Proposed Directors of Tirupati Graphite explain why they have requisitioned an GM. Watch the video here.
To deliver an attractive total return to shareholders with a strong focus on income, from investing in UK commercial property, predominantly in the office and industrial sectors in major regional centres and urban areas outside of the M25 motorway.
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Some excellent TT posts here the last few days, from across the spectrum. Thanks to all. The way these boards should be..
Prospects for interest rate cuts looking dimmer tipped that and perhaps shows the sensitivity
Due on 22nd Feb.Results on 26 Mar.
Better position for refinancing in 2026.
Trotsky I disagree with you on how the income is calculated re: dividends.
From HMRC manuals:
IFM24005 - Real Estate Investment Trust : Property rental income : Calculation of property rental business profits: general: CTA2010/S599
The REIT regime requires that there is a mechanism for calculating the profits of the property rental business, even though those profits are not subject to tax in the REIT. This is because the calculation determines i) the profits which are exempt from tax, ii) the distribution requirement and iii) the profit: financing cost ratio.
The rules apply to calculating the property rental business profits of the REIT company and of each member of a Group REIT that carries on property rental business.
CTA2010/S599 contains the rules for calculating the profits which relate to the tax-exempt UK property rental business. The starting point is that the profits of the property rental business should be calculated in the same way as those of a property business under CTA2009/Part 4 [CTA2010/S599(2)]
Detailed guidance on the property business rules can be found in the Property Income Manual (PIM). The following exceptions apply for REITs:
Capital allowances
Capital allowances are deductions in arriving at the taxable profits of a property business, and this rule is followed in calculating the profits of the property rental business. However the rules which allow a company to claim less than the full amount available are set aside – see IFM24010 for further details.
I am also aware there is no depreciation because I said as much.
I am also similarly aware that capital allowances are not generally available on building works but the point I was making was that an element of the capex could give rise to capital allowances if it can be categorised as integral features where upgrading an unoccupied building with no tenant to recharge.
Also I don't believe there are any rules surrounding the timing of dividends other then the distribution for any year must be made by 9 months after the year end. Whether RGL wants to pay a single annual dividend, an interim and a final or quarterly is completely up to them; notwithstanding the market credibility issue.
I accept it's kicking the can down the road but I suggest the immediate priority is the cash crunch coming up in August.
Certainly I think a share issue is inevitable and probably sooner rather than later.
By my calculations a 1 for 2 rights issue at say 22p raises say £55m after costs; £50m to pay off the bond leaving Net LTV on the secured debt at somewhere around 47% being £378.5m of gross debt and £47.5m of cash to provide some flexibility going forward.
It would then leave NAV per share of c. 46p and dividends of c. 3.2p which on today's price is a yield of c. 14% and a discount to NAV of c. 51%.
Minimal dilution, hope interest rates fall and that they can improve occupancy and achieve some of that ERV excess to leave them in a bette
As I mentioned below, I think the importance of LTV is being overstated unless we see a significant further drop in valuations. The banks are interested in the income.
I can see one of the existing senior lenders agreeing to a bridge facility assuming that the income cover is sufficient, albeit for a cost. This will of course put pressure on the dividend, but they may only need a facility of 20-30m by August.
Longer term much will depend on where interest rates settle, but if rental income growth is as expected for FY24 then this may make the broader refinancing quite viable in 2025.
What is sorely needed is an update alongside the dividend announcement of what the plan is for the bond and strategy for the longer term refinancing.
0715, Selling property doesn't solve the problem if Inglis has to apply all of the proceeds to pay down RGL's outstanding secured loans. The lenders won't have lent against individual properties; they'll have lent against a portfolio of properties on a joint and several basis. With the possibility that market valuations may still continue to fall and LTV covenants being broken, lenders may insist on all of the proceeds being applied to pay down the debt so that they have more LTV cushion. Selling property is not the long term solution; either RGL has to wind itself up and sell all of its properties or increase its capital base. Even if RGL could sell some property to help repay the retail bond now, it only defers the problem. A lot of debt is coming up for renewal in the next few years and RGL has no means to repay it. With the benefit of hindsight, RGL really should have raised more capital rather than take on additional borrowing but we are where we are.
RubyDog, REIT dividends are paid based on the EPRA profit not the tax adjusted profit. In any event, capital allowances aren't generally available on building works and certainly not if the capital expenditure is reimbursed by the tenants. Investment properties are carried at their estimated market value (no depreciation) and any increases/(decreases) in their valuations are, I believe, excluded from the calculation of EPRA profits.
Not sure they could delay paying dividends unless they went to an annual dividend cycle e.g. if the Q3 FY23 dividend was the last dividend for FY22 then they couldn't delay their quarterly dividends if they intended to pay out 90% of their FY23 EPRA profits by Q3 FY24. In any event, delaying the dividend only defers the cash crunch.
