Category: Equity

Holloway Lodging gets a stealth takeover

It appears that Holloway REIT (TSX: HLR-UN.TO) had its prior trustees, including the CEO W. Glenn Squires, were kicked out by George Armoyan’s group of people by a margin of 85% to 15%, according to SEDAR filings.

Now that Armoyan has full control over the company (and indeed, roughly a 20% equity stake by virtue of his ownership in Royal Host REIT (TSX: RYL.TO), it remains to be seen what his plans for the two companies are. There are logical synergies between both companies, but both companies face huge balance sheet issues – mainly that the cash that the properties are generating is not proportionate to the cost of capital required to finance such properties.

Looking at the last quarterly report for Holloway, their balance sheet has stacked up a significant amount of current debt maturities, including a $3.6M line of credit, $42.1M of mortgages requiring refinancing, and perhaps more urgently, $20.2M of convertible debentures that are maturing on July 31, 2011, just under two months away! The company has $300,000 in cash on the balance sheet and the line of credit is good for $5 million.

It should be noted on their MD&A that the company states that:

The REIT has a signed term sheet to finance the repayment of the debentures. The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties, or some combination thereof.

One wonders what the terms on this term sheet is and who the heck would be willing to lend this company money on an unsecured basis.

The market capitalization for the firm at their existing price of 34 cents is about $13M, which means that if the company wished to pay off the debenture using equity (which I am not sure is legal without shareholder approval) then that would represent a significant dilution.

Interestingly enough, these debentures are trading at par.

Also, I have no position in any of these securities.

Suspicious when insurance companies raise capital

I always get suspicious when insurance (and to a lesser degree, financial) companies raise capital through preferred share offerings unless if such offerings are associated with some form of refinancing.

An example would be the latest preferred share offering from PartnerRE (NYSE: PRE) which is a Bermuda-based reinsurance firm. They managed to get “whacked” by the Japanese earthquake and as a result, will be taking a net loss for the year.

Normally, well-capitalized insurance firms set money aside for rainy day years, such as when earthquakes, hurricanes and other sorts of disasters strike all at once. When such disasters hit all at once, they can dip into the cash buffers and pay off the claims. So why raise relatively expensive money? Is their balance sheet that leveraged that they feel uncomfortable just paying off the claims?

All insurance firms are very research-intensive. It is impossible to properly value these companies by just reading the financial summary – otherwise they all look like spectacular purchases.

Rangebound markets

I am not a large believer in technical analysis providing predictive value, but the pattern-seeking eye sees the following trend in the S&P 500 over the past 6 weeks:

We see a downtrend channel. Is this part of a trading range?

Volatility only saw a very brief spike up in March, primarily due to the Japanese earthquake:

We add these two together and see a marketplace betting on a trading range. The swing traders at this point are likely the ones to end up making the money, rather than the trend followers. Not a good time to be taking risk.

What was the big winner in 2011? Oddly enough, nothing more than the 30-year US treasury bond:

Fraud alleged at Sino-Forest Corporation

A specialty research firm, Muddy Waters Research, released a report alleging that Sino-Forest Corporation (TSX: TRE) is essentially a huge fraudulent operation, backed up by quite a comprehensive research report. TRE was slaughtered in yesterday’s trading, down nearly 20% before it was halted for the day.

If the fraud allegations turn out to be true, this will be the biggest fraud story on the TSX since Bre-X. Sino-Forest had a market capitalization of about 6 billion dollars just two short months ago. In an eerie parallel, Bre-X collapsed after reaching a market cap of approximately $6 billion.

My own investment policy on China is simple – don’t. I am sure there are fortunes to be made investing in legitimate Chinese companies that actually have shareholder-friendly management (this is a contradiction in itself) that have been tarred-and-feathered by all of the rampant fraud that is coming out of China today. Such companies might be possible to find when you are across the wrong side of the Pacific Ocean, but how can you ever know without even knowing the local language?

LinkedIn valuation

LinkedIn (Nasdaq: LNKD) went public on Thursday and many people became very rich, especially as it traded over twice as much as its initial offering price of $45/share. You can be sure those insiders are just dying for the holding period to expire before they start dumping their shares into the marketplace.

Looking at their financials reveals a company that has about 95 million shares outstanding after this offering, plus another 16 million options that are deeply in the money gives a diluted share count of about 111 million shares. Multiply that by Friday’s closing price of $93/share gives a company with a capitalization of $10 billion. This puts it on line with technology companies such as Sandisk (SNDK) and Checkpoint Software (CHKP).

The company has increased revenues dramatically from its inception ($120M in 2009 to $243M in 2010) but the company has also increased expenses to obtain those revenues – as such it is marginally profitable. It can be expected to make money in the future, but how far can it scale up before they hit the law of large numbers and their revenue growth starts to taper?

It is interesting to note that the original site on the internet for jobs, TMP Worldwide, now known as Monster (NYSE: MWW) has a capitalization of $1.85 billion, expected 2011 revenues of $1.1 billion and expected 2011 profitability of $52 million.

Obviously the media will portray this IPO as the rise of social networking sites (just as how the Netscape IPO started the rise of the internet boom), but as history as shown, whether these companies will be able to justify their lofty valuations or not remains to be seen. I don’t have any other comment than that I will be looking elsewhere to deploy my capital – the insiders in LinkedIn (even the ones getting in as late as April 2011 got their options at an exercise price of $22.59/share!) will be the ones making the money, not the public.