It seems illogical for shareholders in one of the JSE’s best capital allocators, innovators and value creators to allow management to sell prize assets at a deep discount to their stated value — and get rewarded in the process.
Weird indeed. But this is one interpretation that investors might draw from the recent AGM of RMB Holdings (RMH), at which a shareholder activist protested that “we seem to be getting the worst of all worlds”. At the same time, opportunistic investors might be able to cash in on this market cynicism.
In its most famous iteration RMH was the holding company for FirstRand Bank, but after the stake in the banking giant was unbundled to shareholders in 2020 it was left with a clutch of strategic property assets.
RMH lite has traded mostly at a wide discount to the stated NAV of its four property investments — the recently sold 37.5% stake in Atterbury Europe, a 27.5% position in local retail and office developer Atterbury Holdings, a 10.9% holding in inner-city property specialists Divercity and various stakes in property funder Integer.
The share drifted down to a 12-month low of 137c in May this year, a little over six months after separate offers from property investor Brightbridge and private equity group Fledge were turned down by the board. At that time Brightbridge was offering R1.75bn for the stakes in Atterbury Europe and Atterbury Holdings — a pitch that hugely discounted the latest NAV for these investments of close to R3bn. It is understandable that the RMH board turned the offer down.
But in July the share price sparked back into life when Brightbridge re-emerged with another offer — this time only for the stake in Atterbury Europe. It was pitched at R1.75bn (equivalent to 124c a share) which, while an improvement on the previous offer, still discounted the latest stated carrying value of Atterbury Europe by over 20%, or roughly R500m.
Yet the Brightbridge deal was overwhelmingly supported by shareholders, despite some misgivings aired at the general meeting. RMH is now set to pay a 142c a share special dividend in late October.
If the special dividend is stripped out, RMH’s share price is technically trading at about 60c. RMH’s NAV after the distribution should sit at about 96c a share, which means a roughly 40% discount to the remaining NAV of about 135c a share.
It would be an unexpected capitulation for RMH to sell its remaining property interests at a discount of 40%, or even 30%, especially after executives held out for a markedly better offer for Atterbury Europe.
Or maybe not? A new condition introduced in 2021 for monetising RMH’s remaining assets suggests — according to the latest annual report — that executives are motivated to monetise assets at “45%-60% of gross NAV by September 2022”.
At last week’s AGM, Opportune Investments CIO Chris Logan asked whether this meant that shareholders could lose up to 55% of NAV on a sale and executives would still get rewarded. “If ever there was a low bar .... Remuneration is very important, as incentives determine outcomes. Was there any thought of just giving executives options like at [agribusiness investment company] Zeder?”
We are getting the worst of all worlds with this structure
— Chris Logan
Logan pointed out that Zeder had managed to sell four large assets at premium prices and then execute share buybacks. “We are getting the worst of all worlds with this structure.”
RMH CEO Herman Bosman felt the comments were a little unfair, especially considering that the group had engaged shareholders about the remuneration scheme. “We designed and tested it before putting it to shareholders, and got overwhelming support for all the details you are questioning.”
Bosman also argued that NAV for a company like Zeder was a very different concept to that for a property company, where in most cases trading is at a huge discount to NAV.
Said Bosman: “If you ... think about the special distribution [RMH paid out 80c a share in May last year] plus the share price now, I think that to say shareholders have been done a disservice is a disservice to the management team.”
But Logan maintained it was “quite frankly extraordinary” that directors could get remunerated for selling assets at only 45% of NAV.
Why not rather buy back their shares, he asked. After all, 99.92% of shareholders voted in favour of share buybacks at the 2021 AGM. Buybacks, as opposed to dividends, would not have made numerous shareholders lose 20% of their return of capital through SA’s dividend withholding tax.
Logan also said well-timed buybacks would have helped offset the R512m loss (38c a share) stemming from the sale of the “pure rand hedge and kingmaker” Atterbury Europe stake. “The opportunity cost of this loss has escalated substantially as the rand has fallen sharply and as Covid discounts are abandoned.”
But, said RMH Properties CEO Brian Roberts: “Considering our strategy of monetisation, and that RMH has only limited capital available for a share buyback, the board concluded that a special dividend is the most cost-effective way of returning capital to the RMH shareholders.”
As things stand, retail investors might see RMH as a sturdy hedge against market volatility, and there might be a temptation to pile in for the dividend and then use part of these proceeds to buy more shares at a hopefully huge discount to NAV.
The big question, of course, is the timing of the sales of the remaining assets. On paper, RMH’s stake in Atterbury Holdings — which developed and partly owns retail property Mall of Africa alongside other commercial and industrial developments — should be fairly easy to market. Inner-city business Divercity seems to have a vibrant niche, while Integer has already attracted one suitor (an opportunistic Fledge).
PwC has backed the discounts at which RMH is selling assets, confirming there is an incentive to monetise these as quickly as possible.
A timetable in RMH’s annual report shows that directors could price in asset sales at a 45%-65% discount to NAV if a transaction is clinched before the end of September this year.
But assets sold before the end of September 2023 would need to achieve at least 60%-75% of NAV, with these ranges stretching up to 75%-90% and 90%-100% of NAV in the next two years.
According to Roberts, RMH has given itself a three- to four-year horizon to monetise its three remaining assets. That is the long date. “If we get an opportunity to do it before, we will do so.”
Those betting 200c on a swift outcome at narrower discounts could make a nifty little turn here.
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