Real Estate

Realia/Carlos Slim: weak foundation

Most investors want their holdings to rise in value. In the case of Realia Business, a Spanish property developer, that is not the case. Its controlling shareholder, Mexican billionaire Carlos Slim, seems to be happy to allow its share price to fall. Mr Slim controls over half of Realia through his Mexican investment vehicle Inversora Carso and his ownership of Spanish construction firm FCC. And he has previously made efforts to own more of Realia. Late last week Realia’s board agreed a discounted rights issue at a price over a third below its net asset value. That looks very odd.

To begin with, Realia — which develops both commercial and residential sites — does not seem to need much equity. It generates enough cash flow to bolster the balance sheet. Moreover, Realia has had two rights issues already, in 2015 and 2016. The property company has paid down €459m — nearly half — of its net debt since 2015. Its operating profits cover interest payments by a healthy four times. Even so, the board, controlled by Mr Slim, agreed to another rights issue worth €149.1m, a quarter of the market value. Realia stated that it needs the funds to pay down debt and for unspecified developments.

What this capital increase does do is dilute minorities heavily. On Friday, the day after the rights issue announcement, the shares fell almost 8 per cent. Its shares have fallen by nearly a quarter this year. Those remaining small holders who wish to avoid dilution will need to put up more money. If Realia does need cash it could have sold some of its €1.8bn of property assets.

Realia uses an unusual valuation system for part of its land bank that has depressed the company’s net asset value for years. The developer has both residential and commercial properties. After Mr Slim took control of the group in 2012, Realia changed the valuation method for its residential property bank to a very conservative system used only in Spain, known as ECO.

This method undervalues its residential land by considering only liquidation value. A more widely used method, from the UK’s Royal Institute of Chartered Surveyors, is used by all its domestic peers on their residential land. Metrovacesa, one local rival with residential land in similar locations around the country, uses the RICS method and has a valuation per square metre nine times higher. In fact, Realia employs RICS for its commercial properties.

Presumably, Mr Slim likes what he sees at Realia. Otherwise he would not have subscribed to the previous rights issues, nor (presumably) approved this one. That gives rise to the question of whether Mr Slim aims to accumulate the remaining shares of Realia on the cheap. If so, the board’s role in implementing the rights issue warrants scrutiny. Realia’s motives for another capital raising should be challenged.

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