BNB - Babcock & Brown

I said last week this was the next house of cards to go & i see they are furiously covering their vunerable arses from the shorters hit squad,they all got the same problem,debt to expand & with the banks wanting the bat & ball back its only a matter of time before they cant take from here to prop up this staple..always very dodgy using debt...

michelacuna said:

Hi reece55,

A question for you,
Why do you think BNB is so different than MQG? (I deducted this from your posts at the MQG forum and here).
As far as I can see BNB model was inspired by the MQG model and both revaluate their assets (BNB only real estate but that’s about one third of their business).
Yes, BNB is more transparent in its accounts but MQG is much bigger and complex.
At the current prices both are bargains, no question about that, but are these guys really better?

Regards,

Click to expand...

First, lets be frank I don't think either will perform well in the current environment, hence why I chose to only trade BNB at the present stage (and I don't have an open position at present). That really is an obvious point however. Whether they are cheap now or not I guess is yet to be seen.

Transparency is the biggest difference in my books. Clearly MacBank invented the satellite style of fund business, particularly with infrastructure. I just think BNB applies it in a more sustainable fashion.

Put this into perspective - in each of BNB's associates presentations, they clearly break down the results for the period down to operating cash flows. In addition, there is almost always a reconciliation of how the associates will fund their distribution target and this distribution target is funded from operating cash flows. All in all, they are not afraid to let investors know how it works, what their maintenance Capex is going to be and what the business model is so we can properly assess where we are getting our high yield from. Take BBW for instance, BNB allowed investors to view their model to prove how it works, allowing us to assess if we agree with the model. What's the bottom line here - if we want our yield with BNB, you can pretty much guarantee that it won't require refinancing or asset sales to achieve it. If either are achieved, we get a bonus.

Have a look at an MQG satellite presentation - big difference here, the presentations look great, but they tell you nothing except for how fast EBITDA is growing, management metrics (i.e. traffic growth for MIG) and debt profile. All of these things do not enable you to properly assess the performance of the vehicle. I mean, how hard is it for management to spell out, via proportional share, what operating cash flow was/will be, what the maintenance capex is and how you are funding the distribution. The reason you don't see this is because they are reliant on asset sales and refinancing to achieve the yield and don't want to point it out. And then of course there are the incredibly complicated structured ways they invest in the infrastructure investments - I'm sorry, I don't care how much MQG rant and rave, there is a limit on having an optimal structure. In some instances, their satellite funds are more like diversified financial investors rather than vanilla investment unit trusts, investing in dangerous instruments like subordinated debt interest rate securities. Anyone in finance will tell you that you do not want to be holding sub debt at the moment..... And then there are the related party deals.... have a look at my comments on MAP in the MQG thread....

I could continue to rant and rave, but I think you get the picture. I think BNB are here to stay because they have a model that works and I can clearly see that on paper. MQG say trust us, we are smart, we can make it work but yet the financials give us absolutely no confidence. The numbers don't stack up and if AFG is any kind of a lesson to us all, it is complicated is not necessarily better, regardless of size.

Cheers

tigerboi said:

I said last week this was the next house of cards to go & i see they are furiously covering their vunerable arses from the shorters hit squad,they all got the same problem,debt to expand & with the banks wanting the bat & ball back its only a matter of time before they cant take from here to prop up this staple..always very dodgy using debt...

Click to expand...

Debt is the structure of modern day life. Money goes in and out. What has happened to all that money withdrawn from the equity markets worldwide...back to a bank of some description and then back to some investment vechile. BNB showed today that it doses not have a problem raising cash anytime and for whatever reason. Next time you switch on a light or pay a toll spare a thought for the poor debt laden company thats making it happen,cause it sure as hell ain't the government

hi,
i'm not so sure on how options works, but bnb recently issues some new options. this seems to be a move that is detrimental to the long-term investors of bnb. im just wondering if im missing something, but i view this as an negative step of the management.

reece55 said:

First, lets be frank I don't think either will perform well in the current environment, hence why I chose to only trade BNB at the present stage (and I don't have an open position at present). That really is an obvious point however. Whether they are cheap now or not I guess is yet to be seen.

