This European real estate specialist has been disappointing so far. What next?
Like most other commercial property companies, Tamar European Industrial Fund (LSE: TEIF) stands at a substantial discount to its net asset value (NAV).
This is perfectly understandable; gearing concerns make the risk-reward relationship crucial to deciding a fair market value for such companies; how will they cope if property prices fall further? How much cash do they need to continue?
But in Tamar's case, the group has been doing the right things -- steadily de-gearing by selling off its assets here and there to raise cash. This isn't adequately reflected in the share price in my opinion.
French factories going cheap
The fund was established to invest in industrial real estate assets across Western and Northern Europe. The property portfolio, roughly half of which is held in France, was valued at £268m at the last count.
At 30.25p, the company is now valued a little over £42m. According to Tuesday's half-year results to the end of June, net asset value per share stands at 74.9p (excluding deferred tax). Cash and cash equivalents stood at 12.5p per share, since which time the company has sold assets in Finland and France, paying down a further £19.5m of debt. As a result current gearing is around 58%.
Meanwhile, the property portfolio is yielding 7.4% and has a "strong defensive income profile". So there we have it; 75p of value for 30p, with a steady income stream to boot (Tamar's predecessor company was paying out over 6p a share in annual dividends a couple of years ago).
Disappointment
If only this investing game was that simple.
Overall, the results were unequivocally disappointing for those of us unfortunate enough to be shareholders. The dividend has been deferred until the group sorts out the refinancing of its debt, and the gearing remains a little higher than hoped for in today's nervy commercial property world.
On the debt front, Tamar is hopeful that a refinancing deal can be achieved soon on good terms -- though it also looks likely that more property sales will be needed to reduce gearing further.
It isn't unusual for European property investment trusts to trade on a c.50% discount. Tamar's 60% discount, though, is wider than most. But a successful refinancing deal and a few more disposals could see the valuation and NAV gap begin to narrow.
Patience
Still, it isn't going to happen overnight. And until it does, there's the ever-present threat of the group getting taken out at too heavy a discount price. A potential offer was announced in November (though the offer was called off in March) from Hansteen Holdings (LSE: HSTN) at an indicative price of 40.6p per share (based on cash and shares in Hansteen at the then price).
Hansteen reckoned the potential deal was an excellent opportunity to buy high yielding assets which would "complement and extend its existing European portfolio". No kidding!? Surely 40p is too low for a realistic bid. Or maybe not? After all, at today's price that would still represent a premium of 33% -- and Tamar's board was seriously considering the bid.
Que sera, sera; the bottom line is that the shares are still trading at too large a discount to NAV, particularly given the company's reasonable level of cash.
Further sales and a finance deal will surely see the share price rise -- unless sterling strengthens markedly against the euro which would adversely impact NAV.
I thought Tama's predecessor company presented a quid's worth of value for 40p a year ago. I was wrong. But I still think the group is worth substantially more than 30p a share; patience required I'm afraid as European commercial property remains distinctly unfashionable with investors.
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> David owns shares in Tamar European Industrial Fund.
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