A tiny RE update and 3 quick special situation ideas
Wind power, real estate and dividends
A couple of readers have requested my current view of Swedish real estate. I will give a short summary but the preface is that I don’t really take views on sectors like that, or at least I don’t invest specifically on a sector view. The fact that I wrote so much on RE lately was largely coincidental. The sector was hot so a lot of things were happening — with hindsight that should have been the obvious sign for caution. But I’m attracted to consolidation theses and structural changes in companies, which there were a plethora of last year.
I exited most of my real estate plays at significant losses in the spring and early summer because the special situation dynamic had disappeared (Corem’s upcoming resi spinoff was worth way less, buyout of Entra was off the table for the time being). Additionally, increased borrowing costs, unsure medium-term liquidity cushions and possible impairments on the books melted away large parts of the margin of safety. The outlook has eased a bit since (notwithstanding the great rally this week), but it’s still unclear where, when or at what rates the refinancings will take place.
The demand for office space is looking increasingly challenged, at least for marginal locations. Cyclical woes may add to the still serious secular question marks raised by WFH. If I had to pick one play out of my previously discussed ones, it would be Entra because it trades at valuations similar to Swedish peers, is fully stacked with prime locations with relatively low rent levels, which still seem to transact at low yields, and is exposed to the fundamentally way stronger economy of Norway. It also has a remote outside possibility of a bid emerging from the exit of one of its Swedish owners and longer term is probably unlikely to stay in its current form. I sold it at a loss from late February to early May and re-entered with significantly smaller size mid-July.
My first current idea is also in RE but very small and illiquid. These consists of warrants (teckningsoptioner, TO1) in Tingsvalvet. Tingsvalvet is a former single-asset RE company, a structure which have proliferated on the Swedish exchanges in the last few years. This spring, it was injected with a bunch of other assets and it has since issued preferred shares at 8% yield with an added kicker in the warrants which gives the right to buy Tingsvalvet common shares at 110 every quarter-end until the the summer of 2030. Last trading price, although extremely illiquid and probably unrepresentative of underlying values, is 91.50.
The new Tingsvalvet is steered by Håkan Karlsson, who successfully pulled off a similar structure with Maxfastigheter, which was sold to Stenhus at a nice profit last year. It has industry stalwarts on the board, chief among them Per Berggren, chairman of Castellum and former CEO of Hemsö. In the prospectus they hinted at future access to risk capital — which makes sense with this gallery of inviduals —, and an upcoming share-split, securing supervoting shares for insiders. This indicates the intent to issue stock to larger institutional or industrial actors.
In essence, this is a levered bet on a highly levered stock with a jockey. Additionally, it should provide a decent inflation hedge so long as rates don’t spike massively over a prolonged period. While financing cost increases affect everybody’s cash flows equally and may make banks reluctant to lend to unproven vehicles, yield rises on the books (i.e. lower values in transaction markets) favor new entrants, unburdened by prior debt servicing commitments — so long as these can raise sufficient equity, of course. Such setups should be able to do good business with keen or forced sellers right now.
The interest coverage ratio with the preferred dividends will be very low with a corresponding high implied leverage ratio. The strategy seems to be to buy high-yielding, low-ticket assets in rural areas. With a proper control on vacancy risks, I think this has serious potential, as the competition must have lessened this year . For everybody with some familiarity with option-pricing models, your radar should be beeping by now. The complete revamping of the balance sheet is bound to dramatically increase volatility on a go-forward basis, even if not yet visible in common stock price gyrations.
Zero is a significant possibility here, but the odds seem good to me and insiders like it.
Orrön Energy (formerly Lundin Energy) was a very interesting de facto spinoff this summer. After the oil assets were merged into Aker BP, this renewable stub remained as a little orphan. It was easy to see great selling pressures, especially towards quarter-end, perhaps institutions cleaning it off their books. It also has a nasty genocide headline risk, which at the nadir of the market didn’t seem like something anyone at all would want to touch for a while. Except Lundin veteran Ashley Heppenstall, who bought a bunch right before the insider trading window closed. I took a bite too with an average price of just shy of 7 SEK, thinking this is probably good value with potential to be liked due to the ESG profile. I however fully expected the journey to be a slog. Little did I predict the extent of what would later happen, the crazy trading volume, European energy markets and all the rest. I managed to ride this bull up to 16.80 where I finally sold for a tidy profit in 1.5 months. In true value investor fashion, this cemented the stock further mooning up past 20 as of this writing.
I repurposed a lot of my gains into buying Slitevind at a slight discount to the currently outstanding bid from Orrön. I’m unsure of the exact likelihood for a higher bid, but there doesn’t seem to be any risk whatsoever to the current one. They already have secured acceptance by the majority of shareholders and Orrön is certainly good for the money with their cash-rich balance sheet. The CEO of Slitevind indicated that they had talked with other potential suitors on the deal presentation Q&A but said their “current focus” was this deal. There is also a provision in the deal for competing bids having to top the current one with 5% and a matching possibility. This is at least not complete boilerplate.
It’s also the fastest merger procedure I think I have ever seen, indicating Orrön’s keenness to close the deal. Arise sold some assets during the summer and other wind power related stocks have also done really well, although none as well as Orrön. There seems to be great institutional interest in Scandinavian wind power assets and there should be actors with lower return demands than Orrön, but perhaps they are not yet back from summer vacation. In any event, this should have a resolution shortly, and will likely be a roughly breakeven outcome, but with some unknown upside optionality.
My last suggestion is — maybe a letdown — a revisit of Pegroco Pref. You can read my old write-up here. Pegroco has sold the other assets of any importance and is now cash-rich. The timeline has been longer than I pictured initially, but right now the company is extremely de-risked. I suspect that they are aiming for an IPO of its common stock in the fall, if nothing has changed.
My current guess is that as soon as the Competition Authority has cleared the sale of Nordic Lift — which should happen some time in the next two weeks — Pegroco will call an EGM to clear out the dividend in arrears. An EGM for that purpose needs a minimum of two weeks notice. This in total should give a ballpark estimate on the timing of these events. I will stick with my old estimate of the preferred “value” of at least 115 (although liquidity might complicate this), which with the outstanding 37.6 million SEK of owed dividends per Q1 plus the upcoming September dividend potentially still gives this an amazing annualized return profile. Note that I have continuously under-prognosticated the timeline and failed to anticipate events here, so do your own assessment.
Finally, please be aware that all these ideas are severely illiquid, meaning you can get stuck in them forever, and never ever just buy something because somebody else says so. If a severe urge overwhelms you, please read this before proceeding. Or do like me, think of all the stinging losses you probably have already produced this year.