Home Value Investing Yr Finish 2022 Portfolio Overview

Yr Finish 2022 Portfolio Overview

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Yr Finish 2022 Portfolio Overview

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This 12 months within the markets wasn’t enjoyable.  Whereas I did not take part within the headline driving speculative manias (development shares, SPACs, crypto, and many others), I did get caught with a leveraged PA heavy in actual property and pre-arb/takeover conditions which had been hit by rising rates of interest and M&A financing markets tightening up.  I used to be down -35.31% for the 12 months, versus the S&P 500 ending down -18.11%, my worst absolute efficiency and relative outcome to the markets since starting investing in particular person shares.  My lifetime to-date IRR fell to 21.09%.

Present Positions Updates
As traditional, I wrote these intermittently over the past week, a number of the share costs/valuations may be barely stale. Offered in principally random order:

  • My largest holding by a good quantity — partially as a result of it has held up in worth this 12 months versus every part else falling — is Transcontinental Realty Buyers (TCI), TCI’s three way partnership with Macquarie not too long ago accomplished the sale of their portfolio, together with the holdback of seven properties by TCI.  The ebook worth of TCI jumped to roughly $90/share, however this presumably understates the worth created within the JV sale transaction, the holdback properties had been valued at market within the break up between TCI and Macquarie, however stay at historic value in TCI’s ebook worth.  Cheap individuals can argue the place sunbelt multi-family would commerce at present (decrease) versus earlier within the 12 months when the JV sale was introduced, however the doubtless honest worth of TCI is greater than $100/share whereas it trades for ~$43/share.  After all, TCI shareholders won’t ever see that quantity, however the bigger the hole between honest worth and the share worth, the extra doubtless it’s that the Phillips household’s incentives would align with a go-private proposal.  The present said plan for the JV money is “for added funding in income-producing actual property, to pay down our debt and for common company functions.”  Optimistically, I view that as boilerplate language and would not rule out a go-private provide with the proceeds, nevertheless, if a portion of the proceeds get swept again to the Phillips household by way of their position as “Money Supervisor”, that would be the sign to exit as they’d be getting liquidity for themselves however not minority shareholders.
  • In hindsight, fortunate for Franchise Group (FRG) they bought chilly ft of their try to purchase Kohl’s (KSS) (I offered my place in KSS at a loss after the potential deal was referred to as off), regardless of the upside potential attributable to excessive monetary engineering.  Following that pursuit, the present financial surroundings’s grim reaper got here for FRG’s American Freight section (liquidation channel furnishings retailer idea the place not like their company identify, they personal and function these areas).  Administration made the covid period provide chain mistake of shopping for something they might get their arms on, when shopper preferences shifted, they had been left with stock that was not in demand.  FRG stays bullish on American Freight, on the final convention name Brian Kahn said within the context of his M&A urge for food, “.. if we even choose what you may contemplate to be a low a number of of 5x, which not many companies go for we are able to go investor our capital in opening extra American Freight shops at lower than 1x EBITDA.”  I am guessing subsequent 12 months, Kahn will keep out of the headlines and refocus on the enterprise.  Most of FRG’s issues are centered within the American Freight section, their different two massive segments, Vitamin Shoppe and Pet Provides Plus, proceed to carry out properly.  Excluding their working leases, utilizing TIKR’s avenue estimate of $375MM in NTM EBITDA, I’ve it buying and selling for roughly ~5.5x EBITDA.  June 2024 LEAPs can be found, I purchased some versus averaging down within the widespread inventory.
  • My valuation was sloppy on Western Asset Mortgage Capital (WMC), the hybrid mREIT not too long ago introduced that their present estimated ebook worth is $16.82/share (not together with the $0.40 dividend) versus $24.58/share on the time of my put up.  I referred to as out that the $24.58 quantity was overstated and was going to return down, however did not anticipate the magnitude.  The corporate is at the moment up on the market, there shall be an extra ~$3/share in a termination payment to the exterior supervisor, so if the present ebook is comparatively steady, taking a look at ~$11-12/share worth in a takeout after bills and wish to separate a part of the low cost with the customer.  Surprisingly, the shares have traded up because the present ebook worth disclosure, buying and selling at present for ~$10.00/share.  I ought to most likely promote given I am stunned by that response, however my present inclination is to attend for a deal announcement.  There ought to be loads of patrons, there are at all times credit score asset managers searching for everlasting capital, and a deal should not depend on the M&A financing window being open like an LBO (it will be a reverse-merger like transaction).  On the damaging facet, they’ve remaining business mortgage publicity to the albatrosses which can be American Dream and Mall of America, their residential property (the core of the portfolio) are top quality non-QM adjustable charge mortgages, however most are of their fastened charge interval and thus inclined to charge volatility.