...

I could continue to rant and rave, but I think you get the picture. I think BNB are here to stay because they have a model that works and I can clearly see that on paper. MQG say trust us, we are smart, we can make it work but yet the financials give us absolutely no confidence. The numbers don't stack up and if AFG is any kind of a lesson to us all, it is complicated is not necessarily better, regardless of size.

Cheers

Click to expand...

Thanks for your response,

Have you had a look at BJT accounts?
They don’t generate enough cash to pay distributions and revaluate assets to fill the gap.
Also they made a big gain on derivatives (about 70 mil) that is not clearly explained.
Any concerns here?

Regards,

some more info:

The Australian

BJT revalues assets upwards by $90m

Anthony Klan | January 18, 2008

THE Babcock & Brown Japan Property Trust has announced a $90 million boost in its property values amid a local market increasingly concerned about aggressive property valuations.

The trust announced that it had revalued 17 assets, delivering a 5.3 per cent lift in its total portfolio value to $1.77 billion.

Speaking from Japan yesterday, Babcock Japan Trust managing director Eric Lucas said the valuations were based on the improving strength of the Tokyo retail and office property markets.

"The Japanese market, which had been going down for the past 15-16 years, has turned the corner in the past two to three years," Mr Lucas said.

He said the group had never used inflated valuations but in the broader marketplace "certainly some valuers are more aggressive than others".

Babcock Japan Trust said its revaluations were expected to reduce the company's total debt from 64 per cent of its value to about 61 per cent.

While that level of debt would be considered high by Australian standards - at about the level of the failed Centro Properties Group - Mr Lucas said it was not high in the context of extremely low Japanese interest rates.

"Our property yields are substantially in excess of our cost of debt, which means we have a very different proposition to groups holding 60 per cent debt (in an environment) where there's very little gap between the cost of debt and property yields," he said.

"The debt service coverage ratio (a measure of a company's ability to pay down debt) of BJT is still higher than it is for the average of all other LPTs in Australia."

Mr Lucas said Babcock Japan Trust's assets were roughly split between retail and office properties with a small number of residential assets.

michelacuna said:

Thanks for your response,

Have you had a look at BJT accounts?
They don’t generate enough cash to pay distributions and revaluate assets to fill the gap.
Also they made a big gain on derivatives (about 70 mil) that is not clearly explained.
Any concerns here?

Regards,

Click to expand...

Hi Michael
Indeed, I have had a look at BJT's accounts.

Like just about every property trust in the world, BJT's distribution is not 100% financed from net receipts from rental receipts inclusive of the entities management fee. The net income after the asset management fee is about 50% of the distribution paid. To combat this, in the past BJT have underwritten the DRP. However, looking through BJT's balance sheet, they have plenty of surplus cash to service this commitment. This is also evident because they have been buying back shares and have recently repaid a bridging facility to bring down gearing. Even with these two adjustments, I would have thought they had enough cash to ride out any issues in the event the brokers decided not to underwrite further distributions.

As for the big gain on derivatives, not quite sure where you get that number. I have a net loss of 16.2 Mil for the half, but a 36.3 gain in the prior period. BJT hedges out both it's capital investment and underlying distribution in 3 years in advance and due to the interest rate differential is paid a handsome sum for doing so.

As for whether the revaluation is accurate, I have no idea - I'm not a property man myself. Looking through the value by reference to yield, the average yield in the portfolio is about 5.3% which I think is a little low, but Japan is a bit of a different beast - you have to bare in mind that the weighted average interest rate of their debt is about 2.2%, which would be about average for Japanese debt, so relative to the cost of debt the yield is ok (300 BPS). To achieve the same thing in Aus, the yield of the property would have to be about 11% - do you know of any 12% yielding commercial property in Aus? Japanese real estate values have also experienced a very long and protracted contraction post their asset boom, so they may be due for an increase. But most of this is speculation.

