JSM Indochina Ltd. JSM
October 20, 2010 - 12:49am EST by
chewy
2010 2011
Price: 0.31 EPS $0.00 $0.00
Shares Out. (in M): 230 P/E 0.0x 0.0x
Market Cap (in $M): 71 P/FCF 0.0x 0.0x
Net Debt (in $M): -41 EBIT 0 0
TEV ($): 30 TEV/EBIT 0.0x 0.0x

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Description

JSM Indochina Ltd. ("JSM") is an attractive liquidation with an estimated gross return of 31-45% and because most liquidation proceeds will be returned in <12 months the IRR is >50%.  Importantly, we believe there is no reasonable scenario in which proceeds are below the current price of $0.31/sh.  Our trip to visit all of JSM's properties, discussions with local real estate brokers & lawyers, calls with management, and the June 30, 2010 valuations by Cushman & Wakefield and Jones Land LaSalle gives us comfort that our downside estimate of $0.34/sh, 11% above the current price, is reasonable.

This liquidation is the result of a December 2009 Extraordinary General Meeting ("EGM") that resulted in Passport Capital LLC ("Passport") taking control of the Board.  Therefore, the company is solely focused on maximizing proceeds to shareholders - there is no risk that management decides to stop the liquidation or retain proceeds for new projects as Passport owns 13%. 

JSM's pro forma Net Asset Value ("NAV") of $0.49 consists of $0.18 of cash and $0.31 of real estate in 7 properties in Vietnam and Cambodia.  Our estimate of realized proceeds of $0.40-$0.45/sh includes wind-down costs and write downs to real estate values, but is still 31-45% above the current price. 

Having visited JSM's properties and met with real estate brokers and lawyers in Cambodia and Vietnam, we know there is a fair bit of interest in the properties.  Our best guess is that the current book value of real estate will be realized through the sale process CB Richard Ellis ("CBRE") began approximately one month ago.  There is further detail on each property in the appendix, but it's important to note that:

(i)                         there is no debt on any of the 7 properties, which eliminates the risk that a slight change in property value has a magnified impact on liquidation proceeds;

(ii)                        the properties are mostly raw land, which is preferred by most buyers to developed properties, but more difficult to precisely value.  Offsetting this, the properties are prime locations (e.g., ~3 acres directly across from the U.S. embassy); and

(iii)                      while global commercial real estate activity is weak, meetings with local brokers revealed multiple bidders for most properties because similar properties do not exist.

The company is committed to quickly returning sale proceeds - we've been told to anticipate a distribution upon each property sale.  Thus far, all dividends have been treated as a return of capital and not taxed - the company anticipates this will be the case for future dividends.  JSM returned 25c in April 2010, 15c in September 2010, and we anticipate an additional 5c (or more) before year-end from a sale closed on Oct 11th.

The liquidation is led by Chairman Scott Verges ("Verges").  We've spoken with Verges numerous times and he's well suited to manage this liquidation - he has 30+ years of real estate experience, has previously liquidated a $2b real estate portfolio realizing proceeds 20% above book value, and as an appointment of Passport (he is a friend of Passport's General Counsel) is solely focused on maximizing proceeds.  Further, while Verges has made it clear that JSM is not a forced seller, he noted that JSM's large shareholders are "IRR focused" and therefore he is working to complete the liquidation as quick as possible.

JSM's market cap is $71mm making this a personal account trade for most VIC members.  The 3 month average daily value traded is just $56k, but we found it fairly easy to buy stock by displaying a bid.  Also, Lehman Brothers International EU ("Lehman") owns 31.7mm shares - we're a small fund and we bought our position in the open market without contacting Lehman, but they may want to sell.  In the U.S. commissions are generally a fixed amount per share, however, our commission expense has been 50bps of the value of stock purchased, which includes a U.K. stamp tax.

Background

 

                JSM went public in London raising $207mm in July 2007 (stock is listed on the AIM and trades in US$).  At the time of the IPO, 6 properties were transferred from CEO/Investment Manager Craig Jones ("Jones") to JSM in return for ~18% of JSM's stock, worth $38mm, and Jones outlined plans to invest the remaining cash within one year.  However, two years after the IPO, only 3 additional properties had been purchased and JSM's cash balance was $169mm.  This was likely because Jones was annually paid 2% of NAV and was therefore compensated to sit on cash.  Moreover, departures of key personnel raised the ire of Passport, an investor since June 2008, which installed a new Board in December 2009.

 

After a comprehensive review of the investment strategy, the reconstituted board terminated the management agreement with Jones and replaced it with a consultancy agreement (detailed later).  Another EGM was held in April 2010 and an orderly realization of the company's portfolio was unanimously approved.  Further, a dividend of $0.25/sh was declared.

 

In late September, JSM released 1H 2010 results and announced another dividend of $0.15.  Later in September, the company appointed CBRE to sell the real estate portfolio. 

 

Following the October 11th sale of JSM's interest in Hieu Duc Joint Stock Company ("Hieu Duc"), which owned 2 properties, for 98% of book value there are 7 remaining properties:

(i)                         3 standalone Cambodia properties currently being marketed by CBRE (Embassy Centre, Siem Reap, and Ounalom);

(ii)                        2 adjacent Cambodia properties will be marketed by CBRE before year-end upon the completion of construction (Colonial Mansion I & Colonial Mansion II); and

(iii)                      2 Vietnam properties secured by cash pledges are unlikely to be marketed until early 2011 as the company is working with the banks to either extract the cash pledges or sell the underlying properties (Prince and Peninsula).

 

Valuation

 

Our estimate of liquidation proceeds builds from the 6/30/10 balance sheet, the midpoint of proceeds from the sale of Hieu Duc ($10.3mm was received on 10/11/10 and as much as $2.0mm will be received when a tax matter is resolved, which is expected in the "coming weeks" per the press release), $3.6mm of remaining construction expenditures on Colonial Mansion II (this completes all construction), and no taxes on property sales (consistent with conversations with management and JSM filings, including the 2007 Admission Document).  Our 3 scenarios are:

(i)                        Best Guess - assumes $10mm of wind-down expenses and that the current book value of real estate is realized.  We have discussed our expectations of wind-down expenses with the company and been told that $10mm is "in the ballpark."  Verges and the other directors of JSM have spent significant time speaking with investment bankers, brokers, and preparing data rooms for JSM's properties and they believe that the current book value of real estate is a reasonable estimate of the proceeds that will be realized from the wind-down.  Following a 5 day trip to Cambodia and Vietnam to  visit every property and meet real estate brokers and lawyers, we also believe that the current book value of real estate will be realized.  We believe that it's possible that the current book value of real estate is exceeded as the 6/30/10 interim report notes "the fair value of the Group's investment properties at 30 June 2010 has been arrived at by the Directors on the basis of the lower of the valuations carried out at that date by Cushman & Wakefield (Vietnam), Ltd. ("C&W") and Jones Lang LaSalle Ltd ("JLL") who are independent valuers that are not related to the Group." 

