Markets have seen fairly the rally prior to now two months, my portfolio adopted alongside, pulling my returns for 2023 as much as 38.54% for 2023 versus 26.29% for the S&P 500. My lifetime-to-date IRR is presently 22.47%, which continues to be above my 20.00% objective.
Regardless of the nice yr, I am nonetheless under my excessive water mark as a consequence of a disappointing 2022. I love anybody that invests professionally by means of unstable markets, my returns would not be nearly as good if I used to be managing outdoors capital.
Up to date Ideas on Present Positions
As typical, these transient updates had been written over the previous two weeks, share costs might need moved round a bit of, however hopefully nonetheless directionally related. Excuse the inevitable typos.
Damaged Biotech Basket:
- Homology Medicines (FIXX) has been the laggard within the damaged biotech basket, in November the corporate introduced a reverse merger with Q32 Bio, a personal biotech targeted on the therapy of extreme alopecia areata and atopic dermatitis, hair loss and a pores and skin situation respectively. The transaction assigned an $80MM ($60MM of money, $20MM public itemizing) to FIXX unique of their legacy belongings, which equates to roughly $1.38/share in comparison with the present share worth of $0.55/share. The money at closing is predicted to be $115MM, pre-merger FIXX shareholders will personal 25% of the post-merger firm, or roughly $0.50/share in money. It isn’t uncommon within the present marketplace for the enterprise worth of a pre-revenue biotech to be close to zero, however along with the NewCo, FIXX shareholders will get a CVR for the monetization of any legacy belongings. There’s motive to consider that the CVR can have some worth, FIXX’s IP had preliminary optimistic Section 1 outcomes, however the knowledge remains to be “immature and inconclusive”. Plus there’s the JV, OXB Options, that might be put to Oxford Biomedia Options for five.5x TTM income by March 2025. My present plan is to carry by means of the reverse merger, perhaps the identify change, upcoming Section 2 research knowledge readouts (second half of 2024), conferences/investor attain out, and so on., will encourage conventional biotech buyers to rotate into the inventory offering a barely higher exit. And I am bullish on the CVR, it will act as a liquidating belief, Q32 Bio wants to make use of “industrial affordable efforts” to get rid of the legacy belongings.
- Graphite Bio (GRPH) is an analogous state of affairs, additionally they introduced a reverse merger in November, this one with LENZ Therapeutics, LENZ has a late stage product candidate for treating close to sightedness that’s anticipating a Section 3 learn out within the second quarter of 2024. GRPH shareholders will obtain roughly a $1/share particular dividend at shut (focused for Q1) plus will personal 30.7% of the post-merger LENZ. Submit-merger LENZ is predicted to have $225MM in money after shut (there is a $53.5MM PIPE), equating to a different ~$1.20/share of money per GRPH share. GRPH presently trades at $2.33/share, giving it solely a barely optimistic enterprise worth, appears cheapish for a biotech with a close to time period catalyst in a giant addressable market. I am going to doubtless maintain onto the stub and see what occurs.
- AVROBIO (AVRO) introduced strategic options in July and remains to be figuring out its subsequent steps. As of 9/30, the corporate has ~$100MM of NCAV, assuming one other $10MM of money burn (they additional lowered their workforce in October) earlier than a deal might be commenced would equate to $2/share of worth with none worth attributed to their IP. AVRO bought one in all their applications to Novartis for $80+MM, the opposite, HSC gene remedy for Gaucher, might need some worth as a kicker. Shares presently commerce for $1.32/share, making it a lovely danger/reward.
- Pieris Prescription drugs (PIRS) ran up rapidly after my preliminary write-up, I took earnings, however then it fell and I re-entered, a bit of too early in hindsight as shares have dropped roughly in half since. As of 9/30, PIRS had $30.5MM in internet present asset worth, or $0.31/shares versus a present share worth round $0.15/share. That quantity would not embrace a lot of IP belongings and probably precious partnerships, however with restricted money on an absolute foundation, they’re going to want to maneuver pretty rapidly. Pieris did simply terminate their working lease, typically a precursor to a deal announcement. This one is on the riskier facet, however could possibly be fascinating should you see any worth of their hodgepodge of IP.
