Friday, December 29, 2017

Year End 2017 Portfolio Review

Time to close the books on 2017; it was a great year in the markets and for my personal account which was up 31.25% compared to the S&P 500's total return of 21.83%.
My significant winners were Pinnacle Entertainment, MMA Capital, Tropicana Entertainment and NACCO Industries/Hamilton Beach Brands, my only significant loser was New York REIT.  Below is my performance attribution for 2017:
Soon to be Closed Positions:
  • Pinnacle Entertainment (PNK) recently announced they are being acquired by rival Penn National Gaming (PENN) for $20 in cash plus 0.42 shares of PENN, a great ~3x outcome 20 months after PNK did their OpCo/PropCo split transaction with Gaming & Leisure Property Trust (GLPI).  If I had to sum up the reasons why this idea worked: 1) leverage, PNK was levered 5-6x coming out of the GLPI deal; 2) strong economic tailwinds, people are spending money on experiences (including gaming) instead of things which drove EBITDAR up high single digits; 3) a well timed buyback, PNK bought back over 10% of its stock in the first few months after spinning off from GLPI when the price was $10-$13; 4) expanding multiples in the gaming industry. PENN is citing a 7.7x EBITDAR multiple post synergies on the deal where Boyd Gaming (BYD) might be the biggest winner, snapping up 3 PNK properties to appease regulators at 6.25x EBITDAR pre-synergies.  Proforma for the deal, I have new PENN trading for 7.2-7.7x EBITDAR (with and without synergies) and still believe in the regional gaming tailwind story (good reason to own CZR as well), but I'm going to sell my position shortly after the new year and set a Google alert for wherever the PNK management team lands next.
  • I bought pre-spin January 2018 calls in Hilton Worldwide (HLT) prior to the spinoff of Hilton Grand Vacations (HGV) and Park Hotels & Resorts (PK); HLT has done extremely well over the past year as it moves towards an asset-lite model plus a plan to grow its hotel count by 1/3 while shrinking its share count by 1/3.  I plan to sell in the new year, and potentially roll those proceeds over into other hotel stocks (Hyatt, Wyndham's split and LaQuinta's split come to mind).
Closed Positions:
  • The IEP tender offer for Tropicana Entertainment (TPCA) played out mostly during the first half of 2017, but the offer closed in mid-August at $45 per share.  As a long term shareholder of TPCA, I was too quick to sell into the tender, as shares now trade for $56 and interestingly many people I talked to thought the shares would fall after the tender as it would become more illiquid and Icahn threatened to put a 2 year freeze on additional tenders.  The tender offer was a tremendous short term event idea, the shares were trading at a discount almost all the way up to the expiration date with little chance of it being oversubscribed, but that was never my thesis for owning it, and I should have paid more attention to the post-tender entity's investment case.
  • My only significant loser this year was New York REIT (NYRT), like many others I relied too much on Michael Ashner's original activist presentation and the value it placed on One Worldwide Plaza.  The other issue with NYRT in hindsight was the tight cap rate environment in New York paired with leverage, tiny adjustments in the cap rate have a magnified impact on the valuation when you're talking 4-5% cap rates.  The conference calls after the Winthrop team took over have been comical (much funnier if I didn't own it) and I'm thankful I listened to people smarter than me and sold before things really got ugly.  This was a classic "do your own work" mistake.  The other lesson might be to throw up a caution flag the next time an attractive liquidation comes up, there's a reason why liquidations are rare, they're unlikely to be worth the time, effort, and expense compared to selling a company outright.
