 Hi SpectoAcc
You've summed it up correctly. Neither share nor warrant is worth holding at present for the reasons you give. So we agree on that.
But IF the share becomes a buy again THEN as your option 4 shows the warrants with a far smaller stake are by far the best bet!
I know because I bought the warrants at 4p and sold at 28p.
Also I used to run a warrant portfolio on a subscription website. We had to close it because there were too few warrants left but it ended up doubling and at one time had tripled.
Included in that portfolio were Ground Rents warrants bought at 4p. They soared to 38p and were still in the portfolio when we closed it. I sold on the way down at 28p.
Give me that gain (x7) than the dividend and small share price gain every time!
And if the share becomes a buy again I'll again buy the warrants.
I'm afraid your case falls down on the facts and because you ignored the facts and figures in my original post.
Finally you say I don't realise why there is no time value on the warrant. I'm sorry but you are so wrong on
that too. Ground Rents Income warrants have ALWAYS traded with very little and sometimes NO time value at all. It is nothing to do with impending legislation! The reason is warrants are poorly understood and hence there used to be some incredible bargains with quality Investment Trust warrants and sub shares trading at big discounts.
The only one left worth looking at and which I hold are FASS - Fidelity Asian sub shares.
Also some warrants have in the past traded at a discount for long periods.
Don't get too hung up on warrant theory. Best to be aware of the facts. |
Hmm thanks @kenmitch, I've been trading for more than 20 years, including warrants, but thanks for "trying to help".
OK let's look at it another way. Usually with a warrant vs share, you'd work out likely scenarios, and likely upside/downside.
GRIO isn't going to zero, just about whatever the govnt come up with.
NAV is going to c.40p if the worst case "10x" suggestion is adopted on everything. Something is going to be adopted, and eg 10x for resi doesn't seem out of the question. But even 20x affects GRIO's NAV (although it's already trading at a decent discount to it).
So:
40p lowest (warrants: nil)
80p if more like 20x (warrants: 0.5p? Seems unlikely that even with 4 years to go, GRIO could get back over a quid when it's also paying out income, currently uncovered, in divis)
£1 if some fudge that sees much of GRIO's assets avoid a hit - eg only resi, in certain circumstances (warrants: a few p of time value, but the point about them paying out more in divis than they're receiving in income still stands)
£1.20 if legislation abandoned (say a hard Brexit takes up all Parliamentary time). Warrants - 21p?
Looking at those scenarios, I have to agree that GRIO is probably too risky - upside back towards previous NAV is only one of about 4 possibilities.
Very roughly per scenario, one of which we know is going to happen within months (please don't check my maths too carefully):
Shares -55%, warrants -100%
Shares -25%, warrants -95%
Shares -5%, warrants -75%
Shares +12%, warrants +260%
I'd rather be left holding the shares, with a divi, than taking a punt on option 4. But the previous point stands - probably better holding neither. Options 2 or 3 surely have the highest likelihood, and whilst the shares survive either option largely OK, the warrants only thrive on Option 4. The fact the shares aren't going to zero, even on a Labour govnt, and also aren't about to recover highs or even get back to highs over the life of the warrants in most scenarios (thanks to the change in legislation), makes the calculation a little different to normal.
Good luck calculating what stake to place on the warrants if anyone did deem them the best choice.
You note yourself how little time value there seems to be in the warrants, but haven't grasped that the impending legislation is the reason why. |
SpectoAcc
There is hardly any time value in the warrants. There SHOULD be as they last another 4 years, but there isn’t. So there’s hardly any time value to lose! I assumed you had understood the very simple arithmetic in my first post!
And if the share does fall THEN there will be more time value in the warrant as they won’t let us buy them for nothing and even with share well below £1 the sell price likely to be around 2p.
And yes the warrant fell from 38p to 6p but there’s no need to hold on! I sold out at 28p on the bad news. Also you don’t seem to have grasped the small stake needed for similar upside nor do you seem to understand gearing. It doesn’t matter that you don’t understand warrants but your reply shows you don’t.
I was only trying to help so will leave it there. And anyway neither share nor warrant is a buy at present. |
@kenmitch - because they've also gone from 38p back to 6p ;)
I do understand warrants, and your point, but in a situation like GRIO, there's a clear catalyst for a significant fall in NAV. It may not come to pass (as @Jombaston notes), and even if "Buy the freehold for 10x the annual ground rent" was in the legislation, I doubt very much it would apply to anything "commercial".
But whilst your "cash profit" point holds, so does my loss point - isn't the case that with 4 years to expiry, there's plenty of time value in the warrants, because there's a catalyst - and if it occurs (in a matter of months), the warrants will have virtually nil value, all the way out to 2022 expiry.
I suspect that's why you can sell GRIO in volume at 106.4p, but buy the warrants at 7.8p, all of 1.4p of time value. |
SpectoAcc.
Apart from the last paragraph yours was another brilliant and informative post.
I think until we have more information from the Government and also more on the effects of all this on them from Ground Rents Managers, both shares and warrants are a NO.
