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.
42 thoughts on “US REITs: What A Difference A Manager Makes”
I spoke to Link Market Services (email to ReCap requesting this info was a bit premature) and we can request a copy of the Share Holder registry for RCU by sending them a fax which would detail the purpose for obtaining the information, what kind of information needs to be included – i.e. name of shareholders, number of units, contact details (if possible). The purpose of requesting the info is to arrange an EGM to discuss the merits of a winding up of the trust (and involving independent experts to assess the merits of this (i.e. provide a range of figures for the net proceeds that could be returned to shareholders in an orderly wind up assuming the RRT equity can be sold back to Saban at book value and with proceed used to pay down debt on the RCU portfolio which in turn can stave off fire sales given this would raise approximately $38M using the most recent figures) given that the capital raising is not in the best interest of the 80.8% of shareholders and that this would provide existing shareholders the ability to realise the underlying value of the trust that management seem incapable of realising/protecting.
Link also mentioned that if there is a group of us it may add weight to our case.
Anyone else interested to list their full name and number of units to support this case? Happy to take this offline for privacy reasons and act as a co-ordinator? Could be worthwhile arranging a teleconference for likeminded investors to discuss and arrange a plan? Happy to host or better yet if Steve Johnson could spear head this? (Assuming Steve believes a windup is the best course of action? Not sure what other options there are really?).
If we don’t act collectively and make a strong case for a change in the course of the trust I fear that we could end up losing quite badly.
Let’s make sure that doesn’t happen.
I have 200,000 – happy to provide further details offline. However the list of holders is about to change somewhat given the rights issue and trading therof is about to get underway, so I dont see we have any choice but to take up the rights and then mount a campaign assuming Woolley doesnt control too many by then. It seems likely that Woolley will want own as many as possible once the dust settles in April, so we may not be able to get any motions passed at an EGM if he doesnt like the proposed changes.
Good on you for your initiative Andrew.
Judging from the blog thread there are certainly like minded people who wish to act collectively on this matter. I am one of them.
Before acting though I was hoping to wait to see what Steve was thinking, particularly in relation to his thoughts/ conversations/ plans etc with the two other fund managers with substantial holdings. I think this is critical.
As Link has already intimated if we act together there is a much greater chance of success (whatever success might look like in this situation!). I too had thought of a wind up but also an ASX requested suspension of the shares (temporary); property sales; management replacement and the like.
When the time comes I would be very happy to join in with collating numbers of units and the like for a concerted effort to oppose this capital raising.
In the Consolidated Constitution released on the 2 March 2011 it mentions on the bottom of page 53:
‘For voting on winding up by Members and choosing a new responsible entity see sections 601FL and 601NB’
CORPORATIONS ACT 2001 – SECT 601NB
Winding up at direction of members
If members of a registered scheme want the scheme to be wound up, they may take action under Division 1 of Part 2G.4 for the calling of a members’ meeting to consider and vote on an extraordinary resolution directing the responsible entity to wind up the scheme.
Therefore looks like we have a legal frame work to back us up (assuming I’m understanding this legal speak correctly) to call the unit holder meeting ASAP – we can’t sit on our hands here.
I am currently running the numbers for a windup based on the assumption that the RRT portfolio can be sold back to Saban at book value (doesn’t seem too unrealistic) with the proceeds then used to pay off debt on the CBA/ Pearlmark debt then an orderly sale of these assets over say 12-18 months.
Will provide my calculations shortly but so far the figures are clearly better than the $1.03 NTA that will result from the capital raising.
Anyone here have a legal background?
I have 300,000 shares. I will support this concerted effort.
I have lived through last RCU capital raising by issuing more shares. This management is only capable of leading us downhill from here, even with improving commercial real estate situation in the US. Sam Zell gave his opinions on the overall health and future of commercial real estate.(What Matters For Commercial Real Estate: Supply And Demand, Forbes). Also read “Blackstone’s Gray Joins Board as Real Estate Rises to 71% of Firm’s Profit” and “Global Office Vacancies Decline to Two-Year Low, Jones Lang LaSalle Says”, both by Bloomberg.
I also propose to turn Steve Johnson into an accidental shareholder activist. Simon Marias is not good enough, we choose you. It will be the beginning of a beautiful friendship. We are all Carl Icahns in the making. We will improve the corporate governance in Australia for free.
