Ann: Quarterly Report - Q1 2024, page-6

The recent quarterly report says “the Fund has set a target of US$150m in property sales during the 2024 calendar year. At 31 March 2024 the Fund held 429 1-4 family properties for a total value of US$572.8m”. If they meet the 2024 sales target, and continue to sell at the same rate, it will take nearly 4 years from March 2024 to complete the selling program. I take your point about cherry picking the better assets: there could be a rump of inferior assets that might take even longer to sell, or need a big discount to sell.

NB book value does not allow for selling costs, which average about 6% of gross value. At a rate of 6% on the US$572.8m value, that equates to US$34.4m which will have to be deducted from NTA, if the assets are otherwise sold at book value. That is a discount of about A$7.4c per unit, or A$6c per unit after tax. Thus “true” nta is really about 53c after selling costs, not 59c.

FFO (excluding disposal costs and one-off items) was minus A$6.7m for FY23 and minus A$1.8m for Q1/ 24. This rate of cash outflow is being partly offset by the increase to the nta of remaining units from the buyback, since units are being bought back at about 0.45x stated nta. Assume for simplicity that the rate of BB increases somewhat so that the BB benefit neutralises the nta loss from the cash outflow from operations. If the current pattern continues, and if net rental increases are only enough to match rises in operating costs, the nta in 2028 at the completion of asset sales would be roughly the same as today, unless assets are sold above today’s book value. Unless they hold a successful bulk sale (which was a dismal failure last time it was tried) the most important question is what rate of capital growth can be achieved on the future assets sales, and hence after allowing for debt and taxes, what rate of nta growth will that generate? It it’s zero it will take 4 years to get the nta converted into gradual distributions of cash to investors (as 53c after selling costs). However, if they can achieve say 10% pa growth in equity value (i.e. after debt and taxes) that could be worth waiting for, if all cash is returned to investors at least every 6 months. After a long period of stagnation the RE is doing the right thing by selling assets and winding down the fund. They don’t, alas, acknowledge how long this will take.

I would happily take 45c by June 2025 to get out of this nightmare, whether from a takeover or a bulk sale. Otherwise it’s going to be a very slow grind, something that the RE and manager seem reluctant to admit.