Updates Sierra Rutile, American Farmland

Sierra Rutile

The 36 GBX merger consideration has hit the account yesterday. There was some hiccup in the meantime, but I just waited it out. Dams can be a serious issue for a mining corporation. Would be really interested into how serious Iluka was with going through with the merger. Was this just a way to get more cheap shares for some insiders? You can see the price drop in the chart.

12/6/2016: Announcement merger will go through

11/29:2016: Iluka: "non-satisfaction of the material adverse change condition"
"Iluka has also indicated that it will not proceed to closing the Merger on 29 November 2016, as expected."

American Farmland

At the time of establishing the long/short position for the blog, the situation was as follows:

American Farmland Co

AFCO

7.94

-9.97%

11.07%

8.82

Farmland Partners Inc

FPI

11.890

34.58%

3/30/2017

now:

American Farmland Co

AFCO

7.58

-3.70%

3.84%

7.87

Farmland Partners Inc

FPI

10.740

14.15%

As you can see, the spread has shrunk. I have exited the whole position for the blog. It is difficult to accurately reflect the long with short for the portfolio page. For now I will leave it out. 

Merger arbitrage:American Farmland

The idea is from the excellant Alpha Vulture Blog. I recommend reading his articles and comments.

It is an all-share deal.

"The parties currently expect the transaction to close during the early part of the first quarter of 2017, subject to customary closing conditions including the approval of the stockholders of both the Company and AFCO. However, the Company can provide no assurances that the AFCO Merger will close on the expected timeline or at all." 8k

The cost to short is about 20% and the expected IRR is about 35% with a conservatice closing date assumtion of 3/30/2017.

American Farmland Co

AFCO

7.94

-9.97%

11.07%

8.82

Farmland Partners Inc

FPI

11.890

34.58%

3/30/2017

For the blog I went long AFCO and shorted a similar dollar amount of FPI to hedge. This way the merger spread is unhedged. There were few shares of FPI availabe to short. This is a trade I like. Just set and forget as long as the cost of the short does not rise too much. Luckily IRR was higher then cost to borrow by a wide margin.

Long AFCO, Short FPI

Merger arbitrage:Sierra Rutile

Sierra Rutile is trading at about 33.5 GBX.
The bid of 33 and ask of 35 results in a spread of 2, which is quite wide on the London stock exchange (SEAQ).

Today Germany cleared the deal, which is now expected to close "on or around 29 November 2016".

The merger consideration is 36 GBX. It looks like Sierra Leone will not tax minority shareholders.

"The GoSL has confirmed that no other amounts will be payable by Iluka, SRL or any other SRL Shareholder in respect of capital gains tax or other taxes payable under the laws of Sierra Leone in connection with the Merger."

Upside is 7.46%. With the merger expected to close that shortly the IRR is really good, if the merger closes.

Long LON:SRX.

Post Mortem on Cleco

Cleco
In the comments, I was asked to update my thoughts on Cleco. I happily comply with this post. Shortcut: In the end this roller-coaster-investment worked out fine.

It is really important in this kind of arbitrage situations not to invest when everyone expects the deal to close at the lower end of the timeframe given by management. I had no clearcut expectation when this would close and entered the position at about an 11% discount with an upside of 12% on 11/12/2015 for the blog. These are gross and not annualized returns. It is at times not worth it to go for high annualized IRR with low absolute return given the risk involved. For example writers an seekingalpha often tout annualized returns, but ignore the downside risk. For me it is important how far the stock would fall when the deal breaks. With Cleco we had a profitable company, but for me it was overvalued as a standalone and so the price would drop if the deal breaks.

When we look at the chart, the timing was great at the beginning. Then the unexpected happened. I wrote:

"I have decided to hold on to the position after the sale was rejected by the commision. The hearing was webcasted and I listened to it. Should have sold the position with a small gain as soon as I realized a negative outcome is probable. The decision process looks very non fact-based to me. Although the decision to reject may be right. It looks like it played a role that the buyer was not American..."