So all in all, BJT looks fine to me because of the jurisdictions financial metrics - if they were in Aus, this thing would be a CNP!

Cheers

reece55 said:

Hi Michael
Indeed, I have had a look at BJT's accounts.

Like just about every property trust in the world, BJT's distribution is not 100% financed from net receipts from rental receipts inclusive of the entities management fee. The net income after the asset management fee is about 50% of the distribution paid. To combat this, in the past BJT have underwritten the DRP. However, looking through BJT's balance sheet, they have plenty of surplus cash to service this commitment. This is also evident because they have been buying back shares and have recently repaid a bridging facility to bring down gearing. Even with these two adjustments, I would have thought they had enough cash to ride out any issues in the event the brokers decided not to underwrite further distributions.

As for the big gain on derivatives, not quite sure where you get that number. I have a net loss of 16.2 Mil for the half, but a 36.3 gain in the prior period. BJT hedges out both it's capital investment and underlying distribution in 3 years in advance and due to the interest rate differential is paid a handsome sum for doing so.

As for whether the revaluation is accurate, I have no idea - I'm not a property man myself. Looking through the value by reference to yield, the average yield in the portfolio is about 5.3% which I think is a little low, but Japan is a bit of a different beast - you have to bare in mind that the weighted average interest rate of their debt is about 2.2%, which would be about average for Japanese debt, so relative to the cost of debt the yield is ok (300 BPS). To achieve the same thing in Aus, the yield of the property would have to be about 11% - do you know of any 12% yielding commercial property in Aus? Japanese real estate values have also experienced a very long and protracted contraction post their asset boom, so they may be due for an increase. But most of this is speculation.

So all in all, BJT looks fine to me because of the jurisdictions financial metrics - if they were in Aus, this thing would be a CNP!

Cheers

Click to expand...

Thanks.
BJT big gain on derivatives: 2007 Annual Report, Income Statement page 82
Back to BNB I would say this company looks solid, I agree with you that in the short term they will have some issues but they will be ok in the long term.
Regarding why I believe this stock is cheap. At yesterday’s closing price of 15 it has a PE of 8.43. If I use for example the RBA cash rate as a reference 7.25% at the moment I would have a comparison PE of 13.79. BNB PE is about 60% of that value. That means that the market is pricing this stock as its earnings will drop about 40% and will stay there. Interestingly enough, that is the percentage of their whole Real Estate or Infrastructure business, so the market believes that one of this will disappear entirely? For me, that is a gross overreaction, but as you pointed out, only time will tell. Maybe in a few years time we will look back and will say: “BNB? 2008 and 2009 were the years to accumulate that stock”, but that as well is speculation.

Regards,

I suspect this Bear Sterns thing will mean further losses in BNB's share price. I realise that that BS and BNB are fundamentally different businesses. However, BS's problems will be seen as reflecting/creating further problems in the credit markets. This will impact on BNB's share price.

Mr_T said:

I suspect this Bear Sterns thing will mean further losses in BNB's share price. I realise that that BS and BNB are fundamentally different businesses. However, BS's problems will be seen as reflecting/creating further problems in the credit markets. This will impact on BNB's share price.

Click to expand...

All the financials will be effected. I think there will be an awesome investment opportunity in these beasts once the dust settles. A once in 20 year opportunity perhaps. Maybe a few more skeletons yet though...

kennas said:

All the financials will be effected. I think there will be an awesome investment opportunity in these beasts once the dust settles. A once in 20 year opportunity perhaps. Maybe a few more skeletons yet though...

Click to expand...

Its not looking very healthy, possibly heading for a 100% retracement, a weekly shows a 1,2,3 down.

? What did it list at and what did the smart money get it for before listing.

