Wednesday 30 January 2013

Real Estate Capital Partners Trust (RCU)

Firstly, apologies for the last post on RCU: I mentioned the meeting would be held 'tomorrow' however I did not realise the time stamp was a different time zone to mine. I'm learning something new everyday in the world of blogging! I have the pleasure of writing this from beautiful Koh Samui. I highly recommend the visit.

Okay, the meeting of unitholders was held and here's the result. The initial proposal was the simple one, which was to sell the assets to Saban, return the cash to unit holders and clean up the scraps including letting the dud properties go. At the 'request' of Mr Woolley, the meeting's resolution was instead split into three parts: a. to sell the selected assets to Saban, b. to distribute the cash and c. Delist RCU. The first resolution was voted for while the remaining two were voted against.

At least we have some progress. The concern now is that RCU will shortly be a listed cash box (and holding some properties that are bleeding cash) and we don't know when or if the cash will be returned to unit holders. It could be used as a back door listing for another company, or any other number of permutations. The game continues. At 48c, RCU is trading at ~16% discount to (soon to be) cash, so I'm comfortable holding.

I will report more on this in coming weeks.

Monday 28 January 2013

Real Estate Capital Partners Trust (RCU)

Well, it's looking like the deal with Saban could fall over at tomorrow's meeting. This is bittersweet. Bitter - a nice profitable short term trade may not happen. Sweet - as per my previous note, if the deal falls over I will be buying More (if the stock price falls). RCU has tangible value, and it is trading at less than that value, so if it falls in the short term, then it makes sense to buy more.

But let's look at why the offer may fall over...

Major shareholder Greg Wooley has (amongst other things) sought a higher price from Saban. Saban has declined to increase its offer. Unless one of the two parties are bluffing or a different proposal is put forward, we're at a stalemate.

In December there were signifciant changes in the share register. Acorn, One of the fund managers with a stake in RCU has sold its stake down to Another group called Yasselleraph has taken a stake of 10.9%. Acorn has previously supported the proposal, and I do not know Yasselleraph's intentions or what Acorn has in mind. On balance, the change in shareholding probably doesn't improve the chances of the deal happening.

Anyway, until the meeting happens tomorrow, there isn't a whole lot to do. I am overseas atm, so will not attend the meeting; the asx announcements will need to suffice.

Sunday 27 January 2013

Toast: A reminder of how we are conditioned

Currently staying at a hotel in Singapore. I just went to the buffet, and without thinking bunged two pieces of toast in the horizontal toaster travelator thing. Why two? It then occured to me eating two pieces of toast at a time was my childhood ritual using the standard vertical toaster. Old habits are hard to break!

And not to mention I had to cook them a second time.

Friday 25 January 2013

Berkshire Hathaway Analysis

I remember asking a few fund managers when I was first studying Warren Buffett: do Berkshire's eye-popping returns (19.8% p.a. net of tax from 1965-2011: click here for the 2011 annual report) include or exclude the effect of leverage from the insurance business? Blank looks. I found this intriguing: seriously smart analytical types who are Buffett disciples not knowing a fairly basic question. Everyone in the stock market seems to be obsessed with gross returns. Tax doesn't get much of a mention, nor does the ability to finance the investment. Property investors on the other hand seem to have a much more holistic view: they consider tax issus such as depreciation and the impressive effects of leverage, assuming prices rise as all property investors do (need to...). It's always struck me there is a huge gap between stock market and property philosophy, and that property is in many ways more suited to the Buffett philosophy than stocks.

I stumbled on this research paper called Buffett's Alpha (click here for the article) breaking down the source of Berkshire's returns. It's extraordinary; the conclusion is that the primary source of alpha is the combination of leverage (an average of 1.6 to 1) and the very low cost of finance. Berkshire has enjoyed low finance costs thanks to superb management of the insurance business which has provided a very cheap float; sometimes the cost of float has been less than zero; meaning the interest rate has been negative. So while fund managers race around trying to find the next stock to invest in, are they not beter off finding low risk stocks, sprinkle a little leverage and just sit back and wait for growth to come through? I think so. And that's exactly what successful long term property investors do.

I've long suspected this to be the case, so I'm a little bit chuffed this research has been undertaken.

What are the implications? Well, not everyone likes leverage and most of us don't have access to ultra cheap, stable finance. However, implications are clear: when deciding between investments, also consider the possibility of leverage. An un-leveraged investment may not be appealing, but highly appealing if the price and income are stable and works well with leverage. I calculate IRR assuming no leverage and where possible/appropriate with leverage and I then weigh up the risks and decide which is the best investment. This forces a higher level of 'professionalism' on the process: instead of looking for the next best trade, consider the trades and strategy that will genuinely create long term wealth.


Thursday 24 January 2013

Apple Inc (AAPL)

I have been considering undertaking a covered call strategy on AAPL.

For those who don't know what a covered call is, it involves buying or owning the stock (AAPL) and then selling or writing call options  against the position. A call option gives the owner of the option the right to buy a stock for a set price within a certain period of time. Just like an insurance contract, the price paid for an option is called the 'premium'. So, by selling a call option, one receives the premium fee upfront and gets to keep it regardless of what happens. However the seller of the premium is taking the risk the underlying share price may increase above the 'strike price' and therefore lose money. By owning the actual stock, the downside is limited, hence why it is called a 'covered' call strategy.

The benefit of a covered call strategy is that it allows an investor to generate additional income from their portfolio. There are downsides however, which I will come to shortly.