  • In distinction, Acres Industrial Realty Corp (ACR) is a clear mREIT with minimal legacy credit score issues, all floating charge property and floating charge debt (by way of CRE CLOs) that ought to reduce rate of interest danger.  A majority of their loans are to the multi-family sector, cheap individuals can argue that multi-family is being overbuilt in lots of areas of the nation at present, however these will not be building loans to future class A properties which can be at increased danger for oversupply, however quite to transitional properties which can be present process some form of repositioning, value-add cycle.  ACR is buying and selling for an absurd 32% of ebook worth, principally due to its small dimension ($70MM market cap) and lack of a dividend.  As an alternative of paying a divided, ACR is utilizing their NOL tax asset generated by prior administration to protect their REIT taxable revenue (thus not being required to pay a dividend) to repurchase inventory at a reduction.  First Eagle and Oaktree are massive shareholders, two properly regarded credit score outlets, that may maintain administration sincere.  If the shares do not totally rerate by the point the NOLs are burned off, I may see an identical situation to WMC the place it is sensible to promote, regardless of needing to pay the exterior administration termination payment.
  • One mistake I made in 2021 that carried over into 2022 was oversizing my preliminary place in Sonida Senior Residing (SNDA).  SNDA was an out of courtroom restructuring sponsored by Conversant Capital, which controls SNDA now, that resulted in an injection of money, however nonetheless a really levered entity (SNDA would not have leases, they personal their properties).  After the shares have been greater than lower in half this 12 months (doubtless attributable to inflation/shortages hitting their labor value construction and slower than anticipated occupancy restoration), the market cap is roughly 10% (pre-convertible most well-liked inventory conversion) of the general enterprise worth.  SNDA options each excessive monetary leverage and excessive working leverage, occupancy sits at round 83%, if occupancy strikes one other 5-6% increased to normalized ranges, SNDA is probably going a multi-bagger.  However the reverse could possibly be true additionally.  I am sitting on a giant loss, however sticking it out with the unique thesis that occupancy ranges will normalize as Covid-fears subside and growing old demographics shift of their favor.
  • PFSweb Inc (PFSW) not too long ago distributed the money ($4.50/share) from their 2021 sale of LiveArea, what stays is a third-party logistics (“3PL”) enterprise that’s subscale however has navigated the present surroundings higher than you’d count on from a Covid-beneficiary, signing up new purchasers and estimating 5-10% income development in 2023.  Whereas buyers had been doubtless upset that PFSW hasn’t offered the 3PL enterprise to-date, they did re-iterate on their Q3 earnings name that finishing a transaction is their high precedence and prolonged their govt staff’s incentive comp construction based mostly on a sale by way of 2023.  I’ve bought PFSW buying and selling for roughly ~4.6x 2023 EBITDA (utilizing the TIKR estimate), extraordinarily low cost for a enterprise that ought to have a number of 3PL (there are dozens of them) strategic patrons, simply want the M&A window to open again up.  I am comfy seeing that course of by way of to completion.
  • The rose is off the bloom with DigitalBridge Group (DBRG), shares have retraced most of their positive aspects because the summer season of 2020 when the transition to an infrastructure asset supervisor was in its infancy.  That transition is basically utterly, they nonetheless personal a slug of BrightSpire Capital (BRSP) — doubtless low cost by itself, trades at 61% of ebook — and fairness positions in two knowledge heart corporations that they are within the means of shifting to managed automobiles.  Multiples doubtless want to return down for beforehand high-multiple digital infrastructure investments in a non-zero rate of interest world, it is arduous to know the way correct their marks are inside their funds and the way the present surroundings is impacting future fund elevating.  I tried to catch a backside too early, buying Jan 2024 LEAPs which have a post-split adjusted strike worth of $20/share.  Shares at the moment commerce for $10.45/share, properly in need of my LEAPs and properly in need of CEO Marc Ganzi’s $100MM pay day at $40/share.  Activist investor Legion Companions Asset Administration has not too long ago pushed DBRG to place itself up on the market if shares do not get better.
