In last year's annual report The Trust Company's CEO John Atkin set out the company's strategy as 'leading change through inspiring trust'. They aren't doing much of a job of it.
A bit of background for those who haven’t been following Real Estate Capital Partners USA Property Trust. RCU is a stock we’ve owned in the fund for the past 15 months or so. We own 8%, Acorn Capital owns 12%, Regal Funds Management owns 7% and a private investor named Greg Woolley has accumulated 19.8% over the past 12 months.
The trust’s responsible entity is The Trust Company, a listed company in the business of providing responsible entity services (effectively performing the role of a board for managed investment schemes). Along with RCU's results, released (again) a day late, The Trust Company announced that it had entered into an underwriting agreement with Woolley whereby the trust would raise $20m in a 0.98-for-1 rights issue.
It’s quite clear they need more money. An important lease extension at its main asset requires US$7m of tenant improvements and incentives, and US$88m of debt is due to be refinanced in August. As at 31 December, they had $919k in the bank.
But a rights issue 100% underwritten by the company’s major shareholder? It’s a classic Prisoners' Dilemma that ensures no one but Woolley is going to take up their rights. If we all take up our rights, then Woolley would still own less than 20%. But if I take up mine and you don’t take up yours, I’ll be left in a vehicle that Woolley controls. Given the $2.3m of fees he has negotiated for himself out of this deal, I’m not too sure that’s going to work out well.
So I don’t take up mine. Neither does anyone else, because they all reach the same conclusion as me, and Woolley ends up stealing the vehicle at a 61% discount to the post-capital-raising NTA.
It’s a joke. But we do have a plan. Over the weekend we put together a consortium of new and existing institutional investors and put an alternative proposal to the board that would raise the $20m required. Under our proposal, no single shareholder can end up with more than 20% and minority investors would have much more confidence that their interests would be protected.
Today John Atkin, chairman of the RCU's responsible entity and CEO of The Trust Company, came back to us and told us 'understands our concerns' but doesn’t think he can unwind the agreement in place. That’s unfortunate. But it was somewhat expected and not the end of the road.
We (the three large non-Woolley shareholders) are in the process of making a submission to the Takeovers Panel. We think we’re standing on solid ground. Guidance note 17, which relates specifically to rights issues, states:
In considering whether a rights issue gives rise to unacceptable circumstances [which would allow them to amend or replace the underwriting agreement] the Panel looks at the effect of the rights issue against the principles in s602. In doing so, it considers the following factors:
a. the company's situation
- what methods of raising funds are available to the company
- whether the company has explored other capital-raising alternatives
- the financial situation and solvency of the company, including the reasons for raising the funds. How much the company needs funds may influence what is reasonable for it to accept as a potential control effect
- market factors leading up to the rights issue and those reasonably likely to occur during the rights issue. Market factors have a significant bearing on the structure of a rights issue (below)
- whether the company received, and followed, advice from financial advisers
b. the structure of the rights issue
- size, price, discount to market, timing, underwriting and renounceability
- whether the rights issue is underwritten by professional underwriters or sub-underwriters or a related party or major shareholder
- whether there is a dispersion strategy
c. the effect of the rights issue
- any effect on control or the acquisition of a substantial interest
- the purposes of Chapter 6 as set out in s602
- the steps the board has taken to minimise potential control effects
- disclosure of potential control effects
- the response, or likely response, of the shareholders (and particularly any substantial shareholders) to the rights issue.
A lot of those bullet points are directly relevant here. The Trust Company didn’t once contact me to canvass the current capital raising. Last Wednesday was the first I had heard of it, and I’m fairly sure the other major shareholders would say the same.
These guidelines suggest to me that we have a clear cut case. For now I’ll leave it up to the lawyers but it's going to be an interesting week ahead.
Note: Given the large number of comments on last week's post, there are plenty of frustrated RCU unitholders out there. Unfortunately, we can't work together on anything. We are already substantial and can't act in concert with any other shareholder without risking becoming related parties. Hopefully what we're doing will be to your liking, but you'll have to make your own decisions as the process unfolds.