Some of its assets are ok I'm told, but like all these financials its gearing and market perception are a worry.

gg

kennas said:

All the financials will be effected. I think there will be an awesome investment opportunity in these beasts once the dust settles. A once in 20 year opportunity perhaps. Maybe a few more skeletons yet though...

Click to expand...

Absolutely spot on kennas, but the time to jump in is certainly not now.

Of course picking the bottom is impossible but once it "appears" the worst is behind us then you description of a "once in 20 year opportunity" will be there for many that normally wouldn't be invested in this sector.

kennas said:

All the financials will be effected. I think there will be an awesome investment opportunity in these beasts once the dust settles. A once in 20 year opportunity perhaps. Maybe a few more skeletons yet though...

Click to expand...

very true on this mob,once the dust settles which will be?? there will be opportunities, yep your a lot gamer than me,too risky for my liking as i still think they may be rearranging the deck chairs on the BNB titanic, however they did react swiftly to a possible attack from the long short-short long gang,i would think the sentiment to these types of set ups will see the price head much lower,i reckon they where very lucky they werent among the hit squads early victims, as it gave them much needed time to re-borrow & spread it,interesting to see how they go in the next 3 months...tb

correct me if I'm wrong, but according to market watch, BNB has significant corporate debt which IS related to market capitalisation. It is my understanding that their covenants would be breached if the market cap goes under $3 Bill for a period of at least 3 months.

If this is true it would be like a red rag to a bull for the hedge funds.

Are many people aware of this? It would definately affect my decision on whether to buy BNB

(I am neither long or short BNB)

Bolivia,

If this is true then it sounds very worrying.

Do you have a link for this by any chance?

Bolivia said:

correct me if I'm wrong, but according to market watch, BNB has significant corporate debt which IS related to market capitalisation. It is my understanding that their covenants would be breached if the market cap goes under $3 Bill for a period of at least 3 months.

If this is true it would be like a red rag to a bull for the hedge funds.

Are many people aware of this? It would definately affect my decision on whether to buy BNB

(I am neither long or short BNB)

Click to expand...

so, at $10 she's gone? - bumping along the 12.20 platform today, looking for a crack to slip through - agree the hedgies will be greasing the gaps

Frightening, but 3 things to consider:

a) Do we know for a fact there is such a covenant?

b) At least it's over 3 months, that definitely gives some breathing space.

c) In reality, banks will not enforce such a covenant if the business is otherwise healthy. Not because they are nice people, but simply because it is in their interests to have their debts paid back in an orderly manner. Once the company stops trading as a going concern they know they will be unliikely to get all their money back.

Having said that, if this is true it will put lots of downwards pressure on the share price.

Bolivia said:

correct me if I'm wrong, but according to market watch, BNB has significant corporate debt which IS related to market capitalisation. It is my understanding that their covenants would be breached if the market cap goes under $3 Bill for a period of at least 3 months.

If this is true it would be like a red rag to a bull for the hedge funds.

Are many people aware of this? It would definately affect my decision on whether to buy BNB

(I am neither long or short BNB)

Click to expand...

Bolivia,

Yes... please I would also like the link to this as I hold many BNB.

I had a look at Marketwatch but could not find anything.

Thanks

I believe that BNB staff are due to receive their bonuses by the end of the month. I wonder if there is any chance the company will do the right thing by shareholders and not give them this year.

I also wonder what effect such a decision would have on the share price.

Mr_T said:

I believe that BNB staff are due to receive their bonuses by the end of the month. I wonder if there is any chance the company will do the right thing by shareholders and not give them this year.

I also wonder what effect such a decision would have on the share price.

Click to expand...

If i worked for BNB and they withheld bonuses i had worked hard for i would be mighty pissed off.

It is not the vast majority of the employees fault the SP is falling. I think you need to look after employees before your shareholders.

Easy exec bonuses and performance 'hurdles' are a different matter though...