Hi Tinwins and indirectly answering Friendlydarwes.I think the...

Hi Tinwins and indirectly answering Friendlydarwes.

I think the start of this is the sale of the assets.in IAP. It was a composite deal we buy this if you buy these. So when you sell and make a lot of money the shareholders are looking for a bit of sugar and remember a lot of them had come from URB ( A disaster and the one issue that makes me watch SOL a lot closer than I would normally)

The problem was that the deal had sucked up all the cash.

TGP's great plan of creating something akin to a GW empire wasn't happening as the components were all being sold.

Then there is the pressure of Australians in REITS - its all about the distributions or banks its all about fully franked distributions when it comes to share price.

The 2022 cap rates were roughly 4.5% so the property is worth $257 Million.

Its like the young CFA asking what turnover would be if the cinema was full. Irrelevant as its all about the blockbuster and the Strike and capacity is flexible - more screenings and longer on circuit.

The buildings are worth what the buyer will pay and that depends on supply and demand and the caveat to that interest rates and your gearing. The same building owned by a distressed group is worth less than a building owned by a financially strong one.

We all know this.

Reits are not sexy. You can dress them up as much as you like but it doesn't work.

My view of what went wrong.

In 2015/6 they made money on property trading and property finance in JV. Then they got out of that and into the next which culminated in the IAP and during the period to 2020 they averaged a distribution of 9.8c per unit. However in 2020 they got out of property finance and property deals. As a result of Covid they didn't deploy cash. Then did the IAP deal and again got returns above that of a property landlord. They then kept the distributions to 6c after selling IAP.

If the property valuation was at that point 4.5% yield then at best your income on $1.10 value should be 5c but they stuck with 6c. They had gearing as well and a tax bill to settle. Something I think they thought would all get taken care of in time. The borrowing at end 2022 was around $83 million @4.7%. this would mean that $4million would come straight off the rental. However they had to pay the Tax and then the 6c distributions which are higher than their cashflow income.

So now the debt is $98 million and they have just renewed the facility - no way is it 4.7%. so lets take 6%.

So now the banks take $6 million off the top.

The valuation is $225 million the borrowings are $110 million and the covenant is that they have to have 1.5 times interest cover and no more than 50% LVR.

Not going to survive that with 3% increases in rental...

They need to get the gearing down and the interest expense managed.

They spook the market because your share issue only gets over the line if its really cheap , especially if you are considered distressed. They are right on the 1.5 times interest and probably need to get income up or interest down.

So FD asked if I still am happy that this is worth north of the then share price which I think was around 54c.

Actually I am happy with the valuations - heck they were just redone in the past 6 months.

Always read what people say: TGP : "The six months to December 2023 have been one of the quietest periods in the Group’s history, given the current state of the commercial real estate market in Australia"

What it really says - we are known for doing unusual deals and pulling rabbits out of hats but lost our mojo right now.

So lets rebase the investment:

Property value: $220 Million ( If the company is financially sound)
Debt $100 million
Capital raised say $30 million
So shareholders equity $150 million - (one caveat is the one building needing a new tenant 30 June 2024)

Number of units: 144437000
New issue: 75000000
NTA: 68.35c However if I followed my rights then 1/8 only cost me 40c so I think it is still a good value and these assets are at the top end of "office"

The income statement is 1.7c per share at worst and the income should be growing - new Solar put in leasing increasing etc..

So it will trade at around 40c until the interest rates drop and the capital stabilizes or they start plucking rabbits out of hats. The risk is that people don't take up their right. Does TGP and other committed shareholders have enough to dent the debt. Their commitment plus that of other directors suggests that there is $15 million in the bank already - so yes its good to take up rights.

I will.

There is also no conflict of interest with TGP. All you have to do is take up your rights to stay level. This is a red herring. If they were desperate they would allow holders to take more than their allocated rights. That is not happening.

Nor is all the other tricks - placements etc. The manager is committing to dig deep with you - in fact they are not forcing you to follow them.