Special situation: Liquidation of KANAM Grundinvest fund (ISIN DE0006791809)
Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
Background:
This investment is not an original idea, but rather a “me too” investment. Ben from Wertart has a very good write up from November last year, so I spare myself to go into too much historic description.
Just the short version: Kanam Grundinvest is one of several formerly open real estate funds in Germany which have been put into liquidation. The major difference to almost all other funds is that in the Kanam case investors actually didn’t lose any money over the lifetime of the fund as the real estate seems to have been relatively high quality. As of December 31st 2016, the fund has sold 95% of its real estate and is now effectively a cash box with some remaining real estate exposure.
So let’s focus on what has changed since Ben wrote his post:
- the large Belgian property (18% of the portfolio) has been sold and the NAV has increased to 19,43 EUR /share
- A final “liquidation report” has been published beginning of April
This is how the situation should look like including the latest developments:
| Other Assets | Cash | |
|---|---|---|
| Remaining real estate | 183,8 | |
| – direct cash as of 12/2016 | 717,4 | |
| – Cash from sale of Belgium | 190 | |
| – cash from participations | 175 | |
| ext Receivables | 287,5 | |
| Total Assets | 1.553,7 | 1082,4 |
| – liabilities | -52,3 | |
| – Provisions | -114,4 | |
| Total liabilities | -166,7 | |
| Per share | ||
| Net assets | 1.387,0 | |
| Per share: | ||
| Number of shares | 71,6 | |
| NAV per share | 19,4 | |
| Thereof cash | 15,1 | |
| Thereof Real estate | 2,6 | |
| Therof receivables (tax) | 4,0 | |
| Thereof provisions | -1,6 | |
| Current value | 16,7 | |
| Upside | 2,7 | |
| in % | 16,3% |
So at 16,70 EUR/unit, the theoretical upside is +16,3%.
Major risks:
The major risks are relatively easy to understand:
- the remaining real estate could be worth less than stated (or cost more to sell)
- some of the tax receivables might not be fully recovered
- there are usually some vendor guarantees outstanding for sold real estate
- the timing of the cash flows is unclear
- costs could eat up much of the discount
The biggest buffer against this are the provisions, which should cover anything related with regard to taxes and guarantees etc. For the real estate, I found Wertart’s assumption of just using 85% quite reasonable.
With regard to cashflow timing, one can now make many assumptions. What we know is that they plan to distribute a “significant amount” in the second quarter of 2017 and then have 5 years time to fully liquidate.
Potential returns
Assuming roughly Wertart’s cashflow distribution I would end up with the following cash flow profile and IRR:
| Wertart | % | -16,65 |
|---|---|---|
| 2017 | 53% | 10 |
| 2018 | 12% | 2,25 |
| 2019 | 12% | 2,25 |
| 2020 | 12% | 2,25 |
| 2021 | 12% | 2,25 |
| IRR | 6,4% |
A worst case could be that they pay out only 40% of NAV in Q2 and all the rest after 5 years, which would look like this:
| “Worst Case” | % | -16,65 |
|---|---|---|
| 2017 | 40% | 7,59 |
| 2018 | 0% | 0,00 |
| 2019 | 0% | 0,00 |
| 2020 | 0% | 0,00 |
| 2021 | 60% | 11,39 |
| IRR | 4,0% |
A “good case”, where they can sell the real estate at 100% would look like this:
| “Best case Case” | % | -16,65 |
|---|---|---|
| 2017 | 53% | 10,30 |
| 2018 | 12% | 2,33 |
| 2019 | 12% | 2,33 |
| 2020 | 12% | 2,33 |
| 2021 | 12% | 2,33 |
| IRR | 8,1% |
Is this attractive ?
With a range of 4-8% p.a. and a relatively short duration (~50% of the investment might come back within a few months), it looks to me very attractive on a risk adjusted basis.
I can park money at returns where I would need to go deeply into junk territory in the bond market.
Depending on where the spread to NAV develops after the next distribution, it could be that one could realize a nice short-term IRR by selling the remainder.
Why does this opportunity exist ?
In the current zero rate environment, the question is of course: What do I know what others don’t know or why does this look so inefficient ? Of course, I could be totally wrong and it could turn out that the NAV is still vastly overstated. I think the more likely explanation is the following:
The distributions are treated as return of capital until the very end. So as an investor, you cannot show “income” on the distribution, only a realized gain at the end. For many big investors (Insurance, Pension funds etc.), income however is the most important KPI they are looking at. So buying a 0% income investment in the form of a stock/fund does not look attractive for them. Also, many standard investment mandates will most likely not allow to invest in these kind of securities (listed real estate funds in liquidation). Pure real estate mandates will not like it because it doesn’t have enough real estate exposure.
