RGL-ing over their Q4 numbers
Why I decided to exit Regional REIT
Dear reader
Having previously debated at some length and over a period of time with those adamant that RGL and by extension offices were doomed I finally decided this week to sell RGL based on its 2023 Q4 update.
When I put the numbers that RGL decided to disclose into my model I found myself looking at a reduction of net debt of about £10m, a rent roll that at first sight appears fairly robust quarter to quarter, good EPC progress with 73% of properties C or above. Also the NIY of 4.5% vs 7.9% excluding vacant unit suggests the £26.1m of disposals were half empty (and half full). So a few positives to take from the update.
What tipped my hand however was a string of negatives:
Just £26.1m of disposals for the full year, the very year where disposals were important.
A drop in occupancy to 80% (so voids have grown)
A compressed timeline left to tackle renewing the retail bond
A further 7% gross drop since September 23 (although said to be only 5.9% since June adjusting for disposals)
The LTV now above 55% (60% is breach of covenant).
£1.9m of rents not renewing (which is masked by £1.5m of new rents and a calculated £0.4m Q-to-Q fall in rents).
While I can see how RGL could pull through, and see better days, and also meanwhile offers a generous dividend, and a property portfolio at bargain prices well below the build cost, I was drawn to the statement made at the interim:
"As we look ahead, we remain wholly committed to reducing the LTV, improving occupancy and the portfolio's weighted average EPC rating as we actively manage the portfolio. We look forward to updating shareholders on our progress at the next juncture."
Of these three commitments the 3rd was the least time sensitive. So given that the end of the year is the next juncture (at least in my mind) and there’s clear failure on the top 2 priorities combined with the fact that on the day of the Q4 results the share price hadn’t dropped, and I decided the Q4 update felt like a politician’s answer, and it was wise to step away.
Office REITs remain interesting for me as a source of deep value, but my time with RGL is at an end. Factoring in dividends my loss is small, but I’m reminded of a few important lessons:
Imagine you own this business. (Hint: You do, in part). Set out a couple of key targets for the manager to achieve by X date.
Hold that manager to account. When there’s an update check progress. Ideally have a profit model, plug in the numbers and see how they’ve done. Have they met your expectations?
Stay focused on the key drivers and particularly the risks.
There are other opportunities for your capital. Relentlessly back your winners; cut your losers. This week I cut a loser and backed my winners.
This is not advice
Oak
It's interesting to see other perspectives on RGL. I came across this Substack today:
https://1trueinvesting.substack.com/p/regional-reit-lon-rgl
Its pretty extraordinary how they've moved the EPC rating up so significantly without spending much money. If it was that simple why have they been dragging their feet.
Anyhow appreciate your post and the analysis and agree the office isn't dead but this still has someway to go yet before its investible again. They need to cull the divi (6m/qtr) and stick some sellable assets on the mkt to redeem the bond as any thought of refi is just doubling down on the misery they've inflicted on shareholders.