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26Jul2008
Advance Terrafund: A quest for more down-to-earth profits
You will find it hard to believe how much money the Bulgarian state makes from its agricultural land. According to unofficial data for 2006, only around BGN 300 thousand of revenues were received from the 2.5 million dka of land rented out. In other words this is equivalent to around … 0.12 BGN per dka. Judging by these figures, no reasonable person should invest his money in such a manner.
At the same time, however, the private land owners, who own considerably more modest amounts of land, managed to achieve rental revenues of more than 10 BGN/dka and the trend is for the rental rates to go up. This is the justification for Advance Terrafund – one of the major funds investing primarily in agricultural land – to try to sell the second biggest issue of stocks on the Bulgarian Stock Exchange ever and to do so during a financial crisis. The goal is through a capital increase to raise BGN 125 million and although since the beginning of the year it is hard to describe any public offering of securities as successful, this time around there is
Serious interest expressed
“At a time of crisis many investors simply have nowhere to invest their money. In our talks with our bigger shareholders they said: Yes, we are interested in investing in your capital increase. Approximately 90% of them said that they will participate and will subscribe to all the shares that they are entitled to, whereas the remaining 10% said that they will participate only partially”, said Radoslav Manolov, Executive Director of Advance Terrafund which was founded by the Karoll financial group. He added that Karoll, being also the underwriter of the issue, conducted active talks with foreign investors as well.
One of these foreign investors is the International Financial Corporation (IFC) which is part of the World Bank and intends to absorb around 25% of the capital increase. Vladimir Mihaylovski – permanent representative of IFC for Bulgaria – clarified that the amount envisaged is up to around BGN 30 million which will be invested for a probable time horizon of 4-7 years. He added that they chose Advance for three primary reasons: because of the scale of the fund, because they know and trust the management and because of the high percentage share of the capital that is traded freely on the stock exchange (75% of the capital).
Advance Terrafund is a real estate investment trust (REIT) which raises money on the stock exchange and invests them in properties. Companies of this type are exempt from corporate taxes but are obligated to pay out as dividends 90% of their net profit (net of revaluations). The company reported a profit of BGN 23 million for the last year but this profit is primarily the result of revaluation of land. Karoll Finance is the biggest shareholder owning slightly over 15% of the capital, whereas the remaining capital is divided among various institutional investors.
The current shareholders of Advance Terrafund will receive 1 (one) right for each share of stock they own and this 1 (one) right will entitle them to subscribe to 1.5 new shares with a par value of BGN 1 each. In order to acquire 1 (one) new share they will have to pay its issuing value of BGN 1.9. If they don’t want to participate in the capital increase, they can sell their rights on the stock exchange – it is exactly in this manner that new investors can gain access. In view of the fact that the shares of the fund trade at about 1.90 BGN/share in free trading as well, the price of the rights will probably reach several stotinkas at most. According to the preliminary plan, the trade in the rights will extend from 14th to 27th of August and the rights that are not exercised will be offered for sale through an auction at the beginning of September.
On first impression the increase is of
Staggering proportions
So far only the Himimport Holding has ever managed to raise a bigger amount from the market (BGN 220 million) and this happened at the end of last summer when there was a bullish sense of optimism on the stock exchange. Now the situation is quite different and many investors, even if they want to participate in the capital increase, may find themselves strapped for cash. The management of Advance Terrafund, however, is not worried at all. “The slumping market is more of an advantage for us rather than a problem. We have undertaken the increase now because we didn’t manage to do so last year. Simply the time has come – in order to keep on growing, we already resorted to loans”, said Manolov.
Another potential problem for some investors is that if they participate in the capital increase by exercising 100% of the rights that they are entitled to, the relative share of Advance Terrafund’s stock in their portfolio will increase too much. According to the management of the company, certain pension funds, for example, were forced to sell a portion of their shares to avoid exceeding the legislatively prescribed limit on the investment in shares of REITs after their participation in the capital increase.
According to the estimates of Manolov the BGN 125 million raised will be sufficient to repay the bank loan of EUR 15 million and to finance the purchases over the following 1.5 years. Over the next few years the company intends to acquire on average 10-11 thousand dka per month and thus the agricultural land owned by the company will reach 450 thousand dka at the end of 2009. “According to our plans this will be the last capital increase and the capital will not be diluted any further. After this capital increase, we will have sufficient assets and revenues from them to allow us to finance ourselves advantageously through bond issues which will have a considerable positive impact on the net assets value per share”, he explained.
Stable income
The specialists from Advance Terrafund predict that over the next few years the price of agricultural land in Bulgaria will continue to increase by about 30% per annum and the rate of return for investors is expected to be of approximately the same magnitude. The revenues will come primarily from renting the land out and no sales of agricultural land are planned at this stage. “Another major source of revenues will be the sales of our urban land plots, whose value increases on average by about 100-120% in two years. The main goal of including such land plots in our portfolio is to ensure regular income for our shareholders by selling them”, explained Manolov.
According to some analysts, this might be a disadvantage because it makes it more difficult to value the fund’s portfolio and exposes it to risk from other sectors of the market. The management of the company does not rule out the possibility for part of company’s properties in close proximity to big cities to be included in town-planning regulation, which usually raises their market value multiple times. After 3-4 years the company plans to take up the so-called “land banking” – i.e. to offer blocks of land in specific regions for sale through a tender procedure. Advance is expected to start paying dividends from next year onwards.
The expectations of Mihaylovski are also optimistic. “If we take a look at what is happening with the market of agricultural land in Western and Central Europe, we can expect nothing but price increases. It is only logical that the same will happen here as well. Irrespective of this fact, for IFC this investment is not speculative in purpose. Our purpose is to help the sustainable and efficient development of the agricultural sector and one of the fundamental predisposing factors for this is the consolidation of the agricultural land”, he said.
-- The full vrsion of the article could be found here.--
