What is Reasonably Priced

[thepupil]

see slide 38, Paris CBD is marked at 3.1% cap rate and Paris Resi 3.2%.

I'm not saying that's "wrong" given where rates/vacancy/whatever is, just  saying that when you're buying 30% LTV 3 cap stuff at 70% of NAV, you're paying a 4 cap.

One thing to be mindful of is lease structures vary across countries so all cap rates/ NOI’s are not equal. British office leases, I believe, put more of the cost burden on the tenant, and kind of resemble NNN leases. HK leases whenever I’ve looked seem much shorter and HK buildings have the steamiest cap rates in their NAVs. I haven’t dug into French/Gecina. The NYC model is mostly “modified gross” where certain costs are passed through to tenant.m, but you have some gems like ALX Bloomberg tower where more like NNN. ARE and BXP have a fair bit of pretty long duration NNN like structures, one of the reasons ARE trades so dear.

https://www.gecina.fr/sites/default/files/2020-07/gecina_-_earnings_at_june_30_2020_-_presentation.pdf

[mattee2264]

 KKR and BAM invested in Great Portland Estates and British Land respectively in the autumn. I cannot remember the metrics off hand but they are around 70% NAV.

[rosemontseneca]

I have a small low conviction position in Befimmo, which is a Belgian office REIT.  I show it trading at a ~7 cap rate, and the tenant base is 60% public sector.  No catalyst other than hopefully re-rating post COVID.

Used to own British Land, but it sold it post vaccine bounce.

I tend to like the foreign property stocks because you don't have the same local tax/regulatory arbitrage that you have in the U.S. that is driving the "migration from the coasts" theme.  Whereas everyone is ready to proclaim the death of NYC/SF/LA, London will always be the leading city in the UK, Paris for France, and so forth 

[Castanza]

I have a small low conviction position in Befimmo, which is a Belgian office REIT.  I show it trading at a ~7 cap rate, and the tenant base is 60% public sector.  No catalyst other than hopefully re-rating post COVID.

Used to own British Land, but it sold it post vaccine bounce.

I tend to like the foreign property stocks because you don't have the same local tax/regulatory arbitrage that you have in the U.S. that is driving the "migration from the coasts" theme.  Whereas everyone is ready to proclaim the death of NYC/SF/LA, London will always be the leading city in the UK, Paris for France, and so forth

To your last point, that is what was leading me to dig in a bit. Thanks for sharing

[thepupil]

if you really want to go crazy all the HK property stocks are "cheap", though my only exposure is ownership of Hong Kong Land at an effective NAV multiple of like 0.2x via Jardine Strategic. I'm sure all the other HK landlords are just as cheap (CK Asset may actually be interesting given it has very low leverage and owns things like british pubs and aircraft leasing and infrastructure so not just ?HK property, not reaaaaly my bag though).

 the two Superman stocks (1 HK and CK Asset) are like a hodge podge of everything hated in the world: mainland china, hong kong, UK, real estate, energy, infrastructure (not hated as much), etc. 

Mitsubishi Estates owns the best CBD real estate in the world in my opinion (Maranouchi District, near the palace in Tokyo http://marunouchi.mec.co.jp/en/photo/), but it's a giant Japanese company w/ all that implies. With dividends reinvested, it has returned -0.7% since 1988 

[thepupil]

I have a small low conviction position in Befimmo, which is a Belgian office REIT.  I show it trading at a ~7 cap rate, and the tenant base is 60% public sector.  No catalyst other than hopefully re-rating post COVID.

Used to own British Land, but it sold it post vaccine bounce.

I tend to like the foreign property stocks because you don't have the same local tax/regulatory arbitrage that you have in the U.S. that is driving the "migration from the coasts" theme.  Whereas everyone is ready to proclaim the death of NYC/SF/LA, London will always be the leading city in the UK, Paris for France, and so forth

At first glance, I think this is a nice idea. Just to confirm your 7% cap rate math, is it something like this

1.2 billion debt
0.98 billion equity
2.188B EV

Existing Income Portfolio NOI = 122 million

122 / 2188 = 5.4%cap rate using only existing estate

w/ corp overhead of 14mm/year

108 / 2188 = 4.9% cap rate w/ corp overhead.

but there's a 394mm development pipeline that's 80% pre-let which is non-income producing. Given the degree to which this is pre-let, we may assume that they'll at least generate their cost on this investment, so if we back that out from the EV

2188-394 = 1794, which gives you a 6.0%-6.8% cap rate (depending on whether you count overhead). Alternatively, if you assume they'll make a 6.0% yield on cost on the development, that will get you into a mid-high 6% cap rate as the development NOI comes in line over the next 3 years.

So you're buying a portfolio of 93% occupied 7-8 year weighted average lease office in mostly Brussels and Flanders at a 5-7 cap (depending on what you want to count/not count). The debt cost 2% and is 90%+ fixed rate so you have close to an 8.5% yield to the equity, much of which is returned to you in the form of the 7% dividend. On the risk side, leverage is reasonable at 40% of management asset value and 55% of the mtm enterprise value. 

this is in a NIRP environment.

seems pretty reasonable to me.

The belgian 10 year yields -0.36% and the 2 year yields -0.7%, so there's negative hedging costs (though I probably wouldn't hedge since I don't have a lot of euro exposure and would just take on the currency risk.

[rosemontseneca]

I got to a 7 cap by backing out 487mm for the development pipeline.  That's what they use in their NAV buildup on page 35 of their latest investor deck, but I don't know if that reflects cost or some write-up to cost.  If the latter, it's probably an aggressive assumption.

I also go back and forth on the overhead question, but for purposes of my math it's excluded.

[writser]

Thanks for sharing that, Befimmo looks like a reasonable REIT indeed at first glance.