Winthrop Realty Trust (FUR) Liquidation
When does a public company liquidate? The answer is …. not very often! Management has a vested interest in keeping a business alive at all costs, since in a liquidation they lose their job. In fact, more often than not management continues to drain the coffers of ‘their’ company over many years rather than make the shareholder-friendly decision to liquidate, drawing a salary while the owners are gradually swindled of their equity. Even when equity and cash have been completely depleted, management can still make out like bandits; in a chapter 11 filing management most often oversees the liquidation, keep their jobs even after the company emerges from bankruptcy, and sometimes even get to reset all their non-salary remuneration thresholds (options, grants, bonuses, etc.) giving them greater upside. I find this a rather strange phenomenon since bankruptcy is more often than not the fault of very management that benefits.
So when do liquidations happen? Mostly they take place when either management is itself a significant shareholder, and the benefits of liquidation for management are greater than the continuing stream of cash from remuneration, or when there are significant non-management shareholders who force management to put the company into liquidation. Note that I haven’t cited the Board of Directors as a catalyst for liquidation. That’s because most Boards’ first allegiance is to management. After all, they generally owe their jobs to management and they too have a vested interest in keeping the company alive so they can remain Board members. It’s only when Board members have significant ownership in the company (and this is VERY unusual) that they actually look out for the shareholders (themselves, obviously). Otherwise it takes an activist investor to ‘shame’ the Board into providing the shareholder guarantees that they are legally bound to provide. And I really mean ‘shame’ since Board members are protected against monetary claims from shareholder legal action by mandatory insurance policies. It is thus only the potential damage to a Board member’s reputation that is at stake. This can, however, be a decisive factor, depending on who the Board members are. In the case of Winthrop Realty Trust (FUR), fortunately for shareholders, management was/is a major shareholder.
The issue I want to address here is what happened to the FUR stock price AFTER the announcement of a liquidation, with the goal of identifying in hindsight when the best time to invest might have been. Clearly this is a specific instance of liquidation, and the results cannot be used as guidelines for what to do in other situations. Nevertheless, I think there may be some lessons we can draw from this situation that we might apply to another potential liquidation I am following, the proposed liquidation of New York Realty Trust (which I will address in the next post).
Back to the liquidation of Winthrop Realty Trust. In November 2013, approx. 6 months before the liquidation announcement, FUR management provided, a NAV estimate of between $12.98 (low) and $15.01 (high). At the time, shares were trading at $11.15. On April 29, 2014 the company issued a press release stating that the Board had approved a plan of liquidation, but did not provide any estimate of liquidation proceeds. There was only a statement that the liquidation proceeds for common shareholders would not be less than the lower end of NAV estimated as of the end of the first quarter, $13.79 per share. The share price traded up to the $14-$15 range. The Proxy statement requesting shareholder approval for the liquidation, first issued in mid-May, continued to use the first quarter NAV estimates of liquidation proceeds, $13.79 to $15.79 per share. Shareholder approval was given at the annual meeting on August 4. On November 6 a press release was issued announcing 3rd quarter results. These results used liquidation accounting for the first time and per-common-share liquidation proceeds were estimated at $18.16, subsequently increased to $18.35 later that month. On the announcement, the share price traded up to the $17-$18 range. Since then, estimates for liquidation proceeds have been included in each quarterly report but have not varied significantly. The latest estimate of liquidation distributions, made in late July 2016, was for $10.61 per share (which excluded $7.75 per share in previous distributions). In 2015 three liquidating distributions were made, $2.25, $1.25 and $1.00 per share, respectively on 1/15, 6/16 and 12/3. A $2.00 per share liquidation distribution was made in May 2016 after which shares traded down from $12.50 to the $10.50 – $9.62 range. At $9.62 on June 17, shares were trading at a significant discount to estimated future distributions of $11.85, about $19%. A further $1.25 distribution was made at the end of June. Reflecting this distribution, shares traded down to $8.62 in late June after the ex distribution date (though note that they never traded down the entire amount of the distribution) and there was another opportunity to purchase at about an 18% discount to estimated future distributions. After this distribution, shares traded around $8.70, gradually increasing to $9.14 over the month of July, still a significant discount to estimated liquidation proceeds, up to 18% early in the month. On August 5 the shares were delisted (2 years after the approval of the liquidation) and the assets transferred into a liquidating trust with the result that the shareholders became participants in this trust with non-transferable shares.
So, when was the best time to purchase shares in FUR subsequent to the liquidation announcement? The best time, in retrospect, was just after the announcement was made in May 2014 when the shares traded up from $11 to $14 per share. However, it must be remembered that no official estimate of liquidation proceeds had been made at that time. When the first management estimates of liquidation distributions were made in the Fall of 2014, the shares popped to between $17 and $18. In retrospect that was the WORST time to buy. Over the next 18 months the share price gradually receded, and if one waited until 30 to 75 days before the assets were put into the liquidating trust on Aug 5, 2016 this would have been the second best time to buy. The discount to management’s conservative estimate of liquidation proceeds was between 15% and 20% during that period. I assume the discount widened to the 15-20% range when it became clear that liquidation was not going to be completed before the 2 year deadline, i.e. the remaining assets were going to be put in a liquidating trust. Certain holders would be forced to sell as institutional mandates would preclude them from holding illiquid securities such as the participating interests in the FUR liquidating trust.
I had made a small initial investment in FUR at the end of 2014, adding to it at the end of 2015, with the idea that I would double or triple this amount opportunistically as the liquidation progressed. I viewed the August 5th trust conversion as such an opportunity, but, of course, I BLEW IT! I purchased more shares in May (not a bad time) but then waited to double down until July when I thought institutional investors would all be running for the exit at once as they were forced to sell. This was my mistake; I was too greedy!! I was totally wrong on the timing! During July the share price gradually increased. I now have to concede that institutions were much more proactive than I anticipated, selling at least 2 to 3 months before the shares became illiquid. Needless to say I was sorely disappointed. In retrospect I can see that I invested too early, with single figure discounts to liquidation estimates, and then waited too long to make further purchases.
I console myself with the thought that the purpose of this investment was simply to park funds in a low risk situation that would provide liquidity in a couple of years when I hope the investment scenario will be more favorable. And, as always, better an error of omission than commission!