EPRA NAV does not include the fair value of the debt
There's only realisable value in the debt if it can be sold, and theres usually (though not always) a chance of control covenant that prevents that, so 77p is the more relevant NAV
There is not £81m of hidden value that can be monitised
The reversionary surplus comes from life time tenants dying (so PV that back and account for property Capex) and from staircassing, very few shared ownership tenants ever staircase - so you just won't access the reversion (ok you do at the end of the lease - that's in 240 years)
You simply cannot sell assets and access "hidden" value
RESI will not be realising anything close of their current market cap
If you're correct how are they able to announce a plan for 20% disposals? Any sale would be subject to a covenant of lifetime tenancy, it's true, but your flat "you cannot sell assets" suggests you know something that Gresham House themselves don't.
Staircasing increased 37% to 38% in one year. While the amount is small, it's larger than "very few" and who's to say it can't grow especially as interest rates fall. My own experience is that most people aspire to be home owners and stair casing is the way for people in shared ownership to achieve that.
So despite your misgivings, I remain optimistic that Gresham House will carry out selected disposals and will do so, ABOVE the pro rata value of assets at the current market cap and in fact will sell them at around the reversionary levels instead - thus proving that the misgivings of people, including yourself, are unwarranted.
What you won’t get if you sell is someone who is going to pay up for the reversionary value
Aster the HA did a piece of research into staircasing and found that only 10% of tenants ever did it
I’m not saying that it won’t happen - just that it’s fanciful to say that there’s near the market cap in hidden value
While you do as a landlord get an uplift to reversion on a staircase RESI will have mandatory debt prepayments too (likely they can take out a little but they clearly can’t divi out the lot) so thus losing the c8.5 levered yield (they may have given themselves some reinvestment protection but we don’t know without seeing their loan docs)
Im bullish on RESI - but its just not credible to say that there’s near the market cap in hidden value
See Grangier - they’ve been investing and trading lifetime tenancies for decades
William, it is credible. And there's a few reasons why:
1. It happened in the past. Go back to 2019 and the market cap was within 10% of the reversionary price. In 2021/2022 RESI also traded at a premium to NAV. Today it's 40% discount. Hidden value - fact.
2. A "Lifetime tenancy" isn't a permanent state of affairs. If you take 6 years as the average actual tenancy then within 12 months 16.6% of retirement living properties are available without a Lifetime tenant. That unencumbers the unit within the property from any covenant. A purchaser would follow that same logic if say a property were 80% unencumbered. Death, nursing home, change of circumstance, remarriage, moving in with family - lots of reasons why 6 years average is reasonable.
In 2019 the reit/alternatives sector was awash with bond market refugees fleeing QE
Go back to rates nailed to the floor and RESI trade a lot higher but that’s because of rates
Ditto there’s no shortage of investment trusts/reits trading at huge discounts
I am not saying that there’s not some upside from tenant reversions, but that that’s hardly hidden value and there’s no instant pot of gold that’s going to rerate this stock at near 2x its current sp
Unless of course we do get super low rates back again
Check out the FT today - USS just bought a huge portfolio of shared ownership units from Blackstone
Reversionary surplus is based on the market price so why do you need super low rates to sell a property at its market price? (once unencumbered by lifetime tenancy commitments). I don't follow the logic of your thinking.
Yes, I saw the USS/Blackstone deal. Very positive for RESI. Blackstone are using the proceeds to invest further into shared ownership according to Reuters and the institutional capital shows there's growing interest in assets like those owned by RESI.
Announced today it will be winding up. Not happy even though it jumped 12% at the start of day.
Worth noting it has sold some properties well above NAV. On about a 25% discount today.
This was one of my low risk long term holds for the dividends.
Along with SOHO and SUPR.
