European Real Estate Investment Trust Limited ERET LN
January 29, 2015 - 10:19pm EST by
jgalt
2015 2016
Price: 104.00 EPS 0 0
Shares Out. (in M): 30 P/E 0 0
Market Cap (in $M): 31 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Sum Of The Parts (SOTP)
  • Liquidation
  • Discount to NAV
  • Commercial Real Estate (CRE)
  • Europe
  • Buybacks
  • Management Ownership
  • Long term contracts
  • upside optionality

Description

European Real Estate Investment Trust Limited

 

Ticker: ERET LN

Shares out: 29.648m

Recent price: 104p

Market cap: £30.8m

 

Summary

 

I like “bogo” deals at the supermarket: buy one, get one free.

 

ERET has zero debt and 35% of its market cap in cash.

 

At ERET’s current enterprise value (its market cap less its net cash), you’re buying a German shopping center and a well-leased Spanish industrial building.

 

For free, you’re getting two other well-leased Spanish industrial buildings and an office building in the commune of La Gaude, very close to Nice, in the French riviera (the “IBM La Gaude” site). That’s 751,492 sf of property in Europe, for free.

 

The largest shareholder is on the board and understands real estate well. They’re focused on maximizing value and liquidating this entity.

 

The board appointed a manager (Schroders) and gave them cash incentives to maximize value.

 

While the board has indicated it may take 2-3 years for this to play out from this point forward, the stock is cheap enough relative to what you’re getting that my IRR estimate is 23-31% over that period, based on the stated net asset value adjusted for the current fx and recent events. I estimate current NAV is 170p per share and the entity is cash flow positive.

 

I believe there may be a kicker or two to the stated net asset value which could juice this considerably, but that would just be gravy to my IRR estimate.

 

The stock is down on no news flow, and I think this is a great entry point.

 

Brief history

 

ERET is a company that raised money during the boom years, bought a lot of over-valued assets, was externally managed -- everything you don’t want to see. Smart investors saw the opportunity, took over the board, and have been slowly liquidating the portfolio. Today you have a well-managed residual portfolio being liquidated for the benefit of all shareholders.

 

The assets

 

Here’s a quick overview:

 

 

The company doesn’t really break down the individual valuations for the assets, so this is estimated. The assets are held in euro, but the company reports and is listed in pounds. So I am marking these to today’s GBP/EUR exchange rate. I believe there will likely continue to be pressure on the euro given the initiation of QE, so I’m hedging the euro exposure by being short euros.

 

Spanish industrial buildings

 

ERET owns three industrial buildings in Spain. These are all leased to Panrico, which is a well known (in Spain) donut maker, sort of a national icon. Oaktree Capital is Panrico’s owner. Panrico has been restructured, and as part of that restructuring, its rent paid to ERET was lowered by 25% last year in exchange for a lease extension of 8.5 years.

 

The rent you see above, totalling €2.46m for the three Spanish properties, already takes this into account. These new leases, however, have an average outstanding maturity of over 25 years. After 2018, ERET has the option to re-instate the previous rent level and the previous term based on Panrico’s financial standing.

 

I’m valuing these industrial buildings at $35/sf which is where I believe the company is marking these based on their balance sheet. I believe this is conservative given that a comparable property, in Murcia, was sold last year for $43/sf (although it was a very small, 9,234 sf site). On the other hand, look at the rental yield, at 14.3%. That’s way too high. If these got sold at a 12% yield, it would represent a mark 19% above this valuation, for example.

 

(It’s also fun to see how much lower these assets are marked compared with 2007. Back then, the Valladolid asset was at $107/sf; Madrid, $87/sf; and Cordoba, $57/sf, all on current fx.)

 

The column “Est GBp / sh LIVE” shows the estimated, live pence per share valuation of the assets. In aggregate, the Spanish industrial buildings add up to 43p per share.

 

Panrico’s site in Valladolid:

 

 

Bird’s-eye view: