Abrdn Property Income Share Discussion Threads

[spectoacc] 02/11/2022 07:31

The high cost of debt kicking in.


SALE OF ASSET

abrdn Property Income Trust (API) has completed the sale of The Kirkgate in Epsom for £7.725m reflecting 7.25% net initial yield. The office building was fully-let to 6 tenants with an unexpired term to break of 2.5 years, with the price reflecting an 11.7% discount to the June 2022 valuation.

Mark Blyth, Deputy Fund Manager of API commented "Having undertaken a comprehensive refurbishment of the property and achieved full occupation, we had successfully completed the asset business plan and have taken the opportunity to further reduce our sector weighting to offices. Whilst disappointing to have sold below the June valuation, we believe values will continue to be under pressure in this sector due to market and economic uncertainty. In the short-term, we will use the proceeds to reduce our gearing."

[pavey ark] 29/10/2022 08:41

"so perhaps Aberdeen can trim the inv mgt fee!" ??

Do you consider their fees to be excessive or out of step with other REIT managers?

[nickrl] 28/10/2022 23:39

Pavey Ark re#165 most of the REITs acknowledge this issue and majority are ahead of the 2023 deadline with their portfolios but plenty will need to invest if they want to retain assets beyond 2027. Thing is the price of energy is going to overtake the original driver for this legislation and certainly better rated buildings should be easier to keep occupied so at least API should have less to worry about so perhaps Aberdeen can trim the inv mgt fee!

[pavey ark] 28/10/2022 16:32

Just a bit of the article:

"By April next year, every commercial property that is leased needs to have an energy performance certificate (EPC) of E or above. The government plans to increase that threshold to C by 2027 and B by 2030. Commercial developers cannot let buildings that don't meet those targets. As such, they are spending billions of pounds on retrofitting and redeveloping their properties to avoid being lumped with scores of empty, useless assets."

From 4/8/22 NAV update
"ESG remained a key theme of the quarter as we completed several small upgrades to air conditioning plant and lighting systems, to ensure all our offices are at a minimum EPC C by the end of August 2022 (and therefore complying with statute out to 2030)."

[pavey ark] 28/10/2022 10:00

Rather illogical and you certainly fail to grasp my point regarding yield and discount.

I also pointed out at some length my view on recent underperformance.

Your tone suggests to me that you are unlikely to have appreciated or indeed understood much of what I said.

[adae] 28/10/2022 09:41

Of course the problem is with the sector - we have had a property bubble.

If your reason for investing (albeit only 3%) is discount and yield, neither look particularly easy to pin down.

Mr Baggaley must be very pleased to have such a supportive shareholder, even if by your own admission API has underperformed recently.

[pavey ark] 28/10/2022 09:19

Adae, you seem to be taking a rather firm tone.....with yourself ??

Again, I have looked at SREI and UKCM against API over any number of years and the graphs are absolutely in step with one crossing the other from time to time but but all three would be very close to any best fit curve/graph.

The problem (if there is one) is the sector and as far as I can see not with API.

Jason Baggaley took over in 2007 and is highly thought of in the industry and was always a consideration when I was buying.

Back to the graphs and you will see that although the share price graphs were almost in lock step over the last 15 years there has been a substantial divergence over the last month .....buying opportunity ?....I thought so.

The drop of API shares was on top of the industry wide selloff due to the ongoing financial situation.

There is always a point in any asset when the price compensates for any problems.

There was a considerable amount of pearl clutching over the debt renewal but at 16-20% of the book value I considered the problem to manageable.
Little attention was given to the £30m of sales (very low yielding industrial unit and an office block that had questionable potential) or to the share buyback.

The refinancing took this lower than the others but the economic problems still exist.

The question is has the market indeed been looking forward......50% discount and almost 8% yield would suggest that the market has indeed taken a view.

Will things get worse (?) possibly/probably but it would be foolish to view this worsening situation as though API hasn't been discounted already.

Further falls would see me buying more....currently at under 3% of my total share holdings.

[adae] 28/10/2022 07:02

Long term, we're all in the ground, but 2004 a perfectly reasonable period to look back to.

You need to compare reinvested dividends with the All-Share, and a real property index. If SLI has underperformed both, it has been both a poor investment and poorl managed.

The gearing effect really should make it outperform a simple property index.

[essentialinvestor] 27/10/2022 21:56

PA, that's why I mentioned the.. longer term performance.

Admittedly longer term can mean different time frames to different people etc.

[rambutan2] 27/10/2022 21:28

Pavey Ark, although I don't really agree with your half glass full take on API's prospects, I do appreciate you airing them and making me question/test my assumptions.

[pavey ark] 27/10/2022 20:36

Ah !!!.....I only go back to 2018.

Bought and sold a few times and always went well for me.....my lucky share (?)

Certainly fine/good in comparison with others over last 5 years....certainly not good on your figures.

[pavey ark] 27/10/2022 19:58

I assume you are both shareholders.

EssentialInvestor, I didn't mention discount to NAV or relative performance but I have just put API against UKCM and SREI and very little difference in share price performance until very recently, especially in the last month (5,3,2,1 year show little difference)

The recent steep fall may be down to the concerns over refinancing.

Other than this blip I have always considered this REIT to be very well run.

nickrt, as I said, I think the debt/refinancing issue was overblown.
It could have been handled differently but there is a real chance a dividend cut can be avoided.
The higher rates don't kick in until April so nine months of next year at the higher rate .By my calculations they will have £2m extra to find next year with the newly refurbished properties kicking in with c.£800k.
Rent increases must come at some point so things look manageable.

A 0.5p cut would reduce cost by c.£2m and still yield 6.5% at today's close but if they cut I suspect it would be 0.25p giving almost 7%.

2024 is a bit away and a number of rent rises would have been achieved by then.

Before people jump up and down I am fully aware that things could go seriously wrong but that is the case for every single share in every single company.

The rather unhelpful questions are :-

How much bad news is in the price now ?
How bad can things get ?

[spectoacc] 27/10/2022 19:50

@EI - and that's before you get to possible voids, Empty Rates liabilities, and difficulty collecting rent from tenants (tho API's in general aren't bad). That's on a moderately benign recession, rather than what I think is coming down the track.

The market looks forward, not back.

@nickrl - AEWU paying about 0.9p/qtr of the divi from capital currently, but made that excellent sale at the top of the market. If they time their planned purchase right early next year, they could get away with continuing to cover the divi from capital, and making all that missing rent back up with a cheap purchase.

Not long them mind.

[essentialinvestor] 27/10/2022 18:50

PA, thanks for that, however would expect some of the % discount to NAV

is arguably a factor of a pretty dismal longer term record - much of that "performance"

in a huge property bull market. I would put it in stronger terms but wish to remain polite.

[nickrl] 27/10/2022 18:41

@paveyark my assessment in #109 above was similar assessment on nett NRI being roughly the same but interest costs up £3m so that will mean they won't be able to cover current divi from cash flow. They could raid teh RCF but with interest rate on it that ain't going to work out well in the long term so my take is they will have to cut the divi. Mind you i thought that about AEWU but they haven't and ive lost out there so who knows.

[pavey ark] 27/10/2022 17:16

Obviously there are API shareholders out there so thought this may be of interest.

Since June there have been two sales totalling £30m

I have taken the office sale (£8m)and used it to cover the Q3 share buyback ...(10 million shares).
I then deducted c £12m to complete the St Helens project ( I think this is a full figure as the land was bought earlier and I suspect there would be some early stage payment but still went with £12m).

The share buyback reduces the dividend payment by £400k/year and the St Helens let will generate £645K ...the passing rental from the sold properties was a smidge under £1m so let's call it even

So same net income and £10m cash......looks good to me.

There are two new lets coming into play in early 2023 which should knock a couple of percent off the vacancy figure and generate close to £800k.

Obviously the debt restructuring received a lot of attention ......and I mean a lot...so I had a look.

The current term loan is £110m at 2.75% until April
The new term loan is for £85m at 6.95% fixed for three years (from April)

The difference between these is £2.9m /year .....obviously it would be better if this extra cash was not required but in the context of a £540m portfolio some perspective is required.

The RCF is large at £80m and it will cost something to maintain but better safe than sorry.

The company have said that they do not intend any leveraged purchases and any new additions will come after the sale of existing properties.

A drop of 30% in the property valuations would still see loan to book value of 30%....and just to prove that every cloud has a silver lining this would reduce management charges by £1.1m.

I am assuming a debt figure of c. £110m (£85m + £25m RCF draw)but obviously the £25m can fluctuate and in this climate the company will be aiming down.

Anyway the question is not whither things are very difficult at the present time ..... the brown stuff is certainly hurtling to the whirly thing.... but the real question for investors is how much of this has already been discounted by the market.

If things are just bad and going to get a bit worse then that is one thing but if things turn out as bad as some are predicting then I doubt if your investment in API will be foremost in your mind.

As ever "you pays your money you takes your chance "

[spectoacc] 27/10/2022 15:21

@CC2014 - "I do not understand why the fiscal statement has been pushed back to the 17th. A weeks sure, but the 17th is a long way away given the fragile state of the market.."

Apparently the OBR were calculating off the recent Kamikwasi borrowing peak - by delaying it, they'll use the current borrowing rates instead. Is expected to save up to £10bn (ie £30bn to find, not £40bn).

Agree with points above - BoE +0.75% surely. Too early to call a likely peak in rates atm (how sticky will inflation be - a lot more sticky with the cap now ending in April) but 5% as good a guess as any. I'd speculate it'll be some time before rates start to come down again.

I see the triple lock is in doubt again - good.

As to govnt borrowing billions weekly - my concern is more that the buyer of last resort, LDI-loaded pension funds, are going to be buying increasingly fewer now that LDI has been "found out". Can foreign buyers make up for that? Why wouldn't you buy T-Bills at 4% instead?

[nickrl] 26/10/2022 21:09

Sunak akso knows if he gies too far the pain will still be in 2yrs and that won't help his relection chances. Looks like a gas bonus is more likely now but they really need to force all suppliers to disclose their pisitions viz a vi foreard hedging to know true liability.

[jonwig] 26/10/2022 14:48

The more it's palatable [sic] to the public, the less it will be palatable to the markets. The latter rule.

The pushback is because they want a wider range of views (from market participants) and an input from Sunak himself. He know who to work the phones with. There's been a big shift in confidence between Truss and now, and that needs cementing.

[cc2014] 26/10/2022 14:04

ah. I get it now. They need time to leak the budget especially the NI increase to see if it's pallatable to the public.

[cc2014] 26/10/2022 13:21

I'm broadly in agreement. BOE will now have no choice but to take a prudent view and that to me means 0.75% for sure and maybe a bit more.

I do not understand why the fiscal statement has been pushed back to the 17th. A weeks sure, but the 17th is a long way away given the fragile state of the market. It suggests to me that there were differences between Hunt and Sunak.

I remain very nervous about this market, but mostly my concern is the DMO are after billions every week and it's going on and on and on. I suspect Hunt is going to get a break over the energy crisis but the underlying debt problem goes on and on. Getting inflation down is critical to the interest on index linked gilts, but I worry about the gap between the government cash requirement and the underlying deficit. All being pushed down the road too much imho.