Description

Reysas Gayrimenkul Yatirim Ortakligi AS (IST: RYGYO) is a Turkish Grade A warehouse REIT trading 60% below conservatively estimated liquidation value (liquidation value in turn being a significant underestimation of intrinsic value), and a p/e of 1.45.

You may think that it is crazy to invest in Turkey, where inflation has in the last few years been consistently above 40%.

While this may be true for most Turkish stocks, (hyper)inflation, if anything, is a tailwind for RYGYO.

RYGYO's warehouses are currently 99% leased to A-rated customers like Carrefour, Ikea, Toyota, and Mercedes, typically for periods of 10 years, in either dollar/euro-denominated or inflation-linked contracts. The little debt that RYGYO has is meanwhile almost entirely denominated in Turkish lira. This means that hyperinflation increases the barrier to entry (because new competitors would have to build/buy warehouses at much inflated prices as compared to what RYGYO has done in the past), reduces net operating cost (which are predominantly in Turkish lira), and reduces debt in real terms.

The company is run by father and son Durmuş and Egemen Döven, who own ~8% of the company directly, and ~17% of the company indirectly through Reysas Tasimacilik ve Lojistik Ticaret A.S. (which is an agglomerate of businesses run by the father-son duo; see more info below). As far as I can tell the Döven's are respectable and trustworthy businessmen that have never done anything to screw shareholders over since Reysas Tasimacilik was founded in 1989 (the REIT exists since 2008). Furthermore, Egemen Döven has bought large number of shares (~3M shares) since November 11, 2022 (the last transaction was at a valuation of $420M, which is basically RYGYO's current stock price).

Even if earnings remain the same one can reasonably expect to do well based only on multiple expansion, assuming that even the Turkish stock market is reasonable efficient in the long-run. In contrast to constant earnings, I expect earnings to grow at a very healthy clip, as it has done in the past few years. The Döven's have a great capital allocation track record, as discussed below.

Assets:

RYGYO owns 47 grade A warehouses across Turkey, as well as a number of other prime properties (e.g., two hotels of 23,870 sq. meters and 248 rooms leased to Hilton, 27 plots of land, two office buildings, and one apartment tower).

This link provides a list of all the properties that RYGYO owns, together with addresses and other information. This list gets updated every quarter here. You can find RYGYO's quarterly "activity" reports here. In these reports you find all information on ongoing deals and operations. You can find all financial statements here. The company's website is here. It is best to open the website in Turkish and then let Google translate to English, as opposed to clicking the English button on the top right corner (the English version of the website does not include all tabs and is not updated as frequently).

Standard stock screener websites such as TIKR also provide accurate long-term financial data on the company.

Capital allocation:

Ultimately, I believe this is cheap enough that it will work out well even if the management does nothing else but not squander money.

Capital allocation is nonetheless an important issue in this case as, unlike REITS in the US, RYGYO does not pay any dividend and instead invests all of their profits to build more warehouses (which may change in the future as it is becoming more difficult to get permits for super large warehouses).

The Döven's have an extremely good track record on capital allocation, and I don't expect this to change in the near future. When making an investment they generally set as a standard to get their money back within 2 to 3 years. And historically they have been able to achieve this standard, with a relatively modest amount of leverage.

To give an example of the Döven's capital allocation savviness consider the deal RYGYO recently closed with Mercedes, where Mercedes will rent 15,000 m² of the 51,063 m² of one of RYGYO of warehouses, with a total of 11 years of which 5 years irrevocable lease agreement. In the first 5 years Mercedes will pay approximately €12M rent (excl. VAT). If Mercedes uses the growth and expansion options at the beginning of the 6th lease year it is expected that an additional €21M of rent will be collected. A now comes the good part: to construct the entire 51,063 m² warehouse RYGYO only paid 74.800.000 TK + VAT, which at current exchange rates is €2.59M. So, Mercedes will approximately pay per year what it has costed RYGYO to build the entire warehouse.

Similarly, a few years ago an investor approached the Döven's with the question whether he could rent the space on top of RYGYO's warehouses. After finding out that the investor wanted to use this space for solar panels, and that this was basically a risk-free investment as the Turkish government would guarantee the solar electricity price, the Döven's said no and build the solar panel business themselves. The company is expected to generate 50 MWh by 2024, and all these investments have already been made, so all future revenue is pure free cash.

Obviously, these are just anecdotes, but I do think they illustrate the savviness of the operators (for more such recent examples see here).

For a more systematic assessment of the Döven's track record in terms of capital allocation see the image below which tracks return on equity over time.

