The Intellectual Investor: Income Strategy Weekly Updates

August 14, 2017

Income Strategy Update for Week Ended 8/11/17

Business Development Companies Advance After Strong Q2 Results While Colony NorthStar Falls Short of Expectations

Last week, the Income Strategy declined -2.01%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.79% fall and the S&P 500’s -1.37% loss (Exhibit 1). The strategy ended the week up 9.32% YTD, or 400 basis points ahead of the high yield index and 108 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 8/11/171

Time Period Income Opportunity ML HY II S&P 500
Last Week (8/4 – 8/11) -2.01% -0.79% -1.37%
MTD -2.36% -0.76% -1.06%
QTD -1.55% 0.39% 0.97%
YTD 9.32% 5.32% 10.40%
Inception (annualized since 4/2/2009) 15.19% 12.50% 16.01%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Business development company Triple Point Venture Growth (TPVG) advanced after reporting Q2 net investment income of $0.55 per share, easily surpassing analyst estimates of $0.32, as well as their dividend of $0.36 per share (10.5% annualized yield). The company reported a 19.9% weighted average annualized portfolio yield on debt investments and increased book value by $0.14 to $13.52. Investment firm Medley Capital (MCC) reported FY Q3 net investment income of $0.18, matching consensus estimates. The firm maintained their $0.16 dividend (9.8% annualized yield) and closed the week above its 50-day moving average. The debt of Community Health Systems (CYH) moved higher with the rally in the hospital operator sector. Mortgage finance firm Starwood Property Trust (STWD) reported Q2 EPS of $0.52, just beating analyst estimates of $0.51. Performance was driven by strong realized gains in the investing and servicing segments, as well as better than expected lending margins. The company maintained their dividend of $0.48 per share (8.6% annualized yield). There was no price-changing news on Apollo Global Management (APO).

Exhibit 2: Significant Contributors to Performance, 8/4/17 – 8/11/17

Name Type Return
TriplePoint Venture Growth BDC Equity 7.0%
Apollo Global Management Equity 1.3%
Medley Capital Corp. Equity 2.7%
Community Health Systems 6.875 2/22 Bond 1.7%
Starwood Property Trust Equity 1.1%

Source: Miller Value Partners

Four equities and a preferred comprised last week’s top five detractors (Exhibit 3). REIT Colony NorthStar (CLNS) declined after reporting Q2 funds from operations of $0.35, falling short of consensus estimates of $0.38. The company maintained their $0.27 per share dividend (8.1% annualized yield). FBR Capital lowered their price target on the stock from $16 to $15, 11.6% above where it currently trades, but maintained their “Buy” rating. Triangle Capital (TCAP) continued its slide last week as it received further downgrades at several firms across the street, most notably Janney Capital, who noted that credit losses, in addition to problem loans could cause the firm to cut their dividend 20%-30%. The analyst lowered the price target from $20 to $17, or 21.6% above where it currently trades. William Lyon Homes (WLH) reported Q2 revenues of $422.7M, falling short of analyst expectations of $424.7M, but beat on EPS of $0.49 versus consensus $0.48. The company raised 2017 guidance for deliveries to 3,150-3,350 (3,000-3,250 previously), home sales revenues to $1.725Bn-$1.8Bn ($1.65Bn-$1.75Bn previously) and pretax income before minority interest to $140M-$150M ($135M-$150M previously). There was no price changing news on Seaspan (SSW).

Exhibit 3: Significant Detractors from Performance, 8/4/17 – 8/11/17

Name Type Return
Colony NorthStar Inc. Equity -8.1%
Seaspan Corp. Equity -6.8%
*Recently Added Security* Equity -5.4%
Triangle Capital Corp. Equity -5.3%
William Lyon Homes 6.5% Preferred -3.7%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2017 Miller Value Partners (includes LMM LLC and Miller Value Partners, LLC)

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