The latest Investing Matters Podcast episode with London Stock Exchange Group's Chris Mayo has just been released. Listen 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.
Find out MoreLondon South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
My first post here as a suffering shareholder in RGL !!
I do believe in the long term future of smaller regional offices that are well maintained and offer a high level of facilities. However sentiment is very much against RGL at the moment and that may well take another 12 months to turn. Unfortunately for RGL it is facing a perfect storm.
I've been doing some analysis and some of the posts here have been very useful.
Silverknight said below that the company was facing an existential threat and I certainly think that is the reason for the falls in price of both the shares and the bond.
Here is my analysis for what it's worth:
There is a crunch point coming in 6 months' time; the £50m bond will have to be redeemed whilst at pretty much the same time the next half yearly valuation at 30-Jun-24 will be finalised. I was hoping for a flat or very small decline in the valuation at 31-Dec-23 given that long term yields on gilts had moderated somewhat between Jun-23 and Dec-23 due to falling inflation. The like for like decrease of 5.9% is much worse than I was expecting. One can only assume it is based on transactional data i.e. recent sales of similar offices. If so then that's not a good sign for future valuations. Similarly the fact that they couldn't make any further sales after the £6.25m sale in Nov-23. The key question is have we hit the bottom or will there continue to be further falls ? I think we have to assume there will be another fall at 30-Jun-24. I have calculated that it will take another like for like fall of c. 7% on average to hit the 60% LTV covenants (50% for the Santander Loan). That is without considering cash balances or the retail bond. Is 7% likely ? Probably on the pessimistic side but it can't be ruled out.
With regard to redeeming the bond I think we have to assume that finance is not going to be available; who would want to lend to a heavily-indebted company approaching a covenant breach at 60% LTV with falling asset values ? Therefore I think repayment will have to come from existing cash resources.
At 55.1% gearing just announced and assuming the same level of debt as at 30-Sep of £428.5m that means c. £42.5m of cash (restricted and unrestricted). The majority of this cash can be used to redeem the bond in Aug-24 (allowing for working capital / repayable deposits etc.). Let's assume £12.5m needs to be retained to continue operating and provide a buffer so that the covenants can be 'managed' in the event of a further valuation fall. In that scenario the company needs to find another £20m to redeem the bond.
The only way they can do that is through management of the dividend and asset sales. They could probably get away with cancelling Q423 and delaying Q124 which would save £12.4m. Hence another c. £8m to find from asset sales which is not impossible.
Medium term a rights issue or share placing is probably inevitable but my calculations indicate that need not be a disaster from cu
Well didn't think it would get this low.
Just over a week to after close today, no doubt all will be revealed, well we should know what divi will be, perhaps news on bond renewal or sale of property.
Anyway one can hope.
Anyone got 50 million, think that is all you need to get a majority shareholding.
Must be someone thinking they could make money.
The company legally has to make a distribution of its profit/ EPRA EPS. The question is what will that EPRA EPS be?
Half year EPS was 2.5p (£12.7m). At the high end estimate, if we simply double this, for the full year would be 5.0p (c.£25m).
Realistically, I think earnings will be more in the range of £15-£20m. this could be from increased overheads, reduced income, and also fees paid to investment bankers to roll the £50m bond - that would be £1-2m on its own! So £15-20m = EPS of 3-3.8p per share.
assuming the market prices RGL at a required yield of 15% (it has been in the 10-20% range for a while), that implies that the NAV/price per share should be 20-25 per share. Which is where we are.
So I think it is fairly priced. I stupidly got in at 30, so sitting on a huge loss. My other worry is whether RGL will find a way to halt the dividend through exceptional circumstances, which would be a disaster.
It's unlikely in the first instance that the banks would call in their loans if the loan covenants are breached. In the event that the covenants are breached, the normal course of action would be a review of the outstanding loans and an increase in the interest charged to reflect the additional risk (which may or may not be covered by hedging).
Ideally RGL would like to do a capital raise but, given the deep discount to NAV, the issue of zero dividend preferred shares may be an alternative.
Could be a decent dividend but at what price? REITs have a tendency to eat your capital in exchange for a high income.
And what happens if interest rates don't fall?
Jumbo . You're living in fantasyland. The dividend is unsustainable and will be cut. This company is facing an existential threat and needs urgent action by the directors
Juicy Dividends for a passive long term income,, and most likely interest rates will start to fall,, a great opportunity to buy in,, Strong Buy and Hold
I thought the target was 5.25p. Hopefully the latest fall in valuations and increase in LTV haven't put this in jeopardy.
I'm looking forward to seeing 4.8p Dividend for this year,, and hopefully by next year interest rates will be much lower,, and can see share price much higher,, back in the 60s
Hopefully its mispricing - In recent yrs I have seem a number of similar bonds where the owner is out of favour due to macro trends exacerbating their micro issues. All, so far, paid up. The number of UK companies that defaulted on their bonds are relatively few - however, those that did often came out of the blue and had hidden, sometimes fraudulent issues. I dont see the probability of this scenario being high in this case. I hope not...
Anyone know how much dividends going to be paid out for this year?,, I'm getting a figure of 4.8p for this year alone.. and at today's price %,, anyone?,, and interest rates should be coming down soon,, a solid passive income for the long term,,
Just Gone Blue,, This Could Be The Bottom,, I'm happy with my long term holdings 🤣,, When all this noise and nonsense goes away,, we should start to get to where it should be,, much higher than where it's now
Yes they have to pay something, even a token amount, otherwise it doesn't qualify as a reit, still doesn't improve the case for buying
Legally they have to pay out 80% of REIT income i think. so there isn't that discretion. I believe that REIT income Excludes reductions in the fair value of the property (which we know is down £90m this quarter).
