Category Archives: Portfolio

Conduril reports results for 2017

Last week Conduril released their annual report for 2017 (Portuguese version only, the English translation follows later). The company is still struggling a bit, but I think there are good reasons to be optimistic. Compared to 2016 revenue was basically unchanged, while EBITDA increased from €29.1 million to €34.5 million and net income increased with 65% from €4.2 million to €7.0 million. Thanks to the higher profitability Conduril has announced to increase its dividend from €0.50/share to €1.50/share, a payout ratio of 39%.

This is of course all pretty decent, but I think the most important announcement in the annual report is that the Angolan bonds, worth €83 million, will finally be turned into cash. Last year I was already waiting for that, and it’s not yet reflected in the financials, but supposedly they were settled on March 21, 2018. Given that the company has currently a market cap of €77.4 million that’s a pretty big event. That means that they can repay the fast majority of their outstanding debt (€116.7 million in total) and the reduced interest expense should have a meaningful impact on their profitability going forward. Even after the settlement of the €83 million in bonds Conduril will continue to have a large exposure to Angola. The non-current “other financial assets” line item hides €55.5 million in debt securities that were previously classified as “assets held for trading”.

Given that the removal of Conduril’s debt could almost double its profitability I think the stock remains extraordinarily cheap. Right now it’s trading at just a 11x P/E ratio, and if we include the “other financial assets” in the NCAV figure it’s trading at a 50% discount to that number as well.

Disclosure

Long Conduril

Willbros Group merger arbitrage

Yesterday Willbros Group (OTC:WGRP) announced that it is being acquired by Primoris Services (NASDAQ:PRIM) in an all-cash deal for $0.60/share. With the stock currently trading at $0.55 a juicy spread of 9.1% remains. The biggest reason for the spread is presumably the fact that Willbros Group was on the verge of a bankruptcy before the merger was announced, and if the deal fails the downside is possibly close to 100%. If you look at the stock price of the company you can see it has been a train wreck the last half year. Willbros Group was trading above $3/share in November 2017 before dropping to $0.15/share earlier this week. A non-fundamental reason that might be a contributing factor to the spread is the fact that the stock was delisted from the NYSE this week as well and resumed trading on the pink sheets.

So it’s a situation with a bit of hair, but I also think that this is a deal that is almost certain to be completed, and because of that it’s still a bet with an attractive risk/reward ratio. I don’t think there are any meaningful regulatory hurdles to complete this deal, Primoris can finance the deal using cash on hand and existing credit facilities and “certain Willbros directors and shareholders”, representing ~17% of the outstanding shares, have agreed to vote in favor of the transaction. Given the fact that the $0.60/share offer represents an almost 300% premium to the last traded price I think getting enough other shareholders on board shouldn’t be a problem. So unless there is some skeleton still hiding in a closet somewhere there is little that could derail this deal, and it is expected to close soon: the second quarter of 2018.

Source: Primoris Services Corporation presentation

Disclosure

Long Willbros Group

Jumping on the New York REIT bandwagon

Possible one of the least original value idea’s of 2017 must have been New York REIT (NYSE:NYRT). I always feel uneasy when so many people like something, but I could understand the attraction here. The story previous year was simple. The stock was trading around $10/share, a new manager had taken over with the mandate to liquidate the REIT while NAV/share was above $12 and incentive payments were struck at $11/share. Unfortunately, realizing those numbers proved a bit harder than expected and (adjusted for $5.07 in liquidation distributions already paid) NAV/share is now standing at just $8.03/share. No wonder that people so far have been disappointed with how the story is playing out. But with only a few assets remaining, and not much uncertainty with regards to the value of the remaining assets, I think the stock is currently trading at an attractive discount.

