Bought a small portfolio weight in PHN at 11.63 PLN, a 3.4% portfolio weight. I somewhat tempered the weight as the price was a little more than I wanted to pay. I will add if it falls back to sub 10 PLN.
Q4 hedge fund letters, conference, scoops etc
I have watched this one for quite a while. It is a Polish office developer / trust. A stake was floated by the Polish government in 2013 at 25 PLN per share and it’s fallen ever since. They have little debt – approximately 710m PLN liabilities vs 2748m worth of assets. Or a book value of 41 PLN per share.
Now there are reasons for the low valuation. Primarily I suspect local investors don’t like holdings with big government stakes – they see them as wasteful and slightly corrupt. The government holds 70% of this. I wouldn’t disagree – costs here seem out of control. Having said that I like investing in companies with a large government stake. Yes they may be flabby and wasteful, but I am much less likely to be robbed by a government than I am a private company / business minded individual. There is the possibility for political interference / non-economic decision making, but a discount this large allows a quite considerable margin.
They did have a very high vacancy rate – 8.4% in at the last count (Sep 2018) and it could be viewed as far higher depending on exactly is counted potentially up to 22%. It doesn’t worry me. It is coming down, slowly. The properties have been valued by CBRE in the past and are currently valued by Cushman and Wakefield – providing a measure of assurance the value is more or less right. Anecdotally they have some nice property in good areas – I have never been to Warsaw or Poland so really don’t know!
Dividend last year was 0.27 per share – so a gross yield of 2.3% (exc 17% Polish withholding tax (depending on your tax position)). I have noticed governments use holdings like this to raise money – selling stakes when funds are running low. They wanted to sell more back in 2013.
I recon the properties throw off c35-40m pln every year in free cash- so about 7% of the market cap. Not too exciting, but they are very inefficient – administrative costs are 20%+ of the rent received! (2017 AR – Administrative costs and sales / Rental Income). You can cut this a bit differently – as this includes some development expenses, either way they are not terribly efficient. They don’t provide (or I haven’t found) much information on lease length – there is a bit which is on P33 of the 2017 annual report. To me the leases seem short – which has it’s risks, but also opportunity, as there is potential to raise rents. Their disclosure on this is pretty poor and they stopped reporting in English – understandable as there seems to be little non-Polish investment, but annoying for me!
The reason why I didn’t invest in them earlier was their strategy, which was basically acknowledging there was lots of supply in the Warsaw office market and then deciding to supply even more ! This report analyses supply – it’s actually near impossible to predict supply / demand dynamics but it doesn’t look crazy to me. Looking at 2017 Q4 results they seem to have moved away from the gear-up / build more strategy but it’s very difficult to determine, 2018Q3 is slightly more geared. Even if they do what they said they are going to – and I doubt it, then it isn’t disastrous. Though it is pretty much the exact opposite of what I think they should be doing – i.e. closing the discount to NAV. If every 1 PLN of additional property on your BS adds 0.25 PLN to your share price why build anything at all ?
There has been gradual, slow improvement in this across a number of measures – falls in costs, decreasing vacancy rates and incrementally, over time this will all help lower the discount. Poland’s economy is growing strongly and as a result rents will tend to rise over time – the economy is roughly 17% bigger than it was when this IPO’d, yet the price is lower.
This is one for the patient – weakness to my thesis is that there isn’t too much of a catalyst to get this moving any time soon. Yet, big value discrepancies like this, without needing to engage with unsavoury people / take big risks are few and far between, particularly now, so I can’t imagine the share price falling too heavily. In addition – when there is this much value things tend to happen if you are prepared to wait.
Another way to look at it is, if someone offered you a Polish office building, with a zero yield at a 1/4 of appraised value and you had to wait 10 years to sell at NAV – that gives you 15% PA CAGR. Not bad in the current environment. Here you do get a yield and I don’t think it will take 10 years to get closer to NAV.
As ever, comments are welcomed.
Article by Rob Mahan, Deep Value Investments Blog
