Invista EUR Prf Discussion Threads

[kenny] 29/8/2013 15:21

ERET does not seem to quote a net yield for it's properties, so I have worked it out to be 5.3% being £10.2m divided by £191m. On the other hand IERE's are valued on a net yield of 6.94%.

That is quite a big difference - property investors prefer a higher rental income!

[chuckie egg] 29/8/2013 15:06

I agree with Kenny. The properties have to be sold at a 20% discount to latest valuation before the redemption of the pref's are not fully covered. Even if a fire sale did occur, the pref's should be ok, unless the European market takes a further downturn.

The banks are unlikely to instigate a massive fire sale as they will not want to jeopardise the chance of having their loans paid back in full. Also the interest rate the banks are getting is an attractive 5-6%pa, so there is no reason for them to rush things.

[kenny] 29/8/2013 14:37

Scburbs - you make some valid points which may come to fruition. However, I think ERET is a different beast, where there is indeed scope for its assets to be worth a lot less on a bank wind-up. This is because ERET has not "taken the pain" of the true value of its properties to its balance sheet. For example, IERE recognised a property write down of 7.53% in the quarter to 31.12.12. On the other hand, ERET disclosed a fall of 2.1% in the six months to 31.12.12. This despite the fact ERET has 15% of its portfolio in Spain compared to IERE's 5%. I think the new valuer at IERE has taken a far more realistic view of values at IERE. To put it in context, I would much rather take my chances on a bank liquidation by holding IERE rather than ERET.

I also take comfort from the fact that IERE is in discussions about refinancing with various parties whereas ERET seems to be a bit slower despite having the same expiry date for its financing. In any event, I think you will agree that if you await refinancing news, the preference will be back up to par or above once news of a sucessful refinancing is confirmed.

chinahere - the amount raised in a rights issue will no doubt take account of all of the company's obligations. For example, a part of the 30.12.16 preference share redemption will come from net income to the company between now and then, with the rest from a rights issue. The other matter the company needs to take into account in fixing the amount raised, is payment of the 2% exit fee on the current borrowings. Also see what SRE did recently with a new bond against specific properties in their portfolio.

Net income would provide between a third and a half of the preference redemption amount. This is all without factoring in an uplift in property values in the run up to 31.12.16 - even a small uplift would cover the requirement.

[chinahere] 29/8/2013 13:26

I agree with Scburbs.

They can afford the coupons on the prefs but where will the money come from to repay them at par ?

[scburbs] 29/8/2013 13:10

Kenny,

Not sure I would agree that there is more than enough capital to repay the prefs at par if the porfolio were liquidated by the bank.

The bank would just take the best/first offer(s) which enabled them to cover (or nearly cover) the loan. IMV in a fire sale by the bank the values achieved would be materially lower and the prefs would be exposed (I expect the bank loan may also be exposed). The fact that IERE have been trying to sell assets for a long time without achieving that much progress is another indication that someone trying a quick sale would have to accept a suboptimal price which could be well below current market value.

The fact that liquidation value would be way below current market value was also mentioned by ERET in their results today.

"The Group is engaged in detailed discussions with lenders to refinance the current facility which expires in January 2014. Good progress is being made but there is no certainty that a refinance solution will be secured. This is a priority for the Board and for the Investment Manager. The valuation of the property portfolio would be at risk of a material reduction to that reported at 30 June 2013 in the event a refinance is not concluded."

[kenny] 29/8/2013 12:30

I used to hold a negative view on the preference shares of Invista European Real Estate - epic is IERP - but due to a combination of recent events and my more detailed research, I am now convinced that Mr Market is mispricing these preference shares.

The recent events are a) the company's statement of 5 August 2013 which shows that, at long last, the company is making real and substantial progress towards solving it's over-geared problem and, b) it seems that commercial property in France has stopped moving downward and appers to be stabilising (49.8% of the portfolio is in France).

The preference share issue is quite small at about £29m. The coupon is 9% payable half yearly in June and December and the redemption date is 30 December 2016. These preference shares are cumulative, which I find comforting. Currently, the buy price is 84p so the running yield is 10.714%. The total return between now and redemption is 47.5p so based on an 84p buy price the annualised return for each of the next 3.3 years is an astonishing 17.14%.

The ordinary shares, which I am not interested in for reasons which will become apparent below, trade under the epic IERE.