 It might have been a mistake not to increase the position at the trough around $45. Although I thought short-term downside was limited from there, I was just not comfortable holding more of a company, which could get problems with decentral electricity generation and definitely is not in a growth market (those are long-term problems). The price was not low enough. On the other hand compared to interest rates the cashflows did not look too expensive. I did nothing. Best would have been to sell after the 40c dividend and buy-back in March, but that is easy to say with hindsight.
The end result was an IRR of about 31% in dollar terms (as you can see on the portfolio page).

I just added the gross dividend to the take-out price. The correct calculation would have been to add the dividend with the date one would have received it, which would have increased the pre-tax IRR slightly.

In the end I should have sold the position during the webcast. It was a mistake and more luck than skill that Cleco worked out for me in the end. Of course, the professional full-time arbitrageurs are no better either. (I even like to avoid stocks most favoured by professional arb funds, when looking at special situations like merger-arb.) One gets uncorellated returns and that is exactly what I wanted in this relatively expensive market. OK: It would be best to have only positive, uncorellated returns and never negative ones, but I am learning and avoiding a lot of fees by investing myself.

Bought Essex Rental / Updates on several position / re-entered UMS United medical

Essex Rental

Essex Rental (ticker:ESSX) is up 30% on higher than average volume today. There is a write-up on seekingalpha. I have not much to add. The company has two subsidiaries. One is worth zero and the other more than the current market cap of Essex Rental. Because of the price action today, I believe now is a good time to initiate a position. Technically the debt of the worthless sub should be non-recourse. Maybe someone knows more. This is a specualative position and liquidity is low. This has to be sized accordingly.

Update Cleco

I have decided to hold on to the position after the sale was rejected by the commision. The hearing was webcasted and I listened to it. Should have sold the position with a small gain as soon as I realized a negative outcome is probable. The decision process looks very non fact-based to me. Although the decision to reject may be right. It looks like it played a role that the buyer was not American...

Update Medisana

As expected the money has arrive in the bank account. This was a nice gain in a short time period.

Medisana

€ 2.80

€ 2.70

2/25/2016

3/3/2016

3.70%

Update SPIL

The offer might not go through. Good that is a just an odd-lot. The downside should not be high. SPIL is not expensive at this price. The position is at a small loss. If this gets slaugthered as a broken arb I may increase the position

Spil

$7.55

$7.56

1/15/2016

yes

-0.13%

Update KWG Komunale Wohnen

At last Conwert has come out with a offer to acquiry shares of KWG. Because of the complex land transfer tax in Germany the company does not tender for all remaining shares. It is important not to get over 95%. The price on offer is €10.80. This was one of the more successful position with an IRR of 26.2% since the start of 2014.

KWG Komunale Wohnen

€ 10.56

€ 6.36

1/6/2014

yes

66.04%

Update Apple

As written this was a short-term play. As you could have seen on the portfolio tab of the blog, the position was already sold again. Yes, I think Apple is still undervalued... It is just that I also want to hold some cash. Since 2012 I went with near 100% stock at all times.

Apple

$101.96

$96.20

1/15/2016

3/4/2016

5.99%

Update snow

Same with SNOW. The tendered odd-lot was accepted and the position eliminated. I am not bullish on SNOW as a core long position because the maintenance capex looks high to me.

Snow

$9.00

$8.51

1/15/2016

2/11/2016

5.76%

Update Dream Global

Obviously with the current decision of the ECB and the low interest rate environment German Real estate is still very attractive. DRG has started to rise. There is also a write-up on seekingalpha. Not much to add here. This a big position and I intend to trim a little bit at higher prices.

Dream Global Reit

CA$ 8.68

CA$ 8.30

12/2/2015

yes

6.18%

Update Pfandbriefbank 

Dt. Pfandbriefbank

€ 9.49

€ 8.66

2/5/2016

yes

9.58%

 This is a typical case of being early. Six days after purcase on 2/11 the stock was as cheap as €7.43. I did not dare to increase the already full position. That is the disadvantage of a bank stock it is not good to average down because you will get diluted at the buttom in most cases. Although this time no one already knew more...

