QFDI - Fondo Delta

[writser]

Another idea, mostly for PA's.

 

In Italy quite a few REIF's (real estate investment funds) are listed. A few bloggers have been writing about them the past few years, most notably WertArtCapital and AlphaVulture. Basically, these funds raised money during the boom years (early 2000's), mostly from retail investors. Of course the Italian real estate market blew up during the great financial crisis and the euro crisis. Fast forward to 2017 and the general picture for these funds is: low liquidity, years of losses, off-the-radar (annual reports only in Italian), marginal management and a discouraged investor base. All these funds have a fixed maturity and a lot of them are expiring in this decade. Result: forced selling of real estate and investors get shafted even more. QFDI had an expiry date of December 31, 2014.  Most of these funds have the possibility to ask the Bank of Italy for a 'grace period' to get some more time to wind down. QFDI did so and entered a three-year grace period ending this year. So, they're supposed to wind down in a few months. I'm skeptical they will succeed with that but they can probably apply for a second grace period.

 

Now, the upside. Last year, no less than three vulture investors launched tender offers for QFDI (sloppy translation from AR follows):

 

• GSF has promoted public offer to buy the 60% of the Delta Fund quotas to a post recovery value of 58 euro per share plus a variable fee calculated on amounts in excess of 75 Euros. On July 1, 2016, the asset management company's Board of Directors considered the price not appropriate for the recipients of the offer;

 

• Navona has promoted a takeover bid on 60% of the units of the Delta Fund to a value of EUR 56 per share plus a variable fee calculated on amounts exceeding 75 Euros. On July 21, 2016, the Board of Directors of SGR held the consideration not appropriate for the recipients of the offer;

 

• Mars has promoted a public offer of shares issued by the Fund to a Delta basic fee of 65 euro for each share. On July 28, 2016, the Board of Directors of SGR held the consideration is not appropriate for the recipients of the offer.

 

On 29 September 2016, given the acceptance of the Offer Mars n. 403 946 shares, corresponding to 19.19% some of the units issued by the Fund, Mars communicated to waive the condition precedent relating to the Offer Mars that the Warning A.1.1 (a) of the Offer Document Mars. Therefore, on 30 September 2016, Mars has taken steps to pay those accepting the Offer the amount due for each share tendered, for the simultaneous transfer of ownership of the shares.

 

So, in the end only ~20% of shares were tendered. Maybe the retail base simply didn't now how to tender. Maybe they are very sophisticated and thought the offer was too low. Who knows .. The CVR's indicate that some of these funds did see quite a bit of upside in a liquidation scenario.

 

As of their most recent annual report the QFDI balance sheet is:

 

+ 193m in real estate

+ 7m in other assets

- 5m in liabilities.

 

With 2.1m shares outstanding. No leverage. Income statement is not that important as they are in liquidation, but they managed to make a profit in 2016 despite 7m in writedowns and only a small loss in 2015 despite 10m in writedowns. Quite nice actually.

 

This year, QFDI accepted an irrevocable bid of 105.25m for 110m of their portfolio. A final contract is expected to be signed in October. Since they are in liquidation this amount will be paid out to shareholders, probably late this year or (more likely) early 2018.  The bid is exactly E50 per share, seems like a nice amount to pay out to shareholders. Taxes should not be an issue as this is just a return of capital.

 

So, you can buy today for E70, I expect an E50 dividend within a year and you are left with ~E40 of real estate per share. Yes, this real estate probably deserves a haircut but there is quite a margin of safety, appraisals are done by third parties, they have been vigorously writing down assets the past few years and the bid for the other real estate was only at a ~5% discount to book value (though the bidders probably cherry-picked the best assets). I'm personally assuming I can sell the stub at a ~25% discount to NAV next year (roughly in line with where it has been trading the past months) implying a 20%+ IRR.

 

My confidence level in this trade is not extremely high because I am not Italian, have a hard time understanding the Italian reports and this is all mostly armchair research (I haven't seen their actual properties). However, I think Italian REIF's are a pocket of the market where some inefficiencies are likely to appear, as was demonstrated by the sudden interest of vulture investors in multiple Italian REIF's last year and the subsequent price action. I think the best approach is to buy a basket and I'm also long: QFAL, QFARE, QFARI, QFATL2, QFID, QFIMM, QFSEC, QFSOC, QFUNO, QFVIG.

