Abrdn Property Income Share Discussion Threads

[nexusltd] 19/2/2024 18:42

@ mindthestash & nickrl Thank you for your diverting posts #361, #362 in reply to my post #356.

mindthestash Are you an API shareholder? An interested shareholder would have read the merger proposal docs to help make an informed decision and readily found the answers to the questions you listed.

In good faith I’ll reply to your post. However unless anyone offers a nugget of consequential information, useful scuttlebutt etc, this will be my final post on the topic of the API/CREI merger

Many of your post-merger queries are dealt with in the official LSE announcement & plan that CREI’s managers have set out for the merged entity.
[RECOMMENDED ALL-SHARE MERGER - 07:00:04 19 Jan 2024 - CREI News article | London Stock Exchange]

In direct reply to the post-merger stats requested.

Dividend: Page 4.
1. CREI probably maintaining the 5.5pps p.a. dividend so API shareholders will receive 5.5 * 0.78 = 4.29pps, a +7.27% uplift on the currently uncovered 4pps.
2. Dividend cover >=100%.

Debt facilities: Page 4.
1. Given that this is an official LSE announcement it is likely that the managers have done DD, and agreed terms with the lenders to retain all current term debt facilities. Is this an adequate reply to nickrl’s #362?
2. LTV 30.3%
3. Cost of debt 5.0%, maturity 3.8 yrs.

Merged NAV:
Two ways it can be looked at:
1. A reasonable estimate can be calculated from the two recent December API & CREI RNS’s taking account of the recent disposal announcements.
2. CREI’s stated longer term target LTV is 25%. Also CREI state that they intend to repay all the RCFs, retaining the two term loans; CREI 140mm+API 85mn. That would imply a NAV of 675mn. Assuming static property valuations, the implication is that over time the disposal program would be of c. 100mn. Changes in property asset valuations and borrowing facilities will alter the arithmetic.

Regarding the Drum merger in Q3 2021. As you say Drum was a much smaller target than API. The share price discount to NAV steadily narrowed in the weeks following the merger closing onto zero; however note that the BoE rate in Q3 2021 was 0.1%. First increment of 15bps on 16th December 2021. Do you not think that subsequent BoE rate increases explain the failure to fully close and then subsequent widening of the discount?
Bank Rate history and data | Bank of England Database


I have these questions regarding API, can anyone help?
1. Lease expiry/break schedule? API’s leases are chunky in value. What is the % of passing rent that needs to be negotiated in FY 2024? For example. How close is Atos, a company in financial difficulty, to lease expiry/break?
2. When a lease ends how much time and capex will be required before it can be re-leased? What incentives will be required? How long before it produces income?
3. Effect on NIY of disposals. I would expect that announced disposals will increase the NIY. By how much?
4. Both the term loan and the RCF are tied to SONIA. What is the plot of SONIA plot going to be in 2024?
5. When will API’s gross income cover its cost of capital (debt interest +dividends) + expenses + essential capex?
6. How will APIs’ shareholders benefit remaining standalone? Specifically:
a. some numbers supporting the thesis that a stand-alone API is preferable and
b. how the vexing issue of an incompetent Abrdn that seems to have lost interest in its fund management division is resolved?

I ask these very granular questions, because I believe that API’s business plan is failing. It is struggling; running hard to stand still. Taking leverage risk to increase the potential of capital growth or income is fine. When leverage becomes a liability on the cash flow account, immediate action should follow. API’s borrowings have been deployed to finance one third of the assets by value, generate an income that does not cover its interest bill. There is no margin of error left to cope with the vicissitudes of business. The assets are good, the financing broken. In my view a merger with CREI repairs the financing and will allow the assets to shine.

Further to nickrl’s comment regarding Aberdeen; I read in the FT that the well-known value investor Harris Associates, has dumped all its Abrdn stock after losing faith in its management’s ability to revive its asset management division. It looks like ASLI, whose dividend pay-out has been excessive for a long while, may soon follow the steadily expanding list of wind-downs and mergers of closed-end funds in the Abrdn stable.

