Italian real estate: liquidating CEFs at a ~50% discount

WertArt Capital published two posts this year about Italian real-estate that I couldn’t ignore since it almost sounds too good to be true: Italy is filled with various closed-end real estate funds that are trading at a sizable discount – often around 50% – to net asset value and because of fixed maturity dates they have a solid catalyst on the horizon. That sounds pretty compelling to me, although I can imagine that not everybody has the same initial thoughts. Italy? Yak…

WertArt does a good job of providing some background on the history of the funds, and even more information can be found in this report on Italian REIFs. I have been busy compiling an overview of all the funds that are currently traded on the Italian stock exchange. Not an easy task because all the reports in Italian and I don’t speak/write Italian. Luckily Google Translate exists in this day and age. But, unfortunately, the quality of the disclosed information seems to be mediocre in many cases. In almost all reports you can, for example, find information about the development of the GDP in Japan while most funds exclusively own property in Italy. More relevant information such as rental yields and occupancy levels is often nowhere to be found.

I have decided to make this a multi-post series. Today I’ll give a brief overview of the various funds and the reason why I think they are attractive as a group, and in one or more future posts I’ll dive deeper in some individual funds and other relevant details (e.g. taxes, fees).


The table below provides an overview of the various listed Italian REIFs sorted by the “unleveraged MoS” column. This column is based on the discount to NAV, but adjusted for leverage using the following formula: “(NAV – Market cap) / book value real estate”. This gives a crude proxy by how much property values could decline before NAV is equal to the current market cap. Implicitly this values all other assets and liabilities that are part of the NAV at book value, so for funds that have significant other assets the measure might be flawed:

Overview discounts Italian REIFs

Note that the data is a mix of values originating from 30 June 2014 and 31 December 2014. All funds reevaluate the market values of their real estate biannually, but not all have released annual reports for the year 2014. I have also adjusted various figures to account for example for dividends paid after the end of the latest report, or for liquidation payments that have already been announced. But I almost certainly have missed something for a few funds!

With the average Italian REIF trading at an almost 50% discount to NAV it appears that there are plenty of bargains available and what’s great is that a lot of funds that have a low amount of leverage. Not surprisingly, these are favored by the “Unlevered MoS measure as can be seen in the corresponding LTV column. Loan-to-value is calculated by dividing the value of the real estate with the amount of mortgages outstanding. Other assets and liabilities are ignored.

Liquidation deadlines

Also visible in this table are the expiry dates of the various funds. Most funds expire in the next couple of years, but an expiry date is not a guarantee that the fund will be liquidated at that date. Real estate is an illiquid asset class, and especially in Italy transaction volumes have dropped after the financial crisis. Because of that new regulations have been adopted that allow funds to extend their maturity date by three years. Funds with a green cell in the “+3?” column have already taken advantage of this option while funds with a red cell still have this option available (perhaps I should have switched the color coding?). The maturity date can be further extended if approved by shareholders. Given that the alternative is a possible liquidation at fire sale prices I’m guessing that there is often no real choice.

Overview fund maturities

Rental yields

A big discount to NAV is, of course, great but preferably you also want to own property that is backed by cash flows. Cash flows not only allow investors to generate some income (and/or pay for management fees…) while we wait for a liquidation, but it also acts as a sanity check for the reported assets values.

Most properties appear to be valued at roughly a 7% gross rental yield which sounds reasonable to me for commercial properties. Nothing to get too excited about, but for an asset class that falls somewhere between equity and bonds on the risk spectrum that seems like a reasonable deal. A recent KPMG report about the European real estate markets also mentions yields in this range for offices. Given the large discounts that the funds trade at I don’t think it really matters what a fair yield exactly is. A fund with a 7% gross yield at a 66⅔% discount is yielding 21% at current prices. You have a lot of room for bad stuff at that price level!

Overview yields Italian REIFs

I don’t have yield information for all funds, but I guess that the trend is visible: the funds with the highest discounts often also offer the highest yields. Unicredito Immobiliare Uno is a bit of an exception, but approximately 50% of the portfolio value is concentrated in a property that is being redeveloped and not generating any income at the moment (and the occupancy figure is meaningless since it isn’t adjusted for the sale of a big part of the portfolio after the end of the period while the other numbers are adjusted). Anyway, that’s a discussion for a future post :).