A lot of investors in Germany have been burned by these investments as the entered to early and into the wrong vehicles, because in the past NAVs had been massively overstated.
So I think these kind of vehicles this days are to a certain kind “orphan” securities.
Summary:
The KANAM Grundinvest in my opinion is a relatively boring but interesting liquidation situation which decent potential returns and relatively little downside.
I therefore invest the remaining cash portion (~3,5%) into the KANAM fund at an assumed price of around 16,70 EUR/share. At that level, the fund would also be my default “reinvestment vehicle” for the dividend season in the absence of better ideas.
value and opportunity 
3,01 EUR /unit distribution a few days ago,
Got a strange offer via my broker today. OSK IT Beteiligungs GmbH offers 5,05 EUR/share by Sep 15th. Any thoughts on this? No idea how they derive their price.
Just ignore it. There are some people who try to take advantage of naive invostors.
I reinvested the payback at around 13,75 EUR/unit
I kinda doubt another distribution this year, but read between the lines yourself:
Click to access fondsnewsletter_MMWarburg_120617.pdf
Much lower than expected distribution + a very detailed paragraph on the outstanding risks even at this stage of the liquidation is enough for me to take – I have sold out today.
I agree that the comment is pretty much 100% “Cover my ass” language. The timing of the cashflows from the fund will clearly be slower than I assumed.
However, at the moment I do not have that many other brilliant ideas, so the opportunity cost for this investment is what I would get for cash which is zero or even below zero. So I stay invested until I find somethin better 😉
I would be cautious in using cash as the opportunity cost here, as the Kanam investment is illiquid (though not very risky). While in a market crash cash can be readily deployed for investing in beaten up stocks, the Kanam investment may be subject to an illiquidity discount itself (aka decline in price as well).
I could alos compare it with arisky corporate bond and the comparison would still be very favourable.
Normally I would agree with this. But I have so many cashflows coming in the next 12 months (Actelion, Stada, Sapec,Gagfah) and no really good ideas that I think the best proxy is cash.
I disagree with the illiquidity though. At least my position size woul be easily sellable and today’s price reaction was quite mild.
Liquidity is clearly a multi-faced animal! 🙂 What I meant with with illiquidity is not “trading” liquidity (eg market depth, how easy it is to sell a certain position) but that when the market crashes the price of Kanam may decline as well (even though, perversily, Kanam holds mostly cash). Holding cash directly is quite different from holding an asset that is a claim to mostly cash. Agree with your point on corporate bonds though!!!
Kanam has now published the amount for the next distribution, 3 Euros only. Do you think there will be another meaningful distribution this year?
Thanks for the upüdate. Haven’t thought bout this deeply yet….
Nächste Ausschüttung am 22. Juni 2017 in Höhe von rund
215 Mio. EUR / 3 EUR je Anteil
Restportfolio mit vier kleineren Immobilien wird für Verkauf
vorbereitet
Mit dem Verkauf der Großimmobilie Square de Meeûs in Brüssel im Dezember 2016
und der im April 2017 erfolgten Übergabe an ein institutionelles Käuferkonsortium
wurde das Ziel vor der Übergabe an uns als Depotbank erfolgreich erreicht. Die Erlö-
se der Verkäufe Ende 2016 und die Rückerstattung der kanadischen Quellensteuer
aus dem Verkauf der kanadischen Fondsimmobilien ermöglichen nunmehr eine Ausschüttung
von rd. 215 Mio. EUR / 3 EUR je Anteil am 22. Juni 2017.
Fondsnewsletter KanAm grundinvest Fonds
As a cash proxy I am more fond of the Black Earth Farming merger arb that Alpha Vulture found:
https://alphavulture.com/2017/04/13/black-earth-farming-merger-arbitrage/
IRR is much much much higher since the timeframe is short and I think the likelihood of it going through is higher.
Deine Rendite-Ansprüche gehen aber auch immer mehr zurück 😀 Leider sind die ganzen Immo-Fonds recht illiquide.
Die Prokon-Anleihe könnte vllt. noch was für deine Art des Anlegens sein. Bei einem weiteren Absturz durch die Special Situation (90 mio. Anleihen-Zwangsverkauf bis Mitte Juni) könnte da ein nettes Chance/Risiko-Profil (das m.E. jetzt schon da ist) entstehen.
