Ing Uk Real Estate Income Trust Share Discussion Threads

[sleepy] 31/10/2008 13:19

chopshs and Skyship - thanks for your comments.

I can certainly see a case for including current liabilities. However they have historically been pretty stable and I would hope that they would continue to be so.

Due to the low LTV ratio it is tempting to see a covenant breach as not being too serious and certainly not disastrous for shareholders. However it would almost certainly result in an increased interest rate and possibly restrictions on dividends and might result in forced property sales. It seems to me that the current share price has probably priced in a breach of covenant and at least a further 20% drop in property values from 30/9/2008 - which I believe is a lot more pessimistic than is priced into UK property derivatives.

What bothers me is - why are the shares so cheap? Am I missing something?

[skyship] 31/10/2008 12:01

Hmmm - slightly less headroom than I had remembered. Still, as I believe I've stated here or elsewhere, even if we do breach - so what? With a Mkt Cap of just £100m, we could see a 12% asset fall to breach, then still have Mkt Cap cover of what, 1.6x, 1.8x, 2.0x - not sure.

Will do the sums later, but even with fire sales on the assets we have plenty of cover. Also the fire sale discount need not be too great IMO, as there is a sea of money awaiting such opportunities - max 10%-15% discount I would say.

Also, the name of this company does suggest that if push came to shove, ING would surely step in to take it out.

[chopshs] 31/10/2008 10:43

That's about right. I factor the current liabilities of £19.1m into my calcs which means the values can fall about 11% before the covenant is hit but the difference isn't material. What's pretty clear is that the covenant will be breached unless they renegotiate the terms or dispose of some more property fairly quickly. This 'worry' is already factored into the share price imo.

[sleepy] 30/10/2008 18:42

I have based the following on the 21 October announcement and would be grateful for comments:-

Properties at 30/9/8 valuation (assuming Fulham property sold) - £484 million

Other assets shown as £84.4 million say £78 million cash. After £57.2 million of non-securitised debt is repaid then cash would be £21 million.

Assume £4.7 million from Fulham sale used to help fund dividends over next year or more and that £15 million of £21 million cash is available for offset against securitised debt ("SD").

This would reduce SD for covenant purposes to £210 million and reduce property value needed to meet 50% LTV covenant test to £420 million. This would imply that, without further asset sales, the company could withstand a further 13% fall in asset values and still not breach its LTV covenant.

[nickcduk] 27/10/2008 13:51

Chopshs - Thanks for the info. I think it pretty much fits in with the line of thinking on the board. Company is well positioned in the current market. Dividend cut would be fine in my eyes. If they slashed it in half the shares would still yield over 10%. They could use the balance of the cashflow to reduce debt or in our case net cash off against debt for LTV purposes.

[sleepy] 27/10/2008 13:50

Chopshs - thank you for the good questions and posting the answers. One of the things I like about IRET is the apparently very high level of disclosure. Does anyone know how often the debt covenants are tested e.g. every three months, every six months, every year?

[chopshs] 27/10/2008 13:29

I asked ING a few questions last week and they have kindly responded this morning. No major news but thought some invested here would like to read:

1. Please could you tell me if there is anything that prevents IRET paying down part of the £225m securitized debt as further assets are sold? I am asking this because in the last interims it was stated that you are '....able to reduce the overall level of LTV by increasing cash reserves through sales.' Furthermore you stated 'Subject to market conditions it will continue to maintain cash balances through disposals in order to meet this particular covenant.' This sounds as if you cannot actually reduce the £225m debt at this moment in time (perhaps not until 2013). Is that correct?

Ans: The priority remains keeping within the current debt covenants. This can be achieved by holding cash and 'offsetting the debt'. The current debt is at very favourable rate and therefore it would be better for the company to undertake the offsetting as described above.

2. Are you able to tell me what action, if any, IRET is taking on further disposals?

Ans: The company is intending to make further disposals as it has done over the last 12 months


3. Is it likely that the dividend will need to be cut in order to help protect the LTV covenant?

Ans: The Board continually monitors its dividend policy and although an element of that dividend is paid (c 12%for the last 6 months) from capital no decision has yet been made to alter the dividend.


4. In view of the LTV covenant I assume IRET is not in a position to implement a share buy back programme. Would you agree?

Ans: The primary focus of the company remains the debt management over buybacks


5. In the event of a breach of the LTV covenant does control of securitized assets pass to the loan note holders? Presumably in such a scenario the loan note holders' only interest is to recover their loans and there is no responsibility to equity holders to maximise value? Can you advise who the principal loan note holders are? Is ING one?

Ans: In the event of breach, there are a number of options open to the company. These include a 'waiver' or refinancing etc. The LTV is relatively low a) in property terms and b) for the point of the cycle so there is little risk to the noteholder equity and so this doesn't translate into the need to 'recover loans' as you imply, which may be the case on much higher LTV's These are last resorts and the above action on sales is preferred. ING does not own the debt

[robizm] 27/10/2008 12:05

I have put in a cheeky buy limit order on these, you never know your luck

[nickcduk] 24/10/2008 07:44

I think they are fairly comfortable on the LTV covenant. They disposed of another property just after quarter end which reduced debt by a further 4m or so. That alone would give another 2% cushion against falls in property value. The fear in the market at present is that banks will not want to roll over loans. They are looking to reduce the size of their balance sheets and so will ask for borrowers to repay outstanding debt. The same applies to any potential buyers looking for finance. If they can't raise finance then the market is reliant on only cash buyers to complete transactions.