Share price: $2.32
Shares outstanding: 167.9 million
Market cap: $389.6 million
NAV/share: $2.96
Discount to NAV: 21.7%

Reading the latest 10-K you have to do a couple of adjustments to figure out how the current balance sheet looks like. A bunch of buildings have already been sold this year, and some others are under contract to be sold. The only things remaining are the Viceroy Hotel, the 33 West 56th Street Garage and the Worldwide Plaza (WWP) building. Adjusting for the dividend paid after year-end and all the sales already done or in progress the pro-forma balance sheet looks as follows:

It’s important to recognize that New York REIT uses liquidation accounting for the balance sheet, and as such it does recognize expected fees related to selling the building(s) and also expected revenues and expenses till the date of liquidation. For accounting purposes this date has been set at December 31, 2018. Even though this balance sheet is very simple, all the different parts that are important are visible:

  • The assets in real estate and the mortgage notes payable are related to the Viceroy hotel and the 33 West 56th Street Garage
  • The investment in joint venture is the WWP building (net of debt)
  • Cash are funds that should be available for distribution to shareholders
  • Restricted cash in escrow is mostly money set aside of improvements in the WWP building

The only part of the portfolio that really matters is the WWP building. The REIT owns a 50.1% stake that is valued at $1.725 billion and has a $1.2 billion mortgage. Because New York REIT sold the other half last year to SL Green and RXR Realty we can be quite confident about the valuation. Nothing beats an actual transaction price, and last year two knowledgeable third parties were happy to pay $1.725 billion for it. In the SL Green “2017 Annual Institutional Investor Conference” presentation we can find a couple of slides about their purchase, and they think they got a good deal:

To improve and maintain the asset the coming years New York REIT has set aside $90.7 million. They believe that implementing the new business plan will take between two and four years, and if successful, would result in an increase of the property value between $1.9 billion and $2.2 billion (the low-end of that range doesn’t sound so crazy since it’s not much more than the current price plus the cash value of the planned improvements). In addition to the increase in value, the longer holding period would also generate more cashflows since the liquidation balance sheet assumes a sale at the end of this year. This adds approximately $0.10/share in value/year, which is not so bad considering that we are buying the WWP for roughly $1.37/share (the current price of $2.32 minus an estimated liquidation distribution of $0.95/share at the end of this year when all other assets are sold). From the 10-K (emphasis mine):

Management believes that the combined team of SL Green and RXR Realty will add the necessary talent, expertise and capital, along with the capital contributed by us, to bring this Class A asset with its blue chip tenant roster to its full potential. Management believes that implementation of the business plan for Worldwide Plaza will take at least two years and may take up to four years given the size of the building, which is a little over 2 million square feet, the scope and nature of the capital investment and to allow time for the critical milestones in leasing and asset repositioning to take place.

Management believes that if these actions are successful, the estimated value of the property could increase to between $1.9 billion and $2.2 billion, on an undiscounted basis, by November 2021, our estimated sale date of this investment. Assuming additional investment in Worldwide Plaza of $64.0 million, plus a corresponding investment from our joint venture partners, a future value for Worldwide Plaza between $2.0 billion and $2.2 billion would produce a residual value between $2.19 and $2.77 per share, an increase of $0.32 to $0.90 per share over our current carrying value. In addition, we have contractual rents which generate a predictable cash flow from Worldwide Plaza during the estimated four-year hold period which, net of expenses, we estimate would produce an additional $0.43 per share over the four year hold period versus the $0.13 currently accrued.

I can wait a couple of years for a discount to close when getting paid 7%+ in the mean time. If we throw some of these numbers in an IRR calculation we get some pretty decent results. Note that the 1.725B valuation should perhaps have been labeled 1.85B since it’s based on the current valuation, but it assumes that the planned $128 million in capital improvements isn’t money flushed down the toilet. The 2.0B and 2.2B valuations are inclusive of the improvements.

Of course, between now and 2021 a lot can happen. Given that the LTV-ratio on the WWP building is ~70% a relative small change in valuation can have a relative large impact on the eventual financial result. You can still have a decent single digit IRR if the WWP building declines by ~10% in value, but around ~15% you are already around break even and above that you are quickly going into negative territory.

