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Very positive update !
YTD disposals of £27.2m on top of cash already held will easily see the bond repaid from existing cash resources if needs be.
Hence allowing the confidence to hold the dividend.
Again a statement that a range of refinancing options being explored with the promise of an update soon !
Expect a relief rally over the next few days; certainly up to the ex-div date of 29-Feb !!
Very happy with that considering !!
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
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.
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