I’ve got a few thoughts for you on some companies I follow and own, and a little follow-up on last week’s chatter about hedge funds, but first I thought you’d like a quick teaser solution for your Friday File fun…
The pitch is for Stephen Petranek’s Breakthrough Technology Alert — there’s been some discussion recently about Patrick Cox on the biotech discussions helmed by Dr. KSS, and Breakthrough Technology Alert was the newsletter Cox used to run before he left to start a similar letter for John Mauldin. Like Cox before him, Petranek is a career journalist — he was editor in chief of Discover for several years, then ran a bunch of history magazines before coming to the newsletter world. His LinkedIn profile notes that when he ran at the Washington Post magazine (which is very good) decades ago, he used “advanced storytelling techniques,” so he’s going to fit right in at Agora.
What caught my eye was that Petranek, in one of the free Agora emails, was quoted on a cure for cancer:
“For the first time in my adult life, I am actually optimistic we may be looking at a cure for cancer — not treatment, a cure.”
So that sounds pretty good, right? I know there are thousands of researchers trying to find or develop a cure for cancer, but, well, we’re not there yet — so who does he think is on the verge? Here’s more from the email:
“Stephen is on to a company ‘developing a technology that can take the T cells in your body, those killer cells in your immune system, and re-engineer them to find cancer cells and kill them. They can teach your body’s own cells to seek out and destroy tumors.’
“Now, if you’re hip to the science of cancer, you’re probably a bit skeptical: ‘Immunotherapy’ to fight cancer has a long and disappointing history — 40 years’ worth, in fact.
“This new therapy is something else altogether. It works like this: Doctors take blood from a cancer patient and put it in an extremely high-tech version of a test tube. In the test tube, T cells are withdrawn from the blood and re-engineered so they can identify and attach to a specific kind of cancer that’s growing in that patient.
“‘The new T cells are infused into the patient,’ Stephen goes on, ‘where they multiply, proliferate and grow.’ The process takes all of six days.”
The ad then uses a photo that shows before and after scans of a 47-year-old patient with non-Hodgkin Lymphoma, showing remission, which looks very impressive… and I can tell you the photo shows the effect of Brentuximab Vedotin from Seattle Genetics (SGEN), photos that generated a lot of interest when they appeared in the Daily Mail in the UK last Winter. But Petranek is not touting Seattle Genetics, the quote about the photo says that “the patient was treated with engineered immune system T cells much like the ones this company is working on.” (my emphasis)
And that’s sort of true, I guess, though I think SGEN’s Brentuximab is a bit more general of a treatment — if I understand it properly, it’s a monoclonal antibody that is designed to carry a chemotherapy drug to a targeted tumor, where it does its cell-killing job. So it seems misleading, at the least, to use that photo of a Brentuximab patient to pitch this different drug.
Not that there’s anything wrong with Seattle Genetics — SGEN has been a very successful company so far and a pioneer for more than a decade, getting to a $4 billion market cap now on the strength of this drug and the rest of their (much less advanced) pipeline. The company continues to advance Bentuximab (trade name Adcetris) in several different kinds of cancers, aiming to bring it to a broader patient base. I don’t have any idea whether SGEN will be a investment winner from here, they’re still a couple years from generating profits, according to analysts, and I suppose it depends on whether they can make Adcetris a much larger drug — lymphoma (of all kinds) is a huge market, particularly if they get a first line indication.
But that’s not our “secret” stock — this one being teased today is more specifically personalized, apparently, using the patient’s own cells to make T cells. Here’s a bit more from the ad:
“‘A dramatic percentage of these patients are going into remission.’
“Indeed, they are. Thirteen patients got the treatment in a recent study. ‘These are very ill patients,’ says Stephen, ‘many of whom had been treated with various chemotherapies and failed to respond.’
“Eight of the 13 went into complete remission… and four more had partial remission.”
