Australia and US property yield comparison

I'm looking at an investment property in a regional town just outside of Sydney. It's  a townhouse in a nice area, has several nearby industries and attractions. It also has personal use potential as it is near my hobby, so this isn't a story about the best investment property by any stretch. This property is cheap compared to Sydney. For overseas readers: if you want a gauge of Sydney prices, you can pretty much double to triple the prices I am about quote. 

At the same time, I have been fascinated by US house prices and spent many-a-night looking at prices, rents, cost psqm, demographic movements etc. In a textbook case of not-backing-myself, I have yet to actually go over to the US and make a decision. In the meantime, I receive al sorts of weird and wonderful email 'deals' about how cheap I can buy a property. I can only imagine some of these operators are genuine and some not so genuine. I don't know which is which.  

Anyway, I received some numbers on an Atlanta property for sale. The figures didn't include vacancy rates, so I have just stuck 5% in for the sake of it. The table below compares the US property figures with the figures of the investment property here: 

These figures exclude income tax and finance (if available).

Caveats galore: I don't know if the US property figures are in anyway accurate. I don't know the risks. I don't know the local issues. I don't know the area. I don't know what the true maintenance costs are over there. I am simply going off the numbers and local area prospects they quote at this stage. I also have no idea about the currency. 

As it turns out, the net income is about the same and the US property is almost one third of the price. 

But saying all that, the numbers are massively different. No wonder private equity groups are buying up this stuff by the truck load - and just watch how retail investors will be offered this stuff a few years down the track when property is on the up and up. 

I'm probably going to the US later in the year to check this out good and proper. 

Any thoughts appreciated. 

Guinness Peat Group PLC (ASX: GPG)

The last post on GPG can be found here. 

Since then, there have been a few more developments: 

• More shares bought back
• Further corporate transactions
• Update on the pensions

Excluding Coats I have updated the estimated NTA ex Coats (to the best of my ability):

GPG released a slightly vague and worrying statement regarding pensions (11/4/13): 

So if my numbers are right, the NTA ex Coats has actually dropped a little bit, which I think is due to the buy-back program: buying the stock at 48c when the NTA ex Coats is less will all things being equal drive down the NTA. That's not necessarily a bad thing: competent management buying stock sends a signal as to what the stock might be worth. 

The big factor is what Coats might be worth. I haven't updated my figures on Coats since the last review. That's on my to-do list. 

GPG was then 48c and has now drifted lower to 45c.

I need to do more work on this one. While it is potentially a good trade, I'm not yet convinced I understand the risks enough. 

Kristian 

Disclosure: no position in GPG

Some value investing blogs worth a read

Aleph Blog - Classic: The Fundamentals of Market Tops

I found this blog to be an informative, concise and non-emotional discussion as to identifying market tops.

The Brooklyn Investor: Newton's Apple

Finally: someone has posted something original on AAPL. An equally good post on AAPL by the same blogger was a comparison of Apple and Palaroid.

Here in Australia there is a massive undersupply of quality bottom-up stock market blogs. In Europe and North America there is a bigger and better selection.    

Kristian

Disclosure: no position in AAPL

MacarthurCook Property Securities Fund (ASX: MPS, SGX: AOP)

Well, there was a smoking gun after all. To quote my last article on MPS: 

There is always the chance a capital raising could be undertaken: this can be a great way to kill value in the short term. But I don't see it happening given debt is almost paid off. Unless of course the intention is to load up and buy more property. 

And a capital raising is exactly what has happened and value has been killed in the short term. The purported main use of the funds will be invested in an existing property investment. What I obviously got wrong is my call that I didn't see it happening. I sincerely apologise. 

The capital raising is via a non-renounceable rights offer on a 11 for 20 basis for 6c each. Based on the previous closing price of 8c, the theoretical ex-rights price is 7.3c so with yesterdays closing price of 6.6c we've seen wealth torched in the short term. This happens so often!  

