First of all, Rory, it’s a pity that you won’t engage on the issue any further. No matter how much you know, and I’m sure that you are an expert in your field, I’m confident that, by engaging with serious investors, you will learn even more about the business. The problem you face is that we must pretend that we know all the answers when we’re in a teacher/ pupil situation, and the opportunities in such situations for the “teacher” to learn are few and far between. I assure you that some of the contributors on AAM know their stuff; it’s well worth interacting with them constructively in order to improve your own knowledge.This will be my last post on the issue.
I agree with most of what you wrote in your Sunday Times article. My only quibble, which is why I wrote to AAM in the first place, is with three sentences in the article
Early on, you wrote:
“In Green REIT’s case, its shares are now trading at a 16% discount the the balance sheet value. In Hibernia REIT’s case its shares are trading at a 12% discount to the balance sheet value, or net asset value.”
I’ve no quibble with those two statements (although I haven’t checked your figures). That’s not where I disagree with you. My disagreement relates to the last sentence of your piece, where you wrote:
“There’s always an opportunity to reinvest in the shares of Green REIT and Hibernia REIT knowing that they are already priced for a substantial 12 – 16% decline in Irish commercial property values.”
This is a complete non-sequitur. By quoting exactly the same percentages that you mentioned earlier in the article, you were clearly implying that the two REIT’s are now trading at their “true” underlying NAV’s, which is less than the latest quoted NAV. My purpose in writing was to point out to AAM readers that REIT’s (or other investment trusts) don’t have to trade at net asset value (NAV). (As an aside, it’s worth mentioning that, for investment trusts that hold quoted securities, the net asset value is generally taken to be the market value of the underlying securities, less borrowings, etc.). Most of the time, investment trusts trade at a discount to NAV, sometimes at a substantial discount, as I demonstrated in my earlier posting. At the present time, the REIT in which I hold shares is trading at a 22% discount to the net asset value per the balance sheet at 30 June last. As I said in my earlier posting, the discount has varied between 41% and 14% of NAV at various balance sheet dates over the last five years. Whilst the discounts for this particular REIT are higher and more volatile than those for other REIT’s (for reasons I’ll discuss below), I think that anyone considering investing in a REIT should be aware of this further source of volatility. That’s the main omission from your article that I wanted to bring to AAM readers’ attention.
Now to the reason for the volatility of the REIT in which I hold shares.
It’s important to emphasise at the outset that I never said that I never said that REIT’s are ALWAYS discounted to the NAV. The adverb I used was “generally.” In fact, what can arguably be termed the most famous investment trust of all is Warren Buffett’s Berkshire Hathaway. That trades at a substantial PREMIUM to NAV. I could be wrong, but I think the premium to NAV for Berkshire Hathaway is close to 50%; I’m sure some of our readers will enlighten us if I’m wrong. In BH’s case, investors are betting on the Sage of Omaha and his hirelings being able to continue to generate superior performance in future. For what it’s worth, my concern for BH is that, if anything were to happen to Mr Buffett (he’s not a spring chicken you know), investors might start to wonder why they were paying such a premium for the investment expertise of someone who mightn’t be around for much more, but that’s a discussion for another day.If REIT are ALWAYS discounted to the NAV is this not an indication that the NAV are too high ie permantently over-valued? In that case, why wouldn't someone buy all the shares and dissolve the REIT and realise the profit? after all, is the discount is permanently bin the range 60-85% it would be like taking candy from a baby.
Now, back to jpd’s question. He’s right in theory that someone could buy all the shares, dissolve the REIT and pocket the profit. The problem is that a high proportion of the shares are owned by members of one extended family. Many of them are making a nice living from working in the business (in fairness some of them do a good job). They could be out of a job if they sold their shares. Do turkeys vote for Christmas? I knew that when I was buying into the company, and I’m happy to tag along, as I’m getting a higher yield on my investment since the share price is at such a discount to NAV. There is also the hope that sometime the family will decide to sell out, at which time I and other external investors hit the jackpot.
This brings me to my final point. Rory, you say that I sound like a value investor. Yes, I am! I like to get good value in what I buy. Show me an investor who wants to get bad value? I think it’s interesting the way labels like “value investor” are thrown into discussions occasionally for unknown reasons. I’m not sure of the purpose, but I think that “value investors” are portrayed in some quarters as stick-in-the-muds, as opposed to the go-getters who want excitement and movement all the time. I’m afraid that’s me. I like my investments as boring as possible, provided they deliver value in the long term.
In closing, I would like to say that I’m happy to continue to engage with you, Rory, or with anyone else who would like to contribute to the discussion. I’m sure I’ll learn something new in the process. That should be the aim for all of us.