back in might run counter to the "brave new company" image they are trying to project. That said, it's not like they don't rely on these facilities, and if they could fold them in at a ~12% yield seems like it'd make sense. Just can't handicap.
I'm not smart enough to think about hedging out rates; I agree w/all you said above, though.
Own and have been buying more NRP; they are overearning (and may be for a while) but know it and are building a fortress balance sheet while they can.
I do hesitate to mention NGL again--they have been so consistently terrible for so long--but they might hit the leverage levels which allow them to restart pref distributions this year, which they have put front and center as a goal. The Bs are now floating-rate, with an indicated distribution accumulating at ~$3/year (in addition to the already-accumulated amounts). If I were the CFO I would absolutely not want to restart distributions on these but rather do a tender or exchange offer to the max extent possible, or at the very least wait until leverage came in well below the target level. They have been hinting at some capital action (I'm guessing a sale of some portion of operations) for a while now, but have gotten more circumspect about that recently. They are terrible, terrible, but because of that are constrained these days, which is likely a good thing.
Thanks again for all the commentary. In case you are interested, I am probably passing on GPP. The ROA is very high. That drives the big EV / Assets & Goodwill premium. Makes me believe they are way over-earning with above market contracts (not news to anyone). Basically I agree with your monopsony comment. There are worse things than clipping a 14% yield and potentially getting a small premium on a fold in. But, they still have IDRs. They are approaching the .46 distribution level where the parent starts raking in cash. I haven't paid enough attention to the most recent IDR elimination transactions, but I know there were some unfavorable transactions done in the past. Trying to understand the incentives at the parent is over my head at this point. Are there any more assets to drop down? They can't drop anything into GPP at this valuation. Maybe they need to grow the distribution and get valuation up so they can do more drop downs. We know that the parent doesn't get much credit for cash generated from IDRs, so I assume they don't want to grow distributions just to get into higher IDR tiers. I think it's clear that GPP is over-earning and I expect the parent to take advantage of that if they can. The best outcome is a takeout with a modest premium and you get paid to wait. The worst is some sort of contract restructuring or dilutive IDR elimination deal. I'm sticking with PAAs of the world that are trading near 1x EV / Asset Value on assets that are probably worth a lot more than their book value.Delete
What odds do you actually put on the ADES deal breaking? Wouldn't that be a massive positive for the stock price?ReplyDelete
Not sure how to handicap that, but low. Mainly because the poison pill is still in place, despite this transaction nullifying the NOLs.Delete
One of my predictions is already wrong, not going to be a quiet year for Brian Kahn/FRG:ReplyDelete
I'd be pretty disappointed with $30-$35 in a MBO. Hopefully this is just a ploy to talk the stock up a bit, give them a better currency to make an acquisition (CONN in the WSJ story).
Kahn can't help himself. He got lucky with KSS. Should keep his head down and fix ongoing operational issues at his company instead of looking for more furniture retailers.Delete
Perhaps once he proves himself with actual results for FRG, he might actually be able to use his stock as currency...
As far as I remember, you have a 20% long-term IRR target so the year is not bad until IRR is here:) it seems that your strategy tends to underperform in down years (take 2018) but kills S&P in 'normal' times, so maybe that's just the nature of thingsReplyDelete
NGS may be interesting - their largest shareholder Hoak recently called for 'strategic alternatives', including a sale, primarily pushing for merger with another Hoak entity Nova Compression (which would, I think, keep the NOLs). Direct competitor CSI Compressco is trading at 7.5 EV/EBITDA, NGS is at 6x EBITDA (28% upside though there are some quirks in their adjusted EBITDA calculation) and 0.66 tangible book despite having almost no debt.
Andrew Walker recently covered SLG - office reits surely are not the best business to be in but 9% dividend yield and 50% discount to book for a class A properties in NYC seems too extreme
WSR looks like mini-STOR trading at roughly 8% cap rate while divesting assets at 6% (they've got a management change recently). STOR was taken private at 6% cap rate
And maybe KSS should be back in the watchlist? FRG wasn't exactly stupid offering $50 and maybe they'll return to the idea of acquiring KSS after MBO. The real estate is there and there is almost a $1 bln inventory buildup above historical average - releasing some of it will bring cash close to 25%-30% of current market cap
Thanks, yes 20% is sort of the unofficial long term goal where I think it is worth it to continue, invest the time, etc. I don't really like that I have underperformed in down markets, part of that might be holding on to some of my "legacy" positions well past the event/catalyst because of taxes. This is a taxable account for me, in a tax deferred account I would probably have less volatility.Delete
Thanks for the idea list. Office is still tough for me, my unoriginal general thought is it takes a lot longer to reposition a real estate portfolio in real life than it would seem to a common stock investor. How long have the mall REITs been talking about repositioning, new types of tenants, using big boxes as warehouse space, etc. Think a similarly long shake out is in store for office. I believe in some level of return-to-office, but small changes in demand with static supply could really crush the office REITs. Unoriginal thoughts I know.
Good point on KSS, might be worth keeping an eye on.
I love reading your commentary. You seem to have a couple of investments focused on the senior living industry. Are you familiar with DHC? We were buying their baby bonds DHCNI and DHCNL at prices in the 40% of par range in rage latter half of December. Not really interested in the common equity, but the debt seems to offer the prospect of good returns. Also, Third Avenue Real Estate has been buying the bonds and has an interesting take on them. See here:ReplyDelete