The reason I have been looking at AAPL in particular has been two reasons: firstly, because AAPL is a  fast moving stock, the option premiums are high (which is good if I am a seller or writer of options). Secondly, is that AAPL is cheap on historical numbers. Without going in to the figures in detail, at say US$500 per share (it's actually less in after market trading, but I'm keeping the numbers round) AAPL has a market capitalisation of $470bn. Estimated cash is ~$130bn. Net cash, AAPL trades on a historic PE of well less than 10, which for a technology company is wildly cheap. So the world's most valuable company is actually very 'cheap'. This presents us with a serious problem: do we assume AAPL's days are numbered or do we see this is a buying opportunity of a great company out of favour?

Personally I have been fence sitting. I've been sucked into situations like this before, especially writing covered calls on stocks just because the premium is good. This is a bit like the 'smell the cheese' prank. And I don't really know where AAPL will be in a number of years time. It is a great company with a strong 'eco-system' (love that term) but can it be destroyed? Certainly.

Recently announced sales figures have been disappointing relative to expectations, and the price continues its slide. In after hours trade as I write, the stock is down just shy of 10%. Markets hate missed expectations and there may be more to come. Any chartist will tell you AAPL is in a downtrend, and they are correct. It doesn't look like sentiment has got the point where it is fulfills Howard Marks quote "If I were asked to name just one way to figure out whether something is a bargain or not, it would be through assessing how much optimism is incorporated in its price", but it is certainly getting closer. 

For my money, I'm avoiding AAPL for the time being.

Funny video of Conan O'Brien learning to play polo


Tuesday 22 January 2013

Alternative Investment Trust (AIQ)


AIQ is a listed fund-of-fund manager. In 2009 the decision was made to wind-up the fund by selling-off assets and gradually return cash to unit-holders. I previously traded AIQ at higher levels and have been looking for a new entry point. The trick is to buy units in the fund at a sufficient discount to Net Tangible Assets (NTA) in order to make a profit and allow for time and risk. Just like when you have a garage sale, the first assets to go are the easy and popular ones, leaving the harder stuff for sale towards the end of the day. AIQ call the harder to move assets ‘side pocket’, which I suppose is a nicer term than ‘basket case’ assets. So as the wind-up progresses, the time component to realise the value of the remaining assets becomes potentially longer and harder to predict.

Hot off the press: AIQ has recently announced a fresh payment of AUD13c. The ex date of the payment is today 22 January. Pre the ex-date, the AIQ price traded at 43c and the most recently announced NTA was 54c; therefore the price to NTA discount was 20%. Aside from 2009, the greatest price to NTA discount has been ~35%, and often the price to NTA is greatest just after the ex-date. So, my strategy was to buy AIQ on the ex date if the price dropped to around 26.8c (41c*(1-35%)). Well, that little idea of mine just hasn't worked out at all as the stock has only dropped to 30c; the price to NTA discount has remained fairly static. So i have missed out on this trade, however will continue to keep an eye to see if there discount opens up again at some point.

Wednesday 9 January 2013

Real Estate Capital Partners USA Property Trust (ASX: RCU)


RCU is listed on the Australian Stock Exchange (ASX) and owns a portfolio of USA commercial property comprising office and industrial in New Jersey, New York State, Illinois and Massachusetts. The portfolio is unhedged against the USDAUD currency pair. The book value of RCU was AUD$92.2m or AUD91c as at 30 June 2012.

That’s the straightforward part. For some time now the stock has been trading at well less than book value thanks to ongoing problems with some of the properties, and to make matters worse a capital raising was undertaken in early 2012 at a hugely discounted 40c. On top of this there has been corporate battles including a major shareholder unsuccessfully trying to get control of the portfolio at 46c per unit. In late 2012 a new proposal was put forward from Saban Capital Group to buy the bulk of the properties from the portfolio, and the remaining assets of RCU would be wound-up. All up, unit-holders would have received ~AUD56-58c and the case would be closed. The same major shareholder who tried to buy for 46c is trying to block the deal, or at least hold-out for a higher offer, so where we stand now is that a new meeting of unit-holders is scheduled for 29 January to vote on the proposal. A minimum of 50% of unit-holders must vote in favour and the major shareholder has ~33%, so can potentially block the sale. If the proposal is successful and based on the current exchange rate, I expect the payment to be ~AUD56c. On the current proposal, the vote will be a close call, and not unlikely to fall over.

You may be wondering why anyone would consider cashing in for 56c when the book value is 91c. That’s a fair question. In reality the ‘true’ worth is likely to be somewhere in between those two figures, however I can’t tell you exactly what that figure might be. Two of the properties have been causing significant troubles and RCU is likely to walk away form them completely. As a trader, I just want to buy at a good discount to the likely sale price of 56c, which leaves me with upside exposure should the offer be increased or a new offer is made.

In terms of the downside, we know that a major shareholder was prepared to pay 46c and the new bidder is prepared to pay 56c for the bulk of the assets, so that provides a loose floor price. I say loose because if this new proposal falls over, the price can obviously fall a lot more, however my take is that a significant price fall is unlikely and would be short lived: RCU is backed by a property portfolio and it is in play. I will be buying more if the price falls over.

I have recently bought RCU at 50c. I will make a decent return of ~12% in a month if the offer proceeds in its current format and more if the offer is improved. I will look to buy more should the offer not proceed and the price falls enough. 

Saturday 5 January 2013

Long Data, Short Telephone Calls

Just noticed that Facebook, Blackberry, LinkedIn and Google are all offering or trialling free telephone calls. Skype killer? Quite possibly. However I get the feeling people like single functionality: Facebook to pretend to you are happy, LinkedIn to pretend you have an amazing career and Skype to make your calls. Still, the ongoing message to telecomm's companies is clear: telephones are dying, data is flying.