- Sio Gene Therapies (SIOX) is a liquidation that is now a darkish inventory. One reader has been conserving higher tabs on the liquidation than me (see the feedback), apparently they’ve two of their three subsidiaries liquidated and will have the third performed quickly. The anticipated preliminary distribution within the proxy assertion was $0.38-$0.42/share versus a present worth of $0.37/share. It has been an annoying wait with limited-to-no public disclosure, which is without doubt one of the downsides of investing in liquidations, it’s worthwhile to have a sure character quirk to set it apart within the meantime. Hope this liquidation is put to mattress quickly.
- Cyteir Therapeutics (CYT) is within the remaining phases (as we have seen with SIOX, may final some time) of its company life, shareholders authorised the liquidation plan on 11/16/23 and now we await timing of the liquidation distribution which is estimated at $2.92 to $3.31/share within the firm’s proxy. Liquidation estimates are usually conservative and this seems to be a cleaner state of affairs than most as CYT is barely holding again $500k for a reserve account. Shares commerce at $3.09/share, I doubtless would not purchase it at present, however content material to carry awaiting the liquidation distribution.
- Kinnate Biopharma (KNTE) and Theseus Prescription drugs (THRX) are in related conditions to one another the place Foresite and OrbiMed, as a bunch, have indicated plans to make a proposal for every firm. Presumably the construction would lead to a money buyout for a reduction to internet money plus a CVR for any IP worth, much like Pardes Biosciences (PRDS) which Foresite took non-public earlier within the yr. Each shares commerce for under a slight low cost to my finest guess of a take non-public provide (5-15% upside on every), however it’s value conserving an eye fixed out for different biotechs the place these two are concerned as they pop up. Late breaking information, on the Friday earlier than the Christmas vacation weekend, Theseus introduced they reached an settlement with Kevin Tang’s Concentra Biosciences for $3.90-$4.05/share in money, plus a CVR for 80% of legacy asset gross sales proceeds and 50% of synergies. I am a bit stunned that it was Tang versus Foresite/OrbiMed however hopefully meaning effectively for Kinnate.
- Eliem Therapeutics (ELYM) is a brand new addition to the basket, nothing an excessive amount of has modified since that write-up.
- Reneo Prescription drugs (RPHM) acquired a proposal from Kevin Tang’s Concentra Biosciences for $1.80 per share plus a CVR for 80% of any legacy asset gross sales. Contemplating the corporate has not but declared strategic options formally, I feel it is likely to be a while earlier than we right here an official sure/no response to the provide or another deal. However with Tang tossing in a money provide early, perhaps it’s much less doubtless Reneo chooses the reverse merger path.
Esperion Therapeutics (ESPR) is a damaged biotech adjoining thought, not like the others, this can be a income producing firm that has a non-satin industrial product (Nexletol) for ldl cholesterol. Esperion is locked in a lawsuit with their main commercialization accomplice, Daiichi Sankyo, over a disputed milestone fee tied to the quantity of “relative danger discount” for coronary heart assaults and different cardiovascular illnesses/occasions that was reported within the firm’s CLEAR Outcomes Research. Esperion has a PDUFA date set for 3/31/24 that might develop the label of their main asset to incorporate cardiovascular danger discount and a trial begin date of 4/15/24 with Daiichi Sankyo. This stays a speculative thought, however could possibly be a multi-bagger if each catalysts go their approach within the first half of 2024.
Mereo BioPharma (MREO) is extra of a regular-way biotech, the unique thesis revolved round Rubric Capital taking an activist stance and gaining board seats with a common plan to understand the sum of the components valuation of MREO’s hodgepodge of applications. No publicly disclosed progress has been made in that regard, however the firm did report optimistic Section 2 outcomes for Setrusumab in sufferers with osteogenesis imperfecta with accomplice Ultragenyx (RARE) that boosted the inventory. Following the announcement, Rubric Capital has been a constant purchaser of MREO shares, giving confidence that their plan is understanding.
