MERE - Trading at less than a third of NAV

Hi Nigelpm,

I am looking to increase my exposure to real-estate, so read your post with interest. The link in the header should read: http://www.rns-pdf.londonstockexchange.com/rns/7260R_-2010-8-26.pdf

In assessing a property investment, we have to look a little beyond the NAV. In a highly geared play like this, the NAV is very vulnerable to mark-downs in property valuations, as we've seen in recent times. So, the first question I ask is: am I getting an income that comfortably pays for the debt interest and leaves a good return for the investor?

From the interims, net rental income for the half year is £18.4m. Admin expenses knock £4.4m off, leaving £14.0m. Net finance expense is £10.0m. Well, ISTM that this would be rather vulnerable to a rise in EURIBOR. I note that loans are all with Lloyds Banking Group, in sterling at a rate of EURIBOR + 2.25 to 2.75% p.a. Though Matrix uses interest rate swaps to hedge against short term interest rate rises, these don't provide indefinite protection.

Interest rate rises would cause a double whammy, not only reducing net income but also (possibly) reducing property valuations, as investors seek higher rental yields to make the investment worthwhile vs bond yields.

A furher complication is that the investments and income are denominated in Euros whereas the debt is sterling. Again, Matrix has hedges in place but this is a complicating factor, in the event of problems with the Euro (IMO 2011 will be a year of considerable turbulence for the Euro*)

There certainly could be value in Matrix and I note:

Shortly after the period end the Board was pleased to be able to

announce the reinstatement of the dividend, at a rate equivalent to 8

pence per annum, which is fully covered, and indicative of the Board’s

confidence in the long-term stability of the Group following the

substantial measures undertaken over the past year.

which is highly attractive at the current SP.

However, personally, I am looking for less highly geared property investments, providing a safer, steady yield. haven't seen many of those so far, so am prepared to be patient...

Cheers,

Mark

*IMO the current situation of the Euro is unsustainable. Without fiscal as well as monetary union, I can't see how the tensions between the PIIGS and Germany can be resolved. The PIIGS need to devalue/default to get their debts to sustainable levels but Euro devaluation is unacceptable (and consitutionally prohibited) to Germany. Extreme austerity alone is no solution, as it will destroy the possibility of growing out of the debts, leaving the interest burden unsustainable. Ireland's dire situation (with a worsening "double dip") illustrates what happens if you simply try to cut without otherwise relieving the debt burden. Some form of break -up of the Euro seems inevitable to me - and until the denouement, instability in the Euro market seems highly likely to me.

Hi Mark et al,

In the context of a property play that is relatively hedged agst ccy movements, you may wish to have a look at CLS Holdings (CLI).

This is a pretty successful, quasi family-owned/controlled property co with assets spread roughly equally between the UK, Sweden and France/Germany, so offering a natural ccy protection. The tenants seem to be prime (govt agencies or similar) and the rent roll fairly long term.

For Morstedt family tax reasons (AIUI), CLI doesn't pay a dividend, but instead has regular share buybacks (at a premium), in lieu. This may account for the lack of market interest/understanding, but they've done me proud over the years....

No advice intended/DYOR etc (and thanks for an opportunity to repay in some small way the many contributions you've made , both here and elsewhere)

ATB
extrader

Looks like value is starting to out. Always nice when one gets right in at the bottom ;-)

Hope others took advantage as well.

Still trading at about half NAV:

http://www.rns-pdf.londonstockexchange.com/rns/0680N_-2011-8-25.pdf

Overall, the Group has seen almost no change in NAV over the period,
with a fall of only 1p per share over the half-year to a figure of 278
pence per share as at 30 June 2011. The NAV per share is after taking
into account all liabilities including those associated with the hedging
contract.
The Group had an overall loan-to-value (LTV) ratio at the reporting date
of 65.3% and circa £11.2 million of free cash resources. As discussed
in the Manager’s Report, as this LTV exceeded the 65% threshold after
which a cash sweep operates, the Board has, post the period end,
reduced debt to take the LTV below 65% and £1.5 million (€1.7 million)
was utilised to do this.