(ii)                      Conservative - Wind-down expenses of $12.5mm are 25% above "Best Guess" and a 10% haircut is applied to the current book value of real estate. 

(iii)                     Downside - Wind-down expenses of $15.0mm are 50% above "Best Guess" and a 25% haircut is applied to the current book value of real estate.   

WS Est Liquidation Value



Best Guess Conservative Downside
Cash (6/30/2010)                   67.6                   67.6                   67.6
Less: Dividend (9/24/2010)                   34.4                   34.4                   34.4
Plus: Hieu Duc Sale (midpt)                   11.2                   11.2                   11.2
PF Cash                   44.4                   44.4                   44.4
Less: 2H 2010 Construction                      3.6                      3.6                      3.6
PF Cash                   40.8                   40.8                   40.8




Real Estate Portfolio                   72.2                   72.2                   72.2
Plus: Remaining Construction                      3.6                      3.6                      3.6
Real Estate Value                   75.8                   75.8                   75.8




Net other assets/liabilities                   (3.6)                   (3.6)                   (3.6)




NAV - current                 113.0                 113.0                 113.0
Less: Wind-down Expenses                 (10.0)                 (12.5)                 (15.0)
Haircut to Real Estate Value                        -                     (7.6)                 (19.0)
NAV                 103.0                   92.9                   79.1
S/O                 229.5                 229.5                 229.5
NAV/sh $0.45 $0.40 $0.34
Current Price $0.31 $0.31 $0.31
Upside 45% 31% 11%

 

Cash, cash equivalents, and time deposits

There is minimal FX risk as 96.3% of cash was denominated in U.S. dollars at 12/31/09 (6/30/10 U.S. dollars not reported, but we were told it has not materially changed).

 

Wind-down expenses

This includes remaining professional fees of $2.0mm, director fees of $2.0mm, and $1.0mm of staff costs.  The company will pay Jones ~$4.8mm (consultancy agreement of $222k/mth for 15mths = $3.3mm; expense reimbursement of ~$100k/mth for 15 mths = $1.5mm).  Minor items, such as bank charges, bring total wind-down expenses to ~$10.0mm.  Given the low current interest rate environment, we give no credit for interest income on the cash balance. 

 

Jones is eligible for a $1.0mm bonus payment, which is at the complete discretion of the board.  In talks with Verges, it has been made clear that unless Jones creates significant value for shareholders he will not receive this bonus - specifically, we were told, "Craig needs to bring offers to the table well above NAV to receive this bonus."  Therefore, we do not include it in our estimate of wind-down expenses.

 

Estimated timing of dividends

As JSM is currently attempting to sell each property, management does not provide individual property values.  In order to estimate an IRR, we have included our individual property value estimates, which total to the current book value of real estate. 



Property

Estimated Timing  Est Value   Div/sh   Date 
Hieu Duc
 $11.2  $0.05 12/31/10
Embassy Centre  $24.4  $0.11 3/30/11
Prince/Peninsula  $20.9  $0.09 6/30/11
Colonial Mansion I & II  $13.6  $0.06 9/30/11
Ounalom
 $5.3  $0.02 12/31/11
Siem Reap
 $11.7  $0.05 12/31/11
Final Cash Distribution  $16.0  $0.07 4/30/12


IRR 60%

 

The above reflects the current book value of real estate.  Using the value estimates in our conservative scenario, the IRR is 41%.  Using the value estimates in our downside scenario, the IRR is 15%.  We assume that the final distribution is made 2 years after the liquidation was begun - we're cautiously optimistic that this will be beat.

 

Risks

1.       Timing - Cambodia/Vietnam real estate markets are less liquid than U.S. markets.  We believe we've accounted for this as we assume sales are closed 6-15 months from the time that CBRE was hired.

 

2.       Prince - JSM does not currently own either Prince or Peninsula.  Rather, through cash pledges JSM has the right to acquire Prince and/or Peninsula.  JSM owns 80% of New Vision, an entity created to acquire property and build residential apartments.  As part of the arrangement through which the right to acquire Prince was obtained, JSM pledged $12mm to Navibank to secure New Vision's right to acquire the property.  Because of the need to work with its minority partner and Navibank, the manner that Prince will be liquidated is unclear.  Currently JSM is in discussions with its minority partner and Navibank to determine next steps for Prince.  While the company hasn't stated their goal for these discussions, JSM is liquidating so it seems likely that JSM does not want to proceed with the land acquisition and would like its $12mm pledge refunded.  The 6/30/10 interim report includes further details, but it's worth noting that JSM may not be able to come to an agreement with New Vision and Navibank.  We've been given the impression that JSM is attempting to come to an agreement that all parties find acceptable, but because of its 80% ownership, JSM is able to legally exclude its minority partner and work directly with Navibank - if push comes to shove, JSM will do what is in shareholders best interest.  Of the $12mm pledged to Navibank, JSM's maximum exposure is $7.5mm - therefore at least $4.5mm will be refunded to JSM.  While not publicly disclosed, we estimated that JSM is currently holding its investment in Prince at $7.6mm, so a further $3.1mm loss could occur (JSM has written down the value of Prince and Peninsula from $33.0mm to $20.9mm so we assume a 37% write down occurred on both properties). 

 

3.       Contingent liabilities - Archetype, a provider of architectural designs, construction management services, and other developer related services, has claimed an amount of $1.0mm against JSM who has responded with a counter suit.  The company has noted that they may hold a small reserve due to this liability and indicated that they do not expect to pay. 

 

4.       Country risk - The economies of both Cambodia and Vietnam are rebounding nicely from the economic downturn, but are highly dependent on the health of the global economy (as are most investments).

 

Appendix

 

Following approval of the liquidation in late April, JSM engaged lawyers and consultants to create data rooms for all properties.  As a result of this, the company has confirmed that it has clear title to all properties. 