We need credit markets to thaw and for the Government to ensure that banks carry on providing funding. Its not in the banks interest to call in loans and be stuck with property on their books. That would create a vicious circle and force them to call in even more of their loans and therefore book losses and weaken their balance sheet further.

[flying pig] 24/10/2008 07:14

Skyship - only problem is the rate on the loans goes up in the event of a default - so may be less for shareholders. Agree in reality the share price covers this eventuality in my opinion. However I too bought at rather higher levels.

[skyship] 23/10/2008 18:32

What I don't understand is the valuation, because even if the company breached banking covenants - so what!? What possible penalties could be imposed in current markets. What lender would want to impose any penalty other than an orderly liquidation. In such a case we sell the portfolio as & when buyers can be found at distress valuations, ie perhaps as much as 15% below accepted market. Repay the banks and we will still have a substantial surplus - to be paid out to shareholders or to be the backbone of an ungeared property company. With such a scenario an LTV breach seems fine by me!

[nickcduk] 23/10/2008 13:52

The current share price is absolute lunacy. When it fell to 26p earlier I was tempted to add a few more to my already too large a holding. Looks like a buyer has woken up and moved the price back up. Obviously a seller about who is selling indiscriminately so they could force it back lower.

Just been doing some sums and ive calculated that property values could fall another 13% or so before LTV terms are breached. In current market conditions you wouldn't think that was impossible. They could make a few more disposals or else they could get rid of the dividend to preserve cash. The dividend costs about about £20m a year. If they used that cashflow to reduce debt then the portfolio could fall another 19% over the next year and the LTV would still be safe.

Shares currently seem to be pricing a pretty high chance the company goes to wall. Other companies with higher gearing and lower FFO are trading at a much narrower discount to NAV.

Apologies Skyship for replying so promptly to your post. If I had left it a few days you could have got in a lot cheaper :-( Still pretty confident we will have a happy ending even if we do get some short term pain.

[skyship] 21/10/2008 18:03

Hi Tiltonboy - Bt into both IRET & UKCM today. Posted this on the UKCM thread afterward as Nickduk had reminded me of UKCM on the IERE thread. Certainly UKCM looks to be a bombproof high-yielder. Have you looked at it?

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RE: UKCM - Bought into this one today - thnx to Nickduk for reminding me of its existence!

I assume the dividend will have to be cut after disposals, however still expecting perhaps as much as 6.0p, ie a Yield of 10% @ 60p. Frankly an 8% yield (4.8p) would still be highly satisfactory.

Sure the property market may have further to fall, however further falls are IMO unlikely to be more than an additional 10% max; as the falling interest rates will again make property an increasingly attractive asset class.

Of particular interest here is whether Pearl, the Apr'08 buyers of Resolution, will decide to buy-in the minority stake. There doesn't seem to be much point in holding 73% of this - why not 100%? Certainly provides another upside slant. Views anyone?
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[tiltonboy] 21/10/2008 12:53

SKYSHIP,

Still in. The fall in the property portfolio is very much in line with the index. Hopefully we have seen the worst of the falls in property values, but there may be a little further to go.

The expensive debt has been paid off, but I would like to see a few more sales made.

I would be inclined to cut the dividend in the short term, but as long as voids don't rise, the company may well try and maintain it, as reversions push up the rental income.

Haven't had chance to speak to Mundy yet, as it is a touch crazy here.

tiltonboy

[skyship] 21/10/2008 12:26

Tiltonboy - bought back into these today. Are you still in these; and what do you make of the NAV update?

Nickduk - thnx for yr comments on the IERE thread - will add a few UKCM

[flying pig] 07/10/2008 14:54

Nickcduk
Spot on - lease risk esp as vacant property now subject to rates. Begbies have a huge list of at risk retailers (drumming up business?)
Limited funding risk.
Share value has a relationship to interest rates available.

[nickcduk] 07/10/2008 11:43

IRET have a fixed rate loan which extends through to 2013 I believe with JP Morgan. No need to worry about funding with IRET. Sharp rate cut predicted on Thursday (50bp) and then a further 100 bp or so over the next year. That should help support valuations and make the dividend yield even more enticing. The negatives in the meantime are tenant failure risk. A few retailers look vulnerable at present so it is something worth bearing in mind.

[hectorp] 07/10/2008 11:34

IF the banks are recapitalised and bring stability to UK lending, then I'd be interested.. will wait and see how the Banks do this week ist.
H.

[glynnef] 03/10/2008 20:20

thanks for your replies.. My broker has changed his mind on this !

G.

[glynnef] 03/10/2008 10:18

Tried to buy some IRET in my ISA and got a message that they are not eligible. But the company website suggests an ISA in its FAQs.
Does anyone else hold in an ISA ?

[tiltonboy] 01/10/2008 21:03

bad,

Look interesting. They concentrate on smaller lot size, but have a good spread of assets by location, and also by type.

If I wasn't a holder of IRET I would certainly consider a purchase.