 

In this specific case I think the market underreacted to the QFDI news and bought more shares.

[constala]

Excellent hunting ground indeed... QFATL1 is the bomb. Massive  NOI/FCF so NAV accretive. Very big discount. Prime tenants (ENI, Carrefour. Mac Donald) . Some trophy assets. Trades at 220, NAV 511, and Blackstone bought 40% at 335. How did you miss that one?!

 

[writser]

I took a very conservative (lazy?) approach and discarded QFATL1 quickly because of their leverage. I was mostly looking for stuff with a huge margin of safety. Also, they're in their second grace period already if I am correct and they still have a very large portfolio and didn't seem close to liquidation. At least, those were my notes from the start of this year. Maybe I should take another look, thanks! Do you only own that one?

[constala]

Still own QFSOC, QFAL; both excellent and diverse profiles I believe. I sold the others I had (QFEI, QFDI, QFVIG,QPOL) after a good ride.

[writser]

Good news today: QFDI has received a E60M bid for their three hotels (link), an ~18% discount to book value as of the latest annual. They have now received bids for almost all their real estate for a total amount of E165m. That money should be returned to shareholders tax-free (again, just a return of capital). They only have one office building left on their balance sheet at E8m, cash and receivables of ~E13m and liabilities of E5.5M. They will have some liquidation costs but will still receive rental income for a few months so I'd say net asset value is a pretty good estimation of liquidation value. Should be around ~E85 / share.

 

The bad thing is: shares are up significantly today. Now trading around E81 for an estimated remaining upside of ~5%. Moderately attractive depending on how fast you think the liquidation will be completed. I sold some of the shares I bought a few months ago but still have a position.

[writser]

Last building sold per 11/30 at E6.5m (link). Nav should be around E85.

 

With this sale the fund completed the disposal of the entire portfolio. Considering that the fund will receive part of the rentals this semester, the final value of the units, except for the facts currently not disclosed, will be around the value at 30 June 2017.

 

Not sure what they mean with the bolded part, my Italian is not that good. I'm assuming it is boilerplate language, not aware of any hair.

[writser]

Excellent hunting ground indeed... QFATL1 is the bomb. Massive  NOI/FCF so NAV accretive. Very big discount. Prime tenants (ENI, Carrefour. Mac Donald) . Some trophy assets. Trades at 220, NAV 511, and Blackstone bought 40% at 335. How did you miss that one?!

 

Writeup on VIC (yours?): https://www.valueinvestorsclub.com/idea/Atlantic_1/141022

[writser]

I have been buying more QFDI over the past few weeks. Price has been dropping while time to liquidation has shortened. No significant news afaik. Currently expecting a ~5% return in a few months.

[writser]

Last building sold per 11/30 at E6.5m (link). Nav should be around E85.

 

Announcement today: liquidation of 85.18 / share, payment date 29 December. Amount in line with my expectations but payout is way faster than I expected. Shares up ~5% today. I've been buying even more after discussing this with a fellow forum member - thanks for that. Was a ~6% position or something.

[writser]

Back from vacation, spent a fun morning plowing through a few semi-annual reports from Italian real estate funds. I still believe these are good hunting grounds. I was lucky enough to own a decent position in QFATL2 which went up ~30% up last week or so after they sold their last building at a small premium to book (fwiw I think it is still trading at a ~14% discount to net cash even though it should liquidate within a year). Just to show these things are priced for disaster.

 

QFAL is now trading at a mcap of ~150m, has a pro forma net cash position of ~65m and 200m in real estate. Shares are trading slightly above the price Elliott launched a tender offer in 2016 even though real estate has been doing good in Italy and the balance sheet has de-risked. QFID is in a similar situation.

 

A basket of these funds with the highest MoS is still one of my largest positions and I expect it to perform well. As a fellow forum member pointed out: one of the risks is that these funds have been slowly liquidating over the past few years as their end-date comes closer, so it might be the case that they already sold all their marketable assets and are left with the bad ones. That's one of the reasons I keep this portfolio mostly in run-down mode. However, occasionally one of these funds sells a pile of assets and then it looks so cheap / risk-free on a pro-forma basis that I can't resist buying a few shares.