Embassy Centre - Phnom Penh, Cambodia

Est NAV: $24.4mm; $0.11/sh

Est distribution date: 3/30/2011

Location/quality:

1.       Directly across from the US Embassy

2.       Central Business District ("CBD")

3.       1 block north of "Bank Street" and 1 block east of Canadia & Vattanac towers

4.       4 blocks northeast of the new Prime Minister's offices

Notes from trip:

1.       A local broker noted that there were at least two parties interested in purchasing this asset in June 2010, before the property was put on the market

 

Prince/Peninsula - Ho Chi Minh City, Vietnam

Est NAV: $20.9mm; $0.09/sh

Est distribution date: 6/30/2011

Location/quality:

1.       Thao Dien district - neighborhood of wealthy locals and expatriates

2.       One block from the riverfront - positive given that there are height restrictions on properties located on the riverfront

3.       The British International School and The American School are located less than 10 minutes away allowing for expatriates to raise a family

Notes from trip:

1.       A local broker noted that there were multiple buyers interested in purchasing these assets in June 2010, before the property was put on the market

Colonial Mansion I & II - Phnom Penh, Cambodia

Est NAV: $13.6mm; $0.06/sh

Distribution Date: 9/30/2011

Location/quality:

1.       Located 1 block away from the US Embassy

2.       Central Business District ("CBD")

3.       2 blocks north of "Bank Street" and 1 block east of Canadia & Vattanac towers (large bank towers)

4.       Less than one mile Northeast of the new Prime Minister's offices

5.       Amenities: (i) CCTV, (ii) 24/7 security guard, (iii) pool, (iv) gym,  (v) enclosed garage, (vi) French restaurant

Notes from trip:

1.       Local rumor is that CBRE is working on a contract with the U.S. Embassy

2.       Advantage over similar buildings given a lower price point and proximity to U.S. Embassy

3.       Lycee Francais and The International School are located within 1 block allowing for expatriates to raise a family

 

Ounalom - Phnom Penh, Cambodia

Est NAV: $5.3mm; $0.02/sh

Distribution Date: 12/31/2011

Location/quality:

1.       Along Tonle Sap riverfront

2.       5 minute drive to the only casino in Phnom Penh

3.       Café/restaurants located directly to the north/south - area where tourists/expatriates/wealthy locals congregate

4.       Adjacent to Wat Ounalom Buddhist temple

Notes from trip:

1.       Prime real estate located in the "nightlife" area of the city

2.       A local broker estimated this property could take up to a year to sell

 

Siem Reap - Siem Reap, Cambodia

Est NAV: $11.7mm; $0.05/sh

Distribution Date: 12/31/2011

Location/quality:

1.       15-20 minutes away from Angkor Wat - a world renown tourist attraction

2.       Walking distance to the local marketplace, bar, and restaurant area

3.       Located near: (i) Raffles Hotel, (ii) Royal Palace & gardens, (iii) Amansara, and (iv) FCC (high-end restaurant)

Notes from trip:

1.       3.1 hectares (7.7 acres) of prime real estate centrally located in the tourist district of Siem Reap

2.       A local broker estimated this property could take up to a year to sell

Resources

Outside IR - Andrew Potts of Panmure Gordon: andrew.potts@panmure.com or 44 20 7614 8390.

Company contact - Chairman Scott Verges: sverges@tmgpartners.com or 415 400 2461.

The 6/30/2010 interim report provides detail on each property.


 


Catalyst

 
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    Description

    JSM Indochina Ltd. ("JSM") is an attractive liquidation with an estimated gross return of 31-45% and because most liquidation proceeds will be returned in <12 months the IRR is >50%.  Importantly, we believe there is no reasonable scenario in which proceeds are below the current price of $0.31/sh.  Our trip to visit all of JSM's properties, discussions with local real estate brokers & lawyers, calls with management, and the June 30, 2010 valuations by Cushman & Wakefield and Jones Land LaSalle gives us comfort that our downside estimate of $0.34/sh, 11% above the current price, is reasonable.

    This liquidation is the result of a December 2009 Extraordinary General Meeting ("EGM") that resulted in Passport Capital LLC ("Passport") taking control of the Board.  Therefore, the company is solely focused on maximizing proceeds to shareholders - there is no risk that management decides to stop the liquidation or retain proceeds for new projects as Passport owns 13%. 

    JSM's pro forma Net Asset Value ("NAV") of $0.49 consists of $0.18 of cash and $0.31 of real estate in 7 properties in Vietnam and Cambodia.  Our estimate of realized proceeds of $0.40-$0.45/sh includes wind-down costs and write downs to real estate values, but is still 31-45% above the current price. 

    Having visited JSM's properties and met with real estate brokers and lawyers in Cambodia and Vietnam, we know there is a fair bit of interest in the properties.  Our best guess is that the current book value of real estate will be realized through the sale process CB Richard Ellis ("CBRE") began approximately one month ago.  There is further detail on each property in the appendix, but it's important to note that:

    (i)                         there is no debt on any of the 7 properties, which eliminates the risk that a slight change in property value has a magnified impact on liquidation proceeds;

    (ii)                        the properties are mostly raw land, which is preferred by most buyers to developed properties, but more difficult to precisely value.  Offsetting this, the properties are prime locations (e.g., ~3 acres directly across from the U.S. embassy); and

    (iii)                      while global commercial real estate activity is weak, meetings with local brokers revealed multiple bidders for most properties because similar properties do not exist.

    The company is committed to quickly returning sale proceeds - we've been told to anticipate a distribution upon each property sale.  Thus far, all dividends have been treated as a return of capital and not taxed - the company anticipates this will be the case for future dividends.  JSM returned 25c in April 2010, 15c in September 2010, and we anticipate an additional 5c (or more) before year-end from a sale closed on Oct 11th.

    The liquidation is led by Chairman Scott Verges ("Verges").  We've spoken with Verges numerous times and he's well suited to manage this liquidation - he has 30+ years of real estate experience, has previously liquidated a $2b real estate portfolio realizing proceeds 20% above book value, and as an appointment of Passport (he is a friend of Passport's General Counsel) is solely focused on maximizing proceeds.  Further, while Verges has made it clear that JSM is not a forced seller, he noted that JSM's large shareholders are "IRR focused" and therefore he is working to complete the liquidation as quick as possible.

    JSM's market cap is $71mm making this a personal account trade for most VIC members.  The 3 month average daily value traded is just $56k, but we found it fairly easy to buy stock by displaying a bid.  Also, Lehman Brothers International EU ("Lehman") owns 31.7mm shares - we're a small fund and we bought our position in the open market without contacting Lehman, but they may want to sell.  In the U.S. commissions are generally a fixed amount per share, however, our commission expense has been 50bps of the value of stock purchased, which includes a U.K. stamp tax.

    Background

     

                    JSM went public in London raising $207mm in July 2007 (stock is listed on the AIM and trades in US$).  At the time of the IPO, 6 properties were transferred from CEO/Investment Manager Craig Jones ("Jones") to JSM in return for ~18% of JSM's stock, worth $38mm, and Jones outlined plans to invest the remaining cash within one year.  However, two years after the IPO, only 3 additional properties had been purchased and JSM's cash balance was $169mm.  This was likely because Jones was annually paid 2% of NAV and was therefore compensated to sit on cash.  Moreover, departures of key personnel raised the ire of Passport, an investor since June 2008, which installed a new Board in December 2009.

     

    After a comprehensive review of the investment strategy, the reconstituted board terminated the management agreement with Jones and replaced it with a consultancy agreement (detailed later).  Another EGM was held in April 2010 and an orderly realization of the company's portfolio was unanimously approved.  Further, a dividend of $0.25/sh was declared.

     

    In late September, JSM released 1H 2010 results and announced another dividend of $0.15.  Later in September, the company appointed CBRE to sell the real estate portfolio. 

     

    Following the October 11th sale of JSM's interest in Hieu Duc Joint Stock Company ("Hieu Duc"), which owned 2 properties, for 98% of book value there are 7 remaining properties:

    (i)                         3 standalone Cambodia properties currently being marketed by CBRE (Embassy Centre, Siem Reap, and Ounalom);

    (ii)                        2 adjacent Cambodia properties will be marketed by CBRE before year-end upon the completion of construction (Colonial Mansion I & Colonial Mansion II); and

    (iii)                      2 Vietnam properties secured by cash pledges are unlikely to be marketed until early 2011 as the company is working with the banks to either extract the cash pledges or sell the underlying properties (Prince and Peninsula).

     

    Valuation

     

    Our estimate of liquidation proceeds builds from the 6/30/10 balance sheet, the midpoint of proceeds from the sale of Hieu Duc ($10.3mm was received on 10/11/10 and as much as $2.0mm will be received when a tax matter is resolved, which is expected in the "coming weeks" per the press release), $3.6mm of remaining construction expenditures on Colonial Mansion II (this completes all construction), and no taxes on property sales (consistent with conversations with management and JSM filings, including the 2007 Admission Document).  Our 3 scenarios are:

    (i)                        Best Guess - assumes $10mm of wind-down expenses and that the current book value of real estate is realized.  We have discussed our expectations of wind-down expenses with the company and been told that $10mm is "in the ballpark."  Verges and the other directors of JSM have spent significant time speaking with investment bankers, brokers, and preparing data rooms for JSM's properties and they believe that the current book value of real estate is a reasonable estimate of the proceeds that will be realized from the wind-down.  Following a 5 day trip to Cambodia and Vietnam to  visit every property and meet real estate brokers and lawyers, we also believe that the current book value of real estate will be realized.  We believe that it's possible that the current book value of real estate is exceeded as the 6/30/10 interim report notes "the fair value of the Group's investment properties at 30 June 2010 has been arrived at by the Directors on the basis of the lower of the valuations carried out at that date by Cushman & Wakefield (Vietnam), Ltd. ("C&W") and Jones Lang LaSalle Ltd ("JLL") who are independent valuers that are not related to the Group." 

    (ii)                      Conservative - Wind-down expenses of $12.5mm are 25% above "Best Guess" and a 10% haircut is applied to the current book value of real estate. 

    (iii)                     Downside - Wind-down expenses of $15.0mm are 50% above "Best Guess" and a 25% haircut is applied to the current book value of real estate.   

    WS Est Liquidation Value



    Best Guess Conservative Downside
    Cash (6/30/2010)                   67.6                   67.6                   67.6
    Less: Dividend (9/24/2010)                   34.4                   34.4                   34.4
    Plus: Hieu Duc Sale (midpt)                   11.2                   11.2                   11.2
    PF Cash                   44.4                   44.4                   44.4
    Less: 2H 2010 Construction                      3.6                      3.6                      3.6
    PF Cash                   40.8                   40.8                   40.8




    Real Estate Portfolio                   72.2                   72.2                   72.2
    Plus: Remaining Construction                      3.6                      3.6                      3.6
    Real Estate Value                   75.8                   75.8                   75.8




    Net other assets/liabilities                   (3.6)                   (3.6)                   (3.6)




    NAV - current                 113.0                 113.0                 113.0
    Less: Wind-down Expenses                 (10.0)                 (12.5)                 (15.0)
    Haircut to Real Estate Value                        -                     (7.6)                 (19.0)
    NAV                 103.0                   92.9                   79.1
    S/O                 229.5                 229.5                 229.5
    NAV/sh $0.45 $0.40 $0.34
    Current Price $0.31 $0.31 $0.31
    Upside 45% 31% 11%

     

    Cash, cash equivalents, and time deposits

    There is minimal FX risk as 96.3% of cash was denominated in U.S. dollars at 12/31/09 (6/30/10 U.S. dollars not reported, but we were told it has not materially changed).

     

    Wind-down expenses

    This includes remaining professional fees of $2.0mm, director fees of $2.0mm, and $1.0mm of staff costs.  The company will pay Jones ~$4.8mm (consultancy agreement of $222k/mth for 15mths = $3.3mm; expense reimbursement of ~$100k/mth for 15 mths = $1.5mm).  Minor items, such as bank charges, bring total wind-down expenses to ~$10.0mm.  Given the low current interest rate environment, we give no credit for interest income on the cash balance. 

     

    Jones is eligible for a $1.0mm bonus payment, which is at the complete discretion of the board.  In talks with Verges, it has been made clear that unless Jones creates significant value for shareholders he will not receive this bonus - specifically, we were told, "Craig needs to bring offers to the table well above NAV to receive this bonus."  Therefore, we do not include it in our estimate of wind-down expenses.

