Special situation: Liquidation of KANAM Grundinvest fund (ISIN DE0006791809)
Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
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:
|Remaining real estate||183,8|
|– direct cash as of 12/2016||717,4|
|– Cash from sale of Belgium||190|
|– cash from participations||175|
|Number of shares||71,6|
|NAV per share||19,4|
|Thereof Real estate||2,6|
|Therof receivables (tax)||4,0|
So at 16,70 EUR/unit, the theoretical upside is +16,3%.
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.
Assuming roughly Wertart’s cashflow distribution I would end up with the following cash flow profile and IRR:
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:
A “good case”, where they can sell the real estate at 100% would look like this:
|“Best case Case”||%||-16,65|
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.
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.