Tuesday, February 7, 2023
HomeValue InvestingClark Road Worth: Regional Well being Properties: Revised Pref Alternate Provide

Clark Road Worth: Regional Well being Properties: Revised Pref Alternate Provide

Final June, Regional Well being Properties (struggling expert nursing actual property firm) proposed an alternate supply the place the corporate’s Collection A most popular inventory holders (RHE-A) would obtain 0.5 shares of widespread inventory (RHE) for every share of most popular inventory.  On the time of my put up, RHE was buying and selling at $12/share, as we speak 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 popular inventory holders might alternate their shares for brand spanking new Collection B most popular inventory.  The Collection A most popular inventory trades for $4.50/share.

The proposed Collection B most popular inventory has some fascinating 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 gathered however unpaid dividends get erased.
  • The headline dividend fee is 12.5%, but it surely won’t be payable or begin accruing till the fourth anniversary of the issuance/alternate date.
  • The liquidation desire begins at $10 and will increase again as much as $25 on the fourth anniversary.  If all Collection A holders alternate, the liquidation desire 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 fee), so that may cowl the popular inventory at a $10 liquidation desire.
  • As a substitute of the standard 6 quarters of missed dividends penalty to appoint a most popular inventory board member, for the reason that 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 popular every calendar 12 months.  It begins with 400,000 shares in 2022, then 900,000 shares by 12 months finish 2023 (once more, cumulative, so a further 500k shares in 2023), then 1,400,000 shares by 12 months finish 2024, after which lastly 1,900,000 shares by 12 months finish 2025.  In the event that they fail to take action, then the popular shares could have director nomination rights.
  • Moreover, if Regional Well being would not redeem or repurchase 1,000,000 with 18 months, Collection B holders get widespread shares in a pro-rata style to make up the distinction.  Apparently 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 better proportion of the Collection B.
  • They then throw in somewhat recreation concept 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 popular shares excellent, the liquidation desire drops again right down to $5 (for reference, there are 2,811,535 Collection A most popular shares at the moment excellent).
  • Just like the final alternate supply, this supply requires each the popular (2/3rds) and customary shareholders (majority) to approve.  The widespread vote is perhaps arduous to acquire, they did not get many shareholders to vote within the final annual shareholder assembly, these shares are possible largely in retail fingers.
Regional Well being’s plan following this alternate is to develop their means out of this mess, challenge 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 best way.  My preliminary ideas are it is a fairly engaging deal for the Collection A homeowners, actually higher than the preliminary supply.  In my typical style, simply penciling out what the returns may seem like if Regional Well being truly saved to that redemption schedule.

Now that is far too simplistic, however assuming that everybody exchanges (unlikely on condition 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 seem like this, it’s only a sketch out of the redemption schedule, however I get a 30+% IRR if all works out.  The largest assumption is administration can truly get out from below this, increase fairness, achieve creditability, and so forth. and that is fairly unclear, however it’s a state of affairs that deserves a re-assessment.

Disclosure: I personal shares of RHE-A


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