Just look at the chart:

I am very happy with the results this year sofar. This also reminds me of the time when I bought a Greek stock in their crisis. The next day it was down 10% on one day and I felt terrible about my timing.

Re-entered UMS

UMS was already part of the blog portfolio:

UMS

€ 10.15

€ 9.40

9/5/2014

9/22/2014

7.98%

UMS

€ 10.88

€ 9.52

9/5/2014

4/28/2015

14.29%

Liquidity is very low but with patient limit orders, it was possible to built a small position for the blog again.

UMS

€ 3.31

€ 3.25

3/11/2016

yes

1.85%

If everything goes according to plan, it would look like this:

UMS

FRA:UMS

3.31

-8.06%

8.76%

3.6

liquidation

pre-tax IRR

46.00%

5/31/2016

Please fell free to comment and do your own homework as always!

Bought Deutsche Pfandbriefbank

 Deutsche Pfandbriefbank

 European Bank's share prices have fallen sharply this year. I believe there could be cases of the baby being thron out with the bathwater and established a position in Deutsche Pfandbriefbank. A favourite blog of mine has a good write-up of the bank and due to the rather boring business nothing much has changed since then.

You can see how the blog portfolio is doing under the portfolio tab of the blog.

Update tender situations 

name	ticker	sum	mcap	% mcap	odd lot	min	max	announced+1	due date	price now	price min	price max
INTRAWEST RESORTS HOLDINGS	snow	$50,000,000	390,872,331	12.79%	yes	9	10	1/13/2016	2/10/2016	8.46	8.09	8.83
Siliconware Precision	spil	$1,271,084,854	4,802,458,268	26.47%	yes	275 twd	8.25	12/23/2015	3/17/2016	7.66	7.27	8.12
Fortress Investment	fig	$100,000,000	2,134,164,633	9.52%	yes	4.25	4.75	2/5/2016	3/4/2016	4.4	4.28	4.46

The tender situations are looking good. Snow has secured financing due to sale of IRCG:

"The Company will use a portion of its cash and cash equivalents on hand to fund the purchase of shares in the Tender Offer. The Tender Offer is not conditioned upon obtaining financing or any minimum number of shares being tendered; however, the Tender Offer is subject to a number of other terms and conditions, which are specified in the Offer to Purchase dated January 12, 2016, including the condition that the Company’s sale of IRCG to Diamond has been completed. As described in Note 2, "Significant Accounting Policies", the IRCG Transaction closed on January 29, 2016."

Fortress is another interesting situation to watch for now. They can easily finance the buy-back with cash on hand.

Merger Arb Cleco:CNL

Cleco

I have not written much in past few month because there are fewer and fewer investments I like to invest in.

At the current price I have established a position in Cleco for the blog. There are some concerns the buy out will not go through.

For more information see the following link. This was written by one of my favourite writer at seekingalpha:
http://seekingalpha.com/article/3460066-safe-11-percent-annual-return-with-cleco

name target

symbol

price

discount

upside

bid total

Cleco

CNL

49.82

-10.67%

11.94%

55.77

Weight watchers

I have also sold the full weight watchers position at $24.81. The Oprah effect was a little bit too fast and heavy for me. Maybe there will be a better point to rentry. Additionally the dollar is relatively high for me and I will change this back into euro for a nice additional gain.

Stock

price

price Entry

Date Entry

Active

Return

v S&P500 [€]

Annualized Return

Weight Watchers

$24.81

$19.00

1/9/2015

11/12/2015

30.58%

20.10%

37.33%

Sold UMS

After the shares went ex the dividend of €7.53 and the price did drop less, I sold the shares.

