"Well the other part of my model is what happens with Rentals. Rentals pays for the dividend. And we established earlier on that the dividend is £40.3m a year or £10.1m a quarter"
you've now now update article to say divi is 14.3m/yr and confirmed divi is well covered currently based on last reported net rental income.
From here on it depends on how you see office mkt playing out and for sure NAV is going to fall further but at a much lower pace as equilibrium is found. For many years i laughed at them talking up the reversion opportunity there isn't any that vacancy level can only be managed down through disposals but its not clear that is their strategy.
Morgan is now biggest shareholder but doesn't have a place on the board although Bridgemere will be appointing a NED if supported by shareholders. Going to be interesting to see how Bridgemere use their votes at the AGM as well to force a change of direction here.
Im in a regional Surrey town which was a back office heavy but over half those offices have now been turned into RESI and several others have large vacancies. The problem with the RGL portfolio is its out of town so not as desirable for resi conversion although maybe the budget hotel chains could be interested if the price is right of course.
The REIT rules are that you only have to distribute 90% of taxable profits, not EPRA EPS
Offices have huge capital allowances
So in practise RGL have plenty of room to pay less materially less than 90% of EPS for many years
Also HMSO for years paid a script dividend and remained in compliance with the REIT rules
Management did cite tax as the reason for not cutting the divi but that’s just yet another reason why I think this is investable with the current incompetent and dishonest management
Anyways; your analysis does show that on an optimistic basis unless we see material rental growth we will have an uncovered divi and eventually another divi cut
At some point the cycle will turn; but if you want office exposure go for a first rate management team (eg GPOR/Derwent), and dodge muppet REITs
I also guesstimated the post-raise NAV to be c. 25p based on what was disclosed in the prospectus, but could have missed something. While I agree it’s a hold at this stage until the NAV and vacancy trends are clearer, the underwriter may well be looking at 3x within 5 years if the economy picks up and management can deliver on renovation and sales (not a prediction). Shame existing shareholders weren’t able to oversubscribe.
Hi Chris, I completely agree with you about oversubscription although much less interesting then for the underwriter, Bridgemere, so that's probably why they didn't (couldn't).
Because there’s very limited demand for anything other than prime offices so it can easily be a case of discount it to zero and still get no tenants as the business rates are more than anyone would want to pay
There’s plenty of space around the country that you can lease for £1 psf (but then taking of the business rates and service charge)
Sub-let space in Canary Wharf was being offered for £1 psf - those would have been for whole/most of whole floor plates
Then there’s space that void and has been void for quite some time with landlords and lenders still holding out for a proper rent, the true market value of that space, if not £1 will still be very low
Those vendors are looking to off load space cheaply but I suspect any lessor would have to pick up the other costs you incur like business rates, insurance and service charges as they are big drag. Circa half of RGL property costs is from vacant properties which is why they need to shift them. Also RGL used to be gold standard on transparency but they've become a closed shop over disposals so you can't get a handle on whether their strategy is to dispose of vacant properties as the priority or just unload anything they can sell. This maybe was a necessity to try and raise cash for the bond disposal but that point has now past and they have 12-18mths grace period now so should take a more measured approach.
And let’s not forget that not only are true net effective rents well below headline but if a landlord is carrying out works for a tenant to refurbish space there’s plenty of scope to dress up landlord rent incentives as capex
The old model of valuing offices is completely wrong: one of the big legs down in shopping centre valuations was when they started to be valued correctly - taking full account of the ongoing capex requirements
Inglis should be moved on he has miserably failed this company and utterly destroyed shareholder value
This paragraph also needs amending i believe
"Well the other part of my model is what happens with Rentals. Rentals pays for the dividend. And we established earlier on that the dividend is £40.3m a year or £10.1m a quarter"
you've now now update article to say divi is 14.3m/yr and confirmed divi is well covered currently based on last reported net rental income.
From here on it depends on how you see office mkt playing out and for sure NAV is going to fall further but at a much lower pace as equilibrium is found. For many years i laughed at them talking up the reversion opportunity there isn't any that vacancy level can only be managed down through disposals but its not clear that is their strategy.
Morgan is now biggest shareholder but doesn't have a place on the board although Bridgemere will be appointing a NED if supported by shareholders. Going to be interesting to see how Bridgemere use their votes at the AGM as well to force a change of direction here.
Im in a regional Surrey town which was a back office heavy but over half those offices have now been turned into RESI and several others have large vacancies. The problem with the RGL portfolio is its out of town so not as desirable for resi conversion although maybe the budget hotel chains could be interested if the price is right of course.