Here is the proposed use of funds: 

From what I can see, here are the pros and cons of the capital raising:

Some Pros

1. Expanding the number of shares by 55% should increase liquidity. Professional investors hate illiquidity. A more liquid, visible stock should allow it to trade closer to its fundamental worth.   

2. If there are no more smoking guns, the stock could advance closer to NTA. Raising $11.92m at 6c dilutes NTA and removing the costs of the entitlement offer and the legal fee expenses and assuming the property values are the same as last reported, I estimate the revised NTA to be 10.7c - 11c (down from 13.6c). 

Case-in-point: a re-rating occured last year following a capital raising at 3.5c. The stock doubled afterwards.  

3. Recommencement of distributions. This been mentioned a few times and again in the capital raising documentation: when debt is paid down, distributions may recommence. In a yield hungry market, the potential for re-rating would be high. The yield at current prices (6.6c) could easily be 9-10% p.a. 

4. A buy-back may now occur. (but surely not likely?) 

5. Potential risk may be lower: even though the NTA is watered down, it is watered down with cash. 1c cash = 1c cash. The same can't be said for property valuations. 

Some Cons 

1. The potential % upside is not as great as it was (as the NTA has been diluted down)

2. Raising money to invest such a relatively large amount in another fund managed by AIMS/MacarthurCook ($6.5m of the $11.92m) could be perceived as dubious. 

3. It flags there may be other skeletons in the closet. 

4. My main beef: MPS is raising enough capital to cover the entire funds required to recapitalise the AIMS Property Fund. Why? Do the other AIMS Property Fund investors not have the money or do not intend on putting more money in? Or does MPS think spare funds will be available and can/need to be used for other sources.  

The AIMS Property Fund comprises just 2% of the investments in MPS. There must be a case for just letting the St Kilda property go (held in the AIMS Property Fund) or simply for that fund to sort out it's own problems and not tap MPS investors. I'm not sure I care if I lose the 2% investment. AIMS/MacarthurCook haven't spelled out why exactly investors should fork over so much money for someone else's problem. 

Regardless - it's not impressive.

This isn't an exhaustive list. I wouldn't be worried if the raising was a one-off. But it's not the first time and I worry about what other crap is buried in the underlying investment portfolio. 

I am digging into this further.  

Kristian 

Disclosure: own MPS

MacarthurCook Property Securities Fund (ASX: MPS, SGX: AOP)

This is follow up to the first post on MPS (click here for the article). I keep wondering what I have missed - the stock has been trading at close to half NTA with the chance of a big windfall (from the legal case) on top of that.

Here is some more information: 

AIMS (http://www.aims.com.au)

This is the group that took over MacarthurCook Ltd. AIMS appears to have more of a background in lending and securitisation rather than funds management. The MacarthurCook deal brought them in ~$1bn FUM. Current FUM managed by AIMS is ~$1.5bn. Another of the funds is listed on the Singapore Exchange: AIMS AMP Capital Industrial REIT. As the name suggests, the fund is jointly managed by AMP: which is about as blue-chip a company you can find in Australia. The AIMS AMP fund trades at a premium to NTA.

AIMS is not listed so I don't have their financials. Clearly there is a Chinese connection, but this appears to be an attempt at building connections into the Chinese investment market. Maybe MPS will be used as a vehicle to launch into more exotic investments; as was threatened with RCU.

Property Portfolio 

Perhaps the actual property portfolio is a steaming pile of crap, and as noted the valuation will continue to deteriorate. As at 31 December the total gross assets were $54.3m with the listed property valued at $3.7m and the unlisted portfolio at $48.4m. Cash and other bits and pieces made up the rest. The 31 December accounts note that NTA prices were not available for $20.7m of the $48.4m in unlisted assets. Instead, most recent NTA's were used:

I've scouted websites for these funds and found the following NTA's:

Stockland Direct Property Trust No. 3 $0.63
Arena Childcare Property Fund $1.0189
Arena Office fund $0.5371

Unless there is a risk of substantial shank in the other investments, I can't see major issues here.