As regards the bank borrowings, the liabilities are (probably) joint and several and if there is a risk that valuations might continue to fall then lenders would probably insist on any money raised from property sales being applied against their outstanding debt (at least until there was more headroom in the LTV) i.e. sell one property and the lender would probably insist that all of the money was used to pay down the outstanding "portfolio" debt whereas sell (say) ten properties and the lender might agree to RGL retaining (at least) some of the "excess". Bottom line, selling the odd secured property here and there is unlikely to free up the cash RGL needs and selling a large portfolio of secured properties seems unlikely (few, if any purchasers, would have the cash; they'd probably need to raise some debt themselves and that might prove problematic at the moment).
The link I was trying to post was the colliers regional office update from february.
While the share price is somewhat sickening at present, there is some cause for optimism:
- Regional office rents are holding up extremely well for the most part: [LINK REMOVED]
- The most recent rent roll number is healthy and the rent is being collected, per the feb update
- There is a clear trend to 'returning to the office' for most organisations, multiple sources / news articles on this
- Extremely low levels of deals and liquidity in 2023 have clearly depressed prices but UK regional office outlooks predict an increase in demand for 2024 with many suggesting that we are at the bottom of the cycle for most regions
- There is undersupply in regional offices and this is not going to change any time soon while the UK is seeing significant population growth, and high cost of living in London may push new arrivals outs. This should depress vacancy rates
- It looks like the company has done well getting most of the portfolio into the A-C EPC range which is crucial for the refinancing
- Despite recent US jobs data most observers agree that rate cuts are still coming this year which will be positive for valuations and make an immediate impact on the share price
I understand the concern around the bond but it matures in August, not March. We will know more over the next few months but as some have pointed out, lenders are primarily interested in income. I won't be concerned unless we see a significant increase in vacancies.
Nothing is certain but what I suspect will happen is further asset disposals over the next few months, and some kind of temporary bridge financing (possibly an RCF facility) from one of the existing lenders that cross collateralizes the portfolio while enabling them to continue with the asset disposal programme. Lenders will show flexibility on LTV if the income is strong.
The final possibility that no-one has suggested is a buyout of the whole portfolio by a private investor, which even at a discount to the EPRA NAV would realise a significant profit on the current share price.
DYOR
There is a chart covering all the regional areas but I can't seem to get it posted here !! Beyond my modest IT skills !!
Article in IC on regional office opportunity as below.
Bodes well for RGL if it can navigate it's way out of the current situation !
Are Bristol's prime offices overlooked?
High interest rates have caused regional office values to plunge since 2022. However, unlike other sub-sectors, regional offices also face structural, non-cyclical challenges such as the unanswered question of office use post-Covid-19 and stricter energy efficiency standards. As of April last year, every leased commercial property must have an energy performance certificate (EPC) grade of E or higher. The government plans to increase that threshold to B by 2030.
Regional offices earn much lower rent than London offices but must spend similar amounts to bring them up to standard. On top of this, most such buildings have multiple tenants, making EPC upgrades harder than for single-let buildings like big shiny London office HQs or warehouses.
However, BNP Paribas Real Estate sees reward where there is risk. It says the valuation drop means potential property yields (annual rental income as a percentage of asset value) are very high in the case of top-quality regional offices, almost all of which already meet future EPC requirements.
According to its forecast, prime regional offices will record the highest total return (asset value growth plus rental growth) among all the core asset classes it measures from 2024 to 2028. Bristol’s prime regional office market is the best of the lot, with a predicted 11.3 per cent total return.
Our analysis found regional offices account for less than 1 per cent of the total value of the top 35 Reits’ portfolios. Prime Bristol offices account for even less. BNP Paribas Real Estate is making a contrarian case for why that should change.
My understanding on the dividend and REIT rules is that they must distribute 90% of 'exempt property income' which is basically taxable profits from property rental business. This in turn will be EPRA profits as reduced for any capital allowances claimed. Usually depreciation is added back to calculate a taxable profit before capital allowances are deducted but in this case there isn't any depreciation.
Hence I think there is some flexibility given that capex in FY22 was £10m and at HY23 was £6.7m. If we take the £27.2m forecast of EPRA profits from Edison's last note in Nov-23, assume that it reduces to say £26m because of worse than expected occupancy figures, increased interest costs because of failure to make the forecast asset sales etc. and then say that they can claim £3m of capital allowances because the expenditure meets the tax definition of 'integral features', which is not totally unreasonable if they are spending to meet EPC requirements on energy efficiency, then that could bring 'exempt property income' down to £23m or 4.46p.
