Regarding Michael Pascoe's article that I reproduced above:
I did some research and went looking through BNB's recent reports. What he says may in fact be correct. What he says about the revaluations IS correct - they did occur. What is in issue is whether the revaluations take account of current true value. If they don't then BNB's Profit has been over stated.
What I have written is after looking at their results. I am happy to be corrected on any errors:
REVALUATION OF ASSETS
On the Appendix 4E of their accounts for 2007, page 68, there is an item of Revenue (which adds to profit) listed as "Fair value movement on investment property" in the amount of $100,631,000.
WHAT HAS BEEN REVALUED?
What exactly does this refer to? Some clues as to what this is referring to appear in the following:
Page 2 of "Full Year Results 2007 Announcement" attributes part of the increase of the revenue in the Real Estate division to the following:
"an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."
The "Full Year 20007 Results Presentation" also refers to "uplift in value" of Asian self storage and BNP Property in the USA in a few places.
So the $100M in revalued assets (which has increased profit) is due to 2 things:
a) its Asian self storage portfolio; and
b) rise in value of American BNP property
HOW MUCH OF THIS REVALUATION IS DUE TO ASIAN SELF STORAGE AND HOW MUCH IS DUE TO THE AMERICAN BNP PROPERTY?
Nowhere is it explicitly stated how much of the $100m is due to the revaluation of the Asian self storage and how much is due to revaluing the BNP Property in the USA.
LETS EXAMINE THE REVALUED BNP PROPERTY A BIT MORE
Since the BNP Property in the USA is more worrying of the 2, lets focus on that one.
Page 21 of the "Full Year 20007 Results Presentation" refers to
"The revaluation of the BNP multi-family portfolio in the US as disclosed at the interim result."
Frankly, IMHO this comment raises some red flags. It bascially implies that the revaluation was done before mid year, and so does not take account of events of the second half of 2007.
Page 23 of "Full Year 20007 Results Presentation" justifies this higher value given to the BNP properties by stating the following:
"The total investment is currently valued in excess of $1.8bn and includes nearly $1.5bn of non-recourse, debt. We remain very comfortable with the valuation of this portfolio on our balance sheet for a number of reasons including:
• Occupancy rates across the portfolio are well in excess of 90% and they have continued to experience strong NOI growth of approximately 4%.
• We acquired older properties in the high growth Sunbelt states. Our average price per unit for both deals is well below replacement cost for newly constructed comparable units.
• We financed our purchase primarily with 10yr fixed rate debt with a weighted average coupon of 5.65%. This debt is interest only and assumable.
• On December 21, 2007, we closed a sale on two properties from our Alliance portfolio at a cap rate of 5.43% based on in-place trailing 12 months NOI. We believe the assets in the BNP portfolio, which are on the balance sheet at an approximate 5.75% cap rate, are superior to the assets sold. At the end of the period Babcock & Brown’s direct and indirect equity in the portfolio was $136m."
NOT GOOD ENOUGH
Not good enough BNB! If you are going to revalue property in a falling market (as is the case of the American BNP property) you really need to give more detail than you have.
I find this troubling and I want to find out more. Any suggestions how/where I can do so?