     

    Estimated timing of dividends

    As JSM is currently attempting to sell each property, management does not provide individual property values.  In order to estimate an IRR, we have included our individual property value estimates, which total to the current book value of real estate. 



    Property

    Estimated Timing  Est Value   Div/sh   Date 
    Hieu Duc
     $11.2  $0.05 12/31/10
    Embassy Centre  $24.4  $0.11 3/30/11
    Prince/Peninsula  $20.9  $0.09 6/30/11
    Colonial Mansion I & II  $13.6  $0.06 9/30/11
    Ounalom
     $5.3  $0.02 12/31/11
    Siem Reap
     $11.7  $0.05 12/31/11
    Final Cash Distribution  $16.0  $0.07 4/30/12


    IRR 60%

     

    The above reflects the current book value of real estate.  Using the value estimates in our conservative scenario, the IRR is 41%.  Using the value estimates in our downside scenario, the IRR is 15%.  We assume that the final distribution is made 2 years after the liquidation was begun - we're cautiously optimistic that this will be beat.

     

    Risks

    1.       Timing - Cambodia/Vietnam real estate markets are less liquid than U.S. markets.  We believe we've accounted for this as we assume sales are closed 6-15 months from the time that CBRE was hired.

     

    2.       Prince - JSM does not currently own either Prince or Peninsula.  Rather, through cash pledges JSM has the right to acquire Prince and/or Peninsula.  JSM owns 80% of New Vision, an entity created to acquire property and build residential apartments.  As part of the arrangement through which the right to acquire Prince was obtained, JSM pledged $12mm to Navibank to secure New Vision's right to acquire the property.  Because of the need to work with its minority partner and Navibank, the manner that Prince will be liquidated is unclear.  Currently JSM is in discussions with its minority partner and Navibank to determine next steps for Prince.  While the company hasn't stated their goal for these discussions, JSM is liquidating so it seems likely that JSM does not want to proceed with the land acquisition and would like its $12mm pledge refunded.  The 6/30/10 interim report includes further details, but it's worth noting that JSM may not be able to come to an agreement with New Vision and Navibank.  We've been given the impression that JSM is attempting to come to an agreement that all parties find acceptable, but because of its 80% ownership, JSM is able to legally exclude its minority partner and work directly with Navibank - if push comes to shove, JSM will do what is in shareholders best interest.  Of the $12mm pledged to Navibank, JSM's maximum exposure is $7.5mm - therefore at least $4.5mm will be refunded to JSM.  While not publicly disclosed, we estimated that JSM is currently holding its investment in Prince at $7.6mm, so a further $3.1mm loss could occur (JSM has written down the value of Prince and Peninsula from $33.0mm to $20.9mm so we assume a 37% write down occurred on both properties). 

     

    3.       Contingent liabilities - Archetype, a provider of architectural designs, construction management services, and other developer related services, has claimed an amount of $1.0mm against JSM who has responded with a counter suit.  The company has noted that they may hold a small reserve due to this liability and indicated that they do not expect to pay. 

     

    4.       Country risk - The economies of both Cambodia and Vietnam are rebounding nicely from the economic downturn, but are highly dependent on the health of the global economy (as are most investments).

     

    Appendix

     

    Following approval of the liquidation in late April, JSM engaged lawyers and consultants to create data rooms for all properties.  As a result of this, the company has confirmed that it has clear title to all properties. 

    Embassy Centre - Phnom Penh, Cambodia

    Est NAV: $24.4mm; $0.11/sh

    Est distribution date: 3/30/2011

    Location/quality:

    1.       Directly across from the US Embassy

    2.       Central Business District ("CBD")

    3.       1 block north of "Bank Street" and 1 block east of Canadia & Vattanac towers

    4.       4 blocks northeast of the new Prime Minister's offices

    Notes from trip:

    1.       A local broker noted that there were at least two parties interested in purchasing this asset in June 2010, before the property was put on the market

     

    Prince/Peninsula - Ho Chi Minh City, Vietnam

    Est NAV: $20.9mm; $0.09/sh

    Est distribution date: 6/30/2011

    Location/quality:

    1.       Thao Dien district - neighborhood of wealthy locals and expatriates

    2.       One block from the riverfront - positive given that there are height restrictions on properties located on the riverfront

    3.       The British International School and The American School are located less than 10 minutes away allowing for expatriates to raise a family

    Notes from trip:

    1.       A local broker noted that there were multiple buyers interested in purchasing these assets in June 2010, before the property was put on the market

    Colonial Mansion I & II - Phnom Penh, Cambodia

    Est NAV: $13.6mm; $0.06/sh

    Distribution Date: 9/30/2011

    Location/quality:

    1.       Located 1 block away from the US Embassy

    2.       Central Business District ("CBD")

    3.       2 blocks north of "Bank Street" and 1 block east of Canadia & Vattanac towers (large bank towers)

    4.       Less than one mile Northeast of the new Prime Minister's offices

    5.       Amenities: (i) CCTV, (ii) 24/7 security guard, (iii) pool, (iv) gym,  (v) enclosed garage, (vi) French restaurant

    Notes from trip:

    1.       Local rumor is that CBRE is working on a contract with the U.S. Embassy

    2.       Advantage over similar buildings given a lower price point and proximity to U.S. Embassy

    3.       Lycee Francais and The International School are located within 1 block allowing for expatriates to raise a family

     

    Ounalom - Phnom Penh, Cambodia

    Est NAV: $5.3mm; $0.02/sh

    Distribution Date: 12/31/2011

    Location/quality:

    1.       Along Tonle Sap riverfront

    2.       5 minute drive to the only casino in Phnom Penh

    3.       Café/restaurants located directly to the north/south - area where tourists/expatriates/wealthy locals congregate

    4.       Adjacent to Wat Ounalom Buddhist temple

    Notes from trip:

    1.       Prime real estate located in the "nightlife" area of the city

    2.       A local broker estimated this property could take up to a year to sell

     

    Siem Reap - Siem Reap, Cambodia

    Est NAV: $11.7mm; $0.05/sh

    Distribution Date: 12/31/2011

    Location/quality:

    1.       15-20 minutes away from Angkor Wat - a world renown tourist attraction

    2.       Walking distance to the local marketplace, bar, and restaurant area

    3.       Located near: (i) Raffles Hotel, (ii) Royal Palace & gardens, (iii) Amansara, and (iv) FCC (high-end restaurant)

    Notes from trip:

    1.       3.1 hectares (7.7 acres) of prime real estate centrally located in the tourist district of Siem Reap

    2.       A local broker estimated this property could take up to a year to sell

    Resources

    Outside IR - Andrew Potts of Panmure Gordon: andrew.potts@panmure.com or 44 20 7614 8390.

