tl;dr

Asset play with a free option on a nascent funds management business. 

Trading at 90c.  This is substantially exceeded by cash (41c), solid listed investments (61c) and probably undervalued PE investments (6c), less liabilities (8c) - totalling 101c.  One of Buffett’s 90c dollars!

This attributes zero value to the probability the proven management team make more good deals and grow a recurring revenue base leading to an earnings based valuation.

If that free option turns out to be worthless, you’re still getting forecasted $0.15 of operating earnings (19% yield) and $0.06 fully franked dividends (7.5% yield; 11% grossed up).

Management

Management is a key part of the investment case.  In 2009, now-CEO Tony Pitt bought into TGP, which was then an A-REIT called Trafalgar then (as now) trading at a discount to NTA.  The various assets were sold off for a gain and then the cash was used in a series of very profitable transactions which resulted in a 60% p.a. IRR in the following 9 years (see FY18 results presentation).

In more recent years, TGP has been in and out of data centre investments, in and out of public equity funds management, launched listed investments in which it co-invests and is growing its real estate funds management business.  TGP has also executed what looks to be a very compelling deal to exit its investment in Irongate (ASX:IAP) which will see TGP taking control of various assets previously held by IAP.  Even if this was simply a cash exit, it would have been a good investment (~35% return).

I think all of this chopping and changing is one of the reasons that the market has put TGP to one side - it is complicated, and on a cursory view, seems worrying.  On a proper analysis, I think these are high conviction investments and a willingness to get out when the investment case is broken.  Tony Pitt and the culture he has created seem key to that.

Tony is going to transition from CEO to Executive Chairman in March.  He will be replaced by James Storey who has been in the business for 10 years.  I have a high level of confidence that Pitt has chosen his replacement very carefully - he owns 32% of the company (ie. $64m at current price) and has indicated an intention to increase that holding.  This level of ownership and the consequent illiquidity is another reason I suspect that the market doesn’t like TGP.

What is it?

TGP is a combination of listed investment vehicle and fund manager, investing in three key category: real estate; private equity; and credit.  It was formerly active in public equity funds management, but has now exited that category.

Sum-of-the-parts:

Real estate (IAP)

TGP owns 7.1% of Irongate (listed property company) and TOT owns 12.8%.

After launching several unsuccessful takeover bids at lower prices, TGP has partnered with Charter Hall Partnership to facilitate the latter’s takeover at $1.90 per share plus a ~$0.05 distribution due in March.  As part of this deal, TGP and TOT will dispose of their shares for ~$1.95 and will purchase certain assets.  It seems like this was Pitt’s plan all along and earlier bids may have been intended to put Irongate in play.

TOT will purchase 3 modern office buildings for $254m, leased for 8.3 years (weighted average).  TGP will acquire a 50% interest in 100 Willis Street, Wellington for NZ $82m (A ~$77m) and a call option over the other 50%.  TGP has also sought to purchase IAP’s fund manager and co-investment stakes, but others have pre-emptive rights so it’s an open question whether that proceeds - TGP says it assumes it will not, but who knows.

This is one of those areas where faith in the management team is key.  I trust Tony Pitt and team to have cut a good deal and to be getting more value than they are giving up.  However, I have treated the TGP and TOT stakes in IAP as being valued at $1.90 (ie. the takeover price) and haven’t allowed for any surplus value from the deal.  IAP is trading 10% below the takeover price, showing some concern that the deal will not complete.

Real estate (TOT)

TGP owns 23% of TOT which has simplified its strategy to become a pure REIT.  The market value of TGP’s interest at $0.94/share is about $30.5m ($0.13/share).  At HY22, TOT reported its NTA as $1.26 / $41m / $0.18/share.  

My adjustments to TOT’s Irongate holding (at takeover price) and PMG holding (at acquisition value) get TOT’s NTA to $1.43 / $46.5m / $0.21/share:

Real estate (PMG)

PMG is a real estate investment funds manager in New Zealand with NZ $879m in FUM which is made up of unlisted, open-ended real estate investment trusts.  Again, this is a ‘trust-in-Pitt’ situation and I am taking it on faith that the investments are valuable and the business is prospective.  Pitt would know, having been an owner via TOT.  

As part of TOT’s simplification strategy, TGP has acquired its interest in PMG.  The amount in the table above is the purchase price in AUD.  I have included it as NIL for TGP assuming that it has been acquired for fair value, and netting off the purchase price.  The TGP interest will be 50%, with the remainder held by PMG staff.

Hotel Capital Partners

This is a small, unlisted operation which invests in hotel property, hotel management businesses and provides primary / mezzanine finance.  It completed its first deal in the half, acquiring a hotel for $146m on behalf of a US private equity fund.  It’s on the books for $311k so is immaterial and is in the nature of a free option.

Private equity

The private equity investments comprise the CardioScan Trust and Dealt Holdings.

The CardioScan Trust is a SPV established to acquire a 20% stake in a cardiac monitoring business which has leading market share in Asia and growing at 20% p.a.  Disclosure about the underlying business is scant as one would expect and I am happy to adopt TGP’s estimate of value ($11m) which I suspect is conservative - the valuation hasn’t changed since FY21.  TGP has indicated a desire to exit its investment by end of CY 2022 (see FY21 results presentation).

Dealt Limited is a commercial real estate finance marketplace.  It’s on the books for $2.25m (26% interest) and, again, I’m prepared to take TGP’s assessment on this.

Credit

TGP owns 18% of TCF, which is a listed fund which is designed to allow investors access to private credit deals.  It has currently loaned $24m to a business that seems like a good prospect and anticipates lending out another $25m shortly.

I have adopted the traded value of the fund.