 

Curious if anybody else has some thoughts about this area.

[writser]

I know nobody is interested in this but a lot of these funds have released financials the past few weeks. I continue to like this space. Totally hated asset group and a history of horrible capital allocation / management. On the flip side, most of these funds are currently debt-free, have conservative balance sheets and are in liquidation mode. Some vulture activists are skulking around here too.

 

I bought a small position in QFUNO last week. E137m in real estate on the balance sheet, E154m in shareholder equity, almost no liabilities. The fund is in a 'grace period' and wants to wind down in 2019/2020. By far their biggest asset is a building under renovation in Rome, Via Boncompagni 71. Supposedly it will turn into something super nice (https://www.designboom.com/architecture/mad-architects-71-via-boncompagni-rome-12-11-2014/) but you know, it's Italy. The building was written down from E119m in 2016 to E104m as of today. Still, the location looks prime to me. A quote from the QFUNO 2018 annual report (Google Translated):

 

During the second half of 2018 have not successfully completed negotiations with an institutional investor initiated

at the beginning of the year. Therefore, the Company has determined to turn a new competitive procedure using the Advisor Vitale

& Co., as announced on December 28, 2018 to the market.

 

Received offers the SGR took note that some of the invited investors, in addition to presenting an offer on the property in

Boncompagni have expressed interest in acquiring all or part of the remaining assets of the fund; consequently the SGR

required of all participants in the process, to improve the offer price on Boncompagni and also examine the opportunity to

make an offer with reference to the remaining assets of the Fund.

Such offers were received on 21 February 2019 and the same are under evaluation by the SGR to identify

a shortlist of bidders and the best sales strategy.

 

So talks regarding the trophy asset broke down last year, the building was written down another E10m and a new sale procedure was started. Now it looks like there are multiple bidders and the fund received offers a few weeks ago. As far as I understand this is good news and 'new news' but shares hardly moved. In my limited experience, it's often good to be pessimistic with these funds but sometimes the market is even more pessimistic. I think this is such a case. The market cap of QFUNO is currently ~E120m. By my simplistic calculations the market is pricing in a ~E35m or ~25% haircut on the real estate and given the news above I'm willing to bet that that's a bit too pessimistic. We'll see what happens in a few weeks I hope.

 

QFAL still looks dirt cheap to me, basically the previous post in this topic still holds. Same for QFID (was also targetted by vulture investors in 2016) and QFARI (where an activist bought a 30% stake last year). I also own small stakes in QFARE, QFPOL and QFSOC. A bit of a basket approach. In general I think there is some value in this space but my conviction in individual names is low. As these funds are winding down you are betting on very small real estate portfolios so variance could be high for single funds.

 

As somebody in this topic pointed out QFATL might also be very interesting, however I'm a bit scared by their leverage in combination with the fact that they intend to liquidate this year (forced sales + leverage .. ). Still, they have 3-4 trophy assets with prime tenants that should be relatively safe so I might be too conservative here.

[Foreign Tuffett]

I'm not an expert on US tax law -- and this is not tax advice, but I think Italian closed end real estate funds

would fall under the passive foreign investment company (PFIC) label. That makes them tough for individual investors in the US to own in taxable accounts.

 

 

[Spekulatius]

Looks like an interesting playground to put some IRA money in. The discounts are large enough that even when a lot of things go wrong, one should do alright. I will look at some of these buggers and probably buy a basket opportunistically.

[Guest MarkS]

Looks like an interesting playground to put some IRA money in. The discounts are large enough that even when a lot of things go wrong, one should do alright. I will look at some of these buggers and probably buy a basket opportunistically.

 

I'm also not.a tax expert and not offering advice.  If it trades over the counter you can buy a foreign stock with assets in an IIRA.  I don't believe you're allowed to buy foreign shares on a foreign exchange.with proceeds from an IRA.

[Spekulatius]

Looks like an interesting playground to put some IRA money in. The discounts are large enough that even when a lot of things go wrong, one should do alright. I will look at some of these buggers and probably buy a basket opportunistically.

