of gearing and balance sheet asset liquidity

No one seems to understand the gearing or the relevance of look through gearing, especially to GMG.

Gearing is the total debt (less cash) / total assets (net of cash and including intangibles)

Look through Gearing is the same except that the “proportion of debt” attributable to the “investment in funds” is also included in total debt. For example, say;

Company A has the following balance sheet and investments:
Directly held property assets = $200M
Managed Fund Investments = $100M
Directly held debt $100M

Managed fund (100% owned by Company)
Directly held property assets = $200M
Directly held debt = $100M

Gearing for the company is $300/$100 = 33%
Look Through Gearing is $400/$200 = 50%

Just because some property assets are held by the company “through a separate managed fund entity” doesn’t mean the debt associated with those assets in the managed fund don’t matter. The debt associated with the managed fund assets needs to be maintained, rolled over etc just as surely as debt directly held by the company. The managed fund is simply a “holding company” which goes on all the time. Now whether the holding company is 100% owned or 25% owned the theory is the same. Property in the holding company is geared and tied up with debt which is the responsibility of the all owners of the holding company, except if they want to walk away from all assets and debt completely. To look at only the direct gearing in GMG’s case is so wrong because the managed fund investments make up such a large part of the balance sheet assets.

Ordinary Gearing is a good concept as long as investments in other funds are tradeable and liquid such that they are just a mark-to-market proposition (ie IIF shares) because the IIF debt is irrelevant other than how it affects the market price. But when assets on the balance sheet but are held in illiquid and un-tradeable fund management company then the debt tied up with those assets is of the utmost importance when trying to extract value from those assets back out of the funds. Gearing for GMG is 51% on a look-through basis and is what really counts without question. One cannot say that the illiquid assets held inside managed funds are assets on the balance sheet but that the proportional share of debt associated with those are not liabilities. The debt is inexorably linked to those assets. The debt proportional to GMG's ownership in each of those managed funds is GMG's liability and those assets cannot be redeemed without also dealing with that debt.


IMO what has caused the world of analysts to turn and run from GMG at any cost is the large cornerstone holding of managed funds. This used to be a good thing with hefty management fees but now it is a bad thing (or goodmanthing...lol).

Just under half of GMG balance sheet property assets are tied up in managed funds. On a look through basis, GMG owns twice as much property assets in managed funds than it does directly (ie $3.175B NTA “investments in funds” on balance sheet which reflects about $8B assets at ~40% average gearing within the managed funds). These assets are illiquid, craypotted money held in managed funds that aren't GMG's to sell down for liquidity whenever they want. In fact I would suggest they would get sued selling any managed fund properties at the bottom of the market just to raise cash for their own debt repayments against the wishes of other unit holders. If the gearing becomes too high in the managed funds then fire sale enough assets to reduce debt but if gearing is OK then as managers they are mandated to sit tight through the property cycle. Other unit holders aren’t interested in selling properties at the bottom to help out GMG liquidity. Redemptions in these funds have been frozen for all, especially the large owner-manager GMG.

So assets are locked away in the managed funds and the LVR's need to be kept in check or they go the way of GPT's European fund. GMG have less tangible assets outside those funds on the balance sheet than debt! If they walk away from the managed funds then the intangibles go to zero and they are insolvent with an LVR > 100%. They need to stand by the managed funds, inject new capital in or sell enough property so survive but that is all they can do. They cannot get at the assets out of the managed funds because the other unit holders will not allow a fire sale of fund assets just to dig GMG out of the debt poo.

I think the banks are going to look at the GMG empire as a whole number of separate companies, much like BNB and their satellites are. By the time further write downs are taken into this recession and rents drop over the next few years each individual fund will be lucky to stay within debt covenant levels and survive without further equity injection of forced sales. What is a holding in such a managed REIT fund actually worth?

The banks couldn't even force the funds to sell properties and pay them back if GMG went into receivership because the funds are seperate entities and GMG is just a large investor. The funds don't trade and so the assets are illiquid (unlike the IIF holding which is just worthless). The only thing the banks or GMG can do is sell down their stakes in the managed funds in an off-market transfer. That would see a significant drop in realisable value in this market and probably involve sale of the management rights to each fund as an inducement to find a buyer. The discount to NTA of ASX listed REIT’s shows what value the market REALLY places on shares in REIT managed funds (15-25% range ie IOF, IIF, GPT, MGR etc).

The banks will then look at GMG and say saleable value to us of your intangibles (rights to manage the funds) and the managed funds are say between 25% and 50% of their stated balance sheet NTA value. Probably a premium over other small listed REIT’s at 25% NTA because of the attractiveness of fee gouging management rights that go with it. Thus the banks will be looking to reduce REAL balance sheet assets by between $2.25B to $3.4B (ie 50% to 75% of $4.5B combined managed investments and intangibles held on balance sheet) when deciding whether to refinance or not. That sort of reduction in asset value does nasty things to GMG’s LVR on $4B direct debt.

IMO the banks and market have decided that the assets held in a multitude of managed funds and the associated $1.3B intangible assets for management rights is overstated and non-recoverable in anything like what is listed on the balance sheet. Probably the banks have said as much which is why so many “in the know” have run while negotiations for the next $450M roll-over continues (smacks of OZL trading prior to admitting refinance troubles). Karasco said 4-6 weeks for refi announcement …. Well why at the 11th hour before payment is due if all’s going well?

Goodman would know all this of course and what the banks and analysts are saying and that if things get worse they will take control and force a wind down of debt. No more divies and who knows where/when it will end up?? So Greg pulls as much out from the company for as long as he can before the bastard banks grab control (without buying any more shares needless to say). Better off in his pocket than tied up for ?? years in a debt paydown process like VPG, IIF, GJT etc.

If the banks have taken a bad view of his structure and asset quality then one or two more divi’s will make no difference to his situation. If that is where the banks are going to take it there is really very little he can do in this market and at this late stage. Plenty of bluff and blunder Mickelmore style while it all falls apart behind the scenes then blame the bastard banks but not before plenty with inside get out.

The above is only my opinion and was only arrived at today after a bit of digging and contemplation of the TA. It is convoluted and probably doesn’t make much sense but read it twice and I’m sure you’ll see what my concerns are. I had been playing this down since 40c and burning my fingers as it collapsed. Why the panic by major holders piling out at horrendous losses so soon after a capital raising when the gearing seems reasonable. Sure the REIT sector is on the nose but why so many just want out at any price more so than other REITs? The answer is probably because gearing ain’t gearing and assets ain’t assets!

time will tell.

Spent too much time on this post and too busy now for debating, so I just throw it up for others to chew over.

goodluck