Troy Marchand's Foundry Value Fund commentary for the month ended February 29, 2016.
The Foundry Value Fund was down 1.48% for the month of February, while the Russell Microcap Index was down 1.51% during the same period. This brings our year-to-date return to -9.85% compared to -11.69% for the Russell Micro-cap Index. We have several new ideas in the pipeline we are vetting out. We are still fairly cautious to put much cash to work in this environment, but are finding a few interesting special situation ideas from up north and overseas.
Foundry Value Fund - New Position:
Foundry Capital February letter
The following is from Foundry Capital's February letter to investors. Foundry was profiled in our January issue. Some updates and a new position. If you would like to talk to the portfolio manager about any positions feel free to contact below.
Troy Marchand 317.402.1563
230 E. 16th Street Indianapolis, IN 46202
The text can be found below or you can find the PDF here.
Adcare Health Systems Inc – Preferred Shares (ADK-PA) – Owns, operates and manages skilled nursing facilities and assisted living facilities in the US. 13% dividend yield on the preferred share class. Several activists involved in the name. The Company recently converted to a REIT and shareholders are demanding a sale of the entire company. We purchased the preferred shares at roughly $20, which are redeemed at par ($25) in a change of control event (i.e. sale). The Company’s current cash flows more than cover the preferred dividend payment and we believe the Company would likely buy back all the preferred shares at par, if for some reason they don’t sell the entire company.
A recent activist letter summed up the potential value in the following statement (the entire market capitalization of ADK is ~$45 million and they have many more properties outside of Arkansas):
“We believe that a not widely read 8k filed on February 9, 2016 highlights the underlying value of ADK's assets and the value that could be created through a sale of the entire company. In this filing, ADK disclosed that it granted a party an option to buy ADK's Arkansas facilities for $55 million or what we believe equates to a 10% cap rate. We believe the Arkansas facilities are ADK's weakest, so if a party is considering paying a 10% cap rate for these facilities, we believe ADK can obtain even more favorable multiples for its more attractive remaining facilities.”
Foundry Value Fund - Sold Position:
Extendicare Inc. (EXETF) – Was sold to reinvest proceeds into ADK-PA. Similar companies, however ADKPA pays a 13% dividend and catalysts are more near term, with more potential upside in our opinion.