Long various Italian  REIFs

Clarke Inc launching tender offer, again

Just one month after completing the tender offer that was launched in December the company is back with yet another tender offer. In December Clarke tried to buy 2.5 million shares at $9.5/share, but they managed to buy just 665 thousand shares at that price. They are not giving up though and are now offering $10/share for 2 million shares. I’m very pleased to see that the company continues to try to aggressively buy back shares. Clarke has a lot of cash on the balance sheet and is at the same time trading at a sizable discount to both NAV/share and intrinsic value. Buying back shares is a great use of capital, and the company shares that view. From the MD&A that was released yesterday in combination with their annual report:

Finally, we continue to view our Common Shares as undervalued. As long as this situation exists, we will continue to repurchase our Common Shares as it is the equivalent of buying a dollar for a fraction of that amount. We repurchased 1,243,846 Common Shares under our normal course issuer bid (“NCIB”) in 2014 and 665,330 shares under our SIB in early 2015, all at a discount to our book value per share.

With the stock currently trading at $9.60 Clarke is (again) not offering a big premium to entice shareholders to tender their stock: just 5.2% (taking into account a CA$0.10/share dividend that will be payable in the mean time). If the company will be able to successfully complete the tender offer they will increase NAV/share with ~CA$0.30 which represent an increase of ~2.4%. Doesn’t sound like a lot, but I think that’s a pretty awesome result.


Author is long Clarke

Origen Financial: a liquidation play in the final innings

I first wrote about Origen Financial in 2012 when the company was already in the process of liquidating itself. At the time figuring out its intrinsic value was no easy job since it owned equity interests in a couple of complicated asset-backed securities trusts. This is no longer the case though since the company has sold substantially all of its assets and it is now a cash box.

Origen Financial was initially planning to simply distribute the proceeds of the sale to its stockholders and cease to exists, but it announced an alternative plan last month that would allow it to continue to operate as a mortgage REIT while current shareholders would be given the option to cash out at Origen’s current net cash per share value using a tender offer. Origen is currently trading at $1.64/share while it has approximately $1.82/share in cash. If the tender offer is successfully completed a return of >10% is possible in a couple of months.

If the tender offer isn’t completed the downside is probably minimal. In that case Origen would continue with its original plan to liquidate and still be able to return the majority of its current net cash position to shareholders. The potential return is lower because in this scenario the liquidation will probably take more time and the company would incur more costs. But I think that those costs should be less than $4.5 million: the current spread between Origen’s market cap and its net cash position. In the proxy statement that was mailed to shareholders to vote on the proposal to sell all of Origen’s assets and to dissolve the company they estimated a $1.69/share liquidation distribution. In the press release related to the alternative proposal Origen notes that due to a 3-month delay in the sale of their assets a liquidation distribution would be lower than the original anticipated amount.

Had Origen proceeded with dissolution and distributions of its net cash, the estimated per share amount hat would be distributed is less than the amount estimated in Origen’s proxy materials for the special meeting held in October. The reason for this lower per share amount primarily is attributable to additional operating expenses and transaction expenses resulting from an unavoidable three month delay in completing the GoldenTre transaction. Current members of Origen’s Board of Directors have indicated that they will elect o continue as post-closing Origen stockholders in respect of a substantial portion of the Origen shares they own.

With the stock selling at $1.64 we do have some margin for additional costs since the 5 cents/share translate to $1 million in cash that can be ‘wasted’ before we start to lose money. Only a letter of intent has been signed between MRECS – the party behind the alternative transaction – and Origen, but given the simplicity of the deal I don’t see a lot of risk of it falling apart. In the latest press release Origen estimates that the definitive transaction documents will be signed mid-February, so that could be any day now:

The MRECS transaction is subject to the further negotiation and execution of definitve
transaction documents, MRECS’s satisfactory completion of its due dilgence on Origen, and
other customary closing conditons. Origen expects to deliver tender ofer materials to its
stockholders after the execution of definitve transaction documents, which are anticipated to be completed before mid-February 2015. More detailed information on the tender price and a comparison to management’s estimated distributions upon disolution, the MRECS transaction and the post-closing busines plan for Origen wil be included in the tender ofer materials.