  • My post on the NACCO Industries (NC) split received quite a bit of attention, in retrospect the initial thesis had some flaws which thankfully ended up getting fleshed out in the comment section (thank you readers) by the time the spinoff actually occurred.  After the spinoff, shares of the parent company (NC) traded below $25 for a brief period and I was able to snatch up some additional shares that I eventually sold a couple months later around $47.  My original thesis was to sell the spinoff, Hamilton Beach Brands (HBB), and hold NC, but I ended up doing the opposite as the price of NC rose while HBB fell.  I have a poor track record when reversing my initial thoughts on which piece of a spinoff to hold, but hopefully HBB continued to gain traction in higher end higher margin kitchen appliances this holiday season and will make an attractive acquisition target for one of the big consumer appliance/brand rollups.
  • My thesis on Vistra Energy (VST) was rather simple (arguably too simple), it was a bankruptcy reorg that was traded over the counter at the time and had limited liquidity.  Since then, Vistra uplisted and then entered into a deal to merge with Dynegy (DYN) in a big all stock deal that will increase Vistra's diversification and also its leverage.  Not knowing the power industry well enough, I figured the idea had played out enough for me and sold shortly after the deal announcement at a similar price to where it trades today.
  • Inotek Pharmaceuticals (ITEK) was another simple thesis, it was a busted biotech that was trading below cash and pursuing strategic options.  ITEK ended up doing a reverse merger with Rocket Pharma that should close next year, the stock price shot up, but I sold relatively early and missed out on some of those gains.  Still happy, made money, and don't have many regrets as traditional biotech investing isn't my strong suit at this point.
  • I initially thought Merrimack Pharmaceuticals (MACK) was a combination of some the other busted biotech/CVR themes, but management's own thesis changed a couple times for the negative as the second half of 2017 played out.  First they settled a lawsuit with their convertible bondholders which reduced the net cash position, and then they raised capital which effectively diluted the CVR like nature of their future milestone payments in the Ipsen deal.  At this point, I wouldn't be surprised if management went back on their word to pass any milestone payments to shareholders in the form of special dividends.  I sold at a small loss.
  • All the small CVR (GNVC, MRLB, INNL) related deals I purchased this year closed as expected, now we just wait for if/when milestones to be met.  The Perfumania (PERF) offer also closed as expected.
Previously Unmentioned New Positions:
  • I try to post about every position, but sometimes I don't have anything intelligent to add or everything has been said about an idea by people smarter than me (see Andrew Walker's post on GNCMA/LVNTA: http://www.yetanothervalueblog.com/2017/07/liberty-ventures-gci-merger-set-to.html), but I bought General Communications (GNCMA) in late July as a way to get a discount on a discount on a discount in Charter Communications (CHTR).  The deal to merge GNCMA into LVNTA should close in the first quarter and hopefully eliminates some of the tracking stock discount at LVNTA while providing cash flow from GNCMA to continue Malone's typical levered equity strategy.
  • Another position I didn't get around to posting is Molson Coors Brewing Company (TAP).  I did lead the pitch of TAP at a recent meeting I moderate (notes here: https://specialsituationsresearchforum.wordpress.com/2017/10/30/molson-coors-brewing-company-tap/).  Elevator pitch: Molson Coors is trading within a whisper of 52 week lows, significantly cheaper the big beer peers/other consumer staples, just completed a transformational merger from a forced seller at a good price, levered, stable mature business (even if off-trend on craft/spirits).
Current Holdings:
*Additionally I have CVRs related to GNVC, MRLB and INNL
I hope to find some time to update thoughts on long held positions like MMA Capital Management (MMAC) Green Brick Partners (GRBK), iStar (STAR) and Resource Capital (RSO), all of which I continue to like going into the new year.  I don't have any insightful macro thoughts other than I'll probably continue to focus more on near term event like opportunities in 2018.  Thank you to everyone who has reached out, shared ideas, commented on my posts, its all appreciated and makes sharing ideas fun and entertaining.