  • INDUS Realty Belief (INDT) and Radius World Infrastructure (RADI) have related traits, every have excessive overhead bills in comparison with their asset bases as they give the impression of being to develop/originate new property.  Each have been harm by rising charges this 12 months as they’re centered on low cap charge asset lessons with long run leases (RADI so far hasn’t been capable of flex its CPI-linked resets, presumably an unfair criticism as they’re on a lag), however each have comparatively recession proof money flows.  The weak point of their share costs is sort of completely charge pushed.  Each corporations nonetheless have moderately lengthy development runways without having to lift capital, however searching, each may profit from being in non-public arms the place the price of capital may be decrease or at the least much less unstable.  INDT has a public $65/share bid from Centerbridge excellent and RADI has been the fixed goal of deal hypothesis all year long, the newest agency mentioned to have an interest is infrastructure supervisor EQT.  I underestimated how excessive rates of interest would rise this 12 months and hope one or each of those holdings is profitable in procuring themselves early within the new 12 months.
  • NexPoint Diversified Actual Property Belief (NXDT) lastly did totally convert to a REIT from a closed finish fund.  Nonetheless, the shares have not reacted a lot to that change, the corporate did put out common manner SEC financials for his or her 9/30 10-Q, however disappointedly have not hosted an earnings name or put out a supplemental that may make the tangled internet of holdings extra digestible.  I get a variety of questions on my present ideas on NXDT, and the “no change” reply might be unsatisfying, however I am content material holding this for one more a number of years and letting the story slowly (a bit too slowly proper now) unfold.  There’s a variety of wooden to cut, that is a kind of steadiness sheet to revenue assertion tales that’ll take time, I may see it being a triple from right here (~$11.50/share) over the subsequent 3 years.
  • Howard Hughes Corp (HHC) continues to be a worth entice, anybody who spends time doing the bottoms up evaluation comes away saying it’s undervalued however it’s simply by no means going to be totally appreciated by public markets (attributable to complexity, Ackman, improvement/capital allocation danger, and many others., take your choose).  In October, Pershing Sq. (Ackman’s funding automobile) tried to benefit from this worth disconnect by launching a young provide at $60/share, later elevating it to $70/share, and nonetheless bought only a few takers.  James Elbaor on Andrew Walker’s improbable podcast supplied some hypothesis that Ackman may do a reverse merger of Pershing Sq. into HHC with the intention to redomicile.  Pershing Sq. at the moment owns ~30% of it and it is a double low cost contained in the publicly traded PSH because the fund trades at a large low cost as properly.  Possibly Ackman does one thing one in all these years, however within the meantime, I am emotionally vested to proceed to carry.
  • BBX Capital (BBXIA) is actually the publicly traded household workplace of the disliked Levan household.  Shares commerce for ~$9.40/share and the 9/30 ebook worth was $20.72/share, included within the $20.72/share is roughly $11.63/share of money, securities and their observe from associated occasion Bluegreen Trip Holdings (BVH).  Moreover, they personal a spattering of multi-family actual property in Florida, an actual property developer, door maker Renin (barely financially distressed) and sweet retailer IT’SUGAR (you have most likely seen these is airport terminals).  Administration is not to be trusted right here, however much like my hopeful thesis in TCI, the low cost between the share worth and honest worth is so large that administration’s greed is type of on the shareholders facet in the intervening time.  BBXIA not too long ago accomplished a $12MM tender provide for 1.2 million shares, that makes the proforma ebook worth ~$21.70/share.  Shares commerce for simply 43% of that worth, and nonetheless have $11.75/share in money/securities to buyback extra inventory.  As a result of the shares commerce beneath that quantity, every repurchase beneath that line are literally accretive to the money/securities per share metric.  Whereas it’s arduous to see a agency catalyst to get the shares a lot increased within the close to time period, the low cost appears too extreme to promote into their periodic tender provides.
  • A inventory that doubtless will not point out once more for 3 years, I purchased again into Rubicon Expertise Inc (RBCN) this month because the inventory has offered off significantly, presumably sellers getting out earlier than the corporate stops reporting right here quickly (may commerce with expert-market standing), following the transaction with Janel Company (JANL).  To recap, Janel successfully paid $9/share for RBCN’s NOLs within the tender provide, they’re restricted from buying extra RBCN for 3 years, however now the shares commerce for ~$1.40.  There’s loads of room in there for JANL to pay a premium in three years and get a improbable deal for themselves.  The principle remaining danger is JANL going bust within the meantime.
