# Net tangible asset backing > share price



## slk704 (1 December 2009)

Hi, 

Could someone explain to me why is many real estate stocks I am finding that the net tangible asset backing is greater than the stock price? 

Many have negative p/e  ratio to does this indicate that possibly the nta is due to reduce? 

Or do people generally not believe the stated property values, thus explaining the share price?

Thanks,
Ben


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## adobee (1 December 2009)

*Re: Net tangible asset backing < share price*

Valuations are high
Potential of re finance is poor
Rent yields could fall away


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## Taltan (1 December 2009)

*Re: Net tangible asset backing < share price*

Many have large debts and restricitive covenants hanging over them. As you said there is also doubt about their property valuations, particulalry in a forced selling situation. The outlook for finance is also weak

Of course the above factors all create an opportunity to buy in at prices that would otherwise not be available.


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## Mofra (1 December 2009)

*Re: Net tangible asset backing < share price*

They might be trying to follow the "Macquarie Satellite Model" ie running their own valuations and charging management fees based on the increase in said valuations.

Always pays to look at who values an asset, and how they do so.


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## bloomy88 (1 December 2009)

*Re: Net tangible asset backing < share price*



slk704 said:


> Many have negative p/e  ratio to does this indicate that possibly the nta is due to reduce?




They would have negative P/E ratios because they would have had negative EPS for the FY ended June 30 2009. Many real estate companies made large losses in FY 2009 due to write downs in property values.

Cheers


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## adobee (2 December 2009)

*Re: Net tangible asset backing < share price*

the strategy to date has been .. buy asset.. re value asset .. drawn down on revaluation .. pay dividend ..  not a dividend on rental yields.. this has left many with zero or really negative equity .. 

my understanding is that most banks wont look at someone elses refinance for a reit .. ie if your with westpac and you approach anz for refinance they will laught at you..


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## condog (3 December 2009)

*Re: Net tangible asset backing < share price*

These things get assembled with an absolute minimum equity and maximum debt....any time they accumulate equity above a certain amount it gets stripped out.....  with most reit having just had downgrades or write downs in earnings and or asset valuations.....it is not surprising most are negative or low NTA.....

During a booming market situation would be different, but they strip it out with dividends, acquisitions anyway...


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## Tysonboss1 (21 September 2010)

*Re: Net tangible asset backing < share price*

I heard this explanation the other day as to why this happens,

Imagine I had a special deal with the bank to earn 20% interest on a certain bank account, in the bank account was $1000 earning 20%, So the bank account had a net asset backing of $1000. If I were to sell this bank account how much should it sell for? Some people would be happy to pay $2000 or double it's NTA backing because of the high return would still earn 10% based on their investment of $2000 so this asset will trade well over nta.

However,

If this same account only earned 5%, the average person would still want to earn 10% on their investment so would only be prepared to pay $500 dollars for the $1000 of NTA backing.

It all comes back to the percieved future return on equity and property has a low return on equity.


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## ParleVouFrancois (21 September 2010)

*Re: Net tangible asset backing < share price*

Correct me if I'm wrong but the thread title is the wrong way round.

As in NTA > (greater than) share price.


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## doctorj (21 September 2010)

*Re: Net tangible asset backing < share price*



ParleVouFrancois said:


> Correct me if I'm wrong but the thread title is the wrong way round.
> 
> As in NTA > (greater than) share price.



Fixed


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## skc (21 September 2010)

*Re: Net tangible asset backing < share price*



Tysonboss1 said:


> I heard this explanation the other day as to why this happens,
> 
> Imagine I had a special deal with the bank to earn 20% interest on a certain bank account, in the bank account was $1000 earning 20%, So the bank account had a net asset backing of $1000. If I were to sell this bank account how much should it sell for? Some people would be happy to pay $2000 or double it's NTA backing because of the high return would still earn 10% based on their investment of $2000 so this asset will trade well over nta.
> 
> ...




I remember from accounting 101 that balance sheet items should be calculated/determined based on the most conservative approach.

E.g. Properties (i.e. office blocks acquired ages ago) should be recorded at historical purchase cost, even those their value could be much higher.

Other assets should be re-valued down whenever there is reasonable belief that the value is no longer true. As in the case with the saving account example.

For some reason that went out of the window during the boom times and with the Macquarie model...


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## TabJockey (12 November 2010)

*Re: Net tangible asset backing < share price*



skc said:


> I remember from accounting 101 that balance sheet items should be calculated/determined based on the most conservative approach.
> 
> E.g. Properties (i.e. office blocks acquired ages ago) should be recorded at historical purchase cost, even those their value could be much higher.
> 
> ...




Yeah they changed the rules, you can revalue property if there is a capital gain but it does not go to P&L unless it is reversing a previous loss on said property. Otherwise it goes straight to equity.


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## awg (12 November 2010)

The financials on reits are a bit of a fruit cake imo.

some peeps are making good trading dough on really bashed-up cases though

risky unless you follow them intimately


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