Matt Priore

Reits, dividend investing, portfolio strategy, value
Matt Priore
REITs, dividend investing, portfolio strategy, value
Contributor since: 2013
Company: Priore Investments
Hi MDN1,
Thanks for the comment. A couple points-
While 4M shares is a small amount with respect to the float, it does actually have a somewhat material impact at such deep discounts. The repurchases were made at $19.86, a 17.25% discount with respect to quarter ending BV. Those 4 million shares were on the books for $96M in equity, and they were removed for $79.44. This provides $16.56M in value to shareholders, and spreading that across the 348.8 remaining shares increases BV/share by .05/share (rounded). That isn’t a complete game changer, but with spread income for the quarter running at .60/share, this is similar to an increase in spread income by 8%, and is another legitimate way that management can provide value to shareholders.
While I certainly agree that management's goals are not perfectly aligned with investors, this sort of fee schedule is fairly standard industry wide with respect to closed end funds so it’s hard to envision it changing. This consideration simply forces investors to assess the commitment level of the management team to respecting their responsibility to shareholders - when we see such staunch oppositions to repurchases from some managers, it calls into question their objectives in running their funds and we become more hesitant to throw money over the wall. When AGNC signals that it is cutting 1M in annual fees to provide .05/share to investors, that signals (to me at least) that management is running the fund for the shareholders and that the incentive divergence is a minimal concern for AGNC when compared to other companies in the same space.
Hi user27205633,
I'm happy the content was helpful, thanks for the comment!
Hi Bruce,
I am very glad you enjoyed the article, thanks very much for the comment!
Hi Rob,
Not exactly - swap movement relative to MBS doesn't affect the spread. The spread only relates the borrowing interest rate for AGNC (short term rates) to the MBS assets (longer term rates). Having to buy move expensive forms of hedges will slightly decrease the spread since some of the costs are factored into the interest expense, however the price movement of those hedges directly impact it.
While hedges such as swaps generally do mimic agency MBS rates, there is no explicit need for the two to be in sync / short term asymmetry won't necessarily correct. Swap performance relative to MBS may in some cases signal a 'buy MBA and leverage up' scenario but that is entirely dependent on what management believes is driving the mismatch.
Hi goochsj,
Thank you for the praise, glad you liked it!
Hi Rob,
Thanks very much for the comment, I'm happy you liked the article!
Hi jacky.durkin
That is precisely why I wanted to put forth this overview content. As markcc pointed out, there is potential for bankrupt companies to skyrocket after they optimize their operations. That really isn't RadioShack's story.
Their bankruptcy is not cyclical where they may have a short term cash crunch or an imbalanced set of initiatives within a profitable business. Their balance sheet is underwater. The opportunity to liquidate assets isn't all they need and it doesn't appear on the surface that there are meaningfully profitable arms of RadioShack's business that could survive and develop into a 9 figure market cap company (especially considering the implications on scale of a bankruptcy filing).
Hi Scott,
Thanks very much for the comment and the praise. Glad you enjoyed the article, and as usual I'm glad to see the numbers fell within the overlap of our two projections (as they have for each of the past 4 quarters).
Hi John,
Thanks for the comment glad you enjoyed the article. I was certainly glad to see the true performance validate the analysis.
Hi Bruce,
Thanks for the comment, I'm glad you liked the article.
In terms of the 1:1 BtM ratio, it certainly isn't being seen anywhere in the industry now but these things can change quickly. A few years ago AGNC market price was consistently >110% of NAV, allowing for significant secondary offerings almost every quarter. After QE3, this all changed in about a year's time, with premiums to book turning into 25% discounts across the industry. It took 2 quarters in 2014 for these discounts to shrink from 25% to 10% an I don't believe its beyond reasonable that market pricing could continue to gain on BV over a few months time.
All of that being said, you're right that I am probably in the minority with this opinion. I certainly don't believe these things happen overnight, but I think with QE3 coming to close and AGNCs structural changes to provide investors with more transparency and more incentive to hold through the entire quarter, the necessary puzzle pieces are in place for this to happen.
