JZ Capital focused on debt reduction – JZ Capital Partners has now published its interim results, covering the six months ended 31 August 2019. The results had been delayed while the board secured a new valuation of its property portfolio. The company warned that it might have to take $50m-$150m off the valuation of its properties and that was enough to trigger a 26% slide in its share price. QuotedData analyst, James Carthew wrote an article about it.
In the event, the fund’s NAV has dropped from $810.2m to $748.2m, which in per share terms is a fall from $10.01 to $9.66. The total hit to the property valuation was $64m. This was largely offset by an increase in the valuation of the rest of the portfolio but JZ’s assets also fell as it handed back some cash to shareholders.
The end August portfolio comprised:
- US micro-cap: 23 businesses, which includes four ‘verticals’ and 14 co-investments, across nine industries (one business, Priority Express, was sold after the period end).
- European micro-cap: 17 companies across six industries and seven countries.
- US real estate: 61 properties across five major assemblages in New York and South Florida all in various stages of (re)/development.
The company hopes to sell some of its US microcap assets for about $150m-$170m before the end of February 2020. The cash that this frees up will be used, in the first instance, to reduce JZ Capital’s debt.
Property portfolio
The $64m hit to the valuation of the property portfolio took 82 cents off the NAV per share. An additional $43m was invested in the property portfolio during the period leaving the company with a net $422.7m invested in this area. Additional capital will need to be committed to this area to fund “debt service payments, accretive pre-development expenditures or the acquisition of a remaining
property to complete an assemblage.” The board points out that properties are valued on the basis that JZ is going to hold onto them. In a fire sale, they could be worth much less than the value that has been ascribed to them.
The investment adviser is taking more of a hands on approach to this area, working with RedSky to determine the best route to value for investors for each asset. Several properties will be put up for sale within 60-90 days but the investment adviser reckons it will take two to three years to maximise the value of the property portfolio.
Microcaps
This part of the portfolio added 63 cents to the NAV per share during the period and the uplifts are down to a broad range of investments both in the US and Europe. Only one problem investment was highlighted in the announcement – the value of the loan to Ombuds was written off after the security company (which used to provide security services to Carrefour) declared bankruptcy. This cost the fund 16 cents per share.
Spruceview
The asset management business seems to be doing OK with asset under management gains in Mexico.
Finances
At the end of August, JZ Capital Partners had $1048m in total assets. $135m has been raised from disposals over the past year and, if they succeed in the planned US microcap sale, quite a bit more can be freed up in coming months.
JZ’s liabilities at the end of August comprised $60m in zero dividend preference shares, $50m in convertible unsecured loan stock, $150m of loans and another $41m of other liabilities. We don’t think this includes any money that they will probably have to stump up for the property portfolio. The money that was intended to be used for the planned US side car fund (see our story of 2 October) will be retained within the fund as JZ Capital will not now make a commitment to that fund. JZ Capital’s commitment to JZI Fund IV (the European investment vehicle) has been reduced from €64m to €15m. The board has also asked the investment adviser to get JZ Capital Partners out of an additional $44m of commitments.
€18m and $130m of the loans were provided by Guggenheim Partners. These are due to be repaid on 12 June 2021. There is a covenant that says they loans must be covered at least 4x by assets (despite this strong covenant, the interest rate is fairly high – 5.75% over LIBOR). The maturity date of the CULS is 30 July 2021 – these convert at £6.0373 per share – with the share price at 336p, conversion seems unlikely. the coupon on the CULS is 6%. The zeros mature in 2022 and had an initial gross redemption yield of 4.75% – so represented the cheapest funding. [All this debt looks expensive in the current context]
Incentive fee
“the Investment Adviser has volunteered to forego payment of the remainder of its currently earned capital incentive fee on the basis that (i) $3.9 million of it can be immediately paid to the members of the JZAI team other than Jay Jordan and David Zalaznick and (ii) the net gains underpinning the realised incentive fee are rolled forward and netted against future losses. Additionally, the Investment Adviser has volunteered to forego future capital incentive fees until the Company and the Investment Adviser mutually agree to reinstate such payments.” [this is as clear as mud to us – are fees suspended and rolling up or being waived?]
Our thoughts
On the face of it, JZ Capital is trading on a significant discount to NAV. After this morning’s 4.5% fall in its share price, the headline discount is 55% on a share price of 336p. The success of the fund’s original strategy is illustrated in these figures but, in retrospect, the detour into property investment appears to have been a bad idea. If you have visited Brooklyn or downtown Miami recently, there is no doubt that these areas are moving more upmarket. Given that, we can only speculate as to why the fund has run into problems – did it overpay for assets? did it underestimate how long it would take to secure planning permits? has it struggled to assemble development sites? – we just don’t know. The fund’s debt maturities bunch around 2021/2022 – this was an odd decision by the board unless they always planned to be shrinking the fund or winding it up around then. If the planned US microcap sale goes ahead, they might be able to think about paying down the loan ahead of its maturity date and/or repurchasing CULS and zeros. The closer we get to the fund being able to eliminate its debt, the more confidence can be rebuilt and the more likely it is that the discount will narrow. Investors may still be wary, however, given the fund’s colourful history.
JZCP : JZ Capital focused on debt reduction