Yr Finish 2022 Portfolio Evaluation

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 ordinary, I wrote these intermittently during the last week, a few of the share costs/valuations is perhaps barely stale. Offered in largely random order:

• My largest holding by a good quantity — partially as a result of it has held up in worth this 12 months versus all the pieces else falling — is Transcontinental Realty Traders (TCI), TCI’s three way partnership with Macquarie lately 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 probably understates the worth created within the JV sale transaction, the holdback properties had been valued at market within the cut up between TCI and Macquarie, however stay at historic price in TCI’s ebook worth.  Affordable individuals can argue the place sunbelt multi-family would commerce in the present day (decrease) versus earlier within the 12 months when the JV sale was introduced, however the doubtless truthful 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 truthful 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 extra funding in income-producing actual property, to pay down our debt and for basic company functions.”  Optimistically, I view that as boilerplate language and would not rule out a go-private supply with the proceeds, nevertheless, if a portion of the proceeds get swept again to the Phillips household by way of their function 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 acquired chilly toes of their try to purchase Kohl’s (KSS) (I bought 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 setting’s grim reaper got here for FRG’s American Freight phase (liquidation channel furnishings retailer idea the place not like their company title, they personal and function these areas).  Administration made the covid period provide chain mistake of shopping for something they might get their fingers on, when client 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 would possibly 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 phase, their different two massive segments, Vitamin Shoppe and Pet Provides Plus, proceed to carry out effectively.  Excluding their working leases, utilizing TIKR’s road 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 lately 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 might be a further ~$3/share in a termination price to the exterior supervisor, so if the present ebook is comparatively secure, ~$11-12/share worth in a takeout after bills and want 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 in the present day for ~$10.00/share.  I ought to most likely promote given I am shocked by that response, however my present inclination is to attend for a deal announcement.  There ought to be loads of consumers, there are at all times credit score asset managers in search of 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 adverse aspect, they’ve remaining business mortgage publicity to the albatrosses which are American Dream and Mall of America, their residential property (the core of the portfolio) are prime 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 decrease rate of interest threat.  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 in the present day, however these will not be development loans to future class A properties which are at increased threat for oversupply, however fairly to transitional properties which are present process some sort of repositioning, value-add cycle.  ACR is buying and selling for an absurd 32% of ebook worth, largely due to its small measurement ($70MM market cap) and lack of a dividend.  As a substitute of paying a divided, ACR is utilizing their NOL tax asset generated by prior administration to defend 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 effectively regarded credit score outlets, which may hold administration sincere.  If the shares do not absolutely rerate by the point the NOLs are burned off, I may see an identical state of affairs to WMC the place it is sensible to promote, regardless of needing to pay the exterior administration termination price.
• 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 price construction and slower than anticipated occupancy restoration), the market cap is roughly 10% (pre-convertible most popular 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 may very well 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 ageing demographics shift of their favor.
• PFSweb Inc (PFSW) lately 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 setting higher than you’d count on from a Covid-beneficiary, signing up new shoppers and estimating 5-10% income development in 2023.  Whereas traders had been doubtless dissatisfied that PFSW hasn’t bought 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 government staff’s incentive comp construction based mostly on a sale by 2023.  I’ve acquired 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 consumers, simply want the M&A window to open again up.  I am comfy seeing that course of by to completion.
• The rose is off the bloom with DigitalBridge Group (DBRG), shares have retraced most of their beneficial properties because the summer time of 2020 when the transition to an infrastructure asset supervisor was in its infancy.  That transition is essentially fully, 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 middle corporations that they are within the technique of shifting to managed autos.  Multiples doubtless want to return down for beforehand high-multiple digital infrastructure investments in a non-zero rate of interest world, it is laborious to know the way correct their marks are inside their funds and the way the present setting 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, effectively in need of my LEAPs and effectively in need of CEO Marc Ganzi’s $100MM pay day at $40/share.  Activist investor Legion Companions Asset Administration has lately 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 comparable traits, every have excessive overhead bills in comparison with their asset bases as they appear 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 up to now hasn’t been in a position to flex its CPI-linked resets, probably 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 nearly solely charge pushed.  Each corporations nonetheless have fairly lengthy development runways without having to boost capital, however searching, each would possibly profit from being in personal fingers the place the price of capital is perhaps 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 stated 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 purchasing themselves early within the new 12 months.
