February 23, 2012
Thoughts on ILF's Half Year Results
Thoughts on ILF's Half Year Results
We're under the pump at the moment with reporting season in full swing but I've found a quick way to share some thoughts on ILF's result with you. Apologies for the scribbles but hopefully you find it useful (let me know if not!).
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Comments
Once again you have identified an unloved stock and we the unitholders will benefit. To me ILF still looks very cheap and with a good management in place it should get much better. Congratulations to you and the team on your stock picking skills; a job well done.
Hi Steve,
Loved it. It was simple but very informative and easy to understand. I would love to see something similar for RCU and RNY after they report. Keep up the great work. Regards Joe
Loved it as well, very straight forward. When you put it like that how do so many other professional investors miss this type of opportunity? I guess they will see it in 6 months time when most of that value has been realised.
My only suggestion is that you go practice your onscreen drawing skills with the channel 9 cricket commentators. :)
I agree Simon - all great except the drawing. But I've used the software Steve's using here and it's very difficult to do (especially so for those of us who have messy writing to begin with!).
I look forward to more of these presentations over time, Steve. It's a great way to convey information very quickly.
Yeah, and my handwriting is worse than my on screen drawing.
1. It's too small for most fund managers
2. It had already doubled when we bought it and has doubled again since - lots of people have very rational reasons for selling that aren't related to value
3. It's all easy in hindsight - 12 months ago the US assets had a book value of $132m and debt of $128m - there was every chance they were going to be worth zero. We own plenty of other stuff that looked at least as cheap at the time that hasn't (yet) worked out.
4. The sale still might not happen and we'll be back where we were 12 months ago.
5. The Australian assets aren't currently generating enough income to justify book value. If residential property prices fall further it's unlikely they will any time soon.
So there are plenty of reasons for a discount, but I think this is going to play out well.
The presentation was fine Steve. It was clear enough to follow, got us both back to work quickly and taught me something about valuing property trusts. I’d much prefer quick substance to long polish that takes you away from turning over stones. Well done and keep turning.
Cheers for that as you've just made reading boring olé financial reports fun and informative.
Nice analysis Steve. I feel as though a few things could also be mentioned in addition:
1) Discount to NTA is a useful way of thinking about REITs, but what we really should be focusing on is discount to TTA (total tangible assets) - two vehicles may be trading at different discounts to NTA but at the same discount to asset value when the effect of gearing is accounted for. For REITs, what i like to get to is take the dollar discount (or premium) at which the vehicle trades relative to book, apply 100% of that discount to the real estate portfolio only (assume all liabilities and other assets are at 'fair' value on the financial statements), and then derive an imputed discount on the real estate portfolio only. You can translate this to an implied cap rate for commercial portfolios but it's a little harder to do for retirement, which is more computed of a hypothetical DCF based on an actuary's estimate of FCFs, using a discount rate.
2) It's worth noting that the entire A-REIT sector is trading at a substantial discount to NTA (about 15%), or maybe 10% to portfolio backing. Alternative assets such as retirement (which, as you say, has a poor cash yield in the early stages of its development, and which is suffering due to its links to the residential housing market) are generally trading at >10% discount to portfolio backings. I accept the potential for upside in the ILF vehicle is pretty good but it would be worth pointing out to readers that the prospect of ILF trading at NTA in the near or even medium term future is extremely slim in my view.
Keep up the good work & cheers.
Agreed, on both the gross value point and the valuation points (although sometimes there is option value in a highly leveraged vehicle that you don't get in an unlevered vehicle).
Post sale of US assets and internalisation, there should be at least 38 cents of NTA. A 25% discount is probably fair, so I'd expect it to trade just below 30 at roughly fair value.
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