Valuation:

There are several different ways to value RYGYO. But the core point is that however way you look at it the company seems to be trading way too cheaply.

To see this most readily one can estimate RYGYO's liquation value using the annual valuation estimates that are produced by an independent real estate valuation company for RYGYO's tax purposes. This approach is extremely conservative as it only incorporates the value of RYGYO's warehouses if they were sold today, not the value of all the future cash flows of the contracts that RYGYO is sitting on or the potential for growth based on investment of cash flows.

The aggregate outcome of these annual tax valuations is available on the website of the Central Securities Depository of the Turkish capital market here. Valuation of each individual property (together with a lot of additional information) is available here.

See this excellent write-up for why these valuations are likely to be extremely conservative and potentially underestimate the real estate value with a factor of more than 5X (I have checked this based on recent market transactions by RYGYO, as well as other warehouse transactions, and agree that the value is likely to be at least several times higher than the tax reports indicate---just like in the US the valuation of real estate for tax purposes is typically much lower than actual market value in Turkey).

At the end of 2023 all of RYGYO's land and building assets were valued at ~$1B (30,136,718,000 TL). RYGYO total liabilities are in turn ~$106M (3,151,017,919 TL) and the current market value of RYGYO is $420M. This therefore implies a market cap/liquidation value of 0.41 and an EV/liquidation value of 0.52. This seems to me extremely cheap for a company which has locked-in recurring cash flows for many years, and which assets are likely to only appreciate over time (as elsewhere real estate tends to appreciate over time in Turkey, particularly in inflationary times).

Why does the opportunity exist?

Establishing this is always a bit speculative but it basically seems that the hyperinflation in Turkey, as well as perhaps the shenanigans of Erdogan more generally, has caused all/most major institutional investors to leave Turkey and to indiscriminately sell their holdings (see, for example, this Bloomberg article). RYGYO, which is not negatively affected by the hyperinflation, appears to have simply been thrown out with the bathwater.

Risks:

1. (Geo)politics: Although Turkey was never a liberal democracy it held reasonably free and fair elections from 1984 until approximately 2009, and has since then seen a steady decline in the competitiveness of elections and judicial constraints on the state executive (see, for example, data here). This deterioration in the level of democracy accelerated after the failed coup attempt in 2016, after which President Erdogan has been much more aggressive in suppressing political opposition and undermining checks and balances (see here). Probably it is fair to say that Turkey is now a country that holds elections but where the opposition has little chance of winning due to prosecution, executive control over the courts and media, and electoral rules that structural favor the ruling AKP Party. In terms of private property rights the government has basically left alone any companies that are not tied to any political opposition (such as RYGYO) but has in the last decade subjected companies that are associated with critics or opponents of the government with intrusive tax and regulatory inspections, and even expropriation. While I have no reason to believe that RYGYO will get problems with the government this is obviously an important risk that has to be monitored continuously, and which has to be hedged by holding investment positions outside of Turkey.  

2. Exchange rate: Given hyperinflation a negative move in the lira-USD exchange rate is an important risk. I personally don't use exchange rate hedges, but one could choose to hedge this out (at a cost obviously). Since 2019 RYGYO has been more than a 10-bagger in dollar-terms, so until now exchange rate hedges were not necessary to obtain a satisfactory result.

Disclaimer:

This writeup is for information purpose only, is not investment advice, and is not a recommendation, solicitation, or offer to buy any security. Information contained in this document may constitute forward-looking statements or reflect the opinion of the author as of the date written. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. This material has been prepared from sources and data believed to be reliable and is subject to change without notice. No representations are made as to the accuracy or completeness of this material, and the author does not undertake any obligation to update or review any information or opinion contained herein. No person should make any investment decision on the basis of this material. Investors should seek expert legal, financial, tax, and other professional advice prior to making investments in securities.

Catalyst

My investment philosophy is based on the belief that while the market can price stocks extremely irrationally in the short-run, it does tend to get it right in the long-run (not least because market participants have a strong economic incentive to get it right as stocks in the end are just pieces of real businesses that are making real money that can be distributed to owners). I believe this holds true even for a stock market as crazy at that of Turkey. But I acknowledge it is only an article of faith. It is interesting in this regard, however, that the gap between intrinsic value and market valuation has been closing significantly over the past few years. In 2019, for example, RYGYO traded at less than 5% of its liquidation value, calculated in the same way as above.

A more concrete catalyst may be if foreign investors move back into the Turkey market in large numbers. This may be imminent as the Turkish central bank is now finally increasing interest rates in an effort to fight inflation (the theory before was, counter to basic macro-economic theory, that reducing interest rates would somehow reduce inflation).