  • My vitality vacationer hedge is Par Pacific Holdings (PARR).  PARR is a rollup of area of interest downstream vitality companies in distant areas (Hawaii, Washington, Wyoming, quickly to be Montana).  Their thesis is these refineries are missed by the big gamers but additionally have a defendable market place due to value benefits of their native markets attributable to their distant areas (excessive transportation prices for opponents).  2022 was lastly the 12 months when stars aligned, crack spreads widened out considerably and PARR’s refineries had been working at close to totally capability with no vital downtime for upkeep capex tasks.  In Q3 for instance, PARR reported $214MM in adjusted EBITDA, roughly their mid-cycle steerage for a complete 12 months.  Much like different vitality companies, this 12 months’s money flows allowed PARR to wash up their steadiness sheet and now are positioned to as soon as once more purchase one other refinery, this time Exxon’s Billings refinery.  The deal ought to shut within the first half of 2023, simply perhaps PARR is popping a nook and has gained sufficient scale to lastly begin considerably chipping away at their massive NOL (that was my authentic thesis 8 years in the past).
  • Much like PARR, I’ve owned Inexperienced Brick Companions (GRBK) for 8+ years and simply type of let it sit there.  Regardless of new housing improvement hitting a wall within the again half of 2022 as mortgage charges briefly peaked above 7%, GRBK shares are literally up 20% since 6/30.  It is pretty sure that robust occasions in housing will proceed within the close to time period.  However I am guessing it will not final overly lengthy, single household houses have been underdeveloped following the excesses of the GFC, politically overly tight mortgage situations for a very long time appears untenable, and millennials want houses.  With enticing land in brief provide, I do not see the big scale write-downs of the GFC reoccurring, perhaps asset heavy homebuilders like GRBK shall be seen to be enticing once more versus asset-lite builders.  Shares commerce for a comparatively undemanding 7x TIKR’s NTM (trough?) earnings estimates.
  • One other sloppy purchase from me was Argo Group Worldwide Holdings (ARGO)shortly after my put up the specialty insurer got here out with disappointing outcomes and dropped considerably regardless of being in the midst of a sale course of (the preliminary curiosity from potential patrons was reported to be muted).  I tax harvested my place and re-entered at decrease costs.  Administration not too long ago survived a proxy contest from activist Capital Returns, now seems to have discovered faith and reiterated time and time once more they’re dedicated to their restarted sale course of.  My conviction is fairly low right here, hoping for a sale in 2023.  It trades properly beneath friends on P/B, optically for a P&C insurer vacationer like myself, a sale ought to make sense for each a purchaser and ARGO. 
  • Mereo BioPharma Group (MREO) equally confronted a proxy contest within the fall, as an alternative of preventing like ARGO, MREO noticed the writing on the wall and let activist Rubric Capital on the board.  Rubric’s said technique for MREO is to monetize/liquidate a lot of the corporate’s property, we have but to see motion on that (I might argue it’s nonetheless early, however others may disagree).  Regardless of the potential for a technique change, shares have dropped roughly in half as cash burning biotechnology corporations proceed to be out of favor in a rising charge in surroundings.  MREO is an choice like fairness at this level, could possibly be a multi-bagger or shareholders may get considerably diluted.
  • One other choose of mine that’s down considerably regardless of little information is Digital Media Options (DMS).  DMS has an a $2.50/share bid from a consortium of administration and PE sponsors that personal 75% of the DMS shares.  No information has come out since 9/8/22 non-binding provide, shares have fallen all the way in which to ~$1.30/share at present.  There’s an important dialogue within the remark part of my put up speculating on varied situations, anybody ought to sift by way of them.
  • I haven’t got any authentic ideas on both Jackson Monetary (JXN) — looks like many of the index shopping for has occurred — or Liberty Broadband Corp (LBRDK), others are going to talk extra intelligently than me.  Every are shopping for again a big quantity of inventory, optically low cost, could possibly be coiled springs if recession fears break, however each even have difficult/complicated enterprise fashions in their very own respects.  I’d promote one, each, or none to fund new concepts early in 2023.
  • Nothing has actually modified within the final two weeks for Sio Gene Therapies (SIOX), it’s a failed biotech liquidation, which doubtless shall be a continued theme for me in 2023.  Different liquidations I proceed to carry embrace Sandridge Mississippian Belief I (SDTTU), Luby’s (non-traded) and HMG Courtland Properties (non-traded).  One outdated 2019 liquidation, Industrial Providers of America (non-traded), not too long ago made its last distribution and ended up being a disappointing low-single digit IRR.  To spherical out the miscellaneous stuff, I personal the Atlas Monetary Holdings bonds (CUSIP 049323AB40) which do not seem to have traded because the alternate provide, and remaining CVRs in Prevail Therapeutics, Utilized Genetic Tech, OncoMed and the BMYRT potential ligation settlement.