Finally there seems to be much animus regarding BoD’s, which I think odd as the BoD’s of REIT’s etc. are almost exclusively NEDs. Certainly I have no intention of teaching this very knowledgeable community from which I have learned much. It ought to be known that NEDs duty is not to formulate or execute business plans; a task that executives & managers are paid to deliver. Failing plan delivery, NEDs fire the managers and appoint replacements. The one key decision that REIT NEDs take is setting the level of the dividend. On that basis my view is that API’s board are in a delusional headspace. Cutting the dividend would give Jason the financial flexibility to execute his plan.

[yump] 19/2/2024 17:49

On a general point, I wonder if these share based mergers and combinations at least protect investors from crystallizing losses, which would be the case if they were cash offers.

Especially if they were cash offers from opportunistic buyers that are not listed, hunting around for bargains.

A larger group at least makes for a less digestible takeover target and will remove potential acquirers that don’t have the financial muscle.

I really hope that the depressed REIT’s don’t attract vulture cash buyers from overseas.

[essentialinvestor] 15/2/2024 12:35

Ah well there's a well known rule in psychiatry - the sane sometimes question their sanity, the insane very rarely do, true.

[cwa1] 15/2/2024 12:28

I've paid just over 48p for a chunk this morning and wondering about my sanity...

[essentialinvestor] 15/2/2024 12:23

People paid up to a 5/6% NAV premium here at one time in the old SLI days.

How times change, eh.

[mindthestash] 14/2/2024 18:31

Doctor Doctor I think I'm a pair of reits......
Well pull yourselves together.

See above. That's about the level of logic in the management thinking here and ukcm/bbox.

Is there a chance for bboxukcm with perhaps another addition to get into fste100. It would bring additional demand

[dr biotech] 14/2/2024 16:07

UKCM up c4% today. I don't really understand why that seems to get the nod of approval from the market whereas here it seems to have been a poison pill.

CREI seems to have been really disproportionately affected. But of course the share price doesn't affect the value of the underlying assets or the dividend cover. So I bought more CREI hoping it will resolve positively over time (and as a hedge against the merger not going through)

[nickrl] 14/2/2024 14:04

@mindthetrash compelling reasons against merger well presented especially the small print in loan terms.

[mindthestash] 14/2/2024 13:30

Thank you Nexus and others. However my judgement leads me to
Disagree with Nexus conclusions for the following reasons.
1. Nexus has helpfully set out how the merger could create value. However as far as I am aware Neither board nor management have set not out the results/metrics they will take responsibility to deliver and which as a shareholder I expect to see before I vote to invest my money.
Something like
"After x period
the combined nav will be x
Debt will be x%nav at Ave cost x
Free cash flow will x%cover dividend
Div est...
Etc....
The board and management will perform to these metrics etc."
Its a shame Nexus you are not on either board as it's clear you have a plan you are backing. No shareholder should vote for this unless those running the future set out what exactly they will deliver and be accountable for it.
2. Much of the beneficial merger metric highlights are from combined negotiation strength in debt financing. I hope they've done a decent DD because in many cases a merger of this size will be a trigger event to renegotiate the loan terms. Breakage alternatives now look expensive compared to q3 2024. Depending on headroom in their RCF Crei might be able to take out APIs RCF?
3. The DRUM acquisition was less than 5% bite. Prior to offer crei was trading at premium to NAV and DRUM substantial discount. API and CREI are both dragging each other down. Negative marriage value. Why do this.

4. Presently in API I've got a decent portfolio mostly industrials coming with an 8+% divi. With a few unrushed disposals which I reckon wil have a covered divi and a narrowing discount as rates slowly come down. I'll get the same divi in p per share fully covered at some point 2024 and a refinance to come on decent terms (assuming finance /economists get fired).

With this merger in contrast I'm being promised" bigger is better" with no accountability.

As an API shareholder I can't see a significant benefit. I've voted no because my judgement is my API shares will be worth a lot more later this year than the custodian ones I'll inherit.

[giltedge1] 13/2/2024 08:46

Thanks for analysis Nexus Ltd. Positives for me, announced office sales £15m. (There was a large 10% valuation drop in offices in Q4 although modernised & well let, worrying read across to other REITs). Industrial Sales £25m signed, Combined Profit on Sale £2m & hopefully Moorland ditched. I suppose with PV installations no longer needed. Was £8m dead money. ERV extra £7m to capture. So RCF will largely be paid off in Q2 2024 I presume.
Couldn't make sense of following additional possible sale, any thoughts on which asset?.
"We had the tenant of a logistics unit leave in late November. We have now placed the unit under offer to sell to an owner occupier. The sale figure is approximately 10% ahead of the end December valuation."

