Arbitrage Opportunity: Maplewood International REIT Offers Quick Double As It Liquidates

On September 8, 2015, Maplewood International Real Estate Investment Trust (TSX Venture: MWI.UN), announced that it intends to dispose of its sole investment property in the Netherlands and return the REIT’s capital to unit holders, with a view to ultimately winding-up and terminating the REIT’s business and affairs. Simply put: Maplewood’s plan to acquire commercial real estate outside of Canada never gained traction with investors.

“The REIT has faced a highly challenging environment in Canada to attract the public equity capital necessary to execute on its growth-oriented business plan. As a result, the Board has concluded that the REIT’s proposed value maximization process is the preferred course of action for unit holders to achieve maximum value and liquidity from their investment.”
Kursat Kacira, Chief Executive Officer of the REIT, in a statement announcing the liquidation.

Maplewood may have failed as a public company, but its demise offers a profitable arbitrage opportunity. The Net Asset Value and liquidation value per share are significantly higher than the current stock price of 30 cents (all values in Canadian Dollars unless otherwise noted). Non-cash liabilities, an opaque capital structure and currency fluctuations between EUR/CAD are hiding the true value of the units, which I believe is more than 80 cents.

Share Structure

  • Shares Outstanding: 1,730,057
  • Class B MLP Units: 4,250,000

Class B Units are economically equivalent to REIT Units and are entitled to receive distributions equal to those provided to holders of REIT Units. These Class B Units have been classified as a liability by the REIT in accordance with IFRS. But for the purposes of a liquidation, they should be removed from the balance sheet and added to the shares outstanding as the Class B Units share equally in the proceeds.

Options Outstanding: 476,250 at an exercise price of $0.80

A Conservative Estimation of Liquidation Value for Maplewood International REIT:

Risks and Uncertainties

  • Tax treatment of Netherlands Property sale
  • Uncertainty as to when property sale and wind-up will take place (Capital investment in the property won’t be completed until June 30, 2016)
  • Wind up and termination costs. For the purposes of my estimation above, I’ve assumed additional liquidation costs of $100,000

While it’s unclear when the sale and wind-up will occur, unit holders are protected:

No cash burn: The Rotterdam property is cash flow positive and has positively contributed to unit holder equity for the last six quarters.

The depreciation of the Canadian Dollar versus the Euro is expected to continue in 2016

Material lease amendment: Management expects new lease term of 10.5 years to increase the value of the property

Conclusion:

The liquidation is subject to all necessary regulatory and unit holder approvals, however members of the board and management team own more than 50% of the outstanding shares. So basically, the management and board that proposed the liquidation have the votes to push it through. They also have a track record of value creation, having previously sold WhiteRock REIT and GT Canada Medical Properties REIT.

The extreme gap between the current share price and the liquidation value provides a large enough margin of safety to account for an unexpected costs or value destruction. With the potential for the wind up to happen in the next 12 months I have a long position in Maplewood shares.

Disclosure: I am/we are long MAPLEWOOD INTERNATIONAL REIT.


Originally published at seekingalpha.com.

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