    Company contact - Chairman Scott Verges: sverges@tmgpartners.com or 415 400 2461.

    The 6/30/2010 interim report provides detail on each property.


     


    Catalyst

     

    Messages


    SubjectLease commitments?
    Entry10/20/2010 06:02 PM
    Membercxix
    On the last page of the 6.30.10 report the company notes lease commitments of 6.3mm. What are these leases related to and do you account for them in your liquidation valuation? Can they be cancelled at modest cost? Thanks.

    SubjectBroker/Lawyer commentary
    Entry10/20/2010 09:42 PM
    Membersunny118

    Thanks for the post - I've followed JSM for 9 months and agree with your thinking.  I found the difficult part of this liquidation was gaining comfort in the properties.  Obviously your visit to Vietnam/Cambodia helped you with this.  Can you elaborate on your conversations with the brokers & lawyers?

     

    It's always difficult to know the value of properties in countries like Vietnam & Cambodia - I'm impressed you visited them.  Ch Verges recently gave me similar commentary regarding expected proceeds from property sales - he noted that the 6/30/10 write-downs "cleared the decks" and that the NAV is what he expects from the CBRE sale process.  My experience with liquidations is that the management/board is careful to avoid getting sued so tends to set expectations that they feel comfortable they can beat (Ch Verges is a lawyer so it's in his nature to be careful).  We'll need to wait and see the value that sales occur at, but as I received this comment after CBRE began the sale process, I view it as an informed estimate.

     

    Regarding cxix's question, my recollection is that the $6.3mm lease commitment is related to the 84 yr lease on Siem Reap and therefore already included in the NAV estimates from C&W and JLL as the buyer of Siem Reap will need to assume the operating lease.  But you've done more work on this than me so please confirm.


    SubjectRE: Broker/Lawyer commentary
    Entry10/22/2010 01:32 AM
    Memberchewy
     

    The minority party in Prince is Mr. Nguyen An ("Mr. An"), who controls Hai An Corporation, a local developer.  Mr. An previously developed River Garden, a luxury residential complex adjacent to Prince (www.rivergarden.com.vn).  Within the last month, Chairman Scott Verges stated that JSM and Mr. An have a "very productive relationship" - hopefully this allows for a reasonably quick resolution.

     

    Cambodia properties - Ounalom, Siem Reap, Embassy Centre, and Colonial Mansion I & II

    Cambodians generally accumulate wealth and store it in the form of "cash under the bed" or gold.  The primary way to invest in Cambodia is through land as there is not a stock market.  In order to circumvent taxes, many locals sell property in private cash transactions, which are not reported.  Since Cambodian transactions tend not to have debt financing, or very limited debt financing, the real estate market wasn't impacted as severely as it was in the U.S. 

     

    Unfortunately, it is hard to find comparable past sales due to the private nature of transactions and the uniqueness of properties such as Ounalom and Siem Reap.  We were able to gain comfort because of our talks with brokers, property lawyers, and personally viewing the land. 

     

    A local broker noted interest of two international buyers in Embassy Centre, and this was before it was put up for sale.  He also noted that the U.S. Embassy expressed interest in purchasing the land, but it was unclear if the U.S. government would provide funding. 

     

    When I asked a broker if he would purchase any of JSM's properties himself, the broker noted that if he had the capital, he would purchase Embassy Center and Colonial Mansion I & II because of the property's locations.  Location is important given the shifting trend in the city to develop further north, which puts JSM's property in the heart of Phnom Penh.  

     

    When we viewed Ounalom, the broker noted that this was a very desirable asset given its location across from the riverfront promenade and walking distance to many restaurants that cater to the wealthy Cambodian and expatriate community.  The location is ideal for a boutique hotel, which have the highest average occupancy rates in the city at 94% vs. 3 & 4 star hotels at ~70%. 

     

    Vietnam properties - Prince and Peninsula

    Similar to Cambodians, Vietnamese generally accumulate wealth and store it in the form of "cash under the bed" or gold.  However, the Vietnamese market is more active given a number of speculative real estate buyers.  Debt financing is restricted to well-known developers.

     

    During our visit to JSM's properties in Ho Chi Minh City, a broker noted that the property across from Prince is on the market at an asking price of $2,000/sqm.  The broker felt the current asking price was 10-20% too high as properties directly on the riverfront have a height restriction.  JSM's properties, located 1 block from the riverfront, do not have height restrictions - for this reason the broker felt that JSM's properties are more valuable.  A 15% discount, the midpoint of the broker's suggested discount, results in a value of $20.6mm, $0.3mm below the current book value.

     

    NAV estimate Prince Peninsula
    $/sqm $2,000 $2,000
    Discount 15.0% 15.0%
    $/sqm $1,700 $1,700
    Site Area (sqm)                 5,824                 7,435
    Total Value (mm's) $9.9 $12.6
    % ownership 80.0% 100.0%
    Individual Property Value $7.9 $12.6
    Total Value $20.6  
    Current BV $20.9  

     

    The broker also noted JSM's Thao Dien district properties are ideal because of proximity to the CBD, wealthy neighborhood, quiet surroundings, river views, and no height restrictions.  Her thoughts were corroborated later in a meeting with a broker from another office who knew three individuals interested in purchasing JSM's properties if they were on the market.  A fourth party would also have an offer on the table in a month if he knew Prince/Peninsula were for sale.  While these are just the opinions/anecdotes of brokers, it adds additional comfort to the quality of Prince/Peninsula. 

     

     

    We also spoke with a former member of the valuation team at C&W that covered Vietnam and Cambodia.  It was noted that the there was no coercion by the current or former management team to inflate property values; apparently pressuring appraisers is quite common so JSM stuck out as an exception.  For this reason and JSM's stated intention to sell all properties as part of its liquidation, the former member of the valuation team felt the appraised values fairly represent what can be expected to be achieved in the sale process.

     

    As already pointed out, the lease commitments of $6.3mm on the last page of the interim report are related to Siem Reap - the property is held under a leasehold agreement with ~83 years remaining.  The company has noted that this is already included in the NAV and will be transferred when the property is sold. 