UMS

€ 10.88

€ 9.52

9/5/2014

4/28/2015

14.29%

-9.76%

23.05%

The return was 14.29% and 23.05% annualized respectively. The underperformance compared to the S&P500 in € of 9.76% is explained by the fall of the Euro. Furthermore this is a uncorrelated special situation (here: liquidation), for which the S&P500 is not the best bench anyways. This was by far my biggest position in the last months and in connection with some trading around and the tender offer the actual pre-tax IRR was a bit higher than shown.

The current implied IRR does not meet my total return hurdle regardless of current market situation:

	buy	liquidation
cashflow	-3.39	3.6
date	4/28/2015	5/31/2016
pre-tax IRR	5.65%

If the IRR goes above 10% again, I will reevaluate the situation.

Updates Gyro, KWG, Glentel, WTW,

Gyrodyne

Gyrodyne filed a S-1 form with the SEC and I exited the position. This may look like a loss, but in Euro Gyro actually earned me some money as the Euro has lost in value.

Although the prospectus is preliminary and we don't know the actual numbers yet, I expect them to offer the new shares with a discount to current trading prices. The issue of new shares seems to be neccessary in order to get enough votes for the merger:

"On June 5, 2014, Gyrodyne announced that a special meeting of Gyrodyne shareholders would be held on August 14, 2014 to authorize the Merger. Gyrodyne postponed the special meeting, first to August 27, 2014 and then to December 5, 2014, to allow additional time for shareholders to vote on the Merger. Although the shares that were voted in these previous attempts to conduct the special meeting were voted overwhelmingly in favor of the Merger, not enough shares were voted to achieve the two-thirds of the outstanding shares vote requirement. Accordingly, on November 4, 2014, Gyrodyne announced a further postponement of the special meeting until the first half of 2015. Given the small size of holdings of many Gyrodyne shareholders and the nature of various holders, we believe many holders may not have paid enough attention to the Merger to exercise their right to vote. The board believes, however, that shareholders who would exercise their subscription rights in the rights offering may be more interested in the current structure of Gyrodyne and thus more likely to vote their shares on the Merger proposal."

I believe the shareholder who didn't bother to vote, will not bother to participate in the offering and will be diluted. This could be a chance to get back in at lower prices. The "Strategic alternative costs" for Gyro over the past years and continuing are a little high for my taste.

KWG Komunale Wohnen
 
Deutsche Wohnen announced a takeover offer for €11.50 per Conwert share. Conwert is KWG's parent company, which means KWG is now implicit in play. I have increased my KWG position directly after the announcement in February and it is now trading higher. The majority of the portfolio of KWG should be considered non-core by Deutsche Wohnen.

Glentel

Glentel is trading lower than my purchase price. With BCE trading for 53.32 this offers upside of about 12%, which I think is attractive. I have increased my position a little bit.

		glentel
50% cash	26.5	13.25
50% BCE	0.4974	13.26	53.32
	implied value bid	26.51
	price glentel	23.67	100% cash
	discount	-10.72%	-10.68%
	upside	12.00%	11.96%

Weight Watchers

The purchase of weight watchers was a mistake. I did not understand the falling price on no news and thought either the price in December was too high or the price now (at purchase) too low. The high percentage of float shorted was another interesting piece. The enterprise value is dominated by debt and the business trend is downwards. Any change in the fundamentals will have a huge impact on the share price. The actual numbers were bad and management ignorant of the problems. I will hold the company for now to keep it on my radar, but I don't really think this will be a full position anytime soon with this management team.

Update KWG / bought Flughafen Wien / Macro Enterprises

KWG

After selling most some of my other real estate holdings (IMW,Sirius), the first idea is of course to increase positions, which have not performed according to my expectations.

