Living in Florida, one learns to dread the Federal election cycle.
The constant bombardment of ads has been bad enough for the past month. Over the next few weeks will see us reach genuinely ridiculous levels. It is not worth it most nights to even turn on the Television. It’s better just to read a book and avoid the barrage.
Of course, turning on your computer exposes you to the flood of ads offering “stocks to buy if this guy gets elected and stocks to sell if that guy gets elected.”
This happens in every Presidential election, and it is almost always wrong.
I have heard that Joe Biden will be great for banks. I have heard that Joe Biden will be horrible for banks.
Trump is great for defense stocks, except when he is bad for defense stocks.
It is insanity.
Investing based on those headlines is a great way to get mediocre results at best and suffering grievous losses at worst.
The headlines are all election and coronavirus right now. That will probably continue for some time. This election will not be over on November 4th, and the virus will not be over until we have a vaccine.
So let’s ignore the talking heads guessing what Tesla is going to do this week and focus on some real investment opportunities.
Deconstructing a Top Investor’s Biggest Bets
Philip Goldstein is one of those investors that you never hear but should pay close attention to. He runs Bulldog Investors, a premier closed-end fund investor group who are also known for their several activist campaigns. I make it a point to stay on top of what Goldstein and his fund are doing at all times.
In 2009, Goldstein and Bulldog Investors took control of the Insured Municipal Income Fund, and renamed it Special Opportunities Fund (NYSE: SPE).
The fund is primarily in the closed-end fund investment business. Bulldog buys heavily discounted closed-end funds and often engages in activist campaigns to make the discount go away.
I was recently reading Special Opportunities Fund’s shareholder report and came across a few investing ideas that we can steal.
We will get to the Fund in a minute, but I want to tell you about some special situations patient and aggressive investors might want to jump on. They are not risk-free, but they do appear to be high probability, 3x your capital type of opportunities.
Special Situation #1: Brookfield DTLA Fund Office Trust Investor
Bulldog Investors owns over 400,000 shares of Brookfield DTLA Fund Office Trust Investor Inc. (NYSE: DTLA-) 7.625% Series A Cumulative Redeemable Preferred Stock.
Brookfield’s DTLA Fund owns and invests in high-quality commercial properties in the Los Angeles Central Business District. They own six office locations and one retail property location that make up about 30% of the CRE market in downtown L.A.
Brookfield wound up with these properties when they recapitalized a distressed REIT back in 2013.
The Fund has a preferred stock outstanding that is a cumulative preferred. That means that if the fund skips a dividend, they have to make it up to you in the future. Right now, the preferred stock issue has approximately $20 a share in back dividends that they have to pay at some point. To redeem the issue, they also have to pay off the $25 par value. This means that at some point before 2023, Brookfield will have to pay stock holders $45.
Simply, Brookfield cannot monetize its equity interest without paying off the arrearage and redeeming at par the preferred shares.
In 2023 they have co-investors who will be able to liquidate their interest in the Fund at the appraised value. Brookfield will not be able to meet those redemptions without paying off the preferred so they can monetize their equity interest.
That means that they have to pay the preferred shareholder off in full.
Goldstein and Bulldog talked about their investment in the preferred stock in their latest annual report writing:
“Brookfield DTLA Fund Office Trust Investor Inc. (DTLA-) has been hurt by the Covid-19 pandemic in the first half on 2020. The company owns several high-rise office buildings and a shopping mall in downtown Los Angeles. The Fund owns DTLA’s 7.625% Series A Cumulative Redeemable Preferred Stock, which has not paid dividends for several years. The current stock price of the preferred shares is less than 40% of their liquidating value, i.e., the sum of their face value and accrued dividends. The common stockholders cannot receive any distributions until the accrued dividends are paid. Andy Dakos and I have seats on DTLA’s board. We believe Brookfield is doing the best it can to preserve the value of DTLA’s properties in a difficult economic environment. One possible bright spot is that the pandemic may cause DTLA’s common stockholders to push management to pursue an exit, which would include retiring the preferred stock at a premium to the current market price.”
DTLA is currently trading under $12 per share. With the required payout of $45, investors have the potential to more than triple their investment.
Note: The shares are not very liquid and investors should only use a limit order around the most recent close and be patient.
Special Situation #2: Churchill Capital IV
Bulldog is a considerable player in the SPAC field as well. As Goldstein noted in the shareholder letter:
“Although they are still misunderstood by many investors, special purpose acquisition companies (SPACs)… have recently garnered much public attention… We expect to generate an annualized rate of return in the mid to high single digits from a diversified portfolio of SPACs.”
We will go ahead and steal our SPAC idea from Phillip Goldstein and his team as well.
The shareholder letter also noted that:
“The Churchill Group, led by Michael Klein, has sponsored four SPACs. The first Churchill SPAC merged with Clarivate Analytics, whose stock has performed exceptionally well since then; another Churchill SPAC has announced an $11 billion merger, which has been viewed favorably by investors, with MultiPlan, Inc., a healthcare management company; a third Churchill SPAC is rumored to be in talks with Topgolf Entertainment Group. As a result of Klein’s successful track record, there was significant demand for his latest SPAC, Churchill Capital IV (CCIV.U), the second-largest SPAC ever issued at $1.8 billion. We were able to get a good allocation of units in Churchill IV’s IPO and are optimistic that Klein can again deliver a transaction that will be favorably received by investors. If so, our shares and our warrants should move up.”
I agree. The symbol is CCIV, and it is trading slightly below the $10 trust value at ~$9.70. I consider the SPAC a buy up to the $10 redemption level.
An Easier Way to Play
The real appeal of Bulldog’s Special Opportunities Fund is that you have a skilled closed-end fund investor doing all the work for you.
Shares of the fund actually trade at an 11% discount primarily because no one has ever heard of the Fund, and Goldstein doesn’t bother marketing it in any way.
The dividend yield is also 9.2% and pays monthly.
The two above special situations are worth looking into, but for those of you who do not want to deal with illiquid and complex securities, you can simply buy the fund and get exposure to both.