The Forager International Shares Fund recently acquired a position in a Winthrop Realty Trust. Within a few months of purchase, the trust delisted from the New York Stock Exchange.
Rather than being cause for concern, the delisting is part of the opportunity.
Liquidating REITS
Winthrop is a US real estate investment trust (REIT) currently in liquidation mode. Under listing rules, a liquidating REIT has two years to sell its assets. After this two-year window, any remaining assets go into a liquidating trust where the process continues but absent a stock exchange listing.
After selling assets and returning cash to shareholders for the past two years, Winthrop has reached the end of its window. While we can no longer sell the shares, we still expect a good outcome from here.
So far, $2.25 in dividends have been received and there remains another $9.55 in estimated net asset value (NAV) to be liquidated. Relative to the Fund’s $9.70 original purchase price, receiving those proceeds over the next 18 months or so would represent a healthy 22% return. There is some prospect of doing better.
A valuable piece of Times Square
The company’s current portfolio consists of properties in places ranging from New York City to Hawaii to Texas. The jewel in the crown is its development at 20 Times Square in Manhattan.
Winthrop is constructing a mixed-use building which will include a boutique hotel, premier retail tenants like the NFL and Hershey, and one of the biggest digital billboards in the world. Depending on how these negotiations shake out, the building could provide meaningful upside to the current NAV.
Home town Houston
The second most important property is a luxury apartment building in Houston. While the real estate market in Houston has dipped in the last two years due to the local influence of the oil & gas industry, don’t believe all of the headlines.
Houston is my home town, and I can attest that there is plenty of activity going on. The demise of the real estate market has been greatly exaggerated. And as the energy markets improve, the company’s ability to monetise this asset should boost the NAV further.
Delistings are not for everyone. Part of the reason this opportunity existed was because many investment funds were forced to sell their stakes due to mandate restrictions. There are risks—we will no longer see traditional quarterly updates nor receive revised estimates of net asset value. The investment will have no liquid market and the Fund will not be able to sell its position. We must ride it out to the finish.
But in this specific instance, the potential returns look prospective.
Thanks Kevin. To me this sort of flexibility represents real competitive advantage in an increasingly competitive funds management segment. You say:
“receiving those proceeds over the next 18 months ..” & “we must ride it out to the finish.”
The listing rules are one thing, but what rules governing divestment of assets in the liquidation trust? Where did 18 months come and is the management team suitably incentivised (please excuse the lack of z’s) to get the best price?
Thanks, Ron P
Hi Ron – the main rules governing the process of liquidating the trust come from the trust itself and are backed by years and years of thoroughly developed Trust Law in the US. The trust explicitly instructs its Trustees to liquidate the assets and distribute all cash to its beneficiaries. The initial term is for three years, but management has stated its intent is to finish within 18 months, assuming the real estate markets cooperate.
Management owns 9% of the Trust outright, and it has a sizable incentive scheme in place that is determined by the ultimate value of all realized proceeds. We believe it is suitably motivated. This was a key part to our getting comfortable with the investment.
Is there a way to trade the delisted Winthrop Realty Trust shares?
What’s attractive to me is when you say:
“Part of the reason this opportunity existed was because many investment funds were forced to sell their stakes due to mandate restrictions.”
The fact you DON’T have these kind of rules in place means that you can take on the risk after a careful consideration. The other fundies have no choice but to sell, even if that’s not a sensible thing to do.
Those kind of rules are wonderful for causing funds to revert to mediocrity, and present an opportunity for those who are not thus bound.
Just curious if this is delisted and there are no more NAV estimates how do you factor the value of this delisted fund in the Forager International Shares Fund unit price?
Hi Anthony,
It last traded at a 12% discount to NAV. We are going to carry it at that discount in future, while adjusting the NAV for cash received or any updates from the trustees. The most recent published NAV was $10.61 and we have received $1 since, so the adjusted NAV is $9.61, less a 12% discount = $8.46 as the current valuation.
We will keep doing this until the final proceeds are received – unless there is good reason to change our estimate of the proceeds.
Related thought – and similarly purely out of curiosity, not skepticism!! – how do you value Hughes Drilling if it remains indefinitely suspended?
Zero
Are you applying a similar thesis to your holding in RNY Property Trust?
HI Chas, while I wish RNY owned a piece of Times Square real estate, its assets are suburban office – a much less liquid/desirable asset class. It’s a riskier situation, albeit one where it is trading at a much bigger discount to NAV.