Happy New Year.

Disclosure: Table above is my blog/hobby portfolio, I don't manage any outside money, its a taxable account, and only a portion of my overall asset allocation which follows a more diversified low-cost index approach.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.

21 comments:

  1. Great run this year - congrats and well deserved. I asked last year about your top picks: RSO>STAR>HHC (with hhc's value highest/clearest in your view). I know you still like RSO a lot, but is that your top 3 again this year? CZR?

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    1. Thanks. Yeah, I'd probably swap out HHC which is now more of a hold for CZR. Vegas is booming again, especially non-gaming like professional sports and conventions which is driving additional traffic to the strip, plus some of the regional tailwinds that made TPCA/PNK great investments should help CZR's as well. RSO will raise the dividend back to market levels in 2018, I'm very surprised it trades where it does, seems like a no-brainer at these prices to me. STAR is more of a sit and wait story, hard to know when the market fully catches onto the value created there, could be saying the same thing this time next year and it wouldn't surprise me.

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    2. Thanks for sharing the WYN idea - very interesting. Curious what your favorite positions are right now. Other than RSO, anything you're more bullish on now than you were 3 months ago? VICI/CZR?

      Thanks as always!

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    3. RSO I'm probably less bullish than I was 3 months ago. I can't argue that redeeming the high cost preferred isn't the right thing to do in the long term, but they're shrinking an already small company with high G&A in the process, so I don't know how they size the company up significantly with the share price where is today? They need more scale to make the math work and get to a ~9-10% ROE, right now I'm only projecting them to get to ~5-6% ROE without a big capital raise, the market won't pay book value for that, I'm sure management knows it too. So what could they do? Maybe somehow C-III contributes assets to RSO and takes back equity? Not sure of the exact details, but they'll need to do something big this year.

      Also less bullish on VICI, still own it, but as of a week ago or so (haven't checked since the recent market dip) they were actually priced at a premium to MGP, no longer a discount, some of their transactions they did after my post changed the numbers a bit. I've talked to a few institutional real estate manager types, they think VICI should trade at a premium to MGP because of independence, I'm not so sure that makes up for the difference in credit risk/property quality, but maybe it does? Either way, VICI's existence is great for CZR's, hopefully CZR's can "use" VICI's high valuation currency and do some attractive deals.

      As for more bullish than I was 3 months ago, maybe ETM. Liberty is out trying to make a play for the restructured IHRT, CMLS is also going through restructuring, maybe we see more rationale actors in that industry once both emerge? Also might lose some of the negative view that radio is dying when it was really just insanely over leveraged balance sheets that took them down. On ETM's last conference call, management highlighted the discount in their shares and then backed it up with significant insider buying the last two weeks. I haven't done anything with my position, but I think it warrants another look.

      The DVMT/VMW situation is a little crazy, but DVMT still seems extremely misplaced, but its hard to know what the ultimate outcome will be there, but I'm more bullish on DVMT than I was around year end.

      And then I really like my three newer ideas in 2018: LQ, SRC, and WYN.

      STAR is reviewing strategic options for their legacy assets, so maybe we'll see some movement there in 2018.

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    4. Really appreciate the thoughtful response. With you on RSO - ended up getting out late October actually (gut feel really, thought the story was too simple [add distribution mid-2018, and stock goes up 50%] so I thought I was missing something).

      I also like WYN a lot. Confused by (slightly disappointed with) STAR's exec change. Looks like no intention of monetizing the development assets anytime soon? Thought old CFO did good enough job (increased transparency in reporting, handled debt expiries well). Just seems like a black box where they're reinvesting with no real catalyst. Value is obviously there, esp with the way industrial rents/cap rates have moved over the last 1-3 years, but similar to HHC hard to see market appreciating the value creation unless there are changes.

      Thanks as always.

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  2. Thanks for your great blog and the posts you made in 2017. Keep it up! Happy New Year

    Erik S

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  3. That's a great result, and a great read too - thanks so much for taking the time to publish.

    One question I have is how you decide how much of your liquid net worth is in your "value" portfolio vs your "standard" portfolio? Is the % more a function of your confidence in your "value" alpha? Has it changed over the years you've been doing this or has it stayed constant? Or have you just not thought about it that much?

    Thanks again!

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    1. It's mostly personal circumstances. I've had the same employer (through two mergers) for over 13 years, so a majority of my net worth is in my employer's retirement and deferred compensation plans. Then I own a home and my wife stays at home with our two young kids (read home equity, larger than normal emergency fund and some college savings). A long way of saying that this money is indeed discretionary and in my circumstances I wouldn't manage my entire net worth the same way. Hopefully over time, it becomes a great percentage of the picture if I continue to outperform and I'll see if that ends up changing my risk tolerance.

      Thanks for reading.

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  4. Congrats! Can you please say what your performance would be without leverage? Thank you and happy new year!

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    1. Thanks, but sorry - I don't think I can calculate that easily, it fluctuates quite a bit.

