For the most part, Greg Woolley and I are in agreement. The management of RCU over the past few years has been inept. The fees expropriated have been disgusting. And something needs to be done about it. If we agreed on what that something is, our problems would have been fixed a long time ago.
Unfortunately, we don't. In June last year, I sent Woolley a draft plan on how we could replace RCU's manager with someone more adept and more aligned. He didn't respond. He spent the next five months acquiring as many units as he could, then underwrote a capital raising which, in my opinion, was more about getting control than fixing RCU's capital structure. You can see for yourself from public Takeovers Panel documents that he specifically refused to allow the board to seek alternative co-underwriters.
Within weeks of the capital raising closing, Woolley launched a takeover offer at 46 cents per unit. Yesterday he described 50 cents as a 'disastrous outcome'. I agree with that. But it simply adds evidence to my belief that Woolley's actions are focused on delivering substantial value to himself, rather than maximising value for all of us.
Today, we’re doing something about it ourselves by requisitioning a meeting of unitholders to consider replacing RCU’s responsible entity (RE).
The announcement looks strange. We are requisitioning a meeting to consider the replacement of Real Estate Capital Partners Managed Investments Limited (ReCapMIL), owned by The Trust Company, with The Trust Company (RE Services) Limited, owned by The Trust Company. Why replace the existing RE with one owned by the same company?
The answer to that requires some history. The Trust Company bought ReCapMIL from Andrew Saunders’ Real Estate Capital Partners (ReCap) in 2010, effectively separating the responsible entity function from the investment management function (ReCap remains investment manager to this day). Saunders didn’t do this because he is a good guy. He did it because the regulatory and capital requirements of being an RE were causing him problems.
While the separation was a minor positive for unitholders, in our opinion the new board of the responsible entity have not been able to act as independently of the manager as they or we would like. RCU’s constitution has been written for a combined RE and manager, without the usual ability to replace the manager without replacing the RE. Saunders has also kept an option, which he recently exercised, to repurchase the RE from The Trust Company.
So the simplest way to replace the manager is to replace the RE with one free from the shackles of Andrew Saunders and ReCap.
And that’s exactly what we want to do; remove Saunders as manager and bring in someone else with a clear mandate (and appropriate fee structure) to undertake an orderly realisation of RCU’s assets over an appropriate time frame.
If that’s what a majority of unitholders want, Trust Co will be able to get on with fielding approaches from interested parties and select the most appropriate to conduct an orderly asset realisation.
Reading Woolley's recent bidder's statements criticising RCU, he conveniently blurs the role of manager and responsible entity. That's not fair to Trust Co. We were critical of their actions at the time of the Woolley-underwritten capital raising, but managing commercial property is not Trust Co's job. It is a professional RE and trustee company and performs that role perfectly well for many listed and unlisted schemes and companies. With an appropriate manager and structure, we are sure they can perform the same role here.
There is a chance that it won’t ever come to that. Macquarie is running an expedited sale process for RCU’s assets at the moment and has received indicative bids for some or all of the properties. Hopefully, as those bids firm up, something concrete will be put in front of unitholders.
But we don’t want to be left without an alternative. From our perspective, it makes sense to put all of the options in front of unitholders at one meeting. If we get a bid that is acceptable and vote in favour of a sale, we don’t need to replace the responsible entity. If there isn’t a bid, or it gets voted down by unitholders, we can vote in a new RE and an orderly realisation strategy. If that gets voted down too, we’re stuck with the status quo. Three fairly clear options to choose from, best presented all at once.
There is plenty of value in RCU's assets but it isn't going to be realised in an ASX-listed REIT based 10,000km from New York. We're realistic about that and are more than happy to leave value on the table for someone appropriately qualified to realise it. If that's Greg Woolley, good luck to him. But, as the 57-cent fire-sale bids show, it'll be costing more than 46 cents.
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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.