Final June, Regional Well being Properties (struggling expert nursing actual property firm) proposed an exchange offer the place the corporate’s Collection A most well-liked inventory holders (RHE-A) would obtain 0.5 shares of widespread inventory (RHE) for every share of most well-liked inventory. On the time of my submit, 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 exchange proposal whereby Collection A most well-liked inventory holders may change their shares for brand 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 fascinating phrases that I have never seen earlier than:
- First to nudge Collection A holders to change, if the proposal passes (want 2/3rds) then anybody who rejects the change or is simply too lazy to change 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 fee is 12.5%, however it is not going to be payable or begin accruing till the fourth anniversary of the issuance/change date.
- The liquidation desire begins at $10 and will increase again as much as $25 on the fourth anniversary. If all Collection A holders change, 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 which may cowl the popular inventory at a $10 liquidation desire.
- As an alternative of the standard 6 quarters of missed dividends penalty to appoint a most well-liked 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 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 can 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 trend to make up the distinction. Curiously for each this penalty and the cumulative redemption penalty, the brink is a particular Collection B share quantity, so if solely 2/3rds of the shares are exchanged, every of those milestones turns into a better share of the Collection B.
- They then throw in somewhat 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 desire drops again right down to $5 (for reference, there are 2,811,535 Collection A most well-liked shares at the moment excellent).
- Just like the final change provide, this provide requires each the popular (2/3rds) and customary shareholders (majority) to approve. The widespread vote is likely to be onerous to acquire, they did not get many shareholders to vote within the final annual shareholder assembly, these shares are possible principally in retail fingers.
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 in all probability will not and as an alternative 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 really get out from underneath this, increase fairness, achieve creditability, and so forth. and that is fairly unclear, however it’s a scenario that deserves a re-evaluation.
Disclosure: I personal shares of RHE-A