     


    SubjectCambodia CBRE Report
    Entry10/22/2010 01:34 AM
    Memberchewy
     

    Below is some background on Cambodia from a CBRE Research special report titled "Building a New Cambodia: Opportunities in the Phnom Penh Real Estate Market" from April 2010.  This is a fairly long report so I lifted the information I felt was most helpful.

     

    The capital Phnom Penh is now home to around two million people and bustles with activity, while the re-emergence of the tourism industry centered on the World Heritage site of Angkor Wat and the nearby city of Siem Reap has brought the country significant economic benefits. 

     

    Activity in the Cambodian real estate sector has grown significantly over the past 10 years with an influx of foreign and repatriated money being invested in projects in Phnom Penh.  In the three or four years prior to the beginning of the economic downturn in mid-2008 the local real estate market was being heralded as Southeast Asia's latest property hotspot and was booming with the opening of new hotels, restaurants and bars. 

     

    The onset of the global financial crisis in mid-2008 saw banks begin to restrict loans for real estate as economic growth slowed and property prices fell.  Developers were hit by shrinking demand and the short supply of bank finance available for potential buyers.  The tightening of credit in global capital markets and difficulties faces by international financiers meant many projects were put on hold or cancelled altogether, although the market avoided total collapse as many projects were suspended before they were even constructed and most buyers paid in cash and did not require mortgages.  In some respects the economic downturn acted as a correction as it prevented a large number of projects from all coming on stream at the same time and over-saturating the market. 

     

    Signs of recovery have been evident in early 2010.  Construction activity, mostly centered around smaller developments, began to pick up pace towards the end of 2009 whilst the November 2009 soft opening of Phnom Penh's first Grade A office skyscraper, the 30-storey Canadia Tower, was an important milestone for the city's fledgling office market. 

     

    Real estate activity in Cambodia has mushroomed over the past decade with property being one of only a few investment objects available in the country until the stock market is fully established.  Real estate financing has therefore become an increasingly important service.  Many developers or investors are funded largely with equity but as the economy grows and financing becomes more readily available an increasing number of investors are looking to leverage their investments and banks are requested to finance projects that are on hand. 


    SubjectTrading Update
    Entry10/22/2010 01:16 PM
    Memberchewy
     

    JSM provided a trading update after market close.  The key point of the trading update is that after 6 weeks of the sale process, "CBRE has now advised the Company that their expected response from potential foreign buyers has been less robust than hoped due, they believe, to the softness in markets and investment worldwide and a continued hesitancy to investment in the Cambodian real estate market."  The trading update further noted, "Accordingly, any realisations in Cambodia are likely to be adversely affected by the weak market and take place at levels below the last reported NAV."

     

    This information about Cambodia is the key point, but additional property information:

    1. Colonial Mansion - construction is expected to be materially completed before year-end and broadly within budget. Nothing different from our past expectations.

    2. Prince - discussions continue and the "Board expects to be able to update shareholders shortly." Mildly positive as it shows timing is likely faster than we previously assumed. As the release disclosed that the current book value of properties in Cambodia are unlikely to be realized, but this was not stated for Prince (a Vietnam property), I believe it's reasonable to infer that there has been no expected change to the current book value.

    3. Peninsula - discussions continue and the "Board expects to be able to update shareholders shortly." Mildly positive as it shows timing is likely faster than we previously assumed. As the release disclosed that the current book value of properties in Cambodia are unlikely to be realized, but this was not stated for Peninsula (a Vietnam property), I believe it's reasonable to infer that there has been no expected change to the current book value.

     

    I'm caught off guard by this and I apologize for the unfortunate timing of my post.  My revised expectations are presented below.  This was a security with a decent margin of safety - unfortunately we'll likely need it.  We found JSM attractive as we thought it would be tough to lose money as the stock price was close to our downside estimate of 34c.  As shown below, we've lowered our downside estimate to 28.5c.

     

    Based on today's trading update, our new valuation makes the following changes:

     

    Best Guess:

    Cambodia properties - 25% discount to current book value (knock one-quarter off estimated proceeds)

    Vietnam properties - no discount to current book value

     

    Conservative:

    Cambodia properties - 33.3% discount to current book value (knock one-third off estimated proceeds)

    Vietnam properties - no discount to current book value

     

    Downside:

    Cambodia properties - 50% discount to current book value (knock one-half off estimated proceeds)

    Vietnam properties - 25% discount to current book value

     

      Best Guess Conservative Downside
    Cash (6/30/2010)                   67.6                   67.6                   67.6
    Less: Dividend (9/24/2010)                   34.4                   34.4                   34.4
    Plus: Hieu Duc Sale (midpt)                   11.2                   11.2                   11.2
    PF Cash                   44.4                   44.4                   44.4
    Less: 2H 2010 Construction                      3.6                      3.6                      3.6
    PF Cash                   40.8                   40.8                   40.8
           
    Cambodia                   51.3                   51.3                   51.3
    Plus: Remaining Construction                      3.6                      3.6                      3.6
    Real Estate Value                   54.9                   54.9                   54.9
           
    Vietnam                   20.9                   20.9                   20.9
           
    Net other assets/liabilities                   (3.6)                   (3.6)                   (3.6)
           
    NAV - current                 113.0                 113.0                 113.0
    Less: Wind-down Expenses                 (10.0)                 (12.5)                 (15.0)
    Haircut to Cambodia Real Estate Value                 (13.7)                 (18.3)                 (27.4)
    Haircut to Vietnam Real Estate Value                        -                          -                     (5.2)
    NAV                   89.3                   82.2                   65.3
    S/O                 229.5                 229.5                 229.5
    NAV/sh $0.389 $0.358 $0.285
    Current Price $0.333 $0.333 $0.333
    Upside 17% 8% -14%

      

    Our estimated IRR for our best guess is below.  The only adjustment is to assume that proceeds for Prince/Peninsula are received on 3/30/11 rather than 6/30/11 given that the "Board expects to be able to update shareholders shortly" on both.

        Property    
    Estimated Timing  Est Value   Div/sh   Date 
    Hieu Duc    $11.2  $0.05 12/31/10
    Embassy Centre  $21.6  $0.09 3/30/11
    Prince/Peninsula  $20.9  $0.09 3/30/11
    Colonial Mansion I & II  $8.1  $0.04 9/30/11
    Ounalom    $2.5  $0.01 12/31/11
    Siem Reap    $8.9  $0.04 12/31/11
    Final Cash Distribution  $16.0  $0.07 4/30/12
        IRR 24%  

     

    Our estimated IRR in our conservative case is now 11%, and our estimated IRR in our downside case is -20%.

     

    The full press release:

     

    JSM Indochina Ltd.

     

    22 October 2010

     

    Trading update

     

    The Board  of JSM  Indochina Ltd.  ("JSM")(AIM: JSM.L)  wishes to  provide  an update to shareholders on progress since its interim results.

     

    As previously announced,  the Board was  pleased to announce  the disposal  of JSM's 49% shareholding  in Hieu Duc  for a gross  consideration of  Vietnamese Dong 238,543,200,000. The  tax position is  expected to be  determined in  the coming weeks and the Board will update shareholders on the final position.  As per the  11  October  2010  announcement, until  the  tax  position  has  been determined, all monies are  required to be  held in an  account in Vietnam  in Vietnamese Dong and may not be transferred into US Dollars.

     

    Completion of the construction  of Colonial Mansion II  is now expected to  be materially completed before  the year  end and broadly  within budget.  Active marketing for tenants is expected to commence in early Q1 2011.

     

    In relation to the Prince property,  the Executive Committee continue to  have discussions with JSM's joint venture partner,  and also Navibank, with a  view to resolving the outstanding matters. The  Board expects to be able to  update shareholders shortly.

     

    In relation to  the Peninsula property,  the steps to  transfer the  Peninsula land use rights  into a  new nominee company  are progressing,  and the  Board expects to be able to update shareholders shortly.

     

    The Cambodian real  estate market  in particular continues  to be  challenging and,  as  set  out  in  the  interim  results,  is  characterised  by  limited transparency, a  limited  number  of  comparable  transactions  and  generally decreased transaction volumes as a result of the economic downturn.

     

    As previously announced,  the Company  retained CBRE to  market the  Company's properties for sale.  The active marketing  process has now been in place  for approximately 6 weeks.  CBRE has now  advised the Company that their  expected response from potential foreign  buyers has been less  robust than hoped  due, they believe,  to the  softness  in markets  and  investment worldwide  and  a continued hesitancy to investment in the Cambodian real estate market.

     

    Given this  backdrop,  the Board  wishes  to  reiterate the  caution  that  it expressed in the interim results,  that given limited transaction volumes  and comparable sales data, the prices at which the assets could be realised may be

    different  to  individual   or  cumulative  book   values.  Accordingly,   any

    realisations in  Cambodia are  likely to  be adversely  affected by  the  weak market and take  place at  levels below the  last reported  NAV. In  addition, there remain the various ongoing costs of running JSM.  

     

     

     

    For further information:

     

    JSM Indochina Ltd.             +1 415 400 2461 

    Scott Verges, Chairman 

    Panmure Gordon (UK) Limited    +44 20 7459 3600

    Edward Farmer / Andrew Potts

    Buchanan Communications        +44 20 7466 5000

    Lisa Baderoon / Charles Ryland

     

     


     


    SubjectRE: Trading Update
    Entry10/24/2010 10:46 PM
    Membersunny118
    chewy,
     
    I spoke with Chairman Scott Verges early Friday afternoon and I wanted to share the datapoints I got:
    1. There was a board meeting later on Friday and the focus of the meeting will be lowering expenses. I don't disagree with your estimate of $15mm of run-down expense, but it seems that Scott wants to dramatically scale back expenses.
     
    2. For the 2 Vietnam properties (Prince/Peninsula), they're very likely to get book value ($20.9mm) and there is a decent chance they do better.  Also they seem to be moving pretty quick towards resolutions.
     
    3. Scott made a point of noting that Colonial Mansion I & II are very different than the 3 Cambodian properties currently on the market as they'll soon start to be rented and therefore cashflowing.  This is will attract a much wider audience of buyers when they're put on the market around Jan 1st.  Scott thought that book value is still likely.
     
    4. Siem Reap, Embassy Centre, and Ounalom are the 3 most illiquid properties so Friday's press release that the sale process is off to a slow start is disappointing, but not surprising.  The 3 properties that would be most difficult to sell were intentionally brought to market first.
     
    I think your downside scenario is a good place to start and I'd make the following adjustments: 
    1. I wouldn't knock the Vietnam properties by 25%.  I'd continue to hold them at book value.
     
    2. Also, I wouldn't knock Colonial Mansion I & II.  I think it's fair to say there is a big difference between raw land and residential/office buildings.  I'd continue to hold them at book value.
    3. I think that if Siem Reap, Embassy Centre, and Ounalom had to be sold & closed within the next 12 months, 50% of book value is fair.  So I wouldn't change this assumption.
     
    This results in $0.333/sh.
     
    Frankly, I've been reasonably disappointed with how this liquidation has progressed and it's certainly possible for an outcome less favorable.  But there are some areas of upside that I don't include:
     
    1. There is a $2.6mm deferred tax asset that I believe is from past writeups of the properties.  Given Friday's release, it seems likely that properties are either written down or sell below book.  Therefore, this won't materialize as a cash tax (or at least a good chunk of it won't).  This is worth a little more than 1c/sh.
     
    2. Based on interest to date (and the properties aren't yet on the market) Scott is fairly confident that Prince and Peninsula will go for at least book value and potentially materially more.  We'll see if this materializes, but 10% above book value is almost 1c/sh.
     
    3. I got the impression from Scott that JSM could be setup as a liquidating trust even if a few properties remained (he brought this up, not me - gave the example of 4 remaining properties and letting CBRE run a sales process).  Going dark soon by converting to a liquidating trust could lower your $15mm expense estimate by at least a couple million (another 1c/sh).
     
    4. The company is very unlikely to sell real estate at 50% below NAV - waiting for strong real estate markets will lower the IRR, but will increase gross proceeds.
     
    It seems that the most likely scenario is that the timing for the sale of Siem Reap, Embassy Centre, and Ounalom has been pushed out.  Because of this JSM will convert to a liquidating trust to lower expenses.  So while my estimate above is $0.333/sh if all property sales close within 12 months, I think the most likely scenario is $0.37-$0.40/sh by lowering expenses, taking a less than 50% haircut to book value on the 3 Cambodia properties and not paying most of the deferred tax liability.  The issue is I'm not sure how long this takes.  In a world of 0% interest rates, it's okay to wait.
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