And more clues…
” …a company that quietly but methodically locked up every patent in the world applicable to their technology. A company that has recruited the best and brightest in the field of immunology to join their team, including the pioneers of immune therapy that go back three decades, to the beginning of the field. A company that then pulled off the impossible — it convinced the National Cancer Institute to become an exclusive partner.
“Yes, the federal government’s core intelligence on cancer and immunology has flowed into a cooperative research and development agreement with this small pharmaceutical company.”
So who’s Petranek hinting at as the folks who “really might find a cure for cancer?” Thinkolator sez he’s talking up: Kite Pharma (KITE).
And… I will instantly get out of my depth if I talk much about it, but I can at least tell you why it’s a match: They are a partner with the National Cancer Institute, working with Dr. Rosenberg, and the results that Petranek cites from a group of 13 patients, with 12 going into at least partial remission, are from a Phase 1-2a trial that was highlighted in this press release in August; and the process of extracting and preparing T-cells with their system does indeed take six days.
Kite has been around for five years or so now, they’ve apparently spent much of that time doing early stage-research and gathering up a patent portfolio to protect their Engineered Autologous Cell Therapy (eACT) platform, and they went public with a bit of enthusiasm earlier this year. The IPO was oversubscribed and the price shot up from the planned mid-teens, then muddled around through the Summer and popped back up close to $30 on that late August news and again bumped up in early October when an analyst gave them a dramatically higher ($75ish) price target. Since then, more results about ten days ago were announced here concurrent with an article in The Lancet, which apparently didn’t surprise anyone (the stock didn’t really react).
According to a September presentation from Kite, they’re expecting to publish a bit more updated data in the next couple months (some of came was last week), and they plan to file an IND late this year and begin enrolling for Phase 2 trials of KTE-C19, their lead drug/treatment in the first quarter of 2015 (four pivotal studies are planned for next year in total). So there are some catalysts coming — whether good or bad, I obviously don’t know. And, of course, I understand little of the science in this area so I’ll leave it to our biotech mavens to chatter about Kite if you’re so inclined (Dr. KSS mentioned Kite back when it IPO’d in June, and I think it’s been discussed once or twice since then but not in great detail).
So there’s one for you to think about and discuss if you wish — KITE is a billion-dollar company with plenty of IPO cash to move aggressively on their “pivotal” trials next year, so they probably won’t hit you with a surprise secondary in the next few months… but whether the science works in the end or is better than competing immunotherapies, or whether investors love the stock, I can’t tell you. But I’m quite sure it’s the stock being touted by Petranek… whether that’s good or bad, well, you can decide.
Moving on to some thoughts on other stocks that have had “news” this week…
Medical Properties Trust (MPW) is not a “blue chipper” among Healthcare Reits — but it’s possible that it will get there, and I find much more comfort in their focus on hospital properties than I do the focus of most other healthcare REITs on either assisted living or medical office buildings. There isn’t necessarily anything wrong with medical office buildings, but they are not nearly as unique as hospitals.
This week, MPW took a step toward becoming what I hope they will be: a consistent dividend grower. For quite a while they have traded at a discount to other healthcare REITs partially because they have been a bit riskier in the past or more levered, and partially because they haven’t been consistent about growing the dividend — in fact, the dividend had been the same for several years before I bought shares.
That started to change last year, and the announcement of a dividend increase was part of my impetus to load up on the stock because of the signal that sends — and I think we’re likely to have another dividend increase in the fourth quarter this year. The chances of that just improved considerably with their latest very large deal to buy a couple more properties in the US and a (well, another) large portfolio of 40 properties in Germany. They announced this would be accretive to their adjusted funds from operations (AFFO, they call it) and lift that number to the range of $1.19 to $1.26 for the year following the completion of the transaction.
Now, part of this is gobbledygook real estate financing stuff and they’re trying to give a number that approximates their real sustainable cash flow from their business, but it’s important to note that the “adjustment” is real — they have a couple impaired properties, and this “AFFO” number ignores them, but they have been able to manage through those properties and have sounded optimistic about working them out (getting new operators or selling them) in conference calls, and each challenging property grows smaller as a percentage of the whole as the company grows. So I’m relatively confident in management, but not blind to the fact that less than 100% of the assets are producing their expected cash flow.