So I think that the downside is limited at roughly zero and that there is at the same time a high probability that the alternative transaction will be completed, resulting in a ~10% gain. Sounds like a good bet to me, and a decent spot to park some idle cash.


Author is long Origen Financial

Amaya: is PokerStars a high-quality, high-growth business?

A recent write-up on VIC describes Amaya – the new owner of PokerStars – as a high-quality and high-growth business. As a former professional poker player I have literally played millions of hands at PokerStars and I know firsthand how awesome they are compared to the competition. They have the best software, the best customer support and perhaps most important: they are reliable. Because of that (and being “flexible” in interpreting US laws) they have grown to be the biggest site, and I think it is unlikely that they will lose this position since running an online poker site is a business with strong networking effects and economies of scale.

As a poker player you want to play on the site where you can find the widest variety of games running at any time of the day. At the same time attracting new recreational players is one of the biggest expenses that new (and existing) sites incur, but as the biggest site you can spread your advertising costs over a larger number of customers. So I’m agreeing with a large part of the thesis that the author of the write-up summarizes as follows:

In what amounted to a back-door IPO for the dominant global player in online poker, The Rational Group—owner of PokerStars and FullTilt Poker—was acquired (closed August 1st, 2014) by Amaya, a B2B gaming solutions provider one-tenth its size. While the headline EBITDA multiple appears reasonable given online gaming comps, the true proforma profitability of the business is not widely understood: minimal taxes and CapEx means that virtually all of the EBITDA not consumed by interest becomes free cash flow. Given this, Amaya’s current $28 share price implies a 13x multiple on our estimates of 2015E FCF, which we view as very cheap for a company that dominates its global market (>60% of online cash poker games) and has been growing rapidly (PF 20% 3-yr revenue CAGR & PF 42% 3-year EBITDA CAGR). Moreover, we expect strong FCF growth to continue over the next several years through: (1) the addition of online casino games and sports betting to its poker brands; (2) organic growth of their existing offerings in this rapidly growing market; (3) balance-sheet deleveraging; and (4) expansion of their online poker brands into the US.

At the same time I also think that this thesis is horribly flawed, and the reason is simple: I don’t think online poker is a market with healthy long-term growth prospects. The question that the author fails to address is: what will happen to the business when the most popular poker variants are solved by the computer? This is not a question of if, but a question of when and there is a reason that people don’t play chess or backgammon online for money.

Earlier this year scientist announced that they have solved heads-up limit hold ‘em. The most played poker variants are a lot more complex than that game, but years ago it was reasonable popular. While it wasn’t officially solved until this year no-one was playing it for significant amounts of money anymore because you would risk getting your ass kicked by someone who would be getting strategy advice from the computer. While no-limit – the most popular poker variant – is a lot harder than limit the computer is learning fast. PokerSnowie is a commercially available program that is already pretty capable and better than most humans.

I think there is a reasonable high probability that within five or ten years computer-assisted players will be too good and too widespread and that as a result PokerStars’ main business will collapse. Because of that risk I think it is foolish to pay a high multiple for the company.

Online poker illustration


No position in Amaya

Albertsons and Safeway complete merger transaction

Albertsons and Safeway announced today that they have completed the merger transaction. This wasn’t exactly a surprise after they received clearance from the FTC earlier this week. What is very interesting is that the press release contains valuations for both CVRs since that is required for tax reporting purposes. An estimated value of $1/share for Casa Ley isn’t bad:

Both contingent value rights will be non-transferable and non-tradable.  For tax reporting purposes, Safeway intends to report that the fair market values of the contingent value rights at the time of the merger for PDC and Casa Ley are $0.0488 and $1.0149, respectively, per share, based on third party valuations.

Also nice is that the timings of the payments for PDC have been moved forward a little bit while the total amount has been increased slightly. It’s just a small difference, but probably enough to raise the IRR of the merger arb with a few percentage points.

With respect to PDC, both the initial cash distribution ($2.412 per share) and the total estimated asset value including the CVR ($2.461 per share) have increased slightly over the estimated values set forth in Safeway’s December 23, 2014 press release announcing the sale of PDC. Those earlier estimates were $2.38 per share and $2.45 per share, respectively.


Long Safeway