BUT. I only did the post on the warrants for your benefit as a thank you for your helpful EFR posts. I would not have bothered otherwise. And you have completely missed the key point on the warrants. They are NOT riskier than the shares,if only investing a fraction of the stake you would invest in the share! Otherwise the share is far riskier and you have shown the potential share downside risk.
I don’t know what size stakes you invest in a share you are confident about and there is no need to say. But say you were to invest £6500 in the share and just £500 in the warrant. The cash profit is the same. I.e 10% share price gain will give £650 profit and alsoa £650 profit on that £500 warrant stake.
And if the share falls 10% the share stake loss will be £650 which is more than the £500 you have staked on the warrant. And until 2022 the warrant would still have some value.
So hopefully you understand now the warrant risk reward. I’ve invested in warrants since the 1980s. They were little understood treasures, but sadly there are very few left now.
Finally note too how in the past the warrant soared from 4p to 38p for a 9 fold gain. The share has never risen more than 40%. How can you think the warrants are too risky? |
The reference to 10x here should be seen in the proper context.
This stems from a private members bill, introduced by Labour MP, Justin Madders.
It was then quoted in a Law Commission report on a range of solutions for leasehold reform of houses. They go on to refer to the need to keep in mind the interests of the landlords.
It is quite a jump to apply this one example to this block of flats!
I'm not saying it is impossible that this is the outcome and that GRIO will bear the costs but it is unlikely as it is only one of a great many possibilities.
As ever, please DO YOUR OWN RESEARCH. Many of the press articles contain only partial information. |
Thanks @kenmitch, interesting point! I've only been trading GRIO, due to the divis, but am increasingly worried where the legislation is going, and at GRIO's silence. Perhaps they feel they can't comment further until there's something concrete, but more than one press article has suggested a new rule of buying out the freeholder for just 10x the annual ground rent.
What isn't clear is whether that's "retail only", ie resi and not commercial. Could have a nasty effect on pension funds which you'd think the govnt would want to avoid..
What is clear is where the worst-case would leave GRIO - c.40p or less - and GRIW - 0p.
GRIO are keen to trumpet their success, but if you look at page 2 of the last report (March)
you'll see 5 photos of assets they've bought/current valuations, representing the top 5 holdings.
Take say The Gateway Leeds, cost £2,360,000, value £4,140,000. Yield 3.33%. Convert that to 10x on a "new rules buyout" basis, and it becomes worth £1,380,000, ie a million quid less than they paid, and exactly a third of what it's currently valued at in the NAV.
The same goes for all their holdings, with varying hits to resulting NAV, dropping it by two thirds. I can't imagine the legislation (which is still entirely up in the air) would let say "Wiltshire Leisure Village" buy themselves out of their index-linked ground rent for just 10x the ground rent. But it might. And the resi stuff? The residential blocks or student blocks? It's a complete no-brainer for them if the legislation gives the opportunity.
That makes me think the warrants are just a little too risky - losing (from here) 65% of investment (less divis) is one thing, losing 100% is another. Can't see the new rules not affecting GRIO's NAV in some way, & some of that is in the price of the ords already, but it's hard to see GRIO shooting up on the new rules. |
So you're here too SpectoAcc!
For you or anyone else interested, once hopeful about prospects again, the warrants are by far the best way to play this one. Exercise price is £1 and they don't expire until Aug 2022. Current share price is around 106p so these warrants are currently worth 6p. They can be bought for 7p so are incredibly cheap. BUT that's no use unless/until the share price goes up again! I don't hold currently, having offloaded mine at 28p a while ago. I originally bought around 4p and have been in and out several times, but have been out for months.
The upside, for those not clued up on warrants, is easy.
At £1 share price the warrant is worth nothing but will until 2022 be tradeable, probably around 2p to sell.
AT £1.10 share price the warrant is worth 10p
AT £1.20 share price the warrant is worth 20p etc etc
So, say, the share goes up 10% to 117p then the warrant should go from current 7p to buy to around 17p to sell. i.e the warrant will more than DOUBLE for just 10% on the share price. And target a 20% share price gain (a not unreasonable target if "regulatory uncertainty" eases) around 130p and the warrant would be worth 30p and that's 4 times the current price!
Those of you who only bought the shares in the past missed out on a brilliant winner. The warrants peaked, from memory around 40p.
DON'T all rush to buy now! Warrants are very thinly traded and even one buy can move the price -but unless the share rises too the gains won't last. And it is not always easy to trade warrants and sometimes market makers will widen the spread and hit the selling price. So any tempted to trade GRIW could come unstuck unless/until the share price rises again.
Share is stuck at present and until that changes money in both share and warrant will probably do little. THE one plus for the share is the dividend. No dividends with warrants, but with potential gains like that who cares?
They can be bought and sold at any time (up to Aug 2022 expiry date) exactly the same as shares, though brokers will probably ask you to sign a risk form first. It's full of dire warnings that are a load of nonsense.
