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Interesting to see lots of trades buying into the stock over the past couple of days ahead of the annual results supporting the price up a bit. Do you think the we / the market will get the clarity over debt and financing it clearly needs from the annual report and / or any statements issued at the same time?
LTV covenants are not published in the RGL annual report for any borrowing facility.Covenants can be amended- temporarily or permanently- at any time by mutual agreement.How an LTV covenant is calculated could vary for each facility.Certain properties,such as unoccupied,might be excluded,for example.Typical covenant level is 60%.With an LTV of 55% RGL has not much flexibility.All guess work as RGL does not disclose useful information of this type.Slippery or what?
The change to the Santander LTV limit is recorded in the prospectus for the 2019 capital raise - page 166:
"11.11.2. .....On 18 June 2019, the facility amount was increased to £66m and the term extended to 18 June 2029. A further 18 properties are now secured against this facility to support the increase. This amendment has resulted in the applicable rate of interest increasing to LIBOR plus 2.20 per cent. per annum plus mandatory costs and the financial covenants have been amended, such that:
• historic interest cover must not be less than 300 per cent. at all times;
• projected interest cover must be not less than 300 per cent. at all times; and
• loan to value must be not more than 60 per cent. until the fifth anniversary of the amended facility being signed and 50 per cent. thereafter."
That last point. The loan won't need to be refinanced soon - matures in 2029 - just the possibility that some might need to be paid down sooner. And SONIA now rather than LIBOR.
ZDPs would certainly be an option, but their issue is that interest is being rolled up as capital which would be paid out of assets upon redemption - or a larger capital raise alternative. They're a creeping incremental liability on the NAV. That's fine if the assets are increasing in value, more of a problem if they're stagnant or falling in value. The risk is this uncertainty, whereas fixed-rate debt is a known (not necessarily a nice known, though!).
The numbers just don't stack up at the moment.
A recent This is Money article reported that Peel Hunt analysts estimate that RGL would need to line up more than £175m of disposals (c25% of its portfolio) to reduce its LTV to to c40% but their calculations either seem to be based on the premise that the retail bond forms part of RGL's secured loans or that the disposals would need to be made in addition to a capital raise! IMHO they're living in cloud cuckoo land if they think RGL can sell c£175m of property in the current market within any reasonable time-frame (it's been an unrealistic expectation for the last 12-24 months); buyers generally either don't have the cash or the credit lines to purchase that much property as one lot and it's going to be a puch to sell that amount piecemeal.
I just don't see that a capital raise of c£75m is going to be enough. It smacks to me of Inglis, yet again, living on a wing and prayer i.e. hoping that between now and August 2026 interest rates will have started to drop, property prices started to recover and that the RBS loan can be refinanced on similar terms for another (say) 5-10 years whilst paying off the retail bond plus c£22m of the Santander loan to reduce the LTV to c40% (assuming that the maximim LTV is to reduce to 50% in three months time - I can't find any reference to this in the FY22 accounts). Inglis is just pushing the problem further down the road in the hope that the market will come riding to his rescue and we could just end up finding ourselves in exactly the same problem in two years time. What is the end game? There doesn't appear to be a plan to pay down debt; just continue to refinance with medium term loans.
In reality, RGL could probably do with raising c£150m (c£75m of which, certainly with the benefit of hindsight, it probably should have raised when it acquired the Squarestone portfolio back in 2021, in addition to the c£83m that it did raise at the time). c£150m would enable RGL to repay the retail bond and pay off c25% of its secured loans (reducing its LTV from c55% to c41%). Reducing the LTV to c40% should be the starting point not the end point at this juncture.
If not £150m (a huge ask), then I think RGL should really be looking to raise at least £100m. It needs more headroom and, if it must continue to dispose of property, to retain control over the disposal process and maximise value. It should also be considering ZDPs for, at least, part of the equity raise if it can.
True for full year accounts, should have said 30th April rather than 28th March there
Shows how useless these newspaper share tips are. At least they admit they got it wrong recommending the equity before share price went on to collapse. More than can be said for quite a few rampers on here when it was 30p+, who seem to have now gone very quiet?
I think for annual results they have 4 months to announce
Will be very interesting to see what auditors have made of all this. If they've not signed it off, depending on how open the company are, first signal of something amiss could be a delay in publishing accounts.