In that scenario they would not have to distribute anything for Q423 as they have already distributed more than 90% of 4.46p at 4.05p !
In addition UK REIT rules state that they need only pay the required 90% in dividends by the corporation tax due date for the company which is 9 months after the year end. Hence any dividends for FY24 need not actually be paid until 30-Sep-25 at the absolute latest. Therefore any dividends ordinarily paid quarterly during 2024 could also be delayed to allow some further breathing space.
Trotsky mentions below that asset sales may not result in any free cash if they are pledged as security but is it not the case that funds could be redrawn once obligations had been met in terms of any required repayment ? As long as there is headroom within the agreed facility and no covenant has been breached then I would have thought so. In fact the borrowing figures disclosed for HY23 showed £8.9m of undrawn funds which could come into play if the valuation fall at HY24 is not too bad !
I think it would be grossly negligent of the board to pay out over £12m in dividends for Q423 and Q124 unless some kind of refinancing for the bond is absolutely 'nailed on'. Hence I think we will see a cancellation of Q423 and a deferral of any further dividends until such time as the bond repayment is sorted one way or another.
Not rocket science, just need to sell some property quick and all will be stabilised.
Inglish has secured main debt at a low 3.5% so doesn't want to sell. The problem is debt not cash flow, he needs some proceeds to cover the £50 million and also to narrow the NAV if it is really £700 of offices if he sells what difference will it make on the fund if it goes to a £600 million fund.
The guy is running it like a private old school property company but the market works different and is concerned about risks.
The sooner he listens the quicker this can be turned around.
"The LTV continues to be a key focus of the Board and the management have a plan to reduce LTV to the long term target of 40% through selective sales and repayment of debt. The senior debt is 100% fixed, swapped or capped and will not exceed 3.5%. The Company is actively exploring a range of refinancing options for the retail bond given its near-term maturity date."
Still 6 months to go for bond repayment.
There is probably something happening, the bond will probably be rolled over perhaps a sale is imminent and that is needed befor a bond renerwal announcement is made.
Anyway we will find out a week on tuesday, suspect dividend will be maintained, if not some plan might be itemised.
Still think it's over sold.
Guitarsolo, the banks won't want to be lumbered with the properties. The more I look at it the more I wonder how RGL ever planned to pay down the debt. The REIT distribution rules would never have permitted RGL to retain sufficient cash to pay down the debt over a 5-10 year loan term. So, I can only assume that it was always RGL's intention from the outset to sell a significant number of the properties into a (hoped for) rising property market and/or be able to raise additional capital by the issue of new shares (more likely the latter). Unfortunately both plans have been scuppered by the current economic travails (plus the additional pressure of WFH).
The main problem with raising fresh equity is the fact that the shares are trading at a substantial discount to NAV and, at it's current market price, RGL would probably have to double the number of shares in issue to give it the headroom it needs. If RGL could get a capital raise away at the the current market price that would give RGL c£115m; sufficient to repay the retail bond and make a (big) dent in its bank borrowings. However, all other things being equal, it would also halve the current dividend per share from 4.8p to 2.4p which would have a big impact on historic investors who bought at a much higher prices.
I think personally I would prefer if RGL looked at long-term zero dividend preference shares rather than an issue of ordinary shares (in the hope that with a sufficient efluction of time the property valuations could improve)
I think they'll be able to issue a new bond or a 3-5 year ZDP to repay the existing retail bond. Or maybe they could use a combination of cash and a smaller bond/ZDP to please the market. Defaulting on the retail bond would be the end of the company, so it's not going to happen.
But the only way (that I can see) to reduce the LTV is property sales which will reduce the dividend proportionally. The only way they'll avoid that is if property prices start rising again. Another option is an equity raise or a combination of all of the options listed.
Many thanks for making the effort to check the rules Trotsky! So if they aren't able to sell enough assets it comes down to the cost of the refi of the bond and how much more it will cost compared to corporation tax on the non-distributed-as-dividends profits. Sadly, the banks will know this!
Guitarsolo, I've had a quick trawl of the Revenue Manuals and can't find any 'debt repayment' exemption. I've also had a quick look at the Edison reports and didn't see any reference to "... paying the debt would negative such so compliance would be maintained...", whatever that means. But, I stand to be corrected.
My read is that RGL could possibly (temporarily) cancel its property income distributions (PIDs) to help repay the retail bond but that it would then be in breach of the REIT distribution rules and, as such, would then be required to pay corporation tax at 25% on the difference between 90% (not 100%) of its EPRA earnings and the amount actually distributed. E.g. if its annual EPRA earnings were (say) £34m and it didn't make any PIDs then it would be liable to pay c£7.65m of corporation tax (25% x 90% x £34m).
