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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% purpose.
Regardless of the great 12 months, I am nonetheless beneath my excessive water mark as a consequence of a disappointing 2022. I love anybody that invests professionally via risky markets, my returns would not be nearly as good if I used to be managing exterior capital.
Up to date Ideas on Present Positions
As normal, these temporary updates had been written over the previous two weeks, share costs might need moved round a little bit, 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 non-public biotech targeted on the remedy 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 value 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 may have some worth, FIXX’s IP had preliminary optimistic Part 1 outcomes, however the information remains to be “immature and inconclusive”. Plus there’s the JV, OXB Options, that will likely be put to Oxford Biomedia Options for five.5x TTM income by March 2025. My present plan is to carry via the reverse merger, perhaps the title change, upcoming Part 2 examine information readouts (second half of 2024), conferences/investor attain out, and so forth., will encourage conventional biotech traders to rotate into the inventory offering a barely higher exit. And I am bullish on the CVR, it’s going to act as a liquidating belief, Q32 Bio wants to make use of “industrial cheap efforts” to get rid of the legacy belongings.
- Graphite Bio (GRPH) is an identical 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 Part 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. Put up-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 an enormous addressable market. I am going to possible 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 may be commenced would equate to $2/share of worth with none worth attributed to their IP. AVRO offered 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 pretty threat/reward.
- Pieris Prescribed drugs (PIRS) ran up rapidly after my preliminary write-up, I took earnings, however then it fell and I re-entered, a little bit too early in hindsight as shares have dropped roughly in half since. As of 9/30, PIRS had $30.5MM in web present asset worth, or $0.31/shares versus a present share value round $0.15/share. That quantity would not embrace various IP belongings and presumably priceless partnerships, however with restricted money on an absolute foundation, they will 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 aspect, however might be attention-grabbing when 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 retaining higher tabs on the liquidation than me (see the feedback), apparently they’ve two of their three subsidiaries liquidated and will have the third finished quickly. The anticipated preliminary distribution within the proxy assertion was $0.38-$0.42/share versus a present value of $0.37/share. It has been an annoying wait with limited-to-no public disclosure, which is among the downsides of investing in liquidations, it is advisable 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 ultimate phases (as we have seen with SIOX, might final some time) of its company life, shareholders accepted 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 just holding again $500k for a reserve account. Shares commerce at $3.09/share, I possible would not purchase it immediately, however content material to carry awaiting the liquidation distribution.
- Kinnate Biopharma (KNTE) and Theseus Prescribed drugs (THRX) are in related conditions to one another the place Foresite and OrbiMed, as a gaggle, have indicated plans to make a suggestion for every firm. Presumably the construction would lead to a money buyout for a reduction to web money plus a CVR for any IP worth, just like Pardes Biosciences (PRDS) which Foresite took non-public earlier within the 12 months. Each shares commerce for less than a slight low cost to my finest guess of a take non-public supply (5-15% upside on every), but it surely’s value retaining 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 shocked 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 Prescribed drugs (RPHM) acquired a suggestion 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 believe it may be a while earlier than we right here an official sure/no response to the supply or an alternate deal. However with Tang tossing in a money supply early, perhaps it’s much less possible Reneo chooses the reverse merger path.
Esperion Therapeutics (ESPR) is a damaged biotech adjoining thought, not like the others, it is 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 associate, Daiichi Sankyo, over a disputed milestone cost tied to the quantity of “relative threat 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 may broaden the label of their main asset to incorporate cardiovascular threat discount and a trial begin date of 4/15/24 with Daiichi Sankyo. This stays a speculative thought, however might be a multi-bagger if each catalysts go their manner 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 normal plan to understand the sum of the elements valuation of MREO’s hodgepodge of applications. No publicly disclosed progress has been made in that regard, however the firm did report optimistic Part 2 outcomes for Setrusumab in sufferers with osteogenesis imperfecta with associate 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 figuring out.
Albertsons (ACI) and beforehand unmentioned Spirit Airways (SAVE) are two effectively coated merger arbitrage conditions that do not essentially want extra inked spilled on them. I am going to use this put up as a thanks to Andrew Walker and his great Substack/Podcast, he actually ramped up protection on Spirit because the market grew to become 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 dealing with related push again, regulators are pointing to native market monopolies just like Spirit, though I nonetheless consider the asset divestiture and any additional divestitures ought to be capable of create a compromise state of affairs given Albertsons and Krogers normal lack of nationwide overlap.
HomeStreet (HMST) is a regional financial institution based mostly in Seattle that additionally does lots of enterprise in southern California, which was caught up within the deposit flight disaster final spring. I purchased it after a Bloomberg article urged the corporate was exploring a merger or an asset sale, later we discovered that a number of bidders have made presents for the corporate’s DUS enterprise line (a license that permits 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 web curiosity margin, they’ve minimize bills, and lowered mortgage originations to the purpose the place they might 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 destructive fairness worth as a result of present worth of their mortgage portfolio (fee pushed, not credit score pushed, but). With out the DUS asset sale as a catalyst, this financial institution is one large guess on decrease rates of interest, certainly in the previous couple of weeks, shares have spiked again above $9/share. Tangible ebook worth is $26/share (ex-loan truthful market worth), if charges decline sufficient over the following 12 months or two, HomeStreet will limp alongside till the accounting is passable sufficient the place they turn 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 threat elsewhere in my portfolio, so I would 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 12 months and FHN offered off laborious as arbs exited and market members had been not sure 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 strong franchise, footprint has good demographics (though I’ve seen some tales about multi-family overbuilding in Nashville), minimal mark-to-market losses and powerful capital ratios to the purpose the place administration has signaled plans to return money to shareholders subsequent 12 months by repurchasing shares. On the destructive aspect, the financial institution had a shock mortgage go unhealthy for $72MM (Yellow perhaps?) they usually’ve acquired some expense ramp occurring as FHN modernizes its know-how stack. At this time it trades at $13.80/share, tangible ebook worth is $11.22/share, a goal valuation of 1.5x ebook nonetheless appears cheap, which might yield a $16.83/share goal value. I am content material holding till we get a bit nearer to that quantity, perhaps get long-term capital beneficial properties tax remedy 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 ebook worth round $14.25/share in comparison with the present share value of $13.43/share (0.94x ebook), with earnings steering of $1.65-$1.80/share (12% ROE, sub-8x earnings). My thesis continues to be that there will likely be important realized synergies as the 2 banks had important overlap which is able to turn into extra obvious in 2025 earnings. Till then, the financial institution is in fairly respectable 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 growth heavy mannequin that continues to outperform, turning on its head the worth investor concept that an asset-lite homebuilding mannequin is critical to reach this cyclical business. Rely me as shocked too how their land sourcing and infill location mannequin has continued to be a sustainable aggressive benefit (key man threat with Jim Brickman?), however with migration traits persevering with to be a tailwind for his or her Dallas and now Austin markets, their progress ought to proceed. GRBK presently trades at an affordable 7.5x NTM earnings in keeping with TIKR estimates and has $121MM remaining on their share repurchase plan. I reduce on my place throughout the 12 months, however nonetheless have faith in Inexperienced Brick’s medium-to-long time period future though not essentially an actionable thought immediately.
Acres Industrial Realty Corp (ACR) is a industrial actual property bridge lender, primarily to multi-family properties, but additionally a smattering of workplace, lodge and retail. The market is especially fearful about lenders like ACR, they lend to builders/sponsors who’re repositioning a property, which upon stabilization will then receive long run financing to take out ACR’s bridge mortgage. Banks have pulled again, nobody needs to increase new loans to workplace particularly, however multi-family additionally has some fears of covid induced overbuilding, the pull again in financing itself might trigger a sinkhole in CRE asset worth. If the sponsor is unable to acquire new financing, ACR may be handed again the keys. The formation of ACR was mainly sponsored by Oaktree, the distressed specialist, my inclination is their mortgage ebook is stronger than the typical industrial mREIT because of this. ACR moreover is the odd REIT that does not pay a dividend, which provides them flexibility to plug credit score holes or as they lately introduced, return money to shareholders by way of 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 ebook 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 12 months because the inventory has traded round $80/share in latest months. With charges rising, new industrial growth has slowed at Howard Hughes, plus one in all their essential merchandise in new workplace is all however useless for the following decade or so. Even when industrial growth slows within the close to time period, their land gross sales must be robust within the close to time period as homebuilders are rising their exercise to fulfill demand. Absent some type 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 section (a lot of which they function themselves), the Las Vegas Aviators (presumably the stadium too, however they want lender approval) and the Style Present air rights. They’ve employed Anton Nikodemus to be the CEO of Seaport, he beforehand was an govt at MGM the place he ran the CityCenter properties and was instrumental within the growth of MGM Nationwide Harbor and MGM Springfield. Presumably meaning they’re lastly critical about using the Style Present air rights, however with a number of massive new strip casinos coming on-line this 12 months, their timing may not be proper. My preliminary response is the spin is a optimistic growth, it’s going to take away the Seaport cloud from the pure play actual property belongings, though I query how Seaport will likely be funded/financed. The Aviators ballpark gives 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 possible do a deeper dive as soon as the Kind 10-12 comes out on the spin.
DigitalBridge Group (DBRG) is within the ultimate phases of its transition from a diversified REIT to a pure play asset supervisor targeted on the digital infrastructure business. Frequently rising charges in 2023 had been initially a destructive for DigitalBridge as lots of their portfolio corporations had been bought at low entry cap charges, however the firm was saved a bit by the bogus intelligence pattern that has continued the necessity for information facilities and different digital infrastructure belongings. This stays a little bit of a jockey guess on CEO Marc Ganzi, he is a gifted fund raiser, however he’s dropping 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 in all probability 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 sluggish to develop, not a lot has occurred right here put up conversion, the REIT continues to be a complicated mess of restricted partnership stakes, lots 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 immediately versus a $23.89/share reported NAV (as of 6/30) or a $22/share tangible ebook worth. CEO James Dondero (a controversial determine) continues to purchase shares by way of funds he manages, personally and is taking their administration in shares (though that is a little bit of a destructive given the place the shares commerce), all bullish indicators for the underlying worth in comparison with buying and selling value. The REIT would not cowl its dividend with AFFO, it lately began paying 80% of the dividend in shares, I would reasonably see them minimize the dividend to zero and construct some liquidity, solely paying a particular dividend essential to adjust to IRS REIT rules. 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 might have assumed they might do contemplating how they handle NexPoint Residential Belief (NXRT). Just like TCI, I am prepared to provide administration right here one other 12 months or two to see what develops, however my confidence is decrease than after I first purchased into the concept.
Par Pacific Holdings (PARR) is a downstream vitality firm with refining, midstream and retail areas in geographically area of interest areas within the Rockies, Pacific Northwest and Hawaii. Par Pacific has benefited from one other 12 months of above common refining crack spreads inflicting the corporate to gush money. They’ve efficiently fastened their post-covid steadiness sheet and this 12 months closed on the acquisition of a previously Exxon refinery in Billings, MT. The corporate is producing important taxable earnings which are actually offsetting their $1B+ NOL tax asset. Par Pacific is moreover starting to spend money on renewable gasoline belongings, which could assist folks suppose via the terminal worth query of oil refineries, however I are inclined to suppose that is untimely by a pair many years. The administration crew is previously from Zell’s Fairness Group and continues to execute on worth accretive offers (aside from injecting further fairness in Laramie (a non-public pure fuel producer PARR owns 46% of), it’s laborious to think about a nasty deal they’ve finished). It isn’t essentially actionable immediately, I did promote down a few of place throughout the 12 months, however at 5x NTM EBITDA and 6.75x NTM earnings (TIKR estimates, to be truthful, they’re overearning within the present atmosphere), I proceed maintain as a consequence of being snug with the administration crew.
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 Automotive and paid out a $1.75/share particular dividend, the shares rallied a good quantity to the purpose the place I believe it’s considerably a guess on MEIP’s growth 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 supplied $4.60/share in money, but it surely 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 affix 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 in search of a brand new deal, Verify-Cap has roughly $4.64/share in NCAV as of 9/30 versus a inventory value 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 supply for $1.80/share in inventory plus a CVR, as a substitute 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 beneath Echo Lake’s supply. 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 little bit bidding battle 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 gives variable annuity insurance coverage merchandise. I favored 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 beneath ebook worth (nonetheless does) because it was an orphaned safety with no preliminary index possession and complex 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 might be dividended as much as the dad or mum (just like MBIA) within the close to future, my preliminary thesis has typically 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 Earnings Fund (CCIF) (fka VCIF) was beforehand a residential mortgage closed finish fund that transitioned to a CLO fairness fund. The thesis typically performed out count on for one necessary threat, when it got here time to promote the residential mortgages within the outdated VCIF portfolio and ship the money to Carlyle, the fund took a big 17% write-down. I am nonetheless not solely clear why or what occurred within the few weeks from the proxy to the asset sale, however that minimize nearly all my beneficial properties within the funding. Carlyle is a top quality supervisor and I typically like CLO fairness as an asset class, however put up transition and dividend reinstatement, my place was typically smallish and determined to maneuver on. Would possibly 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 battle 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 the next value 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 acknowledged to that impact. With out a concrete timeline, and Ratcliffe taking operational management of the crew, its unsure why or when he’ll purchase financial management of the crew, the status is being the possession face, and he’ll be that now. In consequence, I might count on MANU shares to commerce at a major low cost following the tender and presumably be useless cash for some time. I used to be improper, 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 at liberty to ask any questions or depart any attention-grabbing new concepts for 2024. Thanks to all my readers, particularly people who have reached with optimistic or destructive suggestions, new concepts, or simply wanting to talk. Pleased New 12 months, hopefully 2024 is affluent as effectively.
Disclosure: Desk above is my taxable account/weblog portfolio, I do not handle exterior cash and that is solely a portion of my total belongings. In consequence, using margin debt, choices or focus doesn’t totally characterize my threat tolerance.
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