Bugger
EPRA NAV does not include the fair value of the debt
There's only realisable value in the debt if it can be sold, and theres usually (though not always) a chance of control covenant that prevents that, so 77p is the more relevant NAV
There is not £81m of hidden value that can be monitised
The reversionary surplus comes from life time tenants dying (so PV that back and account for property Capex) and from staircassing, very few shared ownership tenants ever staircase - so you just won't access the reversion (ok you do at the end of the lease - that's in 240 years)
You simply cannot sell assets and access "hidden" value
RESI will not be realising anything close of their current market cap
Hi William, thank you for your thoughts.
IFRS9 governs the definition and I've amended the article accordingly.
https://www.iasplus.com/en-gb/publications/uk/other/ifrs-9-classification-and-measurement-2014-are-you-lost/at_download/file/ifrs9lost.pdf
If you're correct how are they able to announce a plan for 20% disposals? Any sale would be subject to a covenant of lifetime tenancy, it's true, but your flat "you cannot sell assets" suggests you know something that Gresham House themselves don't.
Staircasing increased 37% to 38% in one year. While the amount is small, it's larger than "very few" and who's to say it can't grow especially as interest rates fall. My own experience is that most people aspire to be home owners and stair casing is the way for people in shared ownership to achieve that.
So despite your misgivings, I remain optimistic that Gresham House will carry out selected disposals and will do so, ABOVE the pro rata value of assets at the current market cap and in fact will sell them at around the reversionary levels instead - thus proving that the misgivings of people, including yourself, are unwarranted.
OB
You can trade lifetime tenanted properties
What you won’t get if you sell is someone who is going to pay up for the reversionary value
Aster the HA did a piece of research into staircasing and found that only 10% of tenants ever did it
I’m not saying that it won’t happen - just that it’s fanciful to say that there’s near the market cap in hidden value
While you do as a landlord get an uplift to reversion on a staircase RESI will have mandatory debt prepayments too (likely they can take out a little but they clearly can’t divi out the lot) so thus losing the c8.5 levered yield (they may have given themselves some reinvestment protection but we don’t know without seeing their loan docs)
Im bullish on RESI - but its just not credible to say that there’s near the market cap in hidden value
See Grangier - they’ve been investing and trading lifetime tenancies for decades
William, it is credible. And there's a few reasons why:
1. It happened in the past. Go back to 2019 and the market cap was within 10% of the reversionary price. In 2021/2022 RESI also traded at a premium to NAV. Today it's 40% discount. Hidden value - fact.
2. A "Lifetime tenancy" isn't a permanent state of affairs. If you take 6 years as the average actual tenancy then within 12 months 16.6% of retirement living properties are available without a Lifetime tenant. That unencumbers the unit within the property from any covenant. A purchaser would follow that same logic if say a property were 80% unencumbered. Death, nursing home, change of circumstance, remarriage, moving in with family - lots of reasons why 6 years average is reasonable.
In 2019 the reit/alternatives sector was awash with bond market refugees fleeing QE
Go back to rates nailed to the floor and RESI trade a lot higher but that’s because of rates
Ditto there’s no shortage of investment trusts/reits trading at huge discounts
I am not saying that there’s not some upside from tenant reversions, but that that’s hardly hidden value and there’s no instant pot of gold that’s going to rerate this stock at near 2x its current sp
Unless of course we do get super low rates back again
Check out the FT today - USS just bought a huge portfolio of shared ownership units from Blackstone
Nowhere did I say near 2X its current sp.
Nowhere did I say instant. (or pot of gold)
Reversionary surplus is based on the market price so why do you need super low rates to sell a property at its market price? (once unencumbered by lifetime tenancy commitments). I don't follow the logic of your thinking.
Yes, I saw the USS/Blackstone deal. Very positive for RESI. Blackstone are using the proceeds to invest further into shared ownership according to Reuters and the institutional capital shows there's growing interest in assets like those owned by RESI.
Source:
https://www.reuters.com/markets/deals/blackstone-sells-3000-uk-homes-pensions-giant-uss-2024-08-13/