We’ve been trying to get a meaningful amount of this US-focused REIT for the past few days. We’re not having any luck so, for those experienced investors prepared to do their own work, I’m handing the idea to you.
I said Real Estate Capital Partners USA Property Trust (RCU) was an interesting stock in Retirement Villages Going Cheap. Despite the price rising 47% since, it’s just as interesting now.
Somehow they have managed to finalise the deal to buy Record Realty’s US portfolio. First signed with the Record Realty administrator back in January, this is a screamer for RCU unitholders. They get two portfolios of property which are, combined, 98% leased to the US Government at what looks like a very attractive price.
One of the two is valued at $240m and carries $284m of non-recourse debt (please note, all numbers are USD unless explicitly stated otherwise). You can assume it is worthless.
The other is valued at $272m but is encumbered with a much less burdensome $153m of debt. After a couple of minor adjustments, that leaves $115m of net equity (a 58% loan to value ratio) which RCU has been able to buy for $82m. In a market that is hot for government-leased properties, I have no doubt that it could be sold for more than book value tomorrow.
RCU’s problem was that it didn’t have any cash (that they agreed to buy something for $82m when they didn’t have any cash, let alone the fact that they have their own portfolio of highly geared assets that need equity, says a lot about management). They managed to raise $12.5m from securityholders but were still $70m away from finalising the deal. The saga has been dragging on for the best part of a year as RCU tried to find a partner to help it fund the transaction.
The saviour is Saban Capital Group. RCU announced yesterday that Saban has stumped up the remainder of the $82m purchase price, leaving RCU with 14% and an option (it is stated as an obligation but it looks more like an option to me) to increase its stake to 35%. RCU, once again, doesn’t have any money but, given the attractive deal on offer, they’ll be doing their best to find it.
In addition to 14% of Record Realty’s portfolio and an option to buy another 21%, RCU owns a bunch of other US properties. Some are highly leveraged. The rest are upside down. You can see the latest valuations and associated limited recourse debt facilities in the table below.
Bedford Woods, Pfingsten and Montgomery
*Note that this is an estimate based on the 30 June AUD carrying values and exchange rates at the time.
The equity in most of these properties is most likely worthless. But the equity in the bottom tranche (Bedford Woods, Pfingsten and Montgomery) is probably worth something meaningful.
So there’s $49m of equity in the relatively (and I mean relatively) conservatively financed tranche, $12.5m in the Record Realty portfolio that is probably worth more, an option to add substantially to that investment and a bunch of other properties that are probably worthless but might be worth something.
There are lots of ifs, buts and maybes but the one ‘probably’ is that it’s probably worth more than the current market cap of AU$27m.
This is not a recommendation and I won’t be spending any more time on it unless the volume picks up substantially. But for sophisticated investors prepared to do their own work, it certainly looks interesting.
Disclosure: The Value Fund disposed of what crumbs it had been able to collect this afternoon. I don't buy any stocks outside the Fund in order to minimise conflicts of interest.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.