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I’m parking some more money .. in a liquidation situation this time.

November 19, 2014

It’s hard not to fall into the trap of increasing market exposure as the market vaults to new highs and your portfolio continues to lag; You sit there with cash and, day after day, share prices keep rising. But this is exactly the wrong time to increase exposure! To give myself a little solace in my current plight I play out the most likely what-if scenario were I to give in and invest my free cash: It goes like this…so I finally capitulate and load up on all those shares I’ve been coveting….. only, the day after I invest the market stumbles and continues dropping steadily for the the next two months, dropping 10, 15, 20%, and I’m sitting there with all those coveted stocks now in my portfolio at 20, 30, 40% losses. Yes, my losses are always greater than that of the overall market; it’s Murphy’s law! So I smugly look back to the present and feel good about not jumping on the bandwagon at this point in the latest bull run. But what to do with all that idle cash then? If you’re like me it begins to burn a hole in your pocket at some point. I could just let it sit there and EARN NO INTEREST. But with a little industry maybe I can put together a low risk investment or two. I did something of the sort when I ‘parked’ some money in the Firsthand Technology Value Fund. Next I put some loose change into a closed end fund with a catalyst, Diversified Real Asset Income Fund (DRA). Those investments are still in the process of maturing and I won’t know whether I’ve reached my investment goals there for a couple of months. OK. But there’s still more change jangling around in the pocket, tempting me to ‘put it to work’ (an expression I’ve never quite understood) So what’s next?  I’ve decided to fall back on that decidedly unsexy sector of investing, liquidations. Why unsexy? Primarily because the upside in any liquidation situation is clearly limited. But then again, so is the downside, and that’s what I’m interested in here. The idea is to limit the downside so that in a market retreat I’ll have the cash ready to buy up all sorts of treasures.

I remember having looked at Winthrop Realty Trust (FUR) a number of years ago as a potential value investment. In fact, I even owned a few shares at one point as I dipped in early when I began a deep dive into their financials. It was short lived however, both the owning and the deep dive, as I quickly realized that I didn’t have the kind of real estate expertise to complete the necessary analysis. So a recent blurb in the Spinoff Monitor caught my attention, “Winthrop Realty Trust increases estimate of liquidation distributions from $18.10 to $18.35 per share.” or something like that. I was very surprised to see the company was liquidating, and even more surprised when I read up on it to see the reason behind the liquidation; management concluded that, despite their best efforts, the Market was not attributing enough value to the company and that shareholders would be best served and realize the most value by a liquidation of the assets. Wow! Management concerned about shareholders realizing value? Unheard of! I decided to dig a little deeper. Now the great thing about a liquidation is that management has to provide an estimate of what exactly they think the liquidation distributions will be (not the timing, mind you, just the total amount). So there is no need for me to have any real estate valuation expertise! In fact, who better than the management of a real estate company to provide the best valuation of the real estate they manage! The thing to remember about management’s valuation in a liquidation scenario, however, is that it is almost always CONSERVATIVE. Yes, that’s right there is no incentive for management to overpromise here… and a good many disincentives for them NOT to do so. So let’s go back and look at the proxy the company put out in June 2013 for their August special meeting to approve the liquidation. In the proxy management provides a range of value for liquidation distributions of between $13.79 and $15.79 per common share. Shares were trading in the $11-12 range before the liquidation proposal was made public at the end of April. Thereafter shares traded in the $15 range until mid October when management upped their estimate of liquidation distributions, first to $18.10 then $18.35. Have I missed the boat? Am I getting in too late? Well, of course, it would have been better if I’d invest in FUR in April before the announcement, or even in early October before they increased their estimates. But I’m looking to park money, with little downside so I can’t anticipate a huge upside, can I? I’ve bought a small position at $16.82 per share. This works out to about a 9% return if the distributions end up totaling management’s estimate of $18.35.  That doesn’t sound so great since the liquidation could take til August 2016 or beyond. Two years to get a 9% return, that might mean a return of only 4% per year! But you have to take into consideration the timing of the distributions. Management has already said that the first distribution should be in January or February 2015, and the quicker the distributions the higher the IRR on my investment. Furthermore, I think management may continue to increase their estimate of the distributions. Given their past actions I feel quite confident management will continue to put shareholder interests before everything else;  after all, management as a group is the largest shareholder with over 9% of the outstanding shares.

I haven’t finished accumulating my position as I’m contemplating a bit of year-end selling may depress the price from here over the next month (possibly mutual/pension funds that don’t invest in liquidations??). So, readers, no buying from you please until I’ve bought my fill. Thanks.

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4 Comments
  1. pete permalink

    If you like real estate situations that are relatively simple, take a look at LAACO (ticker LAACZ.) I own it. I think that NAV is north of $3000 and it trades at around $1350. You get a $60 distribution while you wait, it is an MLP though and you get a K-1.

  2. Dan permalink

    Kind of upset about missing out on FUR when it was at $10-11-12. I just took management’s word even though I know that managements are almost always very conservative about liquidation values. It was kind of complicated to value because the assets are so disparate.

    One interesting development in the liquidation ‘asset class’ is the availability of information pertaining to companies in bankruptcy. It makes certain involuntary liquidations (if you invest in bonds or preferreds) actually possible to invest in.

    I’ve been an investor in GYRO, a tax liquidation company, before the payouts at the beginning of 2014. The situation is quite complicated but basically the common stock is worth around $5.7 right now according to management. It’s trading at a 34% discount. The problem is to unlock value there has to be a 2/3rds vote in favor of merger with a few other entities as apart of the liquidation process. The problem was that the security started trading at $15 after all distributions when the value was around $5.7 so all of the fundamental holders just dumped the shares.

    I am thinking about putting together baskets of securities for the same reasoning you have stated in this article. Those include: net-nets, shell companies (NOL companies, SPACs), contingent value securities (including patent trolls, CVRs, litigation claims) and discounted closed end funds. I’m wondering if there is a category that you would add to this or not?

    Thanks,
    Dan

    • Dan,
      Thanks for commenting. I’ve been an investor in GYRO in the past and at these levels am trying to build a position again. Not sure where you get the $5.70 per share management valuation for common shares; it looks to me more like $4.46. I hope you’re right, however, as I wouldn’t mind building a position at these levels with that much upside!! Year-end selling should help here.

      As to other types of investments you might look at; I suggest looking at spinoffs, recapitalizations, split offs, carve outs etc. Anything where value can be created with the right incentives.

      • Matt permalink

        I own a decent chunk of GYRO and am not sure exactly what it’ll eventually pay out, but I don’t think you’ll lose money buying at this price. However, if you’re relying on the $5.70 NAV, there has been a $0.46 distribution since then, so the upside is not as big as assumed. That distribution had it’s ex-date two months ago but is not payable for another month; as with everything with this liquidation so far, it’s complicated.

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