Albertsons (ACI) and beforehand unmentioned Spirit Airways (SAVE) are two effectively lined merger arbitrage conditions that do not essentially want extra inked spilled on them. I am going to use this submit as a thanks to Andrew Walker and his great Substack/Podcast, he actually ramped up protection on Spirit because the market turned more and more nervous in early November dropping the shares into the low $10s/share. I picked some up and the market has bid up shares since awaiting a ruling any day now of their anti-trust case with the U.S. authorities. Albertsons is going through related push again, regulators are pointing to native market monopolies much like Spirit, though I nonetheless consider the asset divestiture and any additional divestitures ought to have the ability to create a compromise state of affairs given Albertsons and Krogers common lack of nationwide overlap.
HomeStreet (HMST) is a regional financial institution primarily based in Seattle that additionally does quite a lot of enterprise in southern California, which was caught up within the deposit flight disaster final spring. I purchased it after a Bloomberg article instructed the corporate was exploring a merger or an asset sale, later we came upon that a number of bidders have made presents for the corporate’s DUS enterprise line (a license that enables them to immediately originate Fannie Mae industrial loans), however the firm has to this point not been agreeable to a sale. HomeStreet’s deposits prices have risen dramatically, squeezing internet curiosity margin, they’ve minimize bills, and lowered mortgage originations to the purpose the place they could possibly be categorised as a zombie financial institution. A full out sale is very unlikely right here within the close to time period, any acquirer can be required to mark-to-market HomeStreet’s steadiness sheet, which presently would have adverse fairness worth as a result of present worth of their mortgage portfolio (price pushed, not credit score pushed, but). With out the DUS asset sale as a catalyst, this financial institution is one massive guess on decrease rates of interest, certainly in the previous couple of weeks, shares have spiked again above $9/share. Tangible e book worth is $26/share (ex-loan honest market worth), if charges decline sufficient over the subsequent yr or two, HomeStreet will limp alongside till the accounting is passable sufficient the place they change into an acquisition goal by somebody with a stronger deposit franchise. That is a little bit of thesis drift for me and I’ve loads of rate of interest danger elsewhere in my portfolio, so I’d exit this place for future new concepts.
First Horizon (FHN) is a mid-to-large sized regional financial institution that does most of its enterprise within the southeastern United States. It got here on my radar when their sale to TD Financial institution was terminated after regulators made it clear they had been penalizing TD for earlier anti-money laundering wrongdoings by not approving the merger. The deal broke in direction of the tail finish of the regional financial institution panic earlier this yr and FHN bought off onerous as arbs exited and market members had been uncertain if the regional financial institution mannequin was even sustainable anymore. Six months later, issues have calmed down significantly for banks, deposit prices are nonetheless rising however with the Fed about to pivot, many financial institution board rooms are respiration a sigh of aid. First Horizon is a stable franchise, footprint has good demographics (though I’ve seen some tales about multi-family overbuilding in Nashville), minimal mark-to-market losses and robust capital ratios to the purpose the place administration has signaled plans to return money to shareholders subsequent yr by repurchasing shares. On the adverse facet, the financial institution had a shock mortgage go dangerous for $72MM (Yellow perhaps?) and so they’ve acquired some expense ramp occurring as FHN modernizes its expertise stack. Immediately it trades at $13.80/share, tangible e book worth is $11.22/share, a goal valuation of 1.5x e book nonetheless appears affordable, which might yield a $16.83/share goal worth. I am content material holding till we get a bit nearer to that quantity, perhaps get long-term capital good points tax therapy too.
Banc of California (BANC) is one other regional financial institution that closed on their transformational merger with PacWest (PACW) after the previous acquired caught up in final spring’s banking disaster. Following the merger, Banc of California ought to have a tangible e book worth round $14.25/share in comparison with the present share worth of $13.43/share (0.94x e book), with earnings steerage of $1.65-$1.80/share (12% ROE, sub-8x earnings). My thesis continues to be that there might be vital realized synergies as the 2 banks had vital overlap which is able to change into extra obvious in 2025 earnings. Till then, the financial institution is in fairly first rate form after an fairness injection, low 80s loan-to-deposit ratio and sub-4% workplace publicity.