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  5. hi,

    new to the blog and already a big fan. Noticed that you're not carrying SAFE even with it trading down recently. Is that because you like the risk/reward profile of iStar directly more? Could you share your thinking a little on this?

    thanks in advance,
    J

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    1. I like SAFE as a true bond alternative, but it doesn't really meet my hurdle rate. I think it likely does far better than broad bond indexes with similar risk profiles. And then I like it for STAR because SAFE has a lot of potential, could grow fairly large in a few years if they play their hand correctly.

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  6. Congrats on your continued success. Continue to enjoy/learn from every blog post.

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  7. Great performance and thanks for your insightful posts.

    A bit surprised that STAR is a bigger position size for you than RSO. I have it the other way in my portfolio. I agree with RSO being a strong contender for good gains in 2018 as they finish BS cleanup and reinstate the dividend.

    I'm getting a bit impatient with STAR because there doesn't seem to an immediate catalyst.

    I'd be interesting in hearing your thoughts on MMA. I thought it was an accounting hidden asset story that has played out. Maybe I haven't looked closely enough?

    BTW any new thoughts on DS? I was a good 100% gain for me this year but probably is more of a hold now. Edens has sold the story well with buying the stock at $6.

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    1. I wouldn't read too much into owning more of STAR than RSO, I agree it should be flipped but I added to STAR in the middle of the year when it was a touch cheaper and RSO has come down slightly. May add to RSO as the plan should come to fruition in 2018.

      MMAC is still a bit of the same story, they have quite of few hidden assets if you comb through the financial statements. Items that are required to be eliminated for GAAP like the loan to Morrison Grove, or revenue that doesn't meet recognition requirements on their GE/BofA portfolio. At the same time they're still buying back plenty of shares, coiling the spring for when they are able to generate ongoing operating earnings.

      I haven't kept up on DS, should have paid more attention when Wes Edens was a significant buyer of the stock and I saw the headline that they've internalized management which is a nice step to simplifying the story. Congrats, that was a nice winner.

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    2. Thanks for your reply.

      I'll try to dig more through MMAC filings to check out the hidden assets (loan to Morrison Grove, rev recognition issues with GE/BoA portfolio).

      On DS - thanks for the headline on internal management - I somehow missed that. I remember that the external management was a sticking point for you. One process related question - how did you find this headline? Google alerts, other sources? Hoping to improve my process!

      On hidden asset ideas, you might want to look at FRPH (got idea first from Rhizonme Partners). They were a complex, hodge podge of assets and called Patriot transportion. Their (random) collection of asset included mining lands, transportation company, industrial/business parts, etc. They spun off the transportation business, and are in process of resource conversion by changing industrial use land to residential buildings on the Anacostia river in DC. That area of DC is rapidly expanding and so FRPH built a river front building with 300+ apartments that's now 90%+ leased. They have plans to build 3-4 more buildings in that area.

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    3. I looked at FRPH at the time of the Patriot spinoff, passed because I already owned a few similar companies (think that was around the time I bought STAR), mistake of omission. Another interesting DC focused company is JBGS, worth looking at.

      I use Seeking Alpha for press releases, don't use it for much else, but I have a long list of companies over there and track press releases that way.

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    4. Thanks. I use Seeking Alpha for press releases too, but somehow missed the DS news while on travel.

      I will take a look at JBGS soon. I get your point on FRPH - sometimes there are too many ideas to be chased at the same time!

      I was hoping for some action / dividend cuts by Oaktree at OCSL / OCSI, but none yet.

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    5. Maybe it was just an 8-K, on the mobile app those show up in my SA feed too.

      I wanted OCSL/OCSI to be similar to RSO too, but I'd be a little more careful there as the collateral backing middle market loans is much different (or non-existing) than a CRE loan.

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  8. Hi MDC, good call on RSO. They did not explicitly say they will raise the dividend for the common stock, did they? Or do you just extrapolate it from the earnings recovery? Do you have a guess on what quarter they will pay a fuller dividend?

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    1. I'd guess the second half of the year, on the latest call they backtracked a bit and said they didn't really start turning the portfolio over until March '17, so 18 months from there would put the completion date in the Sept-Oct '18 range, maybe a couple months sooner if we're lucky.

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