The LTV is still in the green:

	31.12.2013	30.06.2014
Borrowings	235,475	229,977
Financial Liabilities	4,248	3,440
minority interest book	5,879	6,038
accrued taxes	166	312
1/2 pension liabilites	832	849.5
heating equipment PV	812	812
Cash/Marketable Securities	(7,043)	(6,427)
Financial Assets	(996)	(852)
sum	239,373	234,150
Current/Non-Current/Property	424,476	421,133
LTV	56.39%	55.60%

The problem with KWG is the low FFO cashflow:

	H1/2013 restated	H1/2014	normalized	annualized	2015*
Vermietungserlöse	22,513	22,156	22,156	44,312	46,158
Veräußerungserlöse aus zum Verkauf gehaltenen Immobilien		2,621		0
Veräußerungserlöse aus als Finanzinvestitionen gehaltenen Immobilien	9,186	5,383		0
Umsatzerlöse	31,698	30,160	22,156	44,312	46,158
Immobilienaufwendungen	-9,925	-10,375	-10,375	-20,750	-20,750
Aufwendungen aus dem Abgang von zum Verkauf gehaltenen Immobilien		-1,326		0
Aufwendungen aus dem Abgang von als Finanzinvestitionen gehaltenen Immobilien	-9,225	-5,326		0
sum	12,548	13,133	11,781	23,562	25,408
Gewinne aus der Anpassung des beizulegenden Zeitwertes	8,896			0
Abschreibungen und übrige außerplanmäßige Wertminderungen	-105	-66		0
Sonstige betriebliche Erträge	750	435		0
Personalaufwendungen	-1,527	-1,818	-1,818	-3,636	-3,636
Sonstige betriebliche Aufwendungen	-2,355	-3,339	-2,447	-4,894	-4,894
Betriebsergebnis (EBIT)	18,206	8,345	7,516	15,032	16,878
Finanzerträge				0
Finanzaufwendungen	-5,337	-4,967		0
Finanzergebnis	-5,335	-4,959	-4,959	-9,918	-9918
Ergebnis vor Ertragsteuern (EBT)	12,872	3,386	2,557	5,114	6,960
Ertragsteuern	-2,337	-579	-405	-809	-1,101
Konzernergebnis nach Ertragsteuern	10,535	2,807	2,152	4,305	5,859
davon entfallen auf Anteile ohne Beherrschung	479	189	189	378	394
davon entfallen auf Anteilseigner des Mutterunternehmens	10,056	2,618	1,963	3,927	5,464
EPS in € / normalized FFO	0.62	0.16	0.12	0.25	0.34
number shares	15,881,234	15,881,234	15,881,234	15,881,234	15,881,234

After looking at the new numbers, one can expect an FFO of 0.34 per share for 2015. This would justify a price of 6.80 at a yield of 5%. For 2015, I expect rents to increase 2% and 60*12+20*12 increase in cold rents due to renovation projects. I think an increase of 2% is prudent:
"As of 30 September 2014 the vacancy rate of the KWG portfolio improved by 10.4% to 12.9% (30/09/2013: 14.4%). At the same time, average portfolio rents rose slightly from €5.00/sqm/m to €5.10/sqm/m."
After finishing renovations vacancy will drop further, which is party included in the expected new lettings.

source H1/2014 report

Conclusion
Properties are valued at 421 and net cold rent is ~ 31 mio, which implies a yield of 7.4%. The book value is 10.80/share. But as long as recurring cash flows do not improve the share price will not rise sustainably. Compared with my investment in IMW (purchased at 2.5-3.3 and sold between 7-9.20), KWG was a drag on performance YTD. I will hold on to my position. Maybe some cost savings materialize as the company moved headquarters to Berlin nearer to its parant company, although I have modeled none.

Flughafen Wien is a short-term speculative bet on a tender offer not being accepted by too many shareholders. You can read a write-up at one of my favourite blogs.

Macro Enterprises has announced a buy-back today. You can read more at their website, red corner blog or Corner of Berkshire.  Macro is a Canadian construction company in the ressource industry. I hope not to be too early as with Sberbank, but believe Macro's balance sheet will shield the company from an outright bancruptcy in 2015 and the company is worth multiples of the current price if the situation improves. It is no compounder, but more a kind of an option like Sberbank but less risky. The position is about 2.5%, but this can change quickly.