 

I'm also not.a tax expert and not offering advice.  If it trades over the counter you can buy a foreign stock with assets in an IIRA.  I don't believe you're allowed to buy foreign shares on a foreign exchange.with proceeds from an IRA.

 

I probably wasn’t clear. I just wanted to say that I am investing in an IRA.

[writser]

https://alphavulture.com/2019/03/11/another-update-on-my-basket-of-italian-real-estate-funds/

[writser]

QFUNO paid out a small E 37.5 dividend. Quote from press release from today (Google translated):

 

Torre SGR SpA, on behalf of the type real estate investment fund closed listed company called "Unicredito Immobiliare Uno" (the "Fund", ISIN: IT0001358479), at the end of the first phase of the competitive procedure for the disposal of the entire remaining portfolio of the Fund, select the three best offers non-binding.

 

Further negotiations with the three best non-binding offers for the whole portfolio. One can still buy the real estate at a ~20% - 25% discount to the latest appraisal. Caveat emptor.

[writser]

QFUNO is now trading at ~E761 and paid out a E37.5 dividend. ~9% return since the tidbit in the annual report. Discount to appraisal values is now <20%. Tempted to sell a bit but I'm probably going to sit this one out.

 

QFARE, Amundi Real Estate Europa, announced the past few weeks that they signed agreements to sell a large part of their portfolio, assets in Paris and Berlin, both at a significant premium to appraisal values. Pro forma the balance sheet looks something like: no long-term debt, E89m in real estate and E59m in cash and other current assets. Current market cap is ~E98M. Note that, even though this fund is named 'Amundi real estate Europe' and there is another fund 'Amundi real estate Italy', current assets are roughly 90% Italian real estate .. The rest was easier to sell I guess. The fund is looking, according to the annual report, at a possible block sale of their Italian assets. Probably at a steep haircut.

 

Even though shares are up ~15% since the announcements I think the market is underestimating the impact of these transactions. Assuming a large distribution in a few months you are buying the remaining real estate at a 50%+ discount. I bought back a few shares.

 

 

[writser]

QFPOL signed a preliminary contract for the sale of their main property, Viale Aldo Moro 21 at only a slight discount to the latest appraised value. Pro forma situation: ~22m real estate, ~28m in cash and receivables. Mcap ~37m. You pay effectively ~9m for the three properties left, roughly a 55%-60% discount at the current price.

 

The fund has been steadily selling properties and distributing proceeds and should be able to liquidate within a year or so and will probably distribute  another 200e / share if the above deal closes.

 

Obviously there are some risks but I think it's too cheap at current prices. I bought some more this morning and it wouldn't surprise me if it trades higher over the next few days.

 

I thought my Italian real estate portfolio was more or less in run-off mode but some of these names trade at what I think are attractive levels in their final stages so I've been accumulating more instead this year. We'll see how it turns out, the risk is that I buy the last crap that these funds couldn't get rid of over the past few years and that a huge discount is warranted. But so far these positions have been performing better than how the market judges them, and my positions are small and diversified anyway.

[Spekulatius]

QFPOL signed a preliminary contract for the sale of their main property, Viale Aldo Moro 21 at only a slight discount to the latest appraised value. Pro forma situation: ~22m real estate, ~28m in cash and receivables. Mcap ~37m. You pay effectively ~9m for the three properties left, roughly a 55%-60% discount at the current price.

 

The fund has been steadily selling properties and distributing proceeds and should be able to liquidate within a year or so and will probably distribute  another 200e / share if the above deal closes.

 

Obviously there are some risks but I think it's too cheap at current prices. I bought some more this morning and it wouldn't surprise me if it trades higher over the next few days.

 

I thought my Italian real estate portfolio was more or less in run-off mode but some of these names trade at what I think are attractive levels in their final stages so I've been accumulating more instead this year. We'll see how it turns out, the risk is that I buy the last crap that these funds couldn't get rid of over the past few years and that a huge discount is warranted. But so far these positions have been performing better than how the market judges them, and my positions are small and diversified anyway.

 

Thanks for your continued posts. I have purchased one of these companies recently (QFSOC) and so far, so good.

[writser]

QFID: signed a preliminary contract to sell 'the two towers' for 83m; which would mean a liquidation of ~25% of their portfolio at a ~25% premium to NAV. Yet another fund looking very cheap on a pro-forma basis. Assuming all sales work out there's ~200m in real estate and ~82m in net current assets. Market cap ~154m, implying a ~64% haircut on the remaining real estate.

 

Had a position already, tempted to buy more. But I'm getting to a point where I don't necessarily need more gross exposure to Italian real estate funds.

[writser]

QFAL:

 

https://www.fondiimmobiliarichiusi.it/sito/fondo-alpha-accetta-offerta-di-acquista-a-roma/

https://www.fondiimmobiliarichiusi.it/sito/fondo-alpha-rimborsa-510-euro/

 

Nice quote from the second press release (google translate):

 

Today is a very positive day for the fund. After the pro-quota repayment, in fact, the news arrives that the Board of Directors of DeA Capital Real Estate SGR has accepted an irrevocable proposal to purchase the property located in Rome, Via Casilina, 1/3.

 

Gotta pat yourself on the back sometimes. Anyway, another significant sale above NAV and a E510 / share return of capital. Pro forma the fund is debt-free and the rest of the real estate portfolio is still trading at a ~50% discount to NAV.

[Hielko]

That's not from the official press release: http://www.fondoalpha.it/it/comunicati-stampa/fondo-alpha-accetta-una-proposta-di-acquisto-per-l-immobile-di-via-casilina-1-3-a-roma.html But yes, certainly a positive day for the fund! I like the current trend of sales above NAV :)

[writser]

QFPOL signed a preliminary contract for the sale of their main property, Viale Aldo Moro 21 at only a slight discount to the latest appraised value. Pro forma situation: ~22m real estate, ~28m in cash and receivables. Mcap ~37m. You pay effectively ~9m for the three properties left, roughly a 55%-60% discount at the current price.

 

The fund has been steadily selling properties and distributing proceeds and should be able to liquidate within a year or so and will probably distribute  another 200e / share if the above deal closes.

 

Obviously there are some risks but I think it's too cheap at current prices. I bought some more this morning and it wouldn't surprise me if it trades higher over the next few days.

 

I thought my Italian real estate portfolio was more or less in run-off mode but some of these names trade at what I think are attractive levels in their final stages so I've been accumulating more instead this year. We'll see how it turns out, the risk is that I buy the last crap that these funds couldn't get rid of over the past few years and that a huge discount is warranted. But so far these positions have been performing better than how the market judges them, and my positions are small and diversified anyway.

 

new update in my diary. QFPOL sold another building at a 10% discount to the latest appraisal (link). Two buildings left that are on the books for ~15m. Market is pricing the stub at ~6m. Still looks cheap despite a very modest run-up.

[writser]

QFUNO is now trading at ~E761 and paid out a E37.5 dividend. ~9% return since the tidbit in the annual report. Discount to appraisal values is now <20%. Tempted to sell a bit but I'm probably going to sit this one out.

 

QFUNO finally auctioned off their whole portfolio (link). All the real estate is gone for E117m. with the sale of their trophy asset planned before August 2019 and the rest before July 2020. It is unclear to me if an equity stake on the balance sheet is included in the deal but that one is small anyway. Discount to book appears to be around 10%.

 

What does this thing look like pro forma? Approximately ~125m in net cash and receivables and ~7m in equity stakes, of which one worth 2m is or is not sold. The other 5m equity stake is in a cash box that does seem to have some problems with the Italian tax authorities. Total value approximately 130m. I expect the proceeds from the trophy asset sale to be distributed shortly, in August or September. The company will probably incur some liquidation costs but the portfolio should still generate some rental income. Fair value should be around E800 / share, of which I expect ~E550 to be distributed shortly and the rest in 2020. That makes for an expected IRR in the low teens. I sold the majority of my position. A low double digit IRR with no more upside isn't exactly what I'm looking for in this space and there are still some risks (deal risk, tax dispute, etc).

 

All in all the deal more or less worked out as expected. Incompetent management selling real estate at a discount to book but the market hates these funds and was pricing in an even bigger discount. ~11% return in 4 months.