The company’s goal is to pay out 75-80% of cash flow as dividends, and it has historically been above 100% for a few years (that’s why they didn’t raise the dividend). The fact that the vast majority of their leases have built-in rent escalators (generally tied to CPI, at least loosely — the new German rents, for example, escalate at at least 1% annually and max out at 70% of German CPI… German CPI is currently 0.85%) gives them the potential to increase revenues and dividends in the future even without growing their base, particularly if inflation hits. Inflation would also hit their borrowing costs at some point, of course, but most of their debt is fixed rate and at least several years from maturity — there is no single scary year in their maturity schedule, and their debt is nonsecured bonds that they’ve generally been refinancing at lower rates at maturity, they have intentionally been improving their creditworthiness (which happens naturally as they grow and diversify, too) to help shave some of their future financing costs.
So if they are going to hit 80% of AFFO as their dividend payment, and they hit the low end of their AFFO target for 2015 of $1.19, that would mean the dividend could potentially get to 95 cents/year over the next year or so. Right now it’s 84 cents, and they raised it by one penny per share a year ago, so I suspect they’ll probably raise it a penny again this year to 88 cents (22 cents/quarter), which would mean a forward yield of 6.7%.
That still looks very good to me, and I think it’s possible they could do better — they are still growing and still looking to expand with a good pipeline of possible acquisitions, and hospitals are doing well in this country and many are looking to expand, upgrade or renovate, which gives MPW a chance to get decent sale/leaseback deals with hospitals that benefit both parties (good rents to MPW, big cash infusions for the hospitals). If this continued operational improvement leads investors to value MPW similarly to the (admittedly more established) companies in the sector who have good dividend raising histories, like Ventas (VTR) or Health Care REIT (HCN) or Healthcare Realty (HR), then there is potential for capital gains as well — if MPW traded at a 5% yield, which is still a bit higher than most of those near-peers, the stock would be at $17 in the coming year (it’s around $13 now).
I’m not counting on capital gains, but I think the dividend will grow slowly and should keep up with inflation over the next few years, and the current yield of 6.4% (maybe 6.7% if they announce a dividend hike in December) is very compelling. MPW is not a “set and forget” blue chip, not yet, but I think it might get there — and at these prices, the potential growth is cheap and you get very good income while you wait, if they do follow through with a dividend hike later this year and the stock doesn’t react upward too violently, I’ll likely move this into the “core” positions with other REITs ROIC and COR — and as it is, I did just buy a few more shares of MPW personally. If they don’t raise the dividend in the fourth quarter (last year they announced the dividend raise shortly after the third quarter results, in early November), then the stock could well traded back down to the $12 neighborhood.
I think that’s the lowest it should reasonably go absent a really irrational crash, they are a high-yielding stock that will not suffer directly because of a mild Fed rate hike if one comes to pass in the next 6-9 months (though, like all income investments, they will probably react sharply to changing sentiment about future interest rates). There are certainly plenty of risks, including writeoffs of assets if they have hospitals without tenants for prolonged periods (they generally have 30 year leases, and their urban/suburban hospitals rarely disappear — though they sometimes change operators), and they now also have some currency risk (they’ll presumably earn their rents in Euros for the German rehab and acute care hospitals and have to translate those into dollars to report), but I like MPW as a high current yielder that’s continuing to grow its footprint considerably — and I’ll like it even more if they raise the dividend next month and reinforce that expectation that they will be a dividend growth REIT.
