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.