There is a structured proces around calling a unitholders meeting to vote on resolutions (replacing the responsible entity, voting for a wind up, amend constitution, etc), but I’m not sure if that will protect us in this instance. I recall there being a minimum period of time that is required to pass before a unitholders meeting can be called (from memory this is 21 days?). There is also the complications around calling a unitholders meeting validly, which whilst on the surface appears straight forward in practice has a few minefields to circumvent (something I’m sure Steve will recall as a frustration from his and Greg’s attempt with RHG). Assuming a meeting could be called without much resistance from the RE/Manager challenging, the capital raising would already have been completed and the damage done. Also worth keeping in mind that costs for those involved, particularly legal costs, quickly escalate in these situations before we all throw Steve into the fire.
Sorry to be a post hog but I’m adamant we need to standup to ReCap and RCU management.
Below is a pretty basic table that calculates the NTA on the basis that the RRT Portfolio can be sold back to Saban at market value which is 38.5M plus the distributions owing of 1.2M and the equity in the Pitsburg Property of 1M (i just rounded down to 40M due to legal fees and to be conservative).
I noted the sentence ‘the joint venture documents contain a number of provisions to protect RCU‟s minority position but Saban is the dominant joint venture party and can at its own discretion, in the event that RCU exercises its minority protections, buy out RCU‟s interests at market” – therefore could RCU exercise it’s minority protections to provide the proceeds?
Values below are from the capital raising presentation.
The last column calculates the net proceeds assuming the properties are sold at a 15% discount to their independent values and 5% brokerage costs (i think 4-6% of the asset value is ‘normal’ I dont really know for certain)
PROPERTY VALUE DEBT NET EQUITY 20% Disc Net Equity
RSA SECURITY 92.5 62.3 30.2 11.7
PFINGSTEN 16.7 11.2 5.5 2.16
HIGGINS 16.9 17 -0.1 -3.48*
FEDEX MONTGOMERY 22.5 14.1 8.4 3.9
ONE CENTENTIAL 28.5 27.4 1.1 -4.6*
Original RCU 177.1 132 45.1 17.76
RRT Funds 40
Total Proceeds 57.76
Per share USD 1.13
AUD @ $1.03 1.099
* The negative equity properties have non course loans I believe.
Please check my figures just in case I missed something – i havent included rental income from the RCU assets as well which is conservative.
I wonder if ReCap and RCU management have modelled similar calculations?
Either way we need to arrange for an independent review of a ‘windup’ NTA range given the lack of integrity & competence of the investment manger/RE.
I own 108,685 share in RCU.
The constitution mentions a property sale fee
‘if the Sale Price of an asset… is more than the Purchase Price of the asset, the Manager is entitled to a property sale fee of 1%’
Pretty sure they won’t be getting this!
I’ll call Acorn and Regal tomorrow to try and speak to one of the investment managers regarding their holdings and views on the capital raising – slim chance of them talking to me but worth a shot.
Hi Andrew, I would suggest you hold off on this. You should know more by the end of today and I’ll hopefully be able to explain more myself.
Update from ReCap re the registry -. I’ll hold off calling Acorn and Regal – will there be enough time to contact all shareholders to arrange an EGM? I don’t mind paying the $250 and drafting a letter to RCU unit holders to express the need to call an EGM. Not trying to agitate the issue, just want to achieve a better outcome for the 80.8 percent.
From: Enquiries Recap [mailto:[email protected]]
Sent: Tuesday, 6 March 2012 10:55 AM
To: Andrew Schealler
Subject: RE: RCU First Half Results 2012
I have approached our registry who have confirmed the cost will be $250 to provide a copy of the shareholder register.
Link will not accept a direct request from yourself and should you decide to go ahead, you will need to lodge your request to ReCap with payment. Once requested, it would take 5 business days for the order to be processed and provided to ReCap.
Let me know if I can be of any further assistance.
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Unfortunately the ASX release which I presume you are alluding to Steve does not surprise nor alter my feeling that this should be pursued further.I am interested in your further comment
Matthew (chapter 25, verses 14-30) we find Jesus’ Parable of the Talents. As with all the biblical parables, it has many layers of meaning. Its essence relates to how we are to use God’s gift of grace. As regards the material world, it is a story about capital, investment, entrepreneurship, and the proper use of scarce economic resources. It is a direct rebuttal to those who see a contradiction between business success and living the Christian life.
A rich man who was going on a long journey called his three servants together. He told them they would be caretakers of his property while he was gone. The master had carefully assessed the natural abilities of each servant. He gave five talents to one servant, two to another, and one to the third—to each according to his ability. The master then left on his journey.
The servants went forth into a world open to enterprise and investment. The servant who had received five talents went into business and made five more. The servant who received two made two more. But the servant who received one hid the master’s property in a hole in the ground.
The master returned to settle his accounts. The servant who had received five talents came forth. “My lord,” he said, “you entrusted me with five talents; see, I have made five more!”
