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There will no quick re-rating of the BBI or BEPPA share price. Have a look at what some listed REIT's are trading at and the similarities are obvious.
Fund Name Price-to-Net Tangible Asset
Value per share (NTA)
APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%
Average 7%
From Orbis Funds management:
"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."
Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.
Patience everyone. This will take a long time.
Fund Name Price-to-Net Tangible Asset
Value per share (NTA)
APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%
Average 7%
From Orbis Funds management:
"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."
Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.
Patience everyone. This will take a long time.