Michael Blitzer’s Kingstown Capital Management disclosed a large new activist position last week in Home Loan Servicing Solutions Ltd (NASDAQ:HLSS), with 3.6 million shares representing 5.1% of that company’s common stock. In addition, it revealed its intention to fight against that company’s planned sale to New Residential Investment Corp (NYSE:NRZ) for $1.3 billion, an acquisition that has already been approved by the Board of Directors of each company. We’ll also take a look at the top three picks in Kingstown’s portfolio heading into 2015, as well as its other recent move.
New York-based Kingstown Capital was founded by Blitzer in 2006, and describes itself as a “value-oriented investment partnership that focuses on special situation securities across the capital structure”. The fund’s equity portfolio was valued at $689 million at the end of the year, up slightly from $684 million at the end of the previous quarter, but below its all-time high of $806 million at the end of 2013.
The fund has been aggressive early in 2015. In addition to the the newly disclosed HLSS position valued at $66.28 million, the fund also reopened a position on Ocwen Financial Corp (NYSE:OCN), which was its largest position at the end of the third quarter with 4.5 million shares, but which it sold out of completely during the fourth quarter. In early February, Kingstown revealed reopening a 12 million share position in Ocwen, as the shares of that company continue to freefall, down 85.32% since the start of 2014. The renewed position is now valued at $97.68 million, making it once again the largest in Kingstown’s portfolio, according to end-of-2014 figures. The position in HLSS meanwhile would be the fourth largest.
In the February 24 filing concerning Home Loan Servicing Solutions Ltd (NASDAQ:HLSS), Kingstown revealed in its statement of purpose that it does “not believe a transaction at GAAP book value adequately compensates the Issuer’s shareholders for the value of its assets, which have historically traded between 1.2x – 1.3x book value according to the Issuer’s September 2014 Investor Presentation.” It went on to add that some of the assumptions underlying the issuer’s book value were conservative, and not consistent with the recent performance of HLSS.
The transaction values Home Loan Servicing Solutions Ltd (NASDAQ:HLSS) at $18.25 per share, a 9% premium on HLSS’s closing price of $16.76 on February 20, the day of the announcement. Shares leapt to $18.35 the following day. Kingstown began acquiring its position in HLSS beginning on January 13, well before the sale of the company was announced.
Let’s take a look now at Kingstown’s top three picks at the end of 2014. Its top pick at the close of the year was in News Corp (NASDAQ:NWS), in which it held an even 5.0 million shares. That was a 25% increase on the position from the close of the previous quarter, when it held an even 4.0 million shares. Kingstown’s allocation of 11.38% of its portfolio value to News Corp makes it the second-most bullish fund in that metric among the funds we track, with only Newtyn Management’s 3.60 million share position, 14.37% of that fund’s portfolio, being higher. News Corp. is up 11.54% year-to-date.
The second-most valuable position in Kingstown’s portfolio was in Gencorp Inc (NYSE:GY) with 3.75 million shares. The 100-year-old company is now involved in the manufacture of aerospace parts through its Aerojet Rocketdyne brand, as well as possessing a real estate division called Easton Real Estate. Gencorp Inc (NYSE:GY) is up 5.46% year-to-date on the strength of its most recent quarterly and year-end earnings report on January 30.
Despite reporting a loss of $53 million in fiscal 2014 (partly due to the integration costs involved in its 2013 purchase of Pratt & Whitney Rocketdyne, which was folded into what is now Aerojet Rocketdyne), sales were up 15.5% year-over-year, to $1.60 billion, and its backlog of funded projects grew to $2.2 billion from $1.7 billion at the end of fiscal 2013. Warren Lichtenstein’s Steel Partners was another big believer in Gencorp Inc (NYSE:GY), with 10.08% of its portfolio tied up in the 4.18 million shares it held in the company.
Lastly is Spirit AeroSystems Holdings, Inc. (NYSE:SPR), which Kingstown held 1.50 million shares of at the end of the year. The position was unchanged from the end of the previous quarter, though it moved up to 9.37% of Kingstown’s portfolio from 8.34%, as it enjoyed a strong fourth quarter, up 11.82%, and has enjoyed a particularly strong run since the beginning of the second quarter of 2014, up 74.57%. Brian Jackelow’s SAB Capital Management has been one of the biggest beneficiaries of that run, purchasing 6.80 million shares just before the run started, in the first quarter of 2014, and shedding 2.95 million of those shares since for a large profit. It is still one of Spirit’s largest shareholders, with 3.86 million shares. The manufacturer of aerospace systems beat estimated earnings in its most recent financial results, posting adjusted earnings per share of $0.87, topping estimates of $0.77 by 13%. Shares are up another 14.34% year-to-date.
Disclosure: None