Only a cut? Passing it would save almost £6.2M so surely BOD must be thinking about it with an eye to that bond repayment coming up on the horizon.
£32M cash balance plus 3 passed dividends would pay off the bond and restore balance sheet somewhat. No?
A cut is nailed on so if buying just for dividends you may well be disappointed. They need to find £50m by August but last reported cash balance £32m. This must be the riskiest reit in the UK, I don't know of another with a higher LTV. The current yield is completely unsustainable.
I'm with you on this topping up on each drop.
Dividend announcement on the horizon very soon,, and I've been Topping Up at these radiculsly low prices for passive income for the long term
This commentary from Bloomberg tonight, might explain the recent downturn; -
"The troubles plaguing the US commercial property market moved to Europe this week, elevating fears of broader contagion. The latest victim was Germany’s Deutsche Pfandbriefbank, which saw its bonds slump on concern about its exposure to the sector and described the current turmoil as the “greatest real estate crisis since the financial crisis.” The plunge in German lenders’ bonds is the latest in a series of warning signals as loans begin to sour after rising interest rates eroded the value of buildings around the world. On Tuesday, US Treasury Secretary Janet Yellen said losses in commercial real estate will put stress on owners, but added that the problem is manageable. For offices in the US, where the return to work following the pandemic has been slower than elsewhere, the value destruction has been particularly bad. Embattled New York Community Bancorp was cut to junk by Moody’s Investors Service after flagging real estate problems while Japan’s Aozora Bank recorded its first loss in 15 years due to provisions on loans extended to US commercial properties. And some predict the full impact of the growing crisis might not be fully priced in"
Interesting info about Oakland.At June 23 it was RGL’s 12th largest investment valued at £12.9m.
Continued.....
enough to prevent breach of LTV requirements.
Canetoad; whilst I know your considerations come from a bond point of view, they do a service to stick holders too, so thank you. For what it's worth, I think the bond is safe as houses and the drop an amazing opportunity.
Ethiopia; agree totally with your post which is my stand point.
Some general thoughts....
For the lazy, the Edison report 27/09/23 gives a quick glance at the debt breakdown.
The bond. If not paid, wll constitute an end for RGL, on confidence/perception grounds not on fiscal fundamentals. For that reason alone, it will be repaid. How is conjecture, but the obvious source would be a replacement albeit at a 10% cost; and despite LTV level breaches/concerns, there is enough property value to get such away.
And crucially, enough income (rent roll). Notwithstanding that many seem to have ignored the cyclical nature of RGL's arena, and that cycle being very much at the bottom, if one ignores property value depreciation but accepts (due to work from home), demand/occupancy reducing by 10%, it is hard to see the rent roll reducing below £50m pa. Which supports the £43 mill cost of refinancing and pushing back say 5 years, all the debt at 10%. Yes, there does need to be a plan, to clear debt, and the absence of such is my only concern here. Their ability to kick the can down the line isn't. I don' see Santander closing in on the loan at any LTV breach (I have that loan at currently 56% LTV and the reason for the SP/bond drift), precisely because they can renegotiate an extension/revision on better terms for them, supported by that cash flow. The reality being that RGL only need to pay £5m as a one off to reduce the LTV to compliance.
If not refinanced, 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, for a dividend to be restored when that free income is.
Yes, I do think they are in a declining market, but there is still income/profit within such a niche. I don' think a firesale is warranted, I do think they need to manage occupancy/sales better. The Oakland property , which I know, is a good example. They have long had 3 floors for rent there , and whilst an excellently managed/provisioned property, it is just TOO far, too on the periphery of the market/city centre to be attractive office space. That 20% of the facility is empty will be hampering costs and margins. It will never be in the right place as an office space again. But similar offices in the area have/are being repurposed for accomodation, and it would be perfect for that trend. It would be a great property/location for those specialising in the homeless/refugee obligation provision area and as student accomodation. Targeted sales such as Oakland, yes, for prudence, but not for firesale purposes.
The rent roll, selective sale of just 1 underperforming property is enough to prevent
Needs to sell a office £50Million quickly to fix the balance sheet, other smaller sales can continue in the background, Doesnt really matter about the loss of earnings debt is the problem at the moment,
Whether or not the Bond covenants have been breached at close you could only get 87p for RGL 4.5% 2024 maturing in August at 102.25 with coupon. Simple maths..that's a 17.5% risk reward in just 6 months or 38% annualised.
Now either that is the Mother of all Market mispricings or there is something cataclysmically wrong with RGL. And what price for rolling over that debt
@CaneToad, I've had a look at what you suggested and you clearly know your stuff, thanks.
As far as I can tell all other covenants are LTV not more than 60% except Santander which moves from 60% to 50% July this year. The latest Santander LTV from June 2023 is given as 47.5% so maybe a problem come July but the loan value is £62.5m and as of 9th November 2023 RGL had £32.6m cash so I'm guessing they could just pay some of the loan off to reduce the LTV.
I general the rent roll of £67.8m far exceeds the interest payments of £15.7m including the bond. So as far as I can tell the main issue is refinancing the £50m and of course the future of office space in general.