Often I wonder if there is a chance to make a lot of money without investing much with trusts such as MOF, MDT, VPG just to name some, that are trading at penny dreadful prices but have nett tangible assets many times their share prices.

You could buy a lot of shares and if you can sit it out to the market recovering, you would expect that the trusts values will climb back to at least their NTA values. Of course there is the risk that they are struggling to stay in business because of their debts. It is reliant on the banks to be flexible and the market recovering for these trusts to survive through this market.

Some investment funds are doing this but there is a leap of faith required, such as Orbis.

I feel no need to rush to put money in but I am weighing up which ones are going to survive and climb back up.

Revision of cap rates is going to blow this little scenario out of the water


from Wikipedia

Capitalization rate (or "cap rate") is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows:

annual net operating income / cost (or value) = Capitalization Rate
For example, if a building is purchased for $1,000,000 sale price and it produces $100,000 in positive net operating income (the amount left over after fixed costs and variable costs are subtracted from gross lease income) during one year, then:

$100,000 / $1,000,000 = 0.10 = 10%
The asset's capitalization rate is ten percent.

Capitalization rates are an indirect measure of how fast an investment will pay for itself. In the example above, the purchased building will be fully capitalized (pay for itself) after ten years (100% divided by 10%). If the capitalization rate were 5%, the payback period would be twenty years. Note that a real estate appraisal in the U.S. uses net operating income. Cash flow equals net operating income minus debt service.
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Valad (VPG) was due to report yesterday but no announcement
When it arrives it will be a beauty.

When Property Trust prices were near their peak, the situation existed that bank interest was around the same level as property trust dividends. Also at the same time nearly all property trusts were trading at a considerable premium to their NTA. At that point it seemed logical to sell our SMSF property trust holdings which thankfully we did.

The common reported trend for troubled REIT’s now is that the value of the property it owns has decreased in value and this has triggered repayment demands on loans from its bankers that it can not meet without selling down some of its assets or refinancing.

What I am having difficulty in understanding is the relationship between NTA and some of the current share prices.
Some of the trusts say they are valuing their holdings at market value which would seem to be a realistic to do and they also report their gearing at around the 30% mark.
Now let’s assume that the values used are wildly optimistic and we divide them by a factor of 2 in a fire sale, that would mean that debts repayment would eat up 60% of realised asset sales..
That does not explain to me how I can buy shares in some of these trusts for considerable less than one tenth of the reported NTA.
Also it’s hard to believe that office buildings, shopping centres, and factories have suddenly lost 50% of their valuations when in many cases it would cost more to replace them and the tenants are still paying rents.

I suddenly realised that I do not understand the business model of REIT’s and here was I imagining REIT’s were an investment in buildings and brick and mortar.

Regards KOTE

All the banks have to do with the REITs is ride through this market downturn, eventually it will turn up and the REITs will be able to revalue their properties back up again. It all looks so easy but we don't know how long it is going to take.

If the banks put their foot down (especially foreign banks that want to pull out) then the REITS can't realise the cash quickly enough to cover their liablilities and technically become insolvent then everyone involved loses a lot more. Unfortunately the market does not have much confidence in the nett tangible assets being able to be realised if needed at the current time.

guru19 wrote:Valad (VPG) was due to report yesterday but no announcement
When it arrives it will be a beauty.

Beauty is said to be in the eye of the beholder so now that VPG has reported I wonder if you would like to expand on your remarks above?

Cheers,
Catron

Hi Catron,

I was expecting VPG's announcement to be one of the worst if not going into administration.

Let's hope they survive and pull through this market and recover.

Being a Property Valuer ...u would think I mite have the answers.......
The problem is that I am sure we were all hoodwinked by the individual trusts ....
IF they had stuck to their "knitting "....and not chased overseas assets ...where they were out of their league things would have been better to understand ....greed kicked in ...and people were flashing cheap funds at them ....and a larger assett meant larger fees !!

Yes I know it would be hard in this market to unload some assetts......but there is always a buyer for SOUND assetts ...at a slight discount.

Cap rates when things were "famous"....got down to 5 / 6% levels higher for Industrial and fringe stuff......BUT in this market and times things have changed .....PLUS there is not a lot of genuine non distress asle to give a reliable guide to Cap Rates ...which could now vary from ......8.........to 15% ..depending on the classs of property ........THIS would make a huge difference in values of properties !

Where do you find Value .......probably those who have a good backer /......or better still a GOOD banker ( and thet are hard to find )

Just look at how some PT have been "smashed "........ie CMG....MOF....IIF.....IOF.....GPT and not to mention Centro ....which should have alerted us all ......
Sure some have good asetts ......too much debt .....rising cap rates ...therefore falling values .......and a lessening demand for their Buildings .....un happy Bankers .....falling rents .......GEE where is the good news !

Property Trusts ...should be simple .......HOLD A grade assetts ....In Aust .....no more than 20% gearing collect the rents ....mantain the properties and pay Divs every 3 - 6 months to Happy Unitholders .....
If times get tuff ....you have the gearing covered ....the rents flow .....the share price mite drop alittle ......but we still smile !!!!!!!!!!!

I now only hold SGP and CDP