Our funds own two US property trusts, Real Estate Capital Partners USA Property Trust (RCU) and RNY Property Trust. RCU is managed by RECap, an Australian company run by Andrew Saunders. RNY is managed by New York firm RXR Realty, owned and managed by Scott Rechler.
Both own portfolios of mediocre office property in the US. Both are trading at huge discounts to NTA. One is being destroyed by management. The other is being expertly managed.
One example clearly demonstrates the differences.
In January 2011, a ‘non-recourse’ $44m loan was due to be repaid on one of RCU’s assets. The office building, in Parsippany, New Jersey, is leased to Intel until 2015 but Intel has already moved out. It is a problematic, half empty asset in a difficult market; not the sort of thing that is easy to finance. Saunders was forced to use RCU’s cash to pay $5.75m off the loan in return for a one year extension. Now, one year down the track the loan is once again due for repayment. The building is still mostly empty and is probably worth less than the already-reduced loan amount.
In September and October 2010, RNY also had two non-recourse loans due for repayment. The two loans, for $196m and $52m, are secured by $196m and $55.6m worth of property respectively. Again, there is almost no equity (at current prices) left over for RNY. The negotiations with lenders, however, were handled very differently by Rechler. We’re paraphrasing here but the conversation went something like this:
Lender: How about pay the loan down by $5m and we’ll extend it for six months.
Rechler: How about ‘no’?
It reminds me of a friend of mine who once tried to end a one-sided relationship with his girlfriend:
Friend: I think I want to break up
Girlfriend: Do you mean that?
Girlfriend: Well don’t say it then
Friend (submissive): Ok
Jokes aside, the implications for the unitholders of these two trusts couldn’t be more serious. Rechler, whose family has owned New York property for decades, has leverage and knows it. I met with him in New York last November and asked why lenders would even consider refinancing when there is no equity left in the properties. Rechler explained that his firm is the logical owner and manager of the assets (RXR and Rechler have a total 40% direct and indirect interest in the underlying properties).
They put all of the tenants in the buildings and they own or manage most of the surrounding assets. Try selling these offices to someone else and see how you go on price.
Saunders doesn’t have anything invested in RCU or its assets, sits in an office in Pitt St Sydney and, other than pouring more money down the drain, has no idea how to fix RCU’s problems.
RCU announced this morning that it is in a trading halt, is about to conduct its third capital raising in the last two years and enter a forbearance agreement on the Intel asset. Goodbye $5.75m.
Twenty minutes earlier, RNY announced that it has reached an agreement, still subject to final documentation, relating to the $196m loan. The lenders will take a haircut, RNY will contribute the excess cash it has accumulated over the past 18 months to tenant improvements and incentives and the loan will be refinanced for a period of five years. Hello very large free option on a recovery in US commercial property prices. Rechler hasn’t raised one cent from unitholders and the trust still owns every asset it did five years ago.
These two property trusts are both attractively priced. Thanks to management, we’re going to do a lot better out of one than the other.
Note: All dollar amounts in this post are US dollars.
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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.