Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Bullish signals from private sales

SalvorHardin
Lemon Quarter
Posts: 2049
Joined: November 4th, 2016, 10:32 am
Has thanked: 5297 times
Been thanked: 2465 times

Bullish signals from private sales

#522764

Postby SalvorHardin » August 16th, 2022, 8:13 am

A few days ago the Canadian alternative investment manager Brookfield Asset Management posted its second quarter results for 2022. I pay a lot of attention to Brookfield, not just because it's my largest holding but because Brookfield's reports give a lot of useful information as to what's going on in the markets in which they operate (notably commercial property). One part of the letter to shareholders, regarding commercial property, stood out for me.

"We note this in the context of the market disarray, as you may not be aware that many private markets are still operating in a very normal way. Of course, some borrowing is harder to do, interest rates are higher, some yield spreads are wider, and the markets are not as robust as they were. But for high quality assets, markets are generally still open and available to transact at good valuations."

Despite the claims of the efficient market theorists, we can often see wildly different prices between public and private markets which can't all be accounted for by the liquidity premium. A famous example is when Warren Buffett bought the Washington Post; the stockmarket valued it at $80 million whereas in a private sale Buffett reckons that the price would have been closer to $400 million.

Brookfield's 2002Q2 report talked about two British sales at a substantial premium.

"U.K.: Residential Property Student Housing Business – over seven years we built, developed, and acquired student-housing properties in the United Kingdom that became the third-largest portfolio in the country. At 26,000 beds, Student Roost is an operating business we created from the ground up that became a highly attractive asset for many buyers. We recently sold the business for £3.3 billion of enterprise value. We had invested £700 million into the equity of this portfolio over time, and on closing later this year will generate cash from the investment of £1.8 billion to the equity—resulting in a gain of US$1.6 billion or 2.7x our investment, resulting in an internal rate of return of 25%."

"U.K.: Office Properties in City of London – we sold a property in the City of London for £300 million that we had built ground-up for a cost of £150 million. We acquired our partner’s half pre-Covid at a gross valuation of £270 million. These transactions in totality generated an annualized internal rate of return of 18% and a 2.5x multiple of our equity capital. Down the street, while not a sale, we just completed the refinancing of 100 Bishopsgate, which is now fully completed, fully leased, and is established as one of the leading office buildings in central London. We built it for £850 million and closed last month on a non-recourse refinancing of £1.2 billion. We now have received cash distributions representing 100% of our equity plus a further £330 million, while continuing to own 100% of it. To date this has generated an internal rate of return of 19% and a multiple of equity capital of 2.9x."


I've been topping up my existing UK commercial property holdings, notably Derwent London (central London specialist) which is on a discount of about 30% to its NAV (and some more Brookfield). Derwent London recently sold part of Bush House for more than the most recent NAV.

Anyway, here are the links:

TMF post summarising a few more transactions
https://boards.fool.com/what-is-john-dizard-doing-these-days-35154647.aspx

Brookfield's 2022Q2 results
https://bam.brookfield.com/

Derwent London's sale of Bush House: "The disposal price is £85m before costs, reflecting a premium to December 2021 book value."
https://www.investegate.co.uk/derwent-london-plc/rns/disposal-of-bush-house-wc2/202207180700056998S/

brightncheerful
Lemon Quarter
Posts: 2209
Joined: November 4th, 2016, 4:00 pm
Has thanked: 424 times
Been thanked: 799 times

Re: Bullish signals from private sales

#523057

Postby brightncheerful » August 17th, 2022, 11:20 am

I found reading this article about Brookfield most illuminating.

https://www.institutionalinvestor.com/article/b1yxlp3c8d61j6/How-Brookfield-Avoided-Slamming-Into-a-Brick-and-Mortar-Wall-With-a-Little-Help-From-Its-Frenemies

Certainly makes me think just how negative the stock market can be compared to the reality of the commercial property market itself. A landlord client, whom I have advised for decades, with a small portfolio of shop properties has in the past couple of years experienced more tenants not renewing their leases than before. In every case, except one, the shops have been re-let at much higher rents than the outgoing tenants paid. In one case, we rejected a higher offer than the one we accepted because we doubted the stability of the covenant. The only exception was where the rent before had been artificially high so not expected to be repeated. My colleague who acts as the letting agent reports that for his other landlord clients he is getting substantially more rent on new lettings than the outgoing tenants had paid.

Of course, whether a shop attracts demand depends upon its location. There are plenty of places in GB where demand is virtually nonexistent but in my experience anyone who owns property in such places could have got out long before it became obvious. As for investors who've bought in in the hope of improvement they are likely to have to wait a long time, especially now that yield expansion has returned.

Yield compression is a play on interest rates, regardless of property fundamentals. The only way that yield compression can work as an investment strategy in its own right is if the purchase price was during a period of yield expansion. For example, a proposition yielding 10% on purchase is more likely to be be valued at 7% or less when investment sentiment perceives 7% as good value. Even so if the property fundaments do not stack up, many 'high yielding' propositions are destined to remain high yielding regardless of the valuation opinion. Which is why updated NAVs of quoted property companies (particularly REITS that are into high yielding) cannot in themselves be regarded as reliable because the prop cos are not selling the investments. So although the dividend is likely sustainable, the underlying NAV is only really likely to improve by reason of gearing (loan to value covenant) and yield compression.

brightncheerful
Lemon Quarter
Posts: 2209
Joined: November 4th, 2016, 4:00 pm
Has thanked: 424 times
Been thanked: 799 times

Re: Bullish signals from private sales

#523156

Postby brightncheerful » August 17th, 2022, 3:07 pm

Even when 'private' sales emit bullish signals, the effect on a quoted prop co's share price is only likely to be felt when the buying power for its shares is convinced.

If not then the sp would continue to languish which on one hand provides bargain entry points for anyone with foresight while on the other could be a long wait.

The buying power however has to be existing substantial shareholders wanting to buy more and new buyers wanting even more. Which in the case of prop cos which are mostly valued on nav as distinct from revenue and profit is a tall order.

I like Derwent London but I missed the boat. Within days of my buying the sp took me into a quick profit but I hung on until the results only to experience a fall in sp and a small loss.


Return to “REITs & Property Companies”

Who is online

Users browsing this forum: No registered users and 8 guests