Hi M Plaut,
Thanks for the comment. I agree with KRT_investor below that the dividend will likely be a consistent .22/share each month for a while now. I think it conflicts with managements objectives to deviate each month and they are clearly making far more interest income than $0.66/share so it reasonable.
Despite the 'raise', we should keep in mind that this is essentially a rounding error. It amounts to .04/share per year, or a yield increase of just ~0.17%. Even though its nice that management rounded up to .22 rather than down to .21, I don't believe this is a game changer by any stretch.
Hi Captainmuggles,
I'm very glad you appreciated the article, thank you very much for the praise and the comment.
The reason it can't really be viewed that way is because it is not the same security at all. That debt facility is extremely low risk top priority debt and doesn't carry any of the risk buying a share of RadioShack does. Pricing of equity (0 value in bankruptcy) versus pricing senior debt (likely 100% value in bankruptcy) can't really be compared. It was just a transaction that opened up the possibility for the seemingly very SG friendly $120M agreement and had no significant risks associated with it.
But hey, for every short there needs to be a long. Obviously you have a bullish standpoint and you are well within your rights to think of it that way and act on it. All I would say is that I would more than happily take the other side of that transaction at $1.50
Hi jibje2,
You've done a great job trying to break down all the components and look at things from all angles. I'm a little confused by some of your numbers, but obviously everyone can come to their own price projections.
One detail to consider that you've indirectly brought to light in your psychology section:
I think a lot of investors watching Radio Shack are probably in the same boat you are. If they are already long, then they don't see this deal and say 'hey what a great deal, time to buy more shares!' which would be ideal for a price increase. I don't know how much 'new money' comes in and says 'great, I didn't buy before, time to buy now' either. There will however be a lot of shorts willing to open or extend positions since the price has a pretty clear ceiling in a few months time + the big risk catalyst (this deal) has come and gone and wasn't anywhere close to as generous as the bulls would have liked.
Hi Madridista,
To clarify for other readers - They are not paying down the debt as you suggest. There is a reason why RadioShack still needs to restructure that facilty and those terms in March. It doesn't retire anything but instead changes the owner of the debt facilty.
Saying this that's a capital infusion is like saying if someone sells an unsecured bond backed by RadioShack to someone else on the secondary market that RadioShack is getting new money (obviously not true). Its a tangential transaction that was essential in order to allow the $120M transaction go through based on the power the holders of that debt had.
You're obviously free to call it whatever you like, but it is by no means new money for Radio Shack.
Hi Matthew,
The commentor was speaking about the debt facility buyout, not the $120 in liquidity. The 120M in debt WILL convert to equity if Standard General and its partners choose to in 2015. The debt facility move is purely debt exchanging hands. This is very clear if you read the release.
As for your other two points:
Existing shareholders are not providing near term liquidity, Standard General is. RadioShack is diluting shares and mandating that existing shareholders pay $1.20 to them in the offering to keep their current shares representative of their previous value.
The rights offering is a 'sure thing'. SG will be able to convert its debt into equity and claim the portion of the company not issued @ .40/share through this offering. SG has the option to not convert, so THEIR conversion is optional / not a sure thing (depending on exactly how the covenants are structured, where you are right we do need more information), but the actual sale of the rights to shareholders will go forward before any decisions are made by SG.
Hi Madridista,
It is never touching RadioShacks hands. It is simply an secondary transaction of who owns RadioShacks debt. It was essential since the prior lenders favored liquidation (Standard General favors continued operations now that they have all the risk free upside in case of a turnaround). Not a penny of that arrangement goes to RadioShack.
