Four years ago I bought a basket of various Italian real estate funds because I liked the combination of a 50% discount to NAV and the fact that these funds all have a fixed maturity date. When I started tracking these funds there were 24 different entities with a total NAV of €4.0 billion. Two years ago that number had shrunk to 21 different funds with a NAV of €2.6 billion and now just 14 funds are remaining with a total NAV of €1.5 billion. It’s taking quite some time to sell the assets of these funds, but they are liquidating. At the same time the average discount of the remaining funds has shrunk a little bit, but is still quite high at 41%:
So far my investment in this basket has worked out to my satisfaction. As of today my internal rate of return stands at 14.7% which I think is pretty okay for real estate. While all the funds I bought have appreciated in price, most of the return can be attributed to just two funds that have now been fully liquidated. While things have worked out for me, just blindly buying all these funds would probably have been a bit less successful. Most funds have been quite successful in slowly selling their assets close to NAV, but some have sold them at sizable discounts. The Obelisco fund liquidated this year, writing down their NAV to zero, and without making a single distribution to shareholders…
Another fund that is close to liquidating is Unicredito Immobiliare Uno. In the latest annual report the management company reports that they have received offers from multiple investors to acquire the remaining real-estate portfolio of the fund. I think it’s quite likely they will be able to sell their remaining assets close to NAV, and thus with the discount remaining above 20% I think it’s an attractive bet. It’s my only new position in my basket of Italian real estate funds, all the other ones in the list below have been in my possession for multiple years:
Two years ago I bought a basket of Italian real estate funds with a simple thesis: they are all liquidating (because they all have a fixed end date) and they are trading at a big discount to net asset value. Since then that thesis has been playing out slowly. Back then there were a total of 24 funds with a total net asset value of €4.0 billion. Thanks to asset sales (and also some write-downs) there are now 21 funds remaining with a total asset value of €2.6 billion. The total market valuation is €1.4 billion for an overall discount of 46%, down just slightly compared to the 48% discount two years ago.
While the overall discount has remained roughly constant there have been some significant shifts between individual funds. I bought for example Europa Immobiliare N1 at a 54% discount, but thanks to some successful asset sales the discount is down to 14% (pro-forma for a large liquidation dividend that will be paid next month). Other stocks have seen their discount grow. Two years ago I thought that the Atlantic 1 fund was richly valued at a discount of just 24%, now it’s actually one of the cheapest funds with a 58% discount. I have strongly considered adding this one to my basket, but so far the relative high leverage (50% LTV) has been holding me back.
I did decide to sell Europa Immobiliare N1 though, and added a couple of other positions. A new addition to my basket is Amundi RE Italia. They haven’t made a lot of progress with liquidating so far and incurred some asset write-downs, but the discount is huge at 61%. My other additions are Securfondo and Socrate. Securfondo has been making good progress with liquidating and has only one building remaining, while Socrate also started with selling assets. A great site to keep track of what is happening in this sector of the market is this one. It’s Italian, but it keep track of asset sales, financial reports and other developments related to these funds.
My current basket of Italian REIFs and their performance so far looks as follows:
Elliott Associates launched bids for four different Italian REIFs two months ago, and so far they haven’t been very successful in acquiring shares. They managed to acquire 16% of the shares of the Polis fund, but another hedge fund overbid them on the Mediolanum Real Estate Fund and apparently there was little interest from Fondo Alpha and Immobiliare Dinamico shareholders to tender their shares. As a result Elliott Associates decided to increase their bid for those two funds. They raised the offer for Fondo Alpha by 12.4% from €1156.25 to €1300.00 and the offer for Immobiliare Dinamico was increased by 12.5% from €69.31 to €78.00. I didn’t tender my shares in the previous offers, and I don’t intent to tender them in the new offers, but I do find it very encouraging to see the large interest from hedge funds in Italian REIFs. I bought them last year and no-one was interested, and now everybody tries to get a piece of the action:
Author is long Fondo Alpha and Immobiliare Dinamico
This year a lot seems to be happening in the Italian REIF sector. First we had Elliott Associates launching tender offers for four different funds, and then York Capital Management joined the party by offering €54/share (plus CVR) for Fondo Delta. It didn’t take long before a second interested bidder emerged who was willing to offer €56.70/share and on Monday the bidding war intensified with a third fund launching a tender offer at €65/share. I’m not exactly sure why there is so much interest in this specific fund, but I can’t complain. This offer is still at a 30% discount to the €92/share NAV, but it’s a huge improvement to the 50% discount Fondo Delta was trading at earlier this year. Despite that I don’t think I’ll tender my shares since I expect that simply waiting for the fund to liquidate will be better.
One fund that is making excellent progress in this regard is Valore Immobiliare Globale. The fund announced last Friday that it sold its Milan property for €26.8 million (equal to its appraised value as of 31 December 2015). This is a pretty big deal since the fund now only has two properties remaining with a combined value of €28.3 million. The announcement caused the stock the jump by 20%, but also in this case the discount to NAV remains big at 30%.
After Elliott Associates launched a bid for four Italian REIFs less than two weeks ago another hedge fund has announced that it also wants to join the party. York Capital Management (I never heard of the name, but apparently they have $14 billion of AUM) will launch a tender offer for Fondo Delta, another stock that happens to be in my basket of Italian REIFs. The offer is for up to 60% of the outstanding share capital at a price of €54/share which is a premium of just 11.7% compared to the closing price yesterday and a price 40% below NAV of €92/share.
While the premium is small York Capital Management has structured the offer in such a way that shareholders will get an additional consideration if the fund can be liquidated close to NAV. Depending on the timing of the liquidating selling shareholders would receive between 18 and 30% of the liquidation proceeds above €75/share. Since that is roughly a 20% discount to NAV there is a reasonable probability that shareholders will receive some additional consideration. With the stock currently trading at €52 the spread, excluding the value of the CVR, is 3.8% which looks pretty attractive to me. Because of that I decided to add a bit to my position today with the intention to tender it in the offer.