About five months ago, we wrote that RNY was entering the “endgame”, where assets would be sold and this long-term investment for the Australian Fund would be brought to a conclusion.
The trust’s half year results put a timeline to this process – 12 to 18 months – and confirmed that management expect to begin selling assets in the near future. Unfortunately, the numbers also suggest they won’t fetch anywhere near as much as we had hoped.
Net asset value per unit plunged 35% from $0.54 to $0.35 in Australian currency. Writedowns were taken as a result of a ‘structural shift’ in suburban leasing markets. We have highlighted this secular shift in previous commentary but, in short, less and less people want to drive to work and driving is the only way you can get to most of RNY’s office locations.
One slide provided by management (shown below) highlights the gulf between leasing activity in suburban markets and inner-city boroughs like Queens. Net absorption (the net change in total space leased) has been negative in 9 of the past ten years in RNY’s suburban markets, versus only two negative years in Queens.
We expected RNY’s markets to improve as the economy recovered and unemployment fell. It clearly hasn’t happened, and doesn’t look like it is going to happen.
Instead of selling assets with healthy free cash flow and increasing occupancy, we’re selling strategically challenged assets.
Having fallen a long way since Friday’s announcement, RNY’s units trade at less than half the post-writedown NTA. Hopefully the NTA represents a realistic estimate of what can be realised as the assets are sold, but we won’t have any idea how accurate it is until a few properties have verified their values. And, with the loan-to-value ratio now 75% across the portfolio, small movements in gross asset value can have a big impact on equity holders.
RNY is indeed entering the endgame, but it’s doing so minus a few important pieces.
Note: A few important postscripts after some of the emails and calls received since RNY’s result:
- We write this blog to explain to investors and potential investors how and why we invest our clients’ money where we do. If you choose to invest directly in any stocks we mention on Bristlemouth or in any of our monthly and quarterly reports, you are on your own. We will always put our clients’ interests first, and have no intention of providing updates or insights in any situation – good or bad – that may harm our investors’ interests.
- No, I’m not losing any sleep over our RNY investment. I’m never happy when things don’t work out the way I had hoped, but it is part and parcel of investing. We have an appropriate weighting to the stock and a portfolio of opportunities, some of which are performing better than expected. Indeed, the unit price (yet to be finalised) is going to be up some 3% for the month thanks to good results (or low expectations) from other portfolio investments.
10 thoughts on “RNY Short Pieces for Endgame”
In chess, even in the endgame, it is surprising just what sort of saving resources can emerge for the player who is down on material. Any worthwhile chess player will have long ago lost count of the number of draws and wins that he has extracted from hopelessly lost positions.
In investing in property trusts, my view is that “trends” should be completely ignored, and emphasis should be heavily placed on the balance sheet because at any given point in time, it is very difficult to distinguish a trend from a longer than usual cycle.
In this instance, I think that the market got the fall more or less right. With the discount to NTA in very broad percentage terms remaining more or less unchanged, RNY looks roughly as cheap today at 15cps as it did not so long ago at 27cps.
The write downs seem fairly comprehensive and the new cap rates look high enough to potentially offer a tiny embedded margin of safety within the new NTA.
RNY is definitely not a widows’ and orphans’ stock, and further losses are a real possibility, but I’ll be hanging onto my family’s holding, and potentially topping it up if some of the other stocks in my crosshairs get too expensive.
Agree it now looks to have a margin of satfey. What is concerning is the steady falls leading up to the announcement… How many insiders and related parties were front-running through Jan?
There was a reasonable margin of safety prior to the last refinancing- before the write-downs & the gearing increase from 65.8% to 75.8%- that’s not inconsiderable especially for assets that are not generating free cash. Couple that with still falling occupancy rates & a big slab of lease expirations coming up isn’t pretty. If the market was hot for these properties it wouldn’t be an issue but they’re not. Even Manhattan itself has had its greatest office building boom in a generation & the incentives on offer to get tenants in is gobsmacking at the moment, even for new A class buildings along the Hudson. If the new valuations prove true, you have your margin of safety. However another hit to valuations of the magnitude disclosed in the last results would see equity holders utterly decimated. I don’t think it’s anywhere near as ‘cheap’ now compared to when it last traded at 15 cents three years ago. One plus is the refinancing gives some time to see these assets off in an orderly manner but that comes with the constraints of the covenants imposed by the financier- and they’re tight as you would expect. It’s imperative they start selling assets soonest & achieve sales around NTA to get some headroom with the debt. And don’t forget, further tranches require refinancing next year & you need willing financiers at reasonable rates. There’s lots that could go wrong between now & then. Only once those things are bedded down I think could you imply a margin of safety, not before. Debt’s a bugger, it really constrains any business.
Agree with all those points, but a sufficiently large discount compensates for a helluva lot. Like I said, it’s cheap but there are other stocks that are cheaper, and it’s definitely not for those who can’t stomach losses.
Also, from memory, there is some ring-fencing in RNY’s debts, which makes them slightly less scary than equivalent debt levels in an Aussie REIT.
100% with Jono , I was watching the price decline over the preceding weeks and wondering if someone knew something we didn’t . Then wallop !!
I would have thought the name for this might be insider trading. What does it take to alert ASIC ????
Its easy to be skeptical and believe that those who were selling were privy to information the rest of us weren’t (and no doubt it does happen). However, much of the market intelligence on RNY can be sourced from doing some research into what is happening on the ground with vacancy rates within the NY tri-state area, without needing to wait for the financials to appear on the ASX.
As long as share-markets have existed, the best way to stay ahead of the market is to stay ahead of the news.
This is not a criticism on anyone that didn’t sell RNY in the last 6-12 months. The price of RNY units has really only reflected market conditions as they’ve become apparent. But since the market tends to extrapolate trends, any time the trend continues, its going to appear that the market got it right.
This is where investors have the opportunity to profit – ie if the market values a business byextrapolating the perception of a trend when one doesn’t exist, an investor betting against the market will outperform in the long run, because the market, on average, will misprice the company.
I’m not sure if this definitely applies to RNY but I think selling at any time in the last 12 months would have been selling the units at a distressed price to its NAV even factoring in the market intell available at the time, and that still applies now. So in my view its better off to wait for the sale of properties at fair market than sell RNY at the assumed discount to fair value… unless of course the ‘structural shift’ trend continues!
Interested to see Service Stream placed job ad today for workers, may be good sign for the stock. http://www.seek.com.au/job/30510897
Would I be right in suggesting that the early lessons learned from the investment in Enero has played a hand in mitigating the recent falls in the share price of RNY?
I am glad that lesson was learned early on when there was a lot less FUM.
Perhaps, although it is important to note that it still hurts. RNY was 37c this time last year, so at today’s price has lost some 2/3 of its value. It was more than a 10% position back then, so has had a very significant impact on the value of our investment.
I don’t feel any better about it because we have more than offset it with gains elsewhere … my preference would be to be reporting a 6% month for February and a 20%+ year rather than a 16% year.
Steve, just wanted to get your thoughts on yesterday’s RNY announcements which drove the sp below 4c. It looks to me that the bidders may have been opportunistic given the public knowledge about the pressure being placed on RNY to sell. If the portfolio are sold at a 13% discount to the June 16 valuation then it is likely that shareholders would get nothing after transaction and winding down costs.
So my question is would you support a capital raising to pay down debt to buy RNY more time and flexibility to get a better result from the asset sale?