16 thoughts on “Trust Collapses At RCU”
I represent a holder of 1.7mm units and am supportive of your actions. It is amazing how far corporate governance in Australia still needs to come to protect shareholders. Mgmt here is a disaster. Internalization should improve FCF and excelerate the deleveraging process.
At what point do you think current holders would support a cash takeout somewhere between $0.60-1.0??
Hi folks, looks like we should find out shortly whether a decision to conduct or not conduct proceedings will be made. Touchwood something good comes from this..
Thanks again Steve.
From: Bulman, Allan [[email protected]]
Sent: Thursday, 15 March 2012 9:37 AM
To: Andrew Schealler
Cc: Takeovers Panel Executive
Subject: RE: Query: Real Estate Capital Partners USA Property Trust – Panel Receives Application [SEC=UNCLASSIFIED]
Thank you for your email in the matter of Real Estate Capital Partners USA Property Trust.
Unfortunately we are not able to provide you with an indication of when a decision to conduct or not conduct proceedings will be made. We endeavour to appoint a sitting Panel as soon as possible after an application is received, after which, the sitting Panel will consider whether to conduct proceedings. This is usually completed within a week of an application being received (if not earlier). We confirm that the size of the entities involved in a Panel matter has absolutely no bearing on the speed within which a Panel will consider an application.
If the sitting Panel declines to conduct proceedings, this will be announced by the Panel together with the Panel’s reasons for its decision. If the Panel decides to conduct proceedings, ordinarily there would not be any further media releases from the Panel until the matter has been finalised. Further information about the Panel’s processes and timing are available on the website: http://www.takeovers.gov.au<http://www.takeovers.gov.au>.
Please contact me if you have any further queries.
Allan Bulman | Director | Takeovers Panel
Level 10, 63 Exhibition Street Melbourne 3000
• [email protected]
‘ 03 9655 3597 | 7 03 9655 3511
From: Andrew Schealler [mailto:[email protected]]
Sent: Tuesday, 13 March 2012 1:59 PM
To: Bulman, Allan
Subject: Query: Real Estate Capital Partners USA Property Trust – Panel Receives Application
In relation to the media release “Real Estate Capital Partners USA Property Trust – Panel Receives Application” and specifically the below paragraph:
“A sitting Panel has not been appointed at this stage and no decision has been made whether to conduct proceedings. The Panel makes no comment on the merits of the application.”
Is the Panel able to indicate when a decision to conduct or not conduct proceedings will be made?
The proposed capital raising has some tight timeframes so I would imagine if there is a genuine case in favour of Intelligent Investor Funds Pty Ltd appeal then the application will be given high priority irrespective of the small size of the firm/capital raising?
Sorry if these are dumb questions, I’ve just never held shares that have been involved in these types of corporate issues before.
Manhattan Luring REITs With Soaring Rents: Mortgages
By Christine Harvey and Tom Keene – Mar 16, 2012 2:17 AM GMT+1000
The best-performing real estate investment trusts this year will be owners of office and industrial properties, as occupancies improve and landlords raise rents, a JPMorgan Chase & Co. (JPM) analyst said.
Commercial real estate has “turned the corner,” helping REITs improve earnings and have “robust dividend growth,” Anthony Paolone said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
Demand for industrial and office space is improving as the U.S. economy expands and hiring picks up. The vacancy rate for industrial properties fell to 10 percent at the end of 2011 from 10.8 percent a year earlier, according to Cushman & Wakefield Inc. New York and Washington had the lowest office vacancy rates in the fourth quarter, the commercial-property brokerage said.
Companies such as SL Green Realty Corp. (SLG), the biggest owner of Manhattan skyscrapers, and Prologis Inc. (PLD), the world’s largest warehouse landlord, are the “best buys” among REIT stocks, he said.
“Occupancy is moving higher and rent rolls are starting to move,” Paolone said. “There is some leverage for an economic recovery.”
To contact the reporters on this story: Christine Harvey in New York at [email protected]; Tom Keene in New York at [email protected]
To contact the editor responsible for this story: Rob Urban at [email protected]