RISKS

My analysis of the risks is as below:

1. There has been confusion, on my part and others, about a potential suspension of payment of the coupon albeit it is cumulative. I have now undertaken quite a lot of research on this point and my conclusion is that the only circumstance in which payment of the coupon would be suspended is if the company did not physically have the cash. This is a remote possibility because net cash income in the latest interim accounts was about €1.8m after providing for the coupon which is about €1.5m per six months. Also, the net income of €1.8m per six months after paying the preference coupon is increasing because of efforts to sell vacant properties, lease renewals and the fact the replacement loan should be at a much lower interest rate.

There are various statements in the prospectus for the 2009 fundraising which are somewhat confusing so I have researched the Luxembourg Company Act of 1915 together with IERE's own Articles. In Article 6 of the company's articles, it basically states the dividends can be paid out of capital. The company still has more that enough capital on it's balance sheet to pay the remaining coupons until redemption because it is deducting losses on property write downs from the restricted reserves.

Note that the company has made losses every year since 2009 due to property write downs and it has paid the coupon on the preference since they were issued. Therefore, there is no reason to suppose that the coupon will be stopped - not least when the NAV losses may be coming to an end and, in any event, the annual cost of about €3 is small in the scheme of things.

2. The company has a single debt of about €245m which is due for repayment by the end of this year. In it's statement of 05.08.13 the company stated that re-financing will involve "more than just debt finance", therefore a capital raise - a rights issue. No indication of the size of the capital raise but it will also have to cover the 2% exit fee on the current loan. So another risk to consider is whether the company can alter the rights attaching to the preference shares to dilute their value.

I do not think that the company would even seek to propose this because it needs at least 75% of the preference to vote for it and it is impossible to conceive of a circumstance where the preference holders would do this given the fact the preference have first call on a winding up and also there is more that enough capital to repay the preference at par should the company not be able to achieve a refinancing and be liquidated by the bank.

There is one other factor to consider. In the 2009 capital raise when the preference were issued, a US real estate fund - Forum Partners - subscribed for 41.91% of the preference. Importantly, they did not subscribe for any ordinary shares. I believe that in 2009 they had the foresight that if the company should encounter any subsequent refinancing problems, their money would be safe as they only own the preference. I find it very reassuring that there is a 41% preference shareholder who, importantly, can on their own block any suggestion that the terms of the preference shares should be diluted.

3. Accordingly preference shareholders, unlike ordinary shareholders, need not spend any effort pondering how large the rights issue on the ordinary shares will be or its terms and pricing. It is also important to note that if the company proposes a second preference class, that would stand behind the current issue in terms of redemption rights, winding up etc.

4. Based upon my above analysis, I have no concerns about the company's ability to pay the coupons and redeem at par at the end of 2016 - based upon the current values. I would highlight the fact that earlier this year the company changed valuer and the new valuer slashed the property valuations such that NAV decreased by 30% overnight for the ordinaries. There have been subsequent much smaller falls in NAV. Despite this, I guess my biggest concern would be if property in France continued its downturn should the current halt in falling commercial property values in that country prove to be a false dawn. There is €332.5 of properties and a NAV of €66.7 after deducting the preference shares. So mathematically, the whole would have to fall by 20% in order to reach a situation where redemption of the pref's is just about covered. With the portfolio now valued at a gross yield of 8.27% and a net yield of 6.94% that seems unlikely. Also, the improving net income position will assist in adding cover. Also, we could have a situation where any future material downward valuation in the French property (49.8%) is offset or covered by increases in the German properties (37.8% of the portfolio).

CONCLUSION

As stated at the outset, I believe that Mr Market is mispricing IERP, helped perhaps by the fact that there may be one other US hedge fund, Spearpoint, which may be cutting its losses and running. However, for the personal investor like myself it is very hard to find an investment with a running yield of 10.7% let alone the almost certainty of achieving an annualised yield to redemption of 17.14%.

As always - do your own research and do not rely solely on anything you read on a bulletin board!!

[rooky4] 05/4/2013 09:35

Yes, the preference dividend is described as 'cumulative'.

Quote:
The ability of the Company to pay the Preference Dividend to holders of Preference Shares is not guaranteed and is dependent upon it having sufficient distributable cash resources and, where necessary, sufficient distributable reserves out of which the dividend to holders of Preference Shares is paid. Moreover,the payment of the dividend to holders of Preference Shares is also subject to Shareholder approval. If the Company fails to pay the Preference Dividend to holders of Preference Shares in any twelve month period, the amount due will fall due in the subsequent twelve month period, but there is no guarantee that such an amount will be paid during that period or in any future period.
=============
The phrase 'annual net profits' is not used in the annual report, so maybe it just means rental income minus administration cost, in which case it is pretty much always going to be positive! All the 'profit/loss' lines in the accounts that I can see are losses, but they paid the pref div last time. Also worth noting is that the prefs don't get a vote unless the dividend has been missed.

