Markets have seen fairly the rally previously 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% aim.
Regardless of the great 12 months, I am nonetheless beneath my excessive water mark because of a disappointing 2022. I love anybody that invests professionally by way of unstable markets, my returns would not be pretty much as good if I used to be managing exterior capital.
Up to date Ideas on Present Positions
As ordinary, these transient updates have been written over the previous two weeks, share costs might need moved round a 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 personal 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 property, which equates to roughly $1.38/share in comparison with the present share worth of $0.55/share. The money at closing is anticipated 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 property. There’s motive to imagine that the CVR could 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 by way of the reverse merger, perhaps the title change, upcoming Part 2 examine information 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 “business affordable efforts” to eliminate the legacy property.
- Graphite Bio (GRPH) is the same scenario, in addition 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. Publish-merger LENZ is anticipated 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 will seemingly maintain onto the stub and see what occurs.
- AVROBIO (AVRO) introduced strategic alternate 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 bought one among their packages 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 sexy threat/reward.
- Pieris Prescription drugs (PIRS) ran up shortly after my preliminary write-up, I took earnings, however then it fell and I re-entered, a 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 worth round $0.15/share. That quantity does not embrace a lot of IP property and presumably useful partnerships, however with restricted money on an absolute foundation, they’re going to want to maneuver pretty shortly. Pieris did simply terminate their working lease, typically a precursor to a deal announcement. This one is on the riskier aspect, however might be fascinating for those who 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 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 likely one of the downsides of investing in liquidations, you must have a sure persona quirk to set it apart within the meantime. Hope this liquidation is put to mattress quickly.
- Cyteir Therapeutics (CYT) is within the ultimate levels (as we have seen with SIOX, may final some time) of its company life, shareholders accredited 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 scenario than most as CYT is simply holding again $500k for a reserve account. Shares commerce at $3.09/share, I seemingly would not purchase it as we speak, 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 gaggle, have indicated plans to make a suggestion for every firm. Presumably the construction would end in a money buyout for a reduction to web money plus a CVR for any IP worth, much 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 greatest guess of a take non-public supply (5-15% upside on every), nevertheless it’s value retaining a watch 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 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 alternate options formally, I believe it may be a while earlier than we right here an official sure/no response to the supply or another deal. However with Tang tossing in a money supply early, perhaps it’s much less seemingly 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 business product (Nexletol) for ldl cholesterol. Esperion is locked in a lawsuit with their major commercialization accomplice, Daiichi Sankyo, over a disputed milestone fee tied to the quantity of “relative threat discount” for coronary heart assaults and different cardiovascular ailments/occasions that was reported within the firm’s CLEAR Outcomes Examine. Esperion has a PDUFA date set for 3/31/24 that may broaden the label of their major 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 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 packages. 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 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 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 will 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 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 imagine the asset divestiture and any additional divestitures ought to have the ability to create a compromise scenario given Albertsons and Krogers common lack of nationwide overlap.
HomeStreet (HMST) is a regional financial institution primarily based in Seattle that additionally does a number of enterprise in southern California, which was caught up within the deposit flight disaster final spring. I purchased it after a Bloomberg article prompt the corporate was exploring a merger or an asset sale, later we came upon that a number of bidders have made provides for the corporate’s DUS enterprise line (a license that enables them to straight originate Fannie Mae business loans), however the firm has up to now not been agreeable to a sale. HomeStreet’s deposits prices have risen dramatically, squeezing web curiosity margin, they’ve reduce bills, and lowered mortgage originations to the purpose the place they might be labeled 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 stability sheet, which presently would have detrimental fairness worth because of the present worth of their mortgage portfolio (charge pushed, not credit score pushed, but). With out the DUS asset sale as a catalyst, this financial institution is one huge wager on decrease rates of interest, certainly in the previous few 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 12 months or two, HomeStreet will limp alongside till the accounting is passable sufficient the place they turn out to be 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’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 have been penalizing TD for earlier anti-money laundering wrongdoings by not approving the merger. The deal broke in the direction of the tail finish of the regional financial institution panic earlier this 12 months and FHN bought off onerous as arbs exited and market contributors have 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 strong 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 12 months by repurchasing shares. On the detrimental aspect, the financial institution had a shock mortgage go unhealthy for $72MM (Yellow perhaps?) and so they’ve acquired some expense ramp occurring as FHN modernizes its know-how stack. Right now 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 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 e book worth round $14.25/share in comparison with the present share worth of $13.43/share (0.94x e book), 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 out to be 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 growth heavy mannequin that continues to outperform, turning on its head the worth investor concept that an asset-lite homebuilding mannequin is important to achieve this cyclical trade. Rely me as stunned 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 tendencies 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 response to TIKR estimates and has $121MM remaining on their share repurchase plan. I reduce on my place through the 12 months, however nonetheless believe in Inexperienced Brick’s medium-to-long time period future though not essentially an actionable thought as we speak.
Acres Business Realty Corp (ACR) is a business actual property bridge lender, primarily to multi-family properties, but additionally a smattering of workplace, lodge and retail. The market is especially anxious 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 particularly, 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 may 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 common business mREIT in consequence. ACR moreover is the odd REIT that does not pay a dividend, which provides them flexibility to plug credit score holes or as they not too long ago 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 an enormous 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 12 months because the inventory has traded round $80/share in latest months. With charges rising, new business growth has slowed at Howard Hughes, plus one among their essential merchandise in new workplace is all however lifeless for the subsequent decade or so. Even when business growth slows within the close to time period, their land gross sales needs to be sturdy 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 phase (a lot of which they function themselves), the Las Vegas Aviators (presumably the stadium too, however they want lender approval) and the Vogue 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 growth of MGM Nationwide Harbor and MGM Springfield. Presumably meaning they’re lastly critical about using the Vogue Present air rights, however with a number of massive new strip casinos coming on-line this 12 months, their timing won’t be proper. My preliminary response is the spin is a optimistic growth, it will take away the Seaport cloud from the pure play actual property property, 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 will seemingly do a deeper dive as soon as the Type 10-12 comes out on the spin.
DigitalBridge Group (DBRG) is within the ultimate levels of its transition from a diversified REIT to a pure play asset supervisor targeted on the digital infrastructure trade. Regularly rising charges in 2023 have been initially a detrimental for DigitalBridge as lots of their portfolio corporations have been bought at low entry cap charges, however the firm was saved a bit by the bogus intelligence development that has continued the necessity for information facilities and different digital infrastructure property. This stays a little bit of a jockey wager on CEO Marc Ganzi, he is a proficient fund raiser, however he’s dropping his quantity 2 in CFO Jack Wu who’s shifting on to guide 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 stability 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 as we speak 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 detrimental given the place the shares commerce), all bullish indicators for the underlying worth in comparison with buying and selling worth. The REIT does not cowl its dividend with AFFO, it not too long ago began paying 80% of the dividend in shares, I would moderately see them reduce 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 does not publish press releases, conduct earnings calls or do the standard REIT convention circuit investor displays. All issues I’d have assumed they might do contemplating how they handle NexPoint Residential Belief (NXRT). Much like TCI, I am prepared to offer 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 places 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 mounted their post-covid stability 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 at the moment are offsetting their $1B+ NOL tax asset. Par Pacific is moreover starting to put money into renewable gasoline property, which could assist folks assume by way of the terminal worth query of oil refineries, however I are inclined to assume that is untimely by a pair many years. The administration staff is previously from Zell’s Fairness Group and continues to execute on worth accretive offers (aside from injecting further fairness in Laramie (a personal pure gasoline producer PARR owns 46% of), it’s onerous to consider a foul deal they’ve performed). It is not essentially actionable as we speak, I did promote down a few of place through the 12 months, 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 because of being snug with the administration staff.
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 believe it’s considerably a wager on MEIP’s growth pipeline reporting optimistic outcomes. MEIP hasn’t had a very good historical past of creating new medicine, 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 a wierd 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, nevertheless 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 affix them in changing board, which they gained and earlier this month terminated the reverse merger with Keystone. Now that Symetryx has management of the board, they’re out searching 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 property 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 celebration logistics (“3PL”) supplier that was acquired by GXO Logistics (GXO), the deal closed in October for $7.50/share, a pleasant outcome.
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 bidding conflict 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 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 might be dividended as much as the guardian (much 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 essential 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 reduce nearly all my good points 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. 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 conflict 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 the direction of majority or full possession, however did not see something explicitly acknowledged to that impact. With no concrete timeline, and Ratcliffe taking operational management of the staff, its unsure why or when he’ll purchase financial management of the staff, the status is being the possession face, and he’ll be that now. Consequently, I’d count on MANU shares to commerce at a big low cost following the tender and presumably be lifeless 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 fascinating new concepts for 2024. Thanks to all my readers, particularly people who have reached with optimistic or detrimental suggestions, new concepts, or simply wanting to talk. Pleased New Yr, 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 property. Consequently, using margin debt, choices or focus doesn’t absolutely signify my threat tolerance.