[spectoacc] 13/2/2024 06:57

"The API dividend has been uncovered for 7 quarters".

You'd not know that reading this BB. ;) Predicting it to be covered each impending report.

Re 500 job losses - they should start with their interest-rate predicting economists.

[nexusltd] 12/2/2024 22:18

@nickrl. To be honest I did not bother look up the API term loan to calculate the blended cost of debt as the Q4 Trading update was comprehensive enough to provide us with the figure for both Q3 & Q4. Though I note I must have mistyped as the given figure is 6.7%, not the 6.69% I wrote. Thank you for the heads up thoughts on Aberdeen's direction of travel.

[nickrl] 12/2/2024 20:49

@nexus very comprehensive analysis. The API term loan is on slightly more favourable terms than RCF at 5.46%.
Separately Aberdeen are attempting to move out 500 employees currently as they try and get a grip of their cost base and wouldn't be surprised to see commercial property dropped fully given they are prepared to let their REITs go on the cheap. Im happy though to pick up cheap assets with my acquirer holdings.

[nexusltd] 12/2/2024 18:20

I’ve reviewed the Q4 December 31 updates from both API & CREI. I have accumulated CREI @ average 71p to equal weight of my API holding. I’m voting my API & CREI shares for the proposed merger.

The reason.

Portfolio yield wrt cost of borrowings.
API. The RCF (56.9mn) and Term Loan (85.0mn) facilities are both at a margin of 150bps over SONIA. Q3 & Q4 cost of debt was 6.69%. Portfolio topped up EPRA NIY is 5.40%; a –ve spread of 129bps. It could be that the recent sale of the Cullen Square assets in Livingston, has further reduced the NIY. The numbers in detail:
• Using the topped up EPRA NIY which assumes all rent free periods and lease incentives have expired. 141.9mn debt, -ve 129bps, = -1.83mn = net payment of 0.48pps p.a. to RBS for the ownership of a third of the assets by value.
• Applying the actual EPRA NIY of 4.9%, spread -179bps, = -2.54mn = net payment of 0.67pps p.a. When I calculate the figure for my holding, it amounts to a sizeable cheque that is being written every year to RBS on my behalf.

CREI. The RCF (50.0mn SONIA+171bps = 6.90%) and Term Loan (140mn@3.4%, 6.3yrs) facilities, giving a weighted average cost of 4.3%. Portfolio topped up EPRA NIY is 6.20%; a +ve spread of 190bps.

CREI & API merged. The RCF (35.0mn SONIA+171bps = 6.90%) and Term Loan (140mn@3.4%, 6.3yrs, 85.0mn@6.69%) facilities, giving a weighted average cost of 5.0%. Estimated merged portfolio topped up EPRA NIY is 5.9%; a +ve spread of 90bps.


Dividend cover.
API: The dividend has been uncovered for seven quarters.
• Q1 2022 103.0%
• Q2 2022 94.0%
• Q3 2022 90.0%,
• Q4 2022 98.5%
• Q1 2023 88.6%.
• Q2 2023 72.7%.
• Q2 2023 79.9%
• Q4 2023 83.4%

When will it be covered? The 4p p.a. dividend costs 15.25mn p.a. Need additional c. 3mn net cash to cover. Possibilities:
1. SONIA needs to come down by =>100pbs. Four BoE 25bps cuts. My view one to three cuts in 2024.
2. Asset disposal to reduce the RCF at a NIY < cost of debt, 6.69%, will increase cover.
a. Fully occupied 6.25mn Cullen Square sale is doubtful.
b. The partially occupied offices 14.75mn, Monck Street, London + 101 Princess Street, Manchester sales, should be cover accretive.
c. What of the Q1 2024 £24.4mm sale of the two industrial fully occupied assets? I don’t know.
3. Speculative logistics new build, Villiers Road, Knowsley which is now ready for leasing will start producing income. When? Negotiation time added to possible lease incentives may not bring any net cash in 2024.