Closed Positions

  • Probably the most puzzling M&A transactions of 2022 has to go to Superior Emissions Options (ADES).  Administration dragged shareholders on a protracted strategic options course of during which it was extensively assumed that ADES can be a vendor and return their money to shareholders.  As an alternative, ADES flipped round and grew to become a purchaser of an early stage enterprise firm, destroying worth within the course of.  Shares traded for $6.28 the day earlier than the deal announcement and now commerce for $2.23, I do not know the way this deal even closes.  If it weren’t for the poison tablet to guard the NOL (which I imagine is being disqualified on this transaction anyway), I might assume an activist would are available in right here and block the deal.
  • My authentic thesis for ALJ Regional Holding (ALJJ) centered across the NOLs being monetized following a pair asset gross sales, thus the rationale for the automobile present was gone and Jess Ravich would take out minority shareholders with the brand new liquidity on the steadiness sheet.  That did not occur, as an alternative Ravich delisted ALJJ and went on a mini-buying spree, turning ALJJ right into a household workplace.  I moved on after that.
  • Ballys Corp (BALY) was a tax harvesting casualty for me (regardless of the horrible efficiency, I nonetheless realized positive aspects in 2022, principally holdovers from very early within the 12 months), I nonetheless like the corporate and comply with it.  The Chicago on line casino undertaking shall be a house run, doubtless the identical for no matter they do with the outdated Tropicana on Las Vegas Blvd strip.  It’s low cost and price a glance.
  • WideOpenWest (WOW) was one other sloppy mistake, the M&A financing surroundings modified and I did not change my framework as shortly, thought that an LBO may get accomplished, however with the restricted free money move, it simply did not make sense.  Regardless of the few rumors round it, nothing bought accomplished, if the M&A market reopens, WOW could possibly be one of many early targets.
  • I offered Regional Well being Properties (RHE-A) not too long ago to reap the loss, the corporate’s most well-liked alternate provide didn’t get sufficient of the widespread inventory to vote in favor of the distinctive proposal.  Shares have drifted considerably decrease since, the corporate’s fundamentals are nonetheless strained, their operators are struggling beneath the identical labor points as SNDA, RHE has been pressured to takeover administration of those underperforming nursing amenities.  The asset worth seems to nonetheless be there in a liquidation like situation, however unsure how that will get initiated, the popular inventory is in a tricky spot.  I’d re-enter a place, there is a commenter on my RHE posts searching for others to alternate notes on the place the popular stockholders ought to go from right here.
  • LMP Automotive Holdings Inc (LMPX) and Imara (IMRA) had been my two large winners this 12 months, each conditions performed out in a short time.  IMRA did not pursue a liquidation, however quite a reverse merger, I exited shortly after that, nonetheless making a big fast acquire, however missed the run as much as the highest by a very good margin. Nonetheless engaged on when to promote these when day merchants get ahold of them.

Efficiency Attribution

Present Analysis/Watchlist

These are corporations that I am actively researching, many I will by no means purchase however are at the moment attention-grabbing to me in a method or one other, when you’ve got sturdy ideas about any of them, please attain 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 traditional, thanks to everybody who reads, feedback, shoots me an e-mail.  I apologize if I do not get again to you shortly, however I do recognize all of the suggestions, it helps me as an investor.

Glad New Yr, excited to show the web page to 2023.

Disclosure: Desk above is my taxable account/weblog portfolio, I do not handle exterior cash and that is solely a portion of my total property (I even have a steady/rising profession, do not want this cash anytime quickly).  In consequence, using margin debt, choices or focus doesn’t totally characterize my danger tolerance.

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