[mad foetus] 04/4/2013 08:39

If it can't be paid doesn't it roll up until it can be paid? In other words, when the co is wound up the prefs will get all interest repaid and be redeemed before the rods get anything

[rooky4] 01/4/2013 10:12

From the prospectus:
=================
1.4 From the annual net profits of the Company and after the statutory allocation of 5 per cent. thereof to the legal reserve of the Company until such reserve reaches 10 per cent. of the share capital of the Company, the general meeting of Shareholders of the Company shall be requested to approve, within the limits set forth under article 72-1 of the Company Act, the distribution of the Preference Dividend to the Preference Share holders in priority to any payment to the holders of any other shares of the
Company.
=================

Not being an accountant, I don't see how the prefs can continue to be paid when they are reporting no 'annual net profits', rather a Loss before tax (38,574,000)in the last accounts.

[kenny] 28/3/2013 14:56

I doubt they will be able to issue another preference share - who will buy it when asset cover is so poor and may be non-existant? Also, what coupon would they have to offer to get it away 12%, 15%??

Personally I would not invest in IERE or IERP as there is not likely to be a happy ending e.g. the banks take the properties.

EDIT: or the banks insist on a fire sale of the properties to recover as much of their debts as possible leaving everyone else with zilch - the banks justification would be that management had a long time to acheive more property sales, so now they were appointing their own agents for a quick sale.

[badtime] 28/3/2013 14:18

Tight spread for a change

[cerrito] 17/3/2013 23:10

I cannot see them suspending dividends on the preference shares this year if only-and depending on how much pressure Lloyds put on them in the refinancing-they may want to look at issuing fresh prefs-however unlikely in the current market climate.
Note that the website does not contain the mem and arts of the preference shares but I suppose directors have the right to suspend dividend payments if they consider it appropriate so to do.
Note that pref dividends are E3m a year just under half of last year's net cash flows from operating activities after caspex of E6.4 and 70% odd of the previous year's net cash flow from operating activities post Capex of E4.3m

[zastas] 07/3/2013 15:23

When the likes of GM and RBS were max in trouble, their Prefs traded at about 10% of par. Wagon's became nil, nul points. A big borrower places his cojones at the mercy of the lender.

We'll see with IERP. Best thing would be to suspend dividends to conserve cash.

[badtime] 06/3/2013 21:49

Dip toe in at 70p? Hmmm

[badtime] 05/3/2013 17:02

And down again

[badtime] 22/2/2013 17:48

Seems if u want to sell anything around 10k u hav to take less thn the market price

[badtime] 20/2/2013 22:33

U can buy them cheaper loobrush :)

[langbarb] 11/1/2013 17:27

thanks very much Kenny for you replies. I have to agree there are risks there and the way the portfolio performance is going this is a bit to racy for me... will give it a miss for the time being

[kenny] 11/1/2013 16:02

... also bear in mind two factors which do not bode well for the future:

a) The loans are due to expire on 31.12.13 so there is a question mark over whether they will find a bank willing to re-finance. Even if they do, what will be the terms and costs?

b) Net income after expenses and interest is negative - currently by about €2m a year and increasing materially as more tenants leave as leases end; could easily rise to -€4m per annum in the near term. This means the company is in a race for survival - it has to sell/relet properties before the cash it has to finance this annual deficit runs out. Sales of properties at depressed values may not be enough because it may still not have the cash flow to pay the annual deficit. This is the position at current depressed interest rates, if and when interest rates rise, that will accelerate the company's demise.

[kenny] 11/1/2013 15:31

langbarb, I will not have time to crunch the figures in the near future.

However, just to point out that the accounts you refer to are for the period to 30 September not 31.12.12. In the last 3 months of 2012, there was a further steep fall so, assuming your figures are correct, as we stand today, it is likely a much smaller percentage fall would wipe out shareholders.

[langbarb] 06/1/2013 12:59

Kenny, am trying to understand the risk here. If there were not enough money to repay the prefs in full, this would mean the ords shareholders would be wiped out right? From the Dec finals am I correct to say the company NAV would go down to 0 if the value of the assets were do decline by approx 20%?

[kenny] 14/12/2012 16:30

loobrush,

The potential problem is that there will not be enough money to repay the preference shares at par or, perhaps, anywