Here's another interesting way of looking at things.
(NB i don't have a full picture of the cash flows or the leasing situation of the portfolio so there are many estimates and assumption in the below analysis - non of which should be considered investment advice).
I've tried to take the existing portfolio and make some adjustments around what's being renovated to see where we can get to once the portfolio is fully stabilized. So I took 2018 revenue of the leased properties ($37.4 m), and as some of the properties were only leased for part of the year following refurbishment, I've adjusted the revenue up 14% for 2019. This is because there were 145 projects completed (out of 630 properties which is 23% of the portfolio) So I've assumed these properties only achieved occupancy of 40% over the year so i've adjusted like-for-like revenue up 14%. (145/630 = 23%) (1-40%*23% = 14%).
Then I've looked at the total portfolio including those being refurbished. Occupancy is currently 76% across the entire portfolio. So while this isn't exact as I don't have all of the data, I've assumed the operating metrics of the current portfolio will be similar to the properties being renovated - in other words their rent/purchase price (yield) will be similar. So applying the upward adjusted rental income and assuming occupancy of 100%, I can now get revenue to around $56 million. So on a portfolio of $1.3 billion, that's a gross yield of 4.3% - not great in my opinion for B grade locations.
Then I've assumed a 30% operating cost on revenue (currently its 43% so again we're being nice).
Assuming this, I get net income of $39.3 million, which is a net yield of 3.0%.
This is very low given standard multifamily cap rates in these areas are generally higher than 4.0%.
Then you have to consider the way these are being financed. All of the bank debt facilities are priced at 3.63%-4.0% interest rates and then the Australian notes are paying 7.75%. So none of this debt is accretive to yield at all.
| Revenue from investment properties | 37,396,617 |
|---|
| 1 | 14% upward adjustment for 2019 (due to partially leased properties in 2018) | 42,632,143 |
|---|
| 2 | Occupancy of portfolio | 76% |
|---|
| 3 | Revenue under 100% occupancy | 56,094,925.50 |
|---|
| 4 | Portfolio value | 1,300,000,000 |
|---|
| 5 | Gross yield | 4.3% |
|---|
| 6 | Net income assuming 30% operating expenses | 39,266,448 |
|---|
| 7 | Net Yield | 3.0% |
|---|
So now we're left with $39 million in net income, we take off the interest expense of $37 million and we're left with $2 million.
Remember though, this is all before the management fees, salaries, office expenses and all the other costs are accounted for which even if we assume comes down to $10 million (again being nice), we're still in negative territory.
So what I want to know, is how can you have a fully leased stabilized property portfolio and still not produce a positive net income. This takes something special. The REIT needs to reduce debt fast - starting with those AUD notes. They need to improve their operating margins and they absolutely need to get real about the exorbitant management fees - perhaps i'll do something on this tomorrow.
Does anyone know if Dixon controls the proxy votes for a lot of the shareholders?
I'm only asking because there's value in this portfolio but only if Dixon aren't involved.
(20min delay)
