At the close of business on August 20th, DWS RREEF Real Estate II (SRO) traded at $0.75 per share, a 20.21% discount to the fund’s Net Asset Value (“NAV”). A first effort to liquidate the Fund had failed and the market discount reflected great doubt that a second effort could have different results.
On the morning of August 21st, my article predicting a successful second vote was published here at Seeking Alpha. On that day, the discount narrowed slightly to a 17.53%. Last week, my prediction proved accurate, lending to a converged discount and market closing price of $1.20, approximately 60% higher than prices August 20th.
Reader comments were not consistently in agreement with my call. One reader demonstrated doubt as to where 5 million additional liquidation votes may come from. My responses dated August 21st noted “DWS did not really employ a significant solicitation strategy for either fund last time” and “they are committed now… it is in all shareholders best interest to adjourn a meeting to solicit additional votes.” It was necessary to adjourn the meeting and my anticipation of soliciting for additional votes also proved accurate.
Accuracy and reasoned color of my prediction had even broader implications. In my piece, I wrote:
In the case of SRO, voting polled more than 2-to-1 in favor of liquidation. The writing is clearly on the wall, and everybody can now read it. Those who desired reassigning advisory fees to liquidation were never foolish; they were acting in their own unique interests. All shareholders will now recognize that SRO's contracts will never be reassigned. Even the uniquely motivated shareholders who wanted to redirect assets under management fees to certain related private companies are not so foolish to vote against liquidation this time.
In demonstration of rational reasoning, the voting block which previously had publicly opposed liquidation on both funds, and which represented a large voting block on sister fund DWS RREEF Real Estate(SRQ) entered into a cooperation and voting agreement, and SRQ too achieved a liquidation vote.
I have had little doubt to the accuracy of my prediction and the greatest risk to timely liquidation in my perception has been lawsuits naming the Fund Companies themselves as defendant. Today's announcements of liquidation voting results included some relevant text:
“The Fund also announced that it has been removed as a defendant in a previously disclosed class action lawsuit filed in the Southern District of New York, on behalf of certain Fund stockholders, alleging various securities law disclosure violations. Accordingly, the lawsuit is not currently expected to delay or otherwise affect the Fund’s liquidation and dissolution. The Fund's investment adviser, sub-adviser, and certain Fund officers are still named as defendants in the lawsuit.”
I have no idea whether my direct words toward attorneys who brought cases against the Fund companies themselves made any impact on the removal. Yes, I did contribute my perceptions.
The takeaway from the entire SRO and SRQ liquidation scenario is not who was right or who was wrong. Rather, the takeaway is that Closed-End Funds can present extraordinary market inefficiencies. My highest conviction holding for 2010 is a Closed-End Fund, AWP. My thesis on AWP was recently disclosed on a limited basis here at Seeking Alpha.
Disclosure: Long SRO, SRQ, and AWP