However, RGL would need to be wary of losing its REIT status altogether if HMRC was to deem the breach of the distribution rules to be 'serious' (unlikely I think, as long as RGL explains its rationale to HMRC, but still a possibility). If RGL did lose its REIT status altogether then that could have serious future ramifications with reagrd to the level of dividends RGL could pay down the line unless it could (somehow) regain its REIT status.
Cancelling the dividend is a nuclear option that RGL would need to consider carefully and potentially discuss with HMRC before proceeding.
404x, RGL does not currently pay any corporation tax because its distributes 90% or more of its EPRA earnings as PIDS but if it cancelled, or significantly reduced, its PIDs then it could become liable to pay corporation tax. I never said "... reducing the dividend wouldn't reduce corporation tax ...".
@Trotsky reducing the dividend wouldn't reduce corporation tax, that would be a gift of a loophole. Corporation tax is essentially paid on profits, so in RGL's case it would be a miracle if they had any liability this year. Distributable reserves always come after the tax man in pecking order.
Trotsky, you may be correct re the REIT/income rules. But this was quoted a couple of days back by damofarl from the Edison report of June 2023:
"...the bond could be paid from a combination of cash at hand and cancellation of dividends, and whilst the later being a reit is linked to income, paying the debt would negative such so compliance would be maintained..." [sic]
Ignoring that it doesn't quite make sense (!), are Edison suggesting that there is a way of cancelling some dividend payments to allow for the bond repayment whilst maintaining REIT status?
GS
REIT dividends are based on EPRA rental income after expenses and financing costs (they exclude capital gains/losses) and there isn't much, if any scope, to offset "other costs" as you suggest. I'm not 100% certain but if RGL was to (say) reduce it's dividend to 60% of its EPRA rental income then it may only pay corporation tax on the 40% not distributed (as opposed to 100%).
People (including Inglis) need to start thinking outside the box. It's to say that they need to sell property but there are few, if any, large cash purchasers (other potential purchasers are struggling to raise the finance) i.e. Inglis couldn't make large scale disposals, even if he wanted to (there simply aren't the buyers with the cash and unencumbered by debt). Therefore, Inglis's only alternative is to make peicemeal sales to small cash purchasers (up to c£5m). He also has to consider whether individual properties are being used as security for a loan against a "package" of properties (banks will more often that not make loans against a "package" of properties on a joint and several basis, rather than on an individual property by property basis) . If they are so secured, the banks would probably expect him to apply 100% of the proceeds against the outstanding debt and there would be no "surplus" funds left to help pay off the bond. There may be some small properties that are not secured against RGL's debts but I suspect they are few and Inglis may have already sold what he can.
Factoring in trade and other receivables, cash and cash equivalents, trade and other payables, and deferred income, I'd estimate that Inglis had c£19m of "free" cash at the end of H1 FY23 (as opposed to c£25m at the end of FY22 and c£19m at the end of H1 FY22) but he'd probably need/want to keep at least £10m of that figure for operational purposes.
So, at a push, if nothing else changes, Inglis probably has c£10m of cash available to repay the bond in August unless he can sell a significant chunk of the property portfolio to repay at least one of the existing bank loans in its entirety and generate a cash surplus of c£40m+ (that would appear highly unlikely/unrealistic). His only realistic options would therefore appear to be to either try and issue a new retail bond (with a much higher coupon) or consider an issue of long-dated zero dividend preference shares (this would hurt the existing shareholders but may at least provide the breathing space to allow property values to recover).
i don't know all the details of the reit rules but i believe there is some flexibility about what you can offset against "income" to still qualify for the reit rules.
rgl's problem is debt as we all know... my mantra is constantly shouting at me: "control your debts before your debts control you".
rgl and inglis have made a mess of this. they need a credible plan to repay the bond and show markets how they will keep debt at around 40% ltv. if they have a plan they should be showing the market so that our share price stops tanking. more worrying is if they don't have a plan!
but there is a 65% discount to nav so there is value there, they just need a plan. and if that includes sacrificing a dividend for 6/12 months because we come out of it on the other side much healthier, then say so!
inglis, in my view, appears guilty of trying to keep hold of his £700m portfolio rather than shrinking a bit to be in a healthier position. is that vanity/arrogance? i don't know.....
but as someone who has been here for 6 years+, purchases north of £1 (yes!) when it used to pay a covered 8.2p dividend, i am mighty ****ed off at these directors. covid was no one's fault obviously but other factors are.
guitarsolo
"My other worry is whether RGL will find a way to halt the dividend through exceptional circumstances, which would be a disaster." You hit the nail on the head! We all know REITs are supposed to pay out dividends but what if it bankrupts the company?