And TGS Nopec (TGS.NO, TGSGY on the pink sheets), the big “asset light” seismic company I suggested a while back and still own personally, reported results this week as well. The stock is down a little bit, but I think these are the kinds of situations the company is built for: They don’t own seismic vessels, they just charter them out as needed and collect data — and they own the data. They work with oil companies to do seismic surveys, splitting the cost roughly 50/50 on average these days, and then TGS owns the results. Some of that data is never used by anyone again, and therefore they’ve lost money on it, but some of it is very valuable and is used for decades — they concentrate on areas where there are big licensing rounds planned or in progress, or where a substantial amount of exploration is being considered, so that they can then license that data to other companies who are either looking for oil or considering bidding on exploration blocks.
Their data is mostly for offshore oil fields, with great strength in the Gulf of Mexico and the North Sea, so the decline in offshore spending will hit them — but it won’t hit as hard or as immediately as it hits a big, levered company like Seadrill (SDRL), which I also own (and which is much more volatile). TGS Nopec doesn’t have any debt, and they have excellent operating earnings and free cash flow even if each quarter tends to be quite lumpy. They don’t have a subscription model, where companies pay them every year no matter what, they have lumpy sales as companies pay up front for their portion of new surveys, or as companies buy old data, and they can’t usually predict their orders very well (particularly the old data).
But I still love the idea of TGS — and I’m quite pleased with how well they’ve done this year operationally, though the share price is down a bit. This last quarter (presentation here) highlighted what I consider one of the most important reasons to own this kind of company: They plan to make a profit or break even on new surveys over a few years, and write down the value of data they collect down to zero after four or five years, but the data remains valuable and people keep buying it after that. As of this last quarter, more than 40% of their revenue came from data that they collected in 2010 and earlier that had been written down to almost no value on the balance sheet.
They are also cautious, they accelerated the writedowns of some of their more recent survey data thanks to recent trends of explorers cutting costs — which makes the income look a bit worse, but doesn’t do anything to cash flow, but they also reiterated that they can meet their earnings guidance for this year. That apparently depends on Norway opening their next licensing round before the end of the year, since that should spark some new orders for their data sets in those areas — I don’t know if that will really happen as they project or not, but the new rounds will happen so if it doesn’t hit this year that income should pop right in early in 2015. They have a substantial revenue backlog of $260 million, so there’s some visibility in the coming year, and they’ve raised the dividend for five years in a row now (trailing dividend is about 5.3%, they pay just once a year, in early Summer). You can get some more color on how they think the business is going in the conference call transcript, available here.
I still like the stock, despite the fact that they’re unlikely to grow earnings aggressively in the next couple quarters, and I like that they are talking about being aggressive with collecting new survey data now that day rates are low on the ships they use, I don’t have any particular reason to be heavily invested in oil services but unless you think offshore oil exploration really dries up over the next decade I expect TGS to be a very solid long-term performer. They have a very valuable asset in their multi-client data library, and even after writing down the value of that data quite conservatively in recent years, and accelerating that writedown in this last quarter, they still trade at only about 2X book value.
It looks to me like they’ll keep growing the dividend (they could do so easily even with a couple weak quarters), albeit perhaps less aggressively, and they’ve also bought back and canceled some shares this year (and have more to buy if they wish)… it’s quite possible that the stock could get really cheap again if oil prices drop still further, or if investors give up on offshore oil entirely, and if that happened I might want to be aggressive about buying more TGS… but for now, having no idea where oil is going to go in the next six months, I’ve added a few more shares to my portfolio around $24. (If you ever wish to trade this one outside of Oslo, by the way, please note that the pink sheets are quite illiquid and the price of the US shares isn’t necessarily “fair” at any given moment — don’t ever use market orders for such stocks and use the TGS price in Norway trading, converted from Kroner to dollars, to determine your limit order price… it’s usually easiest to trade these European stocks first thing in the morning, when both NY and the home exchange are open to provide live pricing).