Conclusion

New York REIT isn’t the kind of investment that will make you rich, nor is it the kind of investment that doesn’t have downside. It’s not going to be a ten-bagger, and if New York real-estate for one reason or another doesn’t do well the next couple of years this investment will not work out. That’s okay with me. I know Warren Buffet has famously said: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”, but that has always been something I deeply disagree with. The possibility of losing money is part of investing and if you think you have found something with almost no downside you are probably just fooling yourself. What’s more important is that you bet when to odds are in your favor, and that you size your bet appropriately compared to the amount of risk that you’re taking. But perhaps that idea is harder to turn into a catchy folksy wisdom phrase…

But to circle back on topic: I think the New York REIT offers an attractive risk/reward profile. While the investment is sensitive to the value of the WWP building in four years time, it’s not what I would call a high-risk bet. Perhaps I should have saved my rant in the previous alinea for something that could actually be a zero ;). Between the cash already on the balance sheet, the buildings that soon will be sold and the rent income that will be generated I expect to at least get a fair amount of my invested capital back, and hopefully more than that…

Assuming that the building in four years time will be worth just as much as today (plus the value of the capital improvements) is in my mind a reasonable conservative base case scenario. Getting paid a double digit rate on return  sounds pretty good to me,  and if they would be able to execute on their plan to increase the value of the property, that would just be the icing on the cake. It’s going to take 4 years before the rest of the story plays out, and not everybody might have the patience for that, but that might exactly be why there might be an opportunity.

Disclosure

Long NYRT

AviaAM Leasing being taken under at PLN 5.62

Last year I initiated a small position in AviaAM Leasing AB that is now being taken under at PLN 5.62/share. While I never wrote about the company on my blog, I got a fair number of emails from people asking what the implications are and if there are any alternatives like I’m some expert on Polish securities laws (hint: no). Unfortunately, I don’t think there are any good options here. The group of insiders control 78.27% of the outstanding shares right now. Hitting the 80% threshold in Poland is enough to delist the shares from the stock exchange, and after hitting 90% ownership they can initialize a squeeze-out. I don’t know if there are even appraisal rights available for shareholders in a squeeze-out, but it’s a fair guess that it’s not worth the trouble for small foreign holders to go through that process.

So, as a (small) shareholder you can elect not to tender your shares in the tender offer. But the most likely result is that the only effect of that action is that you delay the payment for your shares. Additionally, sometimes getting paid through a squeeze-out procedure has negative tax consequences since in some countries it can be treated like a dividend (no idea how this works in Poland, but it is certainly a risk). So to summarize: I think we just got screwed and there is little we can do about it…

The only positive is probably that this confirms that it was indeed a cheap stock…

Disclosure

Author is long AviaAM Leasing

Safeway sells interest in Casa Ley

Just before hitting the three year deadline after which Albertsons would be required to pay CVR holders fair value for their stake in Casa Ley they announced that it was sold for approximately US$345 million. The transaction is scheduled to close by February 28, and CVR holders are expected to receive a payout between 87 to 90 cents per CVR six weeks later. It’s a slightly disappointing result since the CVR was valued at $1.0149 at the time of the merger. Albertson is quick to point out that since then the Mexican peso depreciated 20% against the dollar, but on the other hand we have been in a raging bull market for three years as well. Not the best outcome possible, but still pretty decent I think. Now that we know how big the final payout will be we can calculate what kind of return my first ever CVR-trade generated:

Date Description Cash flow
 1/27/2015 Buy one SWY share (35.12)
 1/27/2015 Buy one put as hedge (0.12)
 2/3/2015 Receive cash consideration merger 34.91
 5/11/2017 First payment PDC CVR 0.017
 4/11/2018 Midpoint estimated payout Casa Ley CVR 0.885
IRR: 23.12%

As you can see the trade generated a return of 23% over a more than three year time period which is obviously pretty good, although I believe this understates its profitability. I basically paid 33 cents in 2015 to get paid 90 cents three years later. Looking at it from that perspective the internal rate of return sounds low, but that has to do with the large amount of capital that needed to be tied up in this trade for a week. But thanks to a cheap margin loan it was almost free capital, and accounting for this leverage the internal rate of return would be way higher.

Disclosure

Author is still long two SWY CVR’s