Management must be approaching boundaries of trading insolvently, certainly if they continue status quo. With early Easter, hard deadline for publication is 28th March, failing that suspension the following week. One way or another it has the feeling of an end game.
Matt, the numbers quoted are those for the Santander loan only - from the tables in Annual and Interim reports 'Debt Profile and LTV Ratios'. c£430m is total debt which is made up of four secured loans and the unsecured retail bond. Each of the secured loans have their own LTVs, and each have their own covenant terms (as does the bond in the case of the latter).
I brought the subject up because most of the focus, on here and elsewhere, is on the need to redeem the bond in August and I think that a bit of attention needs to be paid to something which could be an issue before then - and only 'could' until we see the actual numbers.
Irrespective of what happens to the LTVs of the other loans and the overall LTV at the Group level, if the individual LTV for the Santander loan has risen above 50% then it will breach the new maximum limit which comes into force in June. Whilst Santander would not be compelled to take possession of the properties which are collateral to their loan, they would have the option. Would shareholders want to allow them that choice?
My interest her is solely as a bondholder - no financial interest in the equity. But I do think that an equity raise is the least-worst solution for shareholders.
RGLs immediate problem is one of refinancing which is exacerbated due to too high a level of debt being secured on illiqud assets. Regardless of anyone's opinions about board/management, or having assets sold either to just reduce debt or have RGL wound down, the immediate issue to be addressd is the refinancing. The other issues need to be treated seperately.
Just my own opinion, though. But however the refinancing is raised there is going to be a cost to shareholders - either up front or further down the line.
Very disappointed that the management didn't do something earlier - its all about confidence and whats known.
i.e. to sell property it would be at a huge discount as everybody knows its a fire sale - so not really on, especially if already collateral. A share raise is now a disaster as the more the price sinks the lower the price needed for any interest, again especially as the institutions know this. What price here - could be 5-8p.
A historical precedent as usual is available - e.g.this happened to mighty Segro some time back when poor management overstretched it, and didn't believe Capital Economics telling them interest rates looked set to plummet - it then offered millions of virtually worthless shares as the price dropped over 80% - then hey presto - has a huge share consolidation so that existing holders (including staff - and I was one!) were wiped out, but the new institutions rescuing them were quids in on the cheap price and subsequent phoenix rise. oh, and the CEO - he went off with his gold plated pension after huge amounts of the staff were made redundant! This involved going from £10 to a penny share and then back to circa £2.50 again with many forgetting that the £2.50 should be divided by about 20 for the true share dilution price destruction.
Can't believe I was daft enough to think these managers knew what they were doing - part of their job is to read the market, prepare for hard times and unexpected events.
I'm afraid this is near wipe out time if you either sell out at a huge loss or have to shell out for a massive dilution.
Not pretty and after much procrastinating I'm still unsure which option to follow even now!!
Said it all along the bonds are the play here
Http://digitaleditions.telegraph.co.uk/data/1639/reader/reader.html?social#!preferred/0/package/1639/pub/1639/page/109/article/NaN
MH - refinance needs to be completed before annual report can be signed off to meet 'going concern' requirement, otherwise the drop in the share price will be a lot more than 20%!
Thanks MH - yes I accept much of what you say, and clearly there is risk here, but it's priced for insolvency and hugely reduced NAV from the last valuation. I'm a bit confused by your numbers though? Are you comparing rental income with LTV figures? Those numbers of £m are not net debt numbers (which is c£400m)?
Https://www.telegraph.co.uk/money/investing/questors-worst-ever-share-tip-regional-reit-profit/
Matt, if a loan LTV is *rising* close to the covenant maximum limit because property values are falling then that should be a concern even when there is a stable income. Because if the limit is breached then the lender is probably going to want something done about it. So either more collateral provided, or a partial repayment of the loan - or the nuclear option which would become available to them.
I don't get the impression that there is much in the way of available property in the portfolio that isn't already being used as collateral - I might be wrong on this, and would be happy to see someone else's view.
That leaves the alternative of a partial repayment. A capital raise is one solution (equity or debt, or a combination), and property sales to raise cash are another. But if properties are being sold then the result could be a cut to the dividend if the income lost from them is greater than the interest saved on the loan amount repaid. So deteriorating LTVs might matter even to those who are more concerned with stable income than with price fluctuations.