Inexperienced Brick Companions (GRBK) is a homebuilder with a land improvement heavy mannequin that continues to outperform, turning on its head the worth investor concept that an asset-lite homebuilding mannequin is important to reach this cyclical business. Depend me as stunned too how their land sourcing and infill location mannequin has continued to be a sustainable aggressive benefit (key man danger with Jim Brickman?), however with migration developments persevering with to be a tailwind for his or her Dallas and now Austin markets, their development ought to proceed. GRBK presently trades at an affordable 7.5x NTM earnings based on TIKR estimates and has $121MM remaining on their share repurchase plan. I in the reduction of on my place throughout the yr, however nonetheless trust in Inexperienced Brick’s medium-to-long time period future though not essentially an actionable thought at present.
Acres Business Realty Corp (ACR) is a industrial actual property bridge lender, primarily to multi-family properties, but additionally a smattering of workplace, resort and retail. The market is especially nervous about lenders like ACR, they lend to builders/sponsors who’re repositioning a property, which upon stabilization will then get hold of long run financing to take out ACR’s bridge mortgage. Banks have pulled again, nobody needs to increase new loans to workplace specifically, however multi-family additionally has some fears of covid induced overbuilding, the pull again in financing itself may trigger a sinkhole in CRE asset worth. If the sponsor is unable to acquire new financing, ACR is likely to be handed again the keys. The formation of ACR was principally sponsored by Oaktree, the distressed specialist, my inclination is their mortgage e book is stronger than the typical industrial mREIT consequently. ACR moreover is the odd REIT that does not pay a dividend, which supplies them flexibility to plug credit score holes or as they just lately introduced, return money to shareholders through a share repurchase program. Shares have rallied with the repurchase information and Fed pivot, however at $9.80/share, it nonetheless trades at a large low cost to e book of ~$25/share.
Howard Hughes (HHH) is an actual property developer successfully managed by Pershing Sq.’s Invoice Ackman, he has been a constant purchaser of shares this yr because the inventory has traded round $80/share in latest months. With charges growing, new industrial improvement has slowed at Howard Hughes, plus one in all their principal merchandise in new workplace is all however lifeless for the subsequent decade or so. Even when industrial improvement slows within the close to time period, their land gross sales needs to be sturdy within the close to time period as homebuilders are growing their exercise to fulfill demand. Absent some sort of Ackman take-private, the close to time period catalyst for HHH is their upcoming spinoff of Seaport Leisure which is able to home the disastrous Seaport phase (a lot of which they function themselves), the Las Vegas Aviators (presumably the stadium too, however they want lender approval) and the Trend Present air rights. They’ve employed Anton Nikodemus to be the CEO of Seaport, he beforehand was an government at MGM the place he ran the CityCenter properties and was instrumental within the improvement of MGM Nationwide Harbor and MGM Springfield. Presumably meaning they’re lastly critical about using the Trend Present air rights, however with a number of giant new strip casinos coming on-line this yr, their timing won’t be proper. My preliminary response is the spin is a optimistic improvement, it will take away the Seaport cloud from the pure play actual property belongings, though I query how Seaport might be funded/financed. The Aviators ballpark offers a pleasant regular income stream, however not sufficient to cowl additional Seaport losses, not to mention develop their deliberate 250 Water St tower or a brand new Las Vegas strip on line casino. I am going to doubtless do a deeper dive as soon as the Kind 10-12 comes out on the spin.
DigitalBridge Group (DBRG) is within the remaining phases of its transition from a diversified REIT to a pure play asset supervisor targeted on the digital infrastructure business. Regularly growing charges in 2023 had been initially a adverse for DigitalBridge as a lot of their portfolio corporations had been bought at low entry cap charges, however the firm was saved a bit by the factitious intelligence pattern that has continued the necessity for knowledge facilities and different digital infrastructure belongings. This stays a little bit of a jockey guess on CEO Marc Ganzi, he is a proficient fund raiser, however he’s shedding his quantity 2 in CFO Jack Wu who’s shifting on to steer his personal funding group. I haven’t got a lot so as to add to the dialogue on DBRG, content material to carry some time longer to see the complete transition from a steadiness sheet play to an earnings assertion story, we’re nonetheless most likely 1-2 years away from that being full.