The most you can ever lose, as with shares, is your original stake. And with much higher upside you only need a small stake to cash in.
e.g £1000 in the warrants gives roughly the same upside as £13000 staked in the share! And the most you can lose is £1000 instead of £13000! And that £12000 saved can be used elsewhere! |
Called the bottom, but can't say I've traded it well. Still hold, but offloaded some yesterday at 106.4 on a 105/107 spread. Suspect "the market" knows far more than me, but still press articles about how onerous the planned new rules could be. |
Seen the bottom I wonder? Hard to tell, when they gap it out to a 4.5p spread. |
@andyj - I still hold them, but suspect the "regulatory uncertainty" needs getting out the way first. Until then, as you say, more capital falls look likely.
GRIO is basically uninvestable. |
Thank you for those. I had previously earmarked these as a buy if they reached 110, but the speed with which they fell alarmed me. Yields are pointless when capital is falling IMO. I set a new target of 100, but with an uncovered dividend, the sole reason for investing, I feel it is time to remove them completely from my watch list. |
Feel like doing a "Bull points/Bear points" but will just note:
1. They're pre-empting possible legislative changes (which are coming) & have offered all doubling ground renters (of whom they don't have that many) the option to switch to RPI (conclusion expected in early 2019).
2. "69% of the portfolio is inflation-linked and there is a geographical bias to the north of England at 61%. The Group's ground rent reviews are upward only, ranging from every year to every 50 years. Taking this into account, 35% of the portfolio's ground rent income is due to review within the next five years, or 62% within the next 10 years. If inflation, as measured by RPI, were to be 3.0% over the next 10 years, we would expect like-for-like ground rent income to increase 2.6% per annum."
The "50 years" one made me laugh, but still - at least they've quantified what they expect to increase income by PA, even if that's actually spread over years.
3. They're sub-scale, c.£100m (£c.£120m net assets), and now seem unlikely to grow, at least without increasing gearing
4. The legislative changes are still up in the air (Brexit taking up Parliamentary time)
5. Their loan with Santander will need rescheduling in 2021. 2021 isn't that far away.
6. They claim only one of their assets has dodgy cladding:
"To date we are only aware of one development within the portfolio that has ACM cladding. This site has a formally-constituted Residents Management Company ('RMC') within the lease structure, which holds all of the insuring, repairing and maintenance obligations. On that basis, the Group and BMF continue to support the stakeholders in meeting their obligations."
7. The dividend's uncovered & not expected to be covered for c.4 years |
@apollocreed1 - indeed, a point I've made previously on GRIO. Not only that, but not all their holdings are even inflation-linked. So a little rich them claiming to deserve a valuation like a Linker, particularly after the recent NAV fall over just 6 months.
Still - a discount's a discount. |
Looking at their website, I note that the inflation-linked rent reviews are only every 5 years or 10 years or even 15 years. That's not very appealing as inflation can be shooting up while the same low 3% yields are being collected for many years until review. If the discount gets to something like 25% I may be tempted to buy more, but not until then. |
Still no bottom in sight it seems. |
Liberum;
Ground Rents Income Fund (Mkt Cap £103m)
Interims: Additional 5% valuation decline
Event
Ground Rents Income Fund's NAV at 31 March 2018 was 124.6p (diluted NAV 123.4p) which represents a NAV total return of -3.9% in the six-month period from September 2017. NAV total return over the past 12 months is -7.1%.
The decrease is due to a further c.5% reduction in the portfolio value due to ongoing weak sentiment as a result of proposed legislation changes. The biggest adjustment has been for assets with shorter review cycles. Flat and fixed ground rent assets are stable compared to the last valuation at September 2017.
The stock trades on a -14.1% discount to diluted NAV. |
Good point, but ARTL's a real mixed bag.
GRIO may have bottomed - or may not ;) |
ARTL has 24% in ground rents and trades at a similar discount to NAV. |
Slipped through my intended buying price of 110 and now edging closer to a 4% yield. But what use is a yield when the capital is collapsing? |
100k dumped at 104p, still not seen the bottom yet I fear. |
I suspect the change in NAV is less to do with any interest rate model and more a reflection of the lack of liquidity in the ground rent market. Not surprisingly, the valuers have opted for a conservative valuation.
GRIO have invested a little more cash (£2.3m) but unfortunately it doesn't say what yields were achieved. Being a closed end fund with available funds, you would hope they can take advantage of poor market sentiment to pick up cheap assets. |
@erstwhile2 - US 10yr affects everything. If you could get eg 5% from (theoretically) completely safe T-Bills, what yield would GRIO have to be on to be worth holding?
(Yes, you could argue TIPS are more relevant to GRIO - but as I've said all along, GRIO are not a true RPI linker).
(@apollocreed1 - I doubt a Corbynista govnt is priced in yet! But legislative time for ground rents reform also seems to be lacking atm). |
I just bought some today at 107.9. that's a discount of about 12.6% to the diluted NAV of 123.44. If infrastructure funds are trading at discounts of 3% then GRIO has similar inflation-linked income streams and the political risk is already priced in. |
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