Hi Caesar77,
Those are a lot of valid points and I definitely agree with the majority of your sentiment. SG did this deal because it really has no risk and gives them an inside view of Radio Shack + appointments to the BOD. They will have top priority claim on the money they have put forth, and even with Radio Shack's struggles, their entire portfolio would likely liquidate for for the value of the debt facility and the new notes. If things look as bad as you say over the holidays, they just claim their compensation during liquidation and walk away without losses. If RadioShack DOES somehow make major improvements over the next few months they basically get to say that they own the company and then issue further new debt to RadioShack for further restructuring to be completed under their control. It makes sense for them because they have all the options and none of the risk.
Hi novin,
This appears to be a good breakdown of the 2013 numbers. I don't believe 2014 is publicly available at this point.
Hi Cuto191978,
1) Nobody 'knows' what the price will be on Monday, but you can see arguments to both extremes if you go down this message board. Based on my view, it will likely close significantly below the current going rate + will almost certainly track downwards in the near future as some of the bullish momentum arguments start to taper.
2) Yes, current stock holders will get the chance to buy 3 shares of RSH @ $.40/share for each 1 share they own. This will happen in the next few months through a 'rights offering' (info here: The thing to be careful about however is that these shares are 'new' shares. This means that current shareholders will own 20-25% of the company after this offering is complete, and those who exercised their rights will own the rest. The way you can think of it is that if you are a shareholder, you can pay $1.20/share to Radio Shack and your shares keep their value. If you don't, they are worth 1/4 of what they were worth before.
Hope this helps!
Hey Caesar77,
The debt has a lot of complexities but here are the basics: this coalition of Standard General and unnamed (to this point) partners bought out this debt. In essence, the holders of this debt facility had rights to block certain things (i.e. the closing of stores earlier in the year as it meant dissolving their collateral). The purchase of this debt facility was essentially to let the lenders make a deal such as this one and issue further collateralized debt.
Unsecured bond holders do not have the right to sue RadioShack for their actions. Those bonds are issues solely held against 'company reputation' and it is RadioShack's obligation to pay off those debts. They cannot tell RadioShack not to raise more money, and their loans aren't directly backed by collateral.
Hi Sedric,
Thank you very much for the comment, I'm happy you appreciated the article.
This is another great point. Many of the Radio Shack retention bonuses trigger around that time of year, so there is a big personal incentive for those who negotiated the deal to keep the retailer on life support through then. As many pointed out, CFO John Feray resigned a few weeks back ( presumably as he wasn't expecting RadioShack to still be kicking in March.
Hi Madridista,
This is a great point and I wasn't aware of that example, thanks for bringing it to the table!
You are 100% right - I have a negative view on Radio Shack and obviously wrote from that viewpoint. That being said, I've never said that I think the price will be $0.40 on Monday. In fact, as noted in another comment, I believe it will be down but still higher and remain volatile while tracking downward, in line with the example you have given.
Radio Shack is really a widget stock/penny stock at this point, trading based on momentum bouncing around based on PR. The $0.40 point is effectively a sell order for 300M shares at .40 coming in the near term, which overwhelms the market and creates a price ceiling. Smart money with large balance sheets will push this to its equilibrium over time in preparation for that, but it will certainly bounce around. To put a more bullish spin on my conclusion, I would be covering my negative position at $0.40 regardless of my feelings on bankruptcy and changing my view to 'avoid' based on high exposure in either direction, so there may be a relatively strong resistance as it approaches that point.
Hi Equity Val,
Thanks for the great comment and added analysis. I agree with your sentiments, and it is certainly an extremely friendly deal for the lenders. As you pointed out, it highlights how truly desperate Radio Shack was and how much they needed to give up (i.e. take from the owners/shareholders) even to get a small bit of cash.
Glad you appreciate the piece and discussion! You are more than welcome and thank you for the comment.
Hi Jibje2,
Of course, and while that could certainly happen in most cases, this is an unlikely one because of the extreme volume involved. The direct price is pegged to $0.40 (or equivalent pricing as a reverse split is likely in the cards shortly), but once they are 'claimed' they will trade on the secondary market at roughly the going rate of a common share. This could in theory be higher than $0.40 and make the real pricing of this offering go up, however there will be so many new rights available at $0.40/share that the market is really nailed down to that price point as its ceiling. If Radio Shack is doing incredibly well / if say Standard General restructures the debt facility in December and extends their credit due to great initial holiday reports, then it could still happen and all 300M rights could be snatched up. The chances of that are extremely slim however, and I wouldn't count on it.
