EDIT:I have changed some parts of the Post, especially with regard to the summary and the risk section !!!
Preliminary remark: a reader emailed me this idea, thank you very much. But please don’t forget: This is not meant as an investment advise, please do your own homework !!!! I might own already shares of any discussed inevstment personally and many of the invetsments discussed are relatively illiquid.
The DJE Real Estate fund is a kind of “hybrid” fund of fund real estate vehicle. Among others, the fund can invest in all kind of real estate funds as well as real estate stocks, bonds etc. The fund was launched in 2004 when a lot of Germans were frustrated by the stock market and began to flood Real Estate investment funds with liquidity.
As many know, the same money went into the various open ended investment funds, like DEGI Europa, Axa Immoselect etc. The rest of the story is well known, many of those open ended investment funds needed to shut down and are going to be liquidated, 2 of them (SEB and CS) still hope to reopen until June 2012 although this might be too optimistic.
Naturally, a fund that invests in other real estate funds ends up with some investments into those problem fund as well. A fund similar to the DJE fund, namely the “Allianz Premium Immobilien” closed its doors already in August 2011.
The DJE Real Estate fund
The DJE fund managed to stay open longer, but then finally closed for liquidation on December 28th 2011.
Until closure, the fund which is traded in the secondary market, traded close to the official NAV, however after closure, the price collapsed to a level of ~5 EUR:
To make things more interesting, the fund only reports its details on a semi-annual basis, so the last detailed report is from 30.06.2011.
In its current fact sheet one can get at least the percentages of the different categories and total value. Based on this, we will try the evaluate the current holdings.
Fund valuation general approach:
From the current fact sheet we know the following:
- current total value of the fund is 226.7 mn EUR
- 9% of the fund is invested in shares, 0% bonds, 3% others. The rest (88%) in Real estate funds.
We can also assume the following:
- the problem funds will be unchanged (quantity) from 30.06.2011
- for “normal funds” no discount is necessary, neither for stocks and others
- we can evaluate the traded “problem funds” at traded prices (in the official DJE NAV, all funds are valued according to their theoretical NAVs)
So the general valuation could be carried out hte following way:
1. start with stated NAV
2. deduct market prices discounts for traded Problem funds
3. apply additional discounts for special structures
Problem funds / special structures
If we look into the fund list, we can easily spot the problem funds. I have already made a table with the “problem funds”, their NAV and their traded prices:
|Shares||NAV||Current price||NAV total||Current Markjet value||Delta|
|MS P2 Value||618000||21.94||11.62||13,558,920.00||7,181,160.00||-6,377,760.00|
|DEGI Global Business||148512||69.58||44.00||10,333,464.96||6,534,528.00||-3,798,936.96|
|DEGI German Business||148500||90||56.91||13,365,000.00||8,451,566.54||-4,913,433.46|
The first 3 funds (Axa, P2 Value and TMW) are relatively liquid, for DEGI Global I used the bid price. The 5th fund, the DEGI German Business, is not yet finally closed and could in theory reopen. The fund doesn’t have a secondary listing so I used the same discount as for the DEGI Global.
So all in all we end up with a -26.8 mn EUR mark-to-market adjustment for the “problem funds”. Based on the total volume of 226.7 mn EUR and a 7.99 EUR NAV, we would end up with a discount of 11.82% or -0.94 EUR per share.
At current market prices (EUR 5,20) this would mean a possible upside of 35.5%.
Before continuing, we ned to have a look at two additional “special” investments:
As of June 30th 2011, the fund had two “Certificates” in its portfoilos, both issued by ABN Amro which replicate two real estate funds.
1. ABN AMRO – AXA REIM European Real Estate Opportunity II Certificates (26.6 mn EUR) and
2. ABN Amro CW19 – Herald Henderson Zert. v.07(2012)
I am not sure, why DJE invested in those funds through certificates, but this has the following effects: The investor can not cash out directly but is bound to the maturity of the certificate and is exposed toothe credit of the bank. ABN Amro is now RBS and basically UK Government owned, but still it is not good as a direct inevstment. Howeverit looks like that the certificates are being paid down to a certain extent on a regular basis.
To be on the safe side, I would discount those 2 certficates by a flat 10%, the funds seem to be OK, but the format is quite illiquid. This results in the following discounts:
|Shares||NAV||Discounted prcie||NAV total||Current Markjet value|
This is a further -1.57% or 0.13 EUR discount per share toreflect the certificates.
I tried to summarize the calculations in the following “intrinsic” value table:
|NAV as reported||7.99|
|discount problem funds:||-0.94|
|current market price||5.2|
So all in all, “only” a 33% upside, why bother ? In my opinion, the fund is interesting nevertheless because of this:
A) around 2/3 of the fund’s investments (based on NAV) are relatively liquid. It should be no big problem for DJE to return 5 EUR or more within the next 12 months or so. This would mean that at current prices, the investment itself should flow back pretty soon and the discount to intrinsic value could decrease equally soon
B) Additionally, there might be a certain upside in the problem funds as well as in the certificates. So the total 33% upside could be on the conservative end
As already mentioned, ~15% of the fund are invested in ABN certificates, which in an extreme scenario could lead to counterparty losses. Also the certificates might be the least liquid part of the portfolio and require some time to work out.
Of course there is also the risks that the “normal” funds get into problems. So far they look OK. Additionally, the price of the problem funds could further decrease if SEB and CS Euroreal close in may or June.
EDIT: It looks like that the two big Warburg funds are also in some kind of voluntary liquidation. So I will have to update the model to reflect this as well !!!!!!!
Summary: At current prices, the DJE offers a relativley attractive upside to intrinsic value compared to the direct real estate funds in liquidation.
As I want to increase my exposure to special situations anyway, I decided to build up a full position in the DJE Real estate in the coming days with a limitof 5,30 EUR max. EDIT: I will need to adjust the model with regard to the Warburg Funds- so no action yet !!!!!!!!!