“Well done, good and faithful servant!” the master responded. “You have been faithful over a little, I will set you over much. Enter into the joy of your lord!”
Then the servant who had been given two talents approached the master. “My lord,” he said, “you entrusted me with two talents; see, I have made two talents more!” The master praised the servant in a like manner.
Then the one who had been given one talent approached his master. “My lord,” he said, “I knew you to be a hard man; you reap where you have not sown, and gather where you have not scattered; and being afraid I went and hid your talent in the ground. See, you have what is yours!”
The master’s response was swift and harsh: “You wicked and indolent slave! You were aware that I reap where I have not sown, and gather where I have not scattered; you ought for that reason to have invested my money with the bankers; then, on my return, I should have received my own with interest.”
The master ordered that the talent be taken away from the lazy servant and given to the one with the ten talents. “For to every one who possesses not,” said the master, “even that which he has shall be taken away. Cast that useless slave into the outer darkness; there shall be weeping and the grinding of teeth!”
RCU version 2012:-
Lazy servant: Master, I know that this is the third time I ask for more money in two years. I am willing to sell your business back to you for 40 cents on the dollar. If you refuse, there is already a buyer who will probably take over your business. If you do buy (into my story), there is no guarantee from me. You know that my credibility is worthless. I can’t do anything I said I would do.
So major investors were consulted about a capital raising in October – wonder if this was before or after Frost increased their stake from 11% to 20% in October?
Steve, you are a major investor – were you consulted?
I don’t think this statement really addresses any of the issues – the manager is clearly hopeless. In September, the results presentation maintained guidance and had all sorts of ideas for reducing the gap to NTA, like special distributions and buybacks. Then a month later they need an emergency capital raising? – a consumer facing business might turn that quickly, but not real estate.
The responsible entity may have been over a barrel by November, but that does not excuse them suddenly waking up in October to this mess. And to say that they “recognised the control implications” but its okay because they described that risk in both the rights issue presentation and the cleansing notice. Well that makes me feel much better?!
Hi guys, there are some really good discussions going around here.
Sorry I am going off a bit on the above discussions:
I have a few questions on RCU, I am finding it difficult to model the sale potential of RCU’s properties as the management does not provide a breakdown between recoverable outgoings, rent and property expenses for each of the properties.
Assume that the cap rate of 7.4% presented is the cap rate based on full occupancy, would a sale at book value eventuate at the occupancy levels of 70%?
How can RCU management sell these properties when required at those book values?
I noticed that the takeovers panel have now received an application from TII funds objecting to RCU’s capital raising.
Real Estate Capital Partners USA Property Trust – Panel Receives Application
The Panel has received an application from Intelligent Investor Funds Pty Ltd in relation to the affairs of the Real Estate Capital Partners USA Property Trust. The application concerns a 0.98 for 1 renounceable rights issue, announced by the responsible entity1 of Real Estate on 1 March 2012, to raise approximately $20 million at 40 cents per unit.
Details of the application, as submitted by the applicant, are below.
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.
The rights issue is fully underwritten by Frost Holdings Pty Limited, which has voting power of approximately 19.82% in Real Estate. Intelligent Investor submits (among other things):
the voting power of Frost will increase from 19.82% to a maximum of 59.51% depending on the participation in the rights issue and
the responsible entity did not thoroughly investigate means by which it may mitigate the control effect of the rights issue.
Intelligent Investor seeks interim orders including orders preventing each of despatch of the entitlements offer booklet, commencement of deferred settlement trading and issuing or allotting any new units in Real Estate.
Intelligent Investor seeks final orders including that the responsible entity consider any commercial offer of a professional underwriter and/or a number of sub-underwriters to take part in the underwriting of the rights issue.
Director, Takeovers Panel
Level 10, 63 Exhibition Street
Melbourne VIC 3000
Ph: +61 39655 3597
Go Steve we are thinking of you and this action for all our sakes!
And back to the comparison between RNY & RCU…..hows RNY’s results today?! NTA up to 40cents, gearing down to 70.4, its finally turned a profit and even occupancy has inched up. Only the one loan to be refinanced too….
Well thats the reason why Scott Rechler is held in such high regard.
Yep, they are doing a sensational job. I think they’ll look for an exit for the Australian investors one day but it will be a shame – you won’t get access to management of this caliber again.
Today’s results are better than they look. Occupancy is up a little overall, but it’s down a lot in the underwater pool of properties (there is also -2c of NTA in UBS pool B, take it out and NTA is 42c). In the viable pools the occupancy is up a couple of percent. And while next year’s lease expiries look scary, 35% of that is also in the UBS Pool B tranche.