• NexPoint Diversified Actual Property Belief (NXDT) lastly did absolutely convert to a REIT from a closed finish fund.  Nevertheless, 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 might make the tangled internet of holdings extra digestible.  I get numerous 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 (somewhat too slowly proper now) unfold.  There’s numerous wooden to cut, that is a type of stability 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 lure, anybody who spends time doing the bottoms up evaluation comes away saying it’s undervalued but it surely’s simply by no means going to be absolutely appreciated by public markets (attributable to complexity, Ackman, improvement/capital allocation threat, and many others., take your choose).  In October, Pershing Sq. (Ackman’s funding car) tried to reap the benefits of this worth disconnect by launching a young supply at $60/share, later elevating it to $70/share, and nonetheless acquired only a few takers.  James Elbaor on Andrew Walker’s unbelievable podcast provided some hypothesis that Ackman may do a reverse merger of Pershing Sq. into HHC to be able 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 effectively.  Possibly Ackman does one thing certainly one of these years, however within the meantime, I am emotionally vested to proceed to carry.
• BBX Capital (BBXIA) is basically 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’ve got most likely seen these is airport terminals).  Administration is not to be trusted right here, however just like my hopeful thesis in TCI, the low cost between the share worth and truthful worth is so large that administration’s greed is form of on the shareholders aspect in the meanwhile.  BBXIA lately accomplished a $12MM tender supply 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 under that quantity, every repurchase under that line are literally accretive to the money/securities per share metric.  Whereas it’s laborious 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 gives.
• 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 bought off significantly, presumably sellers getting out earlier than the corporate stops reporting right here quickly (would possibly 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 supply, 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 unbelievable deal for themselves.  The principle remaining threat 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 massive gamers but additionally have a defendable market place due to price benefits of their native markets attributable to their distant areas (excessive transportation prices for rivals).  2022 was lastly the 12 months when stars aligned, crack spreads widened out considerably and PARR’s refineries had been operating at close to absolutely capability with no important 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 stability 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 possibly 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 form 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 properties have been underdeveloped following the excesses of the GFC, politically overly tight mortgage circumstances for a very long time appears untenable, and millennials want properties.  With engaging land briefly provide, I do not see the massive scale write-downs of the GFC reoccurring, possibly asset heavy homebuilders like GRBK might be seen to be engaging 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 course of a sale course of (the preliminary curiosity from potential consumers was reported to be muted).  I tax harvested my place and re-entered at decrease costs.  Administration lately 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 effectively under 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 a substitute of combating 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 would argue it’s nonetheless early, however others would possibly disagree).  Regardless of the potential for a method change, shares have dropped roughly in half as cash burning biotechnology corporations proceed to be out of favor in a rising charge in setting.  MREO is an possibility like fairness at this level, may very well 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 supply, shares have fallen all the way in which to ~$1.30/share in the present day.  There’s an excellent dialogue within the remark part of my put up speculating on varied situations, anybody ought to sift by them.
• I haven’t got any authentic ideas on both Jackson Monetary (JXN) — looks as if a lot 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, may very well 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 might be a continued theme for me in 2023.  Different liquidations I proceed to carry embody Sandridge Mississippian Belief I (SDTTU), Luby’s (non-traded) and HMG Courtland Properties (non-traded).  One previous 2019 liquidation, Industrial Providers of America (non-traded), lately made its ultimate 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 supply, and remaining CVRs in Prevail Therapeutics, Utilized Genetic Tech, OncoMed and the BMYRT potential ligation settlement.

Closed Positions

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, if in case you have 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 ordinary, thanks to everybody who reads, feedback, shoots me an electronic mail.  I apologize if I do not get again to you shortly, however I do respect all of the suggestions, it helps me as an investor.

Comfortable 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 general property (I even have a secure/rising profession, do not want this cash anytime quickly).  Because of this, using margin debt, choices or focus doesn’t absolutely characterize my threat tolerance.