And note that I might either be too sanguine about the future of offshore oil (TGS does do onshore seismic too, including in the US shale areas, but that’s a far smaller part of the business), or missing something bad about TGS specifically — the stock has among the highest short ratios in Europe, it has recently been in the neighborhood of 20%. Nothing in their financials makes me think they should be shorted that aggressively, so I’d guess that those folks are arguing that falling oil will mean lower revenue for them and more writedowns on their existing data… which is certainly quite possible. I’m comfortable with their growth prospects as Norway continues to push further into the North Sea, as exploration proceeds in Greenland and off the maritime provinces in Canada, and as Mexico opens up its portion of the Gulf of Mexico, and I think there will continue to be more push to find more oil — but if oil falls to $60 and everyone slashes their budgets then yes, TGS is going to go down a lot. Less than the vessel-owning seismic firms or the drillers, I’d argue, since TGS has a pristine balance sheet, but still a lot.
So that’s what I’ve done this week — added some small chunks to a couple dividend-paying stocks in MPW and TGSGY, but nothing aggressive, and I’m still sitting on more cash than usual and still kinda hoping for some washout bargains somewhere along the line… doesn’t seem to be happening yet, with quick recoveries every time stocks take a tumble (except among the oil stocks, of course, which I’m probably too exposed to already), but I keep hoping. Have a great weekend!
P.S. After talking about publicly traded hedge funds and hedgie-managed reinsurance companies last week, Third Point came up for discussion because it has both kinds of “permanent capital” feeding into Daniel Loeb’s investing strategies. Loeb’s Third Point, in addition to the Third Point Re (TPRE) insurance operation that went public last year, has an offshore closed-end fund, which has been listed in London since 2007, that’s quite similar to the new Pershing Square Holdings listing in Amsterdam. Third Point Offshore trades at TPOU in London in dollars, or TPNTF on the pink sheets (also TPOG in pence, though there’s no particular reason why that would be helpful unless you happen to think in Pounds, they trade almost identically).
This is worth looking at as a comparison to Pershing Square Holdings, even if you tend to prefer the US-listed reinsurance version of the Third Point investing empire over the actual hedge fund (as I do at current valuations — mostly because the reinsurance firm can leverage those returns with float and neither is at severely discounted valuations) — and along those lines, it’s notable that Third Point Offshore has often traded at a dramatic discount to the net asset value (NAV) of the fund during its seven years as a publicly traded vehicle.
Trading at a discount to net asset value is not unusual for closed-end funds, which is really what these are, but the discount did balloon to 50% during the financial crisis and remained stubbornly near 20% or so for many years after that. Third Point stepped in to try to narrow that discount, with one of their primary strategies being a regular annual dividend that they’ve paid for the last couple years (in the 5% neighborhood), and that has helped to get the discount to just a few percent, 3-5% or so most of the time. In retrospect, though I wasn’t thinking about it or considering it at the time, buying into Third Point Offshore when they did trade at a huge discount, while the world was falling apart, was a spectacular idea — though that’s true of many closed-end funds that traded at huge discounts in 2008 and 2009, the recovery brought double-whammy returns for them from a boost in net asset value and a narrowing of the discount at which they traded to NAV.
So that illuminates one of the risks that Pershing Square Holdings will have: It could, particularly if sentiment goes very bad again or Ackman has a big blowup, trade at a substantial discount to NAV if investors suddenly want to flee.
For now, I’d still take the more easily traded (and potentially float-levered) TPRE over Third Point Offshore… and as it comes to overseas publicly traded hedge funds, I’ll stick with Ackman’s Pershing Square Holdings at a reasonable discount of a few percent to NAV — partly because of the lower fees Pershing is charging for what has been similar performance. And though I’m a little bit hopeful that we’ll have another scare that creates big discount pricing in these funds (and lots of other stuff), and that I’ll be wise enough to notice and act on that if it comes, I’m not counting on it happening imminently and I expect all these hedgies to do better during market downturns than I would (since I don’t have a short book and I don’t actively hedge my positions like they can).
Currently the discounts are slim — Pershing Square Holdings reports NAV weekly and as of Tuesday had a NAV of $24.70 so it was at a 5% discount then and is now at a 2%ish discount, Third Point Offshore reports monthly and as of the end of September was at a 3% discount.