No. of Recommendations: 5
Random thoughts
Even if you take a 5% or 10% hit on asset sales, it makes no difference, the maths is simple...
One thing to watch out for is the "institutional imperative". I saw this issue at Brookfield units a few years back.
For the long run success of the business, the best thing for them to do would be to sell the properties that offer the least business value now and in future. Maybe Leicester, Nottingham, especially overbuilt Sheffield. But those properties might be expected to sell at substantial discounts. Realized transactions at big discounts to book would look bad, but would be good.
Whereas what would make management look good and make people confident about the firm's situation would be to sell properties that they could realize at or very close to their IFRS carrying values, which would likely be the better ones with the better business futures. This would look good, but be bad. So--smart money will always bet on current management doing what's best for current management.
All that is another way of saying, never look at the size of a discount realized in recent sales and try to generalize that to the entire portfolio. (I'm not saying you would, that's just a health warning for a common trap). Management knows a lot of investors will do precisely this, so they will typically sell what causes the median investor to draw the conclusion that management wants them to draw. Goodhart's Law starts to appear: The more a metric becomes a target, the less meaningful it becomes as a metric.
Don't get me wrong. It certainly seems like there is a big margin of safety here. It's not as if anyone should be worried about their net asset value being below the current market price, and I have no particular reason to doubt any of their carrying values.
I think we all (management and potential investors both) should be aware of the risk that the target UK student population was in a bubble and may shrink a lot. Management make pleasant sounding noises about new PBSA units coming onto the market falling a lot, but it's still a positive number (even net of units going off the market) when perhaps what the industry needs is six years of net negative numbers. They phrase this as "New supply of PBSA is down 50% on pre-pandemic levels", but the emphasis here is "new" - total supply is high and still rising, and perhaps shouldn't be. I think this is an industry that could take another BIG leg down, for some time or even in some ways permanently. Perhaps. I don't think that would kill them, but there is a danger of mistaking a cycle for a trend. Past happy results may not be repeated.
Jim