Tenant risk.
API: With its concentrated portfolio of 47 assets, is at more risk of significant void increase when a tenant departs. From API Q4 RNS. “Despite these lettings the void rate only reduced to 7.6% from the Q3 level of 8% as we had the tenant of a logistics unit leave in late November”. I note that Atos with a passing rent of ￡872,466 (3.3%) is in financial difficulty and retrenching. Could this be an issue for API?

CREI: Portfolio of 158 assets, 374 tenants is more diversified. Worth noting that the CREI/DRUM REIT merger was well handled and accretive to CREI; I believe that CREI will greatly benefit from a merger with API. Larger asset base = reduced fixed costs & tenant risk, additional financial flexibility for asset management initiatives, improved loan negotiating position, enhanced wealth manager awareness. CREI has the quality of management and the financial flexibility to deliver.

Long term performance.
5yr NAV total return annualised: API 3.0%, CREI 3.6%. +60bps p.a. Thank you, I’ll take that.

Conclusion
In my view Jason Baggaley has built a quality portfolio, and has been near the forefront for recognising a) the need to upgrade the portfolio to conform to the evolving Minimum Energy Efficiency Standards, and b) that quality-tenants are prepared to pay for more energy efficient and well configured space.

The ownership change from SLI to Abrdn has been a catastrophic failure for API. I entirely blame the Abrdn credit management team for not moving earlier to refinance API’s debt on decent terms. The debt refinancing terms have comprehensively x-shredded Jason’s long term plans. Abrdn’s BoE end of ’23 interest rate forecast was laughable. They need to go. Further, it is evident that Abrdn’s asset management division is losing its balls (APEO, UKCM, ACIC) literally and metaphorically.

[mindthestash] 12/2/2024 17:12

This is a lazy soft management merger. No board nor directors have put thier reputation/job on the line and stated performance improvements ie the numbers, they will execute and deliver. In the absence of this level of specifics every shareholder should reject this nonsense

[dr biotech] 12/2/2024 17:04

I did buy some CREI when it was announced. Down 6% since then, so not my greatest trade.

Seems neither party is benefiting at the moment

[raj k] 12/2/2024 16:55

Thanks Dr B and pavey

Im actually thinking of purchasing some CREI aswell as a hedge against what might happen. If the deal falls through i suspect CREI share price will rerate to what it was before this merger was announced. Also API should do the same?

If the merger goes through i think CREI should also rerate, so a win win

OOPS Darn cant trade CREI on II, something about not having the KID documents!

[mindthestash] 12/2/2024 16:44

Current prices say API shareholders get 53p (less costs? ) which is pretty much where it was 19th Jan announcement.
My view is API will slowly but surely head up to 10-15% discount to NAV over the summer as central banks very slowly bring down rates. Not sure there will be the same lift in custodian.

[pavey ark] 12/2/2024 16:30

With the recent sales and the vacancy rate coming down I would be happy to hold API.
I will certainly vote no.
There is little doubt in my mind that this is a poor deal for API holders....API has had a bit of a rough time recently but certainly pulling out of it and I consider this a strange time to do this deal.

Looks a much better deal for CREI as API looks to have much better assets.

[dr biotech] 12/2/2024 14:46

I’m going to vote yes. I don’t really see the downside. Perhaps I’d vote no as a CREI holder.

[raj k] 12/2/2024 14:34

As a holder in API im trying to understand which way i should vote for this merger deal. At the moment the market is valuing API lower than the share offer that Custodian has put on the table, that is using the 0.78 x multiple for each API share.

Say no to deal becuase a better offer will come along in time from another REIT?

Say yes and benefit from a small uplifit immediately and the hope Custodian (from what i see is a well run trust) discount will narrow?

[mindthestash] 12/2/2024 13:14

To all those yet to vote..... Custodian and API both moving down in value in tandem with the share value deal. A bad move for API surely.

[essentialinvestor] 10/2/2024 15:23

The markets initial reaction yes - API discount closes and CREI opens up.

In one sense it is logical, but would hope with multiple interest rates cuts to come (over the next 12 months) the market will reassess - particularly if CREI can successfully dispose of assets to reduce interest costs


Some may remember that SLI once sold at a 6% premium to NAV!, different times, eh

[mindthestash] 08/2/2024 17:00

OOPS
what i meant to say was theres a marriage value of 2+2 = 3.5!!

'bin a long day here in soaking wet Devon