Wednesday, November 23, 2022
HomeValue InvestingClark Avenue Worth: Regional Well being Properties: Revised Pref Change Supply

Clark Avenue Worth: Regional Well being Properties: Revised Pref Change Supply

Final June, Regional Well being Properties (struggling expert nursing actual property firm) proposed an alternate supply the place the corporate’s Collection A most well-liked inventory holders (RHE-A) would obtain 0.5 shares of frequent inventory (RHE) for every share of most well-liked inventory.  On the time of my publish, RHE was buying and selling at $12/share, in the present day it trades sub-$5 as all speculative buying and selling sardines have typically come down considerably over the previous a number of months.  Final Friday after hours, with no corresponding press launch this time, Regional Well being snuck in a new alternate proposal whereby Collection A most well-liked inventory holders may alternate their shares for brand spanking new Collection B most well-liked inventory.  The Collection A most well-liked inventory trades for $4.50/share.

The proposed Collection B most well-liked inventory has some attention-grabbing phrases that I have not seen earlier than:

  • First to nudge Collection A holders to alternate, if the proposal passes (want 2/3rds) then anybody who rejects the alternate or is simply too lazy to alternate will get fairly severely penalized.  The Collection B turns into senior to the Collection A, the liquidation worth of Collection A goes from $25 to $5 and all of the amassed however unpaid dividends get erased.
  • The headline dividend price is 12.5%, nevertheless it is not going to be payable or begin accruing till the fourth anniversary of the issuance/alternate date.
  • The liquidation choice begins at $10 and will increase again as much as $25 on the fourth anniversary.  If all Collection A holders alternate, the liquidation choice will initially drop to $28.1MM, there’s $55MM of debt forward of the popular inventory, final June I estimated the worth of their owned actual property at $87MM (9.5% cap price), so that may cowl the popular inventory at a $10 liquidation choice.
  • As a substitute of the everyday 6 quarters of missed dividends penalty to appoint a most well-liked inventory board member, because the Collection B will not be paying a dividend for the primary 4 years, the Collection B phrases name for a “cumulative redemption” the place Regional Well being has to repurchase or redeem a specific amount of most well-liked every calendar yr.  It begins with 400,000 shares in 2022, then 900,000 shares by yr finish 2023 (once more, cumulative, so a further 500k shares in 2023), then 1,400,000 shares by yr finish 2024, after which lastly 1,900,000 shares by yr finish 2025.  In the event that they fail to take action, then the popular shares may have director nomination rights.
  • Moreover, if Regional Well being does not redeem or repurchase 1,000,000 with 18 months, Collection B holders get frequent shares in a pro-rata vogue to make up the distinction.  Curiously for each this penalty and the cumulative redemption penalty, the brink is a selected Collection B share quantity, so if solely 2/3rds of the shares are exchanged, every of those milestones turns into a larger share of the Collection B.
  • They then throw in just a little sport principle to encourage Collection B holders to take part in early repurchases or redemptions, as soon as there are lower than 200,000 Collection B most well-liked shares excellent, the liquidation choice drops again all the way down to $5 (for reference, there are 2,811,535 Collection A most well-liked shares presently excellent).
  • Just like the final alternate supply, this supply requires each the popular (2/3rds) and customary shareholders (majority) to approve.  The frequent vote could be arduous to acquire, they did not get many shareholders to vote within the final annual shareholder assembly, these shares are seemingly principally in retail arms.
Regional Well being’s plan following this alternate is to develop their approach out of this mess, difficulty new inventory, try to make the most of the misery following covid (much like SNDA, however with out the creditable board/assist) within the senior housing sector and redeem the popular over time alongside the way in which.  My preliminary ideas are it is a fairly engaging deal for the Collection A house owners, definitely higher than the preliminary supply.  In my typical vogue, simply penciling out what the returns would possibly appear like if Regional Well being truly stored to that redemption schedule.

Now that is far too simplistic, however assuming that everybody exchanges (unlikely provided that this hasn’t paid a dividend in a few years and might be sitting within the forgotten corners of retail brokerage accounts), and Regional Well being retains that redemption schedule on the liquidation worth (I needed to common the liquidation worth desk since they do not line up completely) pro-rata for all shareholders which they most likely will not and as a substitute attempt to repurchase shares or tender at a reduction, then they orphan it once more afterwards and its nugatory (which it would not be).  The money flows will not appear like this, it’s only a sketch out of the redemption schedule, however I get a 30+% IRR if all works out.  The most important assumption is administration can truly get out from beneath this, elevate fairness, achieve creditability, and many others. and that is fairly unclear, however it’s a state of affairs that deserves a re-evaluation.

Disclosure: I personal shares of RHE-A



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