Hope that helps!
Hi Cavy_style_investing
Definitely true on the first point, Radio Shack's chance of going to zero outright in 2014 just effectively dried up completely and any put options expiring before then just lowered their ceiling. I'm not sure where you are getting your '$0.27' number or why you bring that up though. Can you explain?
Great look into the numbers, although I would bring up a few points.
-This deal definitely doesn't bring Radio Shack back to Q1 2014. Going into the year they had >$600M in liquidity (compared to ~$180 as of August and less today) + they burned off $370M in Book Value between January and August. In addition to this, operational numbers have gotten far worse. At their most recent burn rates $120M would be evaporated in about 6 weeks (although it would certainly last more than that with the higher turnover of the holiday season, so its certainly fair to give more credit than 6 weeks). However you look at it, Radio Shack is certainly not worth close to as much as they were in January 2014.
-Your point about current shareholders is correct and you have to own the stock to purchase the new shares, but there are very clear ways that when this settles that pins the pricing to (close to) $0.40. Consider what happens if the stock is at a significantly higher price point than $0.40 when the rights offering begins, say even $0.60: Rights offerings trade in the secondary market just like common stock, so holders would be able to buy the rights at $0.40/share and instantly sell for a profit since that would be the going rate for common shares. That a bit of an oversimplification, as obviously common shares are certainly worth a bit premium if buying the rights at $0.40/share is attractive. Given the volume of the rights that will be available however, if the common share value is significantly more than $0.40 all shareholders will exercise and the market will quickly be saturated, make the rights and shares functionally the same security. There are a lot of intricacies, but the broad point is that when the offering commences it will trade around the same price as a common share & 3/4 of that pool will be available for $0.40.
Hi markcc,
That's a really interesting take, and great point. Thanks for the comment!
Hi sjflegends,
That was exactly my point - its easy to argue that $0.40 > $0.00 so you are 100% right. The problem is up until 9:15 Friday morning shareholders were paying over $1 for Radio Shack shares. Anyone will be able to buy shares for $0.40 a share in the near future, so anyone who either just bought or has held radio shack shares bought WAY above what they will be able to sell them for. Shareholders lost due to previous higher expectations not due to Radio Shack avoiding immediate bankruptcy.
Hi bazooooka,
I agree, Radio Shack definitely isn't a stock that trades solely based on fundamentals at this point, so we can certainly expect some volatility. It won't simply open at $0.40/share on Monday, but I think its a pretty safe near term target given the proportions of the offering.
To your other point however, there is no chance of a buy out. Buying Radio Shack before bankruptcy entails taking on and paying off $1.3B in debt while receiving less than that in assets + an expensive restructure, operational losses while things are sorted out, AND having to pay for common shares. There are plenty of articles out there about who might be interested in buying Radio Shack stores, but this is all in the case of a bankruptcy scenario as the sale of those stores is what covers their secured debt.
Hi Chris,
Thanks for the piece, nice article and good call. I wanted to note that taxable income isn't a concern for AGNC as you have laid it out. The low figure comes from roughly $1.8B in losses from 2013 that AGNC is carrying forward, offsetting gains where possible on income in 2014 and preventing it from being taxable. This allows them to more quickly grow book value. They have just under $1.375B left ($3.89/share) and this will continue to suppress the taxable income figure going forward (these figures should be pretty straightforward if you look at page 23 of their most recent presentation
On the Q1 call management discussed this artifact and guided that taxable income would be an insignificant figure in the near future / they reiterated the .65/share dividend was important to them. Based on that guidance, the low minimum distribution requirements associated with low taxable income figures aren't really a concern here, and since they will be continually taking these losses against gains, there really isn't anything they will be doing to try and improve that figure in Q3 and Q4.