NexPoint Diversified Actual Property Belief (NXDT) is previously a closed finish fund that 18 months in the past transformed to a REIT. Sadly, this story has been very gradual to develop, not a lot has occurred right here submit conversion, the REIT continues to be a complicated mess of restricted partnership stakes, a lot of that are with associated events, and restricted investor outreach to simplify the story. Rising charges did not assist NXDT and its valuation has suffered, buying and selling round $8/share at present versus a $23.89/share reported NAV (as of 6/30) or a $22/share tangible e book worth. CEO James Dondero (a controversial determine) continues to purchase shares through funds he manages, personally and is taking their administration in shares (though that is a little bit of a adverse given the place the shares commerce), all bullish indicators for the underlying worth in comparison with buying and selling worth. The REIT would not cowl its dividend with AFFO, it just lately began paying 80% of the dividend in shares, I would moderately see them minimize the dividend to zero and construct some liquidity, solely paying a particular dividend essential to adjust to IRS REIT laws. In abstract, it’s simply odd that NXDT would not publish press releases, conduct earnings calls or do the everyday REIT convention circuit investor shows. All issues I’d have assumed they’d do contemplating how they handle NexPoint Residential Belief (NXRT). Just like TCI, I am keen to provide administration right here one other yr or two to see what develops, however my confidence is decrease than after I first purchased into the thought.
Par Pacific Holdings (PARR) is a downstream vitality firm with refining, midstream and retail places in geographically area of interest areas within the Rockies, Pacific Northwest and Hawaii. Par Pacific has benefited from one other yr of above common refining crack spreads inflicting the corporate to gush money. They’ve efficiently mounted their post-covid steadiness sheet and this yr closed on the acquisition of a previously Exxon refinery in Billings, MT. The corporate is producing vital taxable earnings which at the moment are offsetting their $1B+ NOL tax asset. Par Pacific is moreover starting to put money into renewable gasoline belongings, which could assist individuals assume by means of the terminal worth query of oil refineries, however I are inclined to assume that is untimely by a pair many years. The administration workforce is previously from Zell’s Fairness Group and continues to execute on worth accretive offers (apart from injecting extra fairness in Laramie (a personal pure gasoline producer PARR owns 46% of), it’s onerous to think about a foul deal they’ve performed). It is not essentially actionable at present, I did promote down a few of place throughout the yr, however at 5x NTM EBITDA and 6.75x NTM earnings (TIKR estimates, to be honest, they’re overearning within the present atmosphere), I proceed maintain as a consequence of being snug with the administration workforce.
Closed Positions (since 6/30)
Damaged Biotech Basket:
- Pardes Biosciences (PRDS) was acquired for $2.13/share in money and a CVR for 80% of any legacy asset gross sales by an affiliate of Foresite Capital.
- MEI Pharma (MEIP) settled with activists Anson/Cable Automobile and paid out a $1.75/share particular dividend, the shares rallied a good quantity to the purpose the place I feel it’s considerably a guess on MEIP’s improvement pipeline reporting optimistic outcomes. MEIP hasn’t had a very good historical past of creating new medication, so I booked a small win. Better of luck to the activists, I hope it really works out as to encourage extra activism in these damaged biotechs.
- Verify-Cap (CHEK) is an odd little story, the corporate entered right into a reverse merger with Keystone Dental Holdings in August. Previous to the announcement, 5.8% shareholder Symetryx Company had provided $4.60/share in money, however it was unclear how critical this bid was or if Symetryx truly had the financing to shut. After the deal announcement, Symetryx went activist in opposition to Verify-Cap and recruited the founder to hitch them in changing board, which they received and earlier this month terminated the reverse merger with Keystone. Now that Symetryx has management of the board, they’re out on the lookout for a brand new deal, Verify-Cap has roughly $4.64/share in NCAV as of 9/30 versus a inventory worth of $2.08/share.
- Dianthus Therapeutics (DNTH) closed on the reverse merger transaction with Magenta Therapeutics (MGTA), issued CVRs for the legacy belongings after which rallied a bit after. I took a small revenue and await proceeds, if any, on the CVR.
