The first broken thesis: RNY Property Trust
Hokey dokey, so, today ticked off two dubious ‘first-evers’ in investing for me:
- First time I held a company that fell 70% in a day.
- First time I held a company that fell 70%.
Not the kind of boxes you want to be ticking. RNY Property Trust (ASX: RNY) went tits up, slipped, and fell off a cliff. As for me, I slipped and fell off the bandwagon. The update on marketing efforts was pretty grim.
Just a re-heat of the original thesis, RNY is selling properties in order to pay off a loan called ACORE (there are some other properties and debt but ACORE is the main one). Leftover cash on top of the ACORE loan (if properties are worth more than the loan) is how shareholders make their money and prior to today I thought there was a good chance of getting substantially more than the 3.3 cents I paid for shares. However:
“The bids for the Long Island assets (6800 and 6900 Jericho Turnpike, and 55 Charles Lindbergh Blvd) and the Westchester assets (560 and 580 White Plains road) ranged from approximately 15%-50% below valuations.
If sales of these assets were conducted at the bid prices, net sales proceeds would be insufficient to pay the ACORE mortgage debt encumbering such assets.
…If the above-mentioned assets were sold at the high bid pricing, then projecting sales proceeds, the payment of debt, selling expenses, and other liabilities and expenses would result in an NTA per unit between A$0.01 and $0.03.”
Straight away, the thesis is broken. In my original valuations I considered these outcomes likely:
- 6800 Jericho – unknown but figured a 25% discount
- 6900 Jericho – considered firm, perhaps 10% discount
- 560 White Plains – considered 50% discount likely
- 580 White Plains – considered 20%-25% discount
- Charles Lindbergh – considered no discount, maybe even higher price due to re-sign of Lockheed and additional tenants
For the first four properties I considered these outcomes to be kind of lower down the probability scale, due to the signing of new tenants etc that had been happening. Yet the news that the high bid for Charles Lindbergh was at least 15% below December valuations effectively shattered my thesis, as this was the most valuable property by far.
What to do now?
In my view, since I have totally misjudged the state of the property markets/ values for these properties, to hold on from here would be sheer stubbornness on my part – I’ve already seen stark evidence that the thesis is broken, not just looking a little wonky.
The next question is, what to do now? We’ve been told that units are worth between $0.01 and $0.03 based on the remaining property values. Things certainly could get a lot better. However, with the thesis already broken, I think it would be foolish of me to continue holding.
There is a good case for holding, capitalisation rates are high and the properties obviously have value from a cash flow perspective. There are also the ISB properties to consider. I may take a few days to think over this and absorb some lessons, but at this point I believe I am exiting RNY in the near future.
What can I learn from this?
A few lessons jump out immediately.
- I may have overlooked one thing in my initial thesis – that local area buyers would be well aware of RNY’s trouble and be motivated to bid low.
- I should have suspected that maybe the correlation between property values in Long Island/Westchester would be pretty strong. I.e., if one requires a big discount to sell, they might all require a big discount (e.g. because property market is weak).
- Because of the correlation, the chance of success was lower than I previously predicted
- I assumed that the property market was rational (I know, I know). I looked at rental yields (among other things) and thought these properties were great value. However if the market thinks Long Island property is shit, yields won’t matter in the short term – but asset values matter, a lot, cos RNY has to pay its debts.
- Following on from the above point, there was effectively a mismatch in liabilities, which I did not weigh appropriately. I.e., debt came due sooner than the property values might have been realised, which means that this investment’s outcome was governed by debt not the net asset value of properties.
- Something I’ve commented on previously – there comes a point when extensive research does not improve your predictive ability. So I may have learned a little more about what types of outcome are really determinable by research (in hindsight this one may not have been).
- Look for less binary outcomes (there is no saviour with RNY such as a dividend or takeover/turnaround potential etc which may have compensated for an adverse event and made holding and not crystallising losses a viable choice)
- Thank God for position sizing (‘free lunch’)
Having to tell people you’re selling your shares sucks, especially with small microcaps. I was tempted to do a [redacted] and tell you when I buy my shares but brush it under the carpet/not notifying you when I sell – ah, but then I remembered that I’m not a cretin.
In the future I may consider selling the failed investments first and then writing about it later – I’m running this portfolio for my benefit, after all. However you have my word that I continue to strive for the highest standards of integrity, and I’ll make a decision on that in the near future.
Disclosure: I own shares in RNY Property Trust. This is a disclosure and not a recommendation. FYI, RNY is so small and such low liquidity that you won’t be notified before I sell it.