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It has been a while since I posted. Not too much going on here – quick portfolio update will follow in a day or two as there have been a few developments….

I have done quite a bit of work on Invista European Real Estate.  I have build a model (link here) This is a European commercial property fund, launched late 2006 – right into the peak of the bubble. There were big falls in NAV – 50% in 2009 and the fund rapidly got itself into trouble with loan covenants. It issued preference shares and warrants in 2010 to survive and has scraped along the bottom ever since.

It now has a MCAP of EUR 7.9m. Down from 200m plus on IPO. This is not a story of value creation.

I came to look at it as I was doing a trawl of AIM / smallcap property stocks to see if I could find anything with promise…

Superficial attraction is that the current NAV is 52m EUR – vs a 7.9m MCAP means it is a potential 5/6 bagger.

The downside is it 52m of NAV attached to 272m EUR of debt / c324m of total assets. A mere 16% decline in the total asset value wipes out the shareholders. Valuing property is an inexact science, transaction volumes are down so this isn’t as implausible as it sounds. (It isn’t actually this bad as some assets are under contract to be sold but the point still holds///)

There are however, a number of other factors to consider:

* 25% of leases break in 2015 – this means time to renegotiate/ potential to break. A substantial proportion of revenue may be in doubt.

* The company’s debt is financed out for the next 3 years at 3m EURIBOR +7.7% but falling to 3m EURIBOR +4.7 if selected sales are made. Most of these seem to have been done.

* The company needs additional funds to extend leases / make property attractive to potential (and existing) tenants.

* I tend to think any tenants will be in a strong position when it comes to renegotiation time – if they are paying attention (or google this) they will know their landlord is in desperate need of money and has very little leverage. A weak position leads to a weaker one…

* The NAV is in doubt – last half year it fell 20% – due to a fall in property value of 5.34%.

Despite these issues I still think this stock has potential. Given the valuation discrepancy there is enough upside to allow for substantial falls in NAV (as opposed to total asset value) and still make my money back. I tend to think in economic cycle terms things should be on the up – International property databank (IPD) supports this with a generally strong European performance (most assets are in France / Germany). Being heavily indebted at the bottom of the cycle on the way up lets you make money fast. But property is regional / highly dependant upon location and these assets do not seem to be near major centres.

So it is finely balanced. On the one side if things go up from here I can make make a lot of money fast, if not at the stroke of some surveyor’s pen I can loose my money.

A bit too risky for me – I like lowish risk highish return. (Having said that if the share price falls a bit for no reason I may well be tempted to have a punt).

My preferred solution is to go for the preferred stock. These were issued with a 9% coupon in 2009. Under the terms of the refinancing the company is prevented from paying the dividend but it will accrue. The preferred have a par value of 100 – 124 including dividends. They are currently trading at c67. So with time I hope to double my money. While I wait I get paid 9%. The problem is how much of a NAV fall needs to happen before the prefs are wiped out.

Well current prefs are on the BS for 32.9m EUR. NAV is 52m EUR total assets (ex sales 253m) – so there needs to be a 33% fall in gross asset value before both are wiped out. This is looking implausible. In 09 the NAV fell 50% but those days wont be coming back….

Given the prefs are trading at a 54% discount to NAV I would have to lose c27% of the total asset value before I start losing money. It isnt implausible but seems unlikely, in addition there is always the chance the ordinary shareholders could face a cash call…

I have built a model going out to 2017 of this – there are a great number of unknowns but I have done the best I can. My bear case assumes a 20 % fall in NAV in 2014 followed by 10% in 2016 (remember there are sales in Q4 2014 so this lowers the impact vs. what I said above). I also assume a 20% fall in rent due to lease breaks and a high cost of financing. I think this is very much worst case and I only lose 13m EUR off the prefs – so I still make money.

My base case – suggests NAV of ordinaries goes to 35m EUR – so they still can make a healthy return.

Link is here.

I have done my usual housekeeping checks – bit out of date – used 2013 annual report.

Pref ownership

Forum Partners LLC (Property investment firm)- 42%

Brooks Macdonald (Private Client investment manager)- 19%

Concentrated, reasonably big – might stand up for themselves…

Ords owned by Ironside Partners (Hedge Fund)- 24%

Brookes MacDonald 30%

Weiss 6%

Management – don’t own many shares – but then they don’t get paid much 52k EUR for chairman….

Chandos – 261k shares – about £10k and about £6k in prefs.

Fees / charges – approx EUR 1m per annum (fixed). Modelled other charges going down proportionately with assets… As long as co sells enough to access lower rates on debt all is well… Even if they don’t if rents and NAV are maintained all still goes OK…

Spread – 65.25-67.75 on the prefs – I could buy them though Hargreaves Lansdown made me buy over the phone – and pay an additional fee for the privilege!

I have bought a moderate amount – approx 8% of my portfolio’s value. I may add the ordinaries if they fall significantly. Likely to stop out if any NAV / revenue decline shows significant risk to pref shareholders. I may take profits if there is very good news and my upside diminishes significantly.