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.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.