Shown below is the June 30 breakdown of investments:

The APN Champion Retail Fund was since written down to zero, however this was already reflected in the 31 December NTA. Doing a quick reconciliation of the NTA's of the major investments between 30 June and 31 December doesn't reveal anything cataclysmic. Except perhaps for the PFA Diversified Property Trust, where the price has softly down-trending.

There is always the chance a capital raising could be undertaken: this can be a great way to kill value in the short term. But I don't see it happening given debt is almost paid off. Unless of course the intention is to load up and buy more property. Even that may not stop the price creeping up to get closer to NTA. Still, stranger things have happened.

The stock has already doubled since June last year, so perhaps this price level is just a pause on the uptrend.

I just can't find the smoking gun.

Kristian

Disclosure: own MPS

MacarthurCook Property Securities Fund (ASX: MPS, SGX: A0P)

MPS is a small listed property fund. At the current price of A7.9c it has a market capitalisation of $28.5m. MPS is also listed on the Singapore Exchange, however for simplicity I am just going to work through the AUD numbers. 

Without boring you too much, MPS is managed MacarthurCook Funds Management which in turn is run by AIMS Financial Group. There has been (and still appears to be) lots of friction between unit holders and MacarthurCook and to some extent with AIMS too. I have been following this situation for years. It appears the MacarthurCook/AIMS management is staying in place and there is no intention of winding up the MPS fund. In fact, the managers appear to prefer buying more property and not selling. So unlike RCU, we will have to make our money through a re-rating of the stock, which is not as simple as a straight wind-up. Further, the trust is currently making no distributions. Therefore, we should be looking to make a lot more money in order to take on the extra risk, or at least the potential extra time it might take to realise our investment.

The underlying assets are valued at 13.6c, so with the stock trading at 7.9c the discount to assets is a chunky 42%. However, the assets have been marked down heavily thanks to reductions in value of the underlying assets and a key risk is that asset values could be written down further. A snapshot of the most recent balance sheet (31 December 2012) is shown below:

Gross assets stand at $54.3m. The major component of those assets are in listed ($3.7m) and un-listed ($48.4m). Most of the properties are Australian based across a spread of office, retail, industrial and other, and spread across numerous fund managers. MPS is essentially a fund-of-funds as it invests in other property funds.

MPS has minimal debt, which lowers risk as any further write downs aren't overly 'magnified'.

Since 2009 MPS has been in spring-clean mode: selling assets, paying down debt and dealing with problems. A capital raising was undertaken last year and aside from any further problems  with the assets themselves, the final piece of the puzzle appears to be paying down debt due by June 30. This debt was part of the capital restructuring and is called OCBC and MPS reports it is in a position to pay this debt which my back-of-the-envelope numbers agree with.

Listed below are some reasons the stock may continue to get re-rated from current levels:

Potential catalyst a) for re-rating: re-commencement of distributions

MPS intends to re-commence distributions when/if the OCBC debt is repaid by June 2013. Some of the underlying assets are income producing, some are not. MPS has indicated the overall distribution yield will be 6.1% p.a. I believe this is on the investment portfolio, not the unit price. Allowing for the discount we can buy the units for translates the distribution yield to 10.4%. That's a pretty attractive return and therefore a good chance for the stock to be re-rated.

When/if the distributions do re-commence, some of the income should be tax-deferred which is a great source of tax efficient income. 

Potential catalyst b) settlement of legal claim

While this may be a longer-shot, there is the potential for a further 4.9c resulting from a legal claim against TFML. The Supreme Court has found in favour of Macarthur Cook, which TFML has appealed against. I have no view on what the final outcome of this will be. From an investment perspective it will be a free bonus - and a massive one at that!

Potential catalyst c) buy back of stock

Instead of buying new property, MPS may buy-back its own stock if the 'share price continues to NTA remains at such a steep discount'. Given the stock is so thinly traded, it won't take much at all to power up the price if a buy-back is instigated.

Disclosure: own MPS.

Kristian