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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
"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?
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
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).
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
@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.
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 ...".
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!
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.
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)
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.
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.
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.