- Quince Therapeutics (QNCX) ended up spurning the Echo Lake provide for $1.80/share in inventory plus a CVR, as an alternative they ended up shopping for one other biotech in a transaction that did not require shareholder approval. Shares now commerce for $1.10/share, effectively under Echo Lake’s provide. I took a small loss on the inventory.
PFSWeb (PFSW) was a 3rd occasion logistics (“3PL”) supplier that was acquired by GXO Logistics (GXO), the deal closed in October for $7.50/share, a pleasant end result.
Sculptor Capital Administration (SCU) was a hedge fund supervisor that put itself up on the market after a really public spat between founder Daniel Och and CEO Jimmy Levin. The agency discovered a purchaser in Rithm Captial (RITM) (fka New Residential), a bit of bidding warfare ensued however finally Rithm Capital closed on the deal in November for $12.70/share.
Jackson Monetary (JXN) is a 2021 spin of Prudential PLC that primarily offers variable annuity insurance coverage merchandise. I appreciated the setup as a result of it was a UK listed firm spinning off a a lot smaller US listed firm; Jackson Monetary initially traded considerably under e book worth (nonetheless does) because it was an orphaned safety with no preliminary index possession and sophisticated financials. Over the next two years, Jackson was added to indices, paid a wholesome dividend and acquired again a considerable quantity of inventory. Whereas that gameplan remains to be occurring and a few potential extra capital could possibly be dividended as much as the mother or father (much like MBIA) within the close to future, my preliminary thesis has usually performed out and I am not a robust sufficient accountant to determine their monetary statements. I made a decision to promote and relocate to newer concepts.
Carlyle Credit score Revenue Fund (CCIF) (fka VCIF) was beforehand a residential mortgage closed finish fund that transitioned to a CLO fairness fund. The thesis usually performed out anticipate for one essential danger, when it got here time to promote the residential mortgages within the previous VCIF portfolio and ship the money to Carlyle, the fund took a big 17% write-down. I am nonetheless not completely clear why or what occurred within the few weeks from the proxy to the asset sale, however that minimize nearly all my good points within the funding. Carlyle is a top quality supervisor and I usually like CLO fairness as an asset class, however submit transition and dividend reinstatement, my place was usually smallish and determined to maneuver on. May re-visit it if we see some stress in non-public credit score and the leveraged mortgage market.
Manchester United (MANU) is the famed English Premier League soccer membership, my thesis revolved across the bidding warfare between Sir Jim Ratcliffe and Sheikh Jassim of the Qatari royal household, I wrongly guessed that Sheikh Jassim would come out victorious since his bid was for all MANU shares and at a better worth than Ratcliffe. However for no matter motive, the Glazers select Ratcliffe, after months/weeks of rumors, the official announcement was made this previous week that Racliffe was tendering for 25% of each Class A and Class B shares at $33/shares, plus investing one other $300MM at $33/share for membership facility enhancements. I had hoped there can be some language round a path in direction of majority or full possession, however did not see something explicitly said to that impact. With no concrete timeline, and Ratcliffe taking operational management of the workforce, its unsure why or when he’ll purchase financial management of the workforce, the status is being the possession face, and he’ll be that now. Consequently, I’d anticipate MANU shares to commerce at a major low cost following the tender and probably be lifeless cash for some time. I used to be incorrect, however did not actually lose any cash on this one.
Efficiency Attribution
Present Portfolio
Along with the above, I even have a bunch of CVRs, non-traded/illiquid liquidations, an illiquid bond and a litigation stub.
Please be happy to ask any questions or depart any fascinating new concepts for 2024. Thanks to all my readers, particularly those who have reached with optimistic or adverse suggestions, new concepts, or simply wanting to talk. Completely satisfied New 12 months, hopefully 2024 is affluent as effectively.
Disclosure: Desk above is my taxable account/weblog portfolio, I do not handle outdoors cash and that is solely a portion of my general belongings. Consequently, the usage of margin debt, choices or focus doesn’t totally signify my danger tolerance.