My understanding was that the 2.2p dividend was quarterly on the consolidated share price. This makes the yield about 6.5%.
You're right and I've missed that Chris; I'll adjust the article accordingly - thanks for letting me know.
The REIT rules are that you only have to distribute 90% of taxable profits, not EPRA EPS
Offices have huge capital allowances
So in practise RGL have plenty of room to pay less materially less than 90% of EPS for many years
Also HMSO for years paid a script dividend and remained in compliance with the REIT rules
Management did cite tax as the reason for not cutting the divi but that’s just yet another reason why I think this is investable with the current incompetent and dishonest management
Anyways; your analysis does show that on an optimistic basis unless we see material rental growth we will have an uncovered divi and eventually another divi cut
At some point the cycle will turn; but if you want office exposure go for a first rate management team (eg GPOR/Derwent), and dodge muppet REITs
I also guesstimated the post-raise NAV to be c. 25p based on what was disclosed in the prospectus, but could have missed something. While I agree it’s a hold at this stage until the NAV and vacancy trends are clearer, the underwriter may well be looking at 3x within 5 years if the economy picks up and management can deliver on renovation and sales (not a prediction). Shame existing shareholders weren’t able to oversubscribe.
Hi Chris, I completely agree with you about oversubscription although much less interesting then for the underwriter, Bridgemere, so that's probably why they didn't (couldn't).
Am I missing something regarding the consolidation?
No, but I was!
Ah. The Consolidation is a pig. Missed that
Presumably all that rounded value will just end up with the underwriters?
Having never previously owned it, started buying small positions since May because it’s cheap and pays (hopefully) high dividend yield
There’s a pattern with me
Have taken up the 7 for 15 rights issue
Definitely more ‘back to office’ pressure around
Not sure RGL should be looking to sell assets - why are they attractive to the prospective buyer and not a REIT?
Also not sure why they are looking to sell and maintain a dividend
Also not sure why offices need expensive overhauls rather than just rent discounts
🤷♂️
Because there’s very limited demand for anything other than prime offices so it can easily be a case of discount it to zero and still get no tenants as the business rates are more than anyone would want to pay
There’s plenty of space around the country that you can lease for £1 psf (but then taking of the business rates and service charge)
It's not my experience William. Can you share a link to an example of a £1 psf office?
If I go to Knight Frank for example, office leases are well over 10X that:
https://www.knightfrank.co.uk/properties/commercial/to-let/uk-scotland-lanarkshire-glasgow/office/all-floor
Typical non prime office rents are about £10 psf
Sub-let space in Canary Wharf was being offered for £1 psf - those would have been for whole/most of whole floor plates
Then there’s space that void and has been void for quite some time with landlords and lenders still holding out for a proper rent, the true market value of that space, if not £1 will still be very low
William,
But where's the evidence for £1psf? Can you use CTRL+C and CTRL+V to copy and paste an example of these Canary Wharf offices for £1psf.
Because at £1 psf that would be £27.9m a year to rent a whole square mile in the square mile.
Zoopla shows Canary Wharf to be £26psf+++. Plenty at above £60psf.
https://www.zoopla.co.uk/to-rent/commercial/offices/canary-wharf/
There’s no record of it it’s grey/sub let space - or rather it isn’t as it’s void
It’s space that was being touted about by an agent
As said it’s for a large floor plate on basis that the new tenant then picks up the business rates and the service charge
You are right historic rents for the wharf are about £50 (used to be £35 then it peaked at low 60s)
But that’s not the current market rent for space that nobody wants - have you seen the plans for the HSBC building
So because the historic rents are about £50 psf it means the business rates are about £25 psf
So any tenant sub-leasing at £1 will be paying about £32-35 psf
Those vendors are looking to off load space cheaply but I suspect any lessor would have to pick up the other costs you incur like business rates, insurance and service charges as they are big drag. Circa half of RGL property costs is from vacant properties which is why they need to shift them. Also RGL used to be gold standard on transparency but they've become a closed shop over disposals so you can't get a handle on whether their strategy is to dispose of vacant properties as the priority or just unload anything they can sell. This maybe was a necessity to try and raise cash for the bond disposal but that point has now past and they have 12-18mths grace period now so should take a more measured approach.
And let’s not forget that not only are true net effective rents well below headline but if a landlord is carrying out works for a tenant to refurbish space there’s plenty of scope to dress up landlord rent incentives as capex
The old model of valuing offices is completely wrong: one of the big legs down in shopping centre valuations was when they started to be valued correctly - taking full account of the ongoing capex requirements