“Deine Rendite-Ansprüche gehen aber auch immer mehr zurück”.
Oder meine Risikoneigung geht zurück 😉
Dann solltest an deinen Namen denken und auf “opportunities” warten. Die kommen immer. Die kommen eigentlich immer siehe Diesel-Gate, Öl-Absturz, Russland/Ukraine … Eigentlich jedes Jahr was dabei.
Bei Prokon ist ja der Spaß, dass die Rendite von 9% p.a. mit Windparks abgesichert ist. Und die Special Situation, dass man durch eine Schwachsinns-Regelung 90 mio. verkaufen muss. Dazu ein GB mit einer Abschreibung, die schon lange fällig war, offen steht und dummerweise 2016 auch noch ein schlechtes Windjahr (-16%) war, das nach der Gewinnwarnung von Anfang November erst recht schlecht wurde. Dazu ist dich Nachfrage nach den Anleihen überschaubar. Schlechte News könnten einen irrationalen Kurs (hinsichtlich der Absicherung) bringen. Genauso könnte der Kurs von Leuten gedrückt werden, die an die 90 mio möglichst günstig wollen.
Don’t know if you are aware of this board which discusses dissolution of open-ended German real estate funds: http://oifonds.xobor.de/
thanks. Didn’t know that one either..
some fans of yours are very much committed there. One of them is me. Btw: Agree to your analysis. I love boring investments and cannot get enough of them…
The Kanam is interesting, but the Degi Europe is even better as a cash equivalent. It has no properties left and the upside is 20%. About 50% of the NAV should be paid out in 2017.
Good explanation for why this opportunity may exist.
thanks for the comment. I do not like DEGI. WHy ? Because it was a shitty managed fund. One should make sure that they have correctly provisioned against tax and other issues. Otherwise the NAV can be eaten up by all kind of extra charges.
I trust the Kanam guys much more.
We were invested in CS Euroreal (but not anymore), another vehicle in liquidation, which trades at a higher discount but has more real estate assets left. I recently looked at their final report before it is turned to the administrator.
The main two problems I see is that they 1) estimate the last distribution 10 years after the last property sale. Hence, when they sell the last one in 2 years, I may wait 12 years for the last chunk of my money (that most likely kills my initial IRR).
2) I do not know the incentive structure of the administrator, but prior they were renumerated as a % of net assets. Hence, no incentive to quickly distribute cash. They will always keep too large of a cash buffer earning no interest, again killing the IRR.
However, it can work out nicely, if you can reinvest the dividends at large discounts (they should remain tradeble), but who knows?
There is a lot of interesting information about formerly open real estate funds on the pages of CS Realwert AG. (german only)
Link: http://csrealwerte.de/neuigkeiten/
Interestingly, the largest position of CS Realwert AG is also the KANAM Grundinvest.
thanks for the link !
I guess from the 3 scenarios that you would only want you would only want to hold it until the end of 2017, since the cost of carry outweighs the minimal returns of the subsequent years?
Issue with this one is the non-existent margin of safety at the levels it is trading at. Your modelling (even at the worst case level) assumes a front-loaded payout, where the majority of cash and tax receivables are handed out this year (retaining real assets for the subsequent years).
Tight. Very tight. US REITs pay more and you will most likely make money on the FX as well…
Thanks for the points. A few answers:
– I think a comparison with a REIT makes absolutely no sense as there is hardly any real estate exposure left.
– Also I think you haven’t actually looked at my calculations. The front loaded payout I assume is even in the most aggresive case only ~70% of currently available cash. It does not assume payout of any receivables etc. and leaves 350 mn EUR liquidity even in the best case.
– your comment is actually proof that most investors don’t seem to understand this investment
Finally, my “cost of carry” in this case are actually zero as for me this is more or less a cash/bond proxy. The margin of saftey in my opinion is very high. But of cours and as always I could be totally wrong.
Can’t argue with that! You seem to understand this investment well, or at least you think you are.
Yes, I think I understand it to a certain extent. Clearly I might miss something (big).
I have invested into similar vehicles in 2011 (https://valueandopportunity.com/?s=degi), but that was clearly too early back then. So my track record here is cleary “spotty”.
Thanks for writing this up. Was wondering what you thought was the reason that “in the past NAVs had been massively overstated” in German real estate fund liquidations and why you are comfortable enough with NAV assessments today?
Good question. Of course I could be wrong but I think the Kanam NAV should be realistic due to:
– only very small real estate exposure left
– track record (sales proceeds vs. stated values) is good
– “buffer” in the form of provisions
mmi