The 2022 Interim shows an LTV of 39.5% for debt of £64.4m. 44.9% for £64.1m six months later in the 2022 Annual. 47.2% for £62.5m by the time of the 2023 Interim.
On the current 60% limit then there is still a cushion should there have been a deterioration in the LTV since the last reported figures. There is less padding available when that limit reduces to 50% in three months time.
I'm not making a prediction, just trying to highlight the possibilty that a capital raise *might* be needed earlier than August, i.e. June, for reasons other than for the retail bond redemption. Hence my interest in what the annual report will say about the individual loan LTVs.
Interestingly the Bond price has risen since the disasterously bad RNS
LTV falling is just a consequence of falling prices. Property is a riskyish asset, so prices go up and down. For me, it's all about rental income (which is much more stable) and the extent to which this covers interest payments and dividends. This position still looks pretty healthy, certainly more healthy than a 40% dividend yield would suggest (all IMHO of course!)
The problem is others might read posts like yours making claims about rent is going up and take an even bigger uninformed risk. I don't like to see people being misled by only being given one part of a story, whether knowingly or not.
By the way if anything I was being generous quoting the vacancy rate from interims. Q4s state occupancy had fallen further to 80%, so now the equivalent of 1 in 5 buildings by value they own is empty.
Rent going up is no use if it's more than offset by all these untenanted buildings. This is particularly precarious for such a highly indebted company when creditor demands on those same buildings continue, regardless of whether they're occupied.
The LTV ratios for the individual loans can be found in the annual and interim reports.
For instance, page 29 in the 2023 Interim Report has the LTV for the Santander 2029 is 47.2% and an outstanding loan of £62.516m. The numbers in the Annual Report to December 2022, are 44.9% and £64.116m.
So although some of this loan was repaid, the LTV still deteriorated. Compare that to the December 2027 loan which also had a repayment but where the LTV improved - which is what you would hope to see.
Whilst we don't yet know the individual LTVs as at the 2023 year end, we do know from the February valuation RNS that the Group LTV deteriorated from 51.9% to 55.1%, and a further £11.5m worth of property was sold in the second half of the year. The unknowns being how much of this was used to pay down loans, or which loans.
This might be a concern for the Santander loan in particular, because on June of this year the maximum LTV for this falls from 60% to 50%.
There may be the need for a capiatal raise other than to just redeem the debt in August. £75m v. £50m anyone?
The issue for me is visibility. As a (prospective) buyer of offices I would be seriously concerned about reletting once the lease term expires. Owning empty office space is a killer. Markets are always looking forward-hence the uncertainty and catastrophic effect on the sp.
It's not about whether it's fine or not, or whether there's risks or not. It's about Gauging what's in the price versus the reality. The property valuations already take account of whether a property is vacant or not, and a 70% discount to NAV, with rent easily covering interest and dividends, and a yield of nearly 40% represents good value, particularly when the recent issue is caused by an incredibly inept RNS rather than a fundamental change to the business. The trick is making sure you size these opportunities correctly in you portfolio - less than 0.5% for me on this one.
Not all commercial property landlords have the same pricing power. There are structural issues with the office market, demand has dramatically declined across the sector in recent years, particularly for the type of lower grade out of major city buildings that RGL specialise in.
This is very different from say warehousing which is booming, or even retail which is making a bit of a comeback.
This lack of demand is why RGL's vacancy rate is so high - in last interims ERPA rate reported as 16.2%. Compare that to say British Land with a diverse mix of prime offices and retail with a reported EPRA of 4.0%.
It's so important to not take some of these posts at face value because if you believed them you'd really be left with the false impression that everything was fine here.
You can keep repeating stuff, but it doesn't make it true. No one buys a property thinking they'll rent it for less. Rents fall if the market becomes awash with new properties or demand for rental properties falls. Given 98% rent collection, doesn't really seem like demand is falling. Most Companies who rent do so because they don't want to tie their capital up in an illiquid asset, or they cannot afford/get decent enough terms on a loan. And even if they do start buying, this would just push up prices and NAV for someone like Regional. We can agree that the RNS yesterday was a big mistake, but your understanding of commercial real estate is flawed. I've had dealings in this space for a few decades now, so I'm pretty familiar with it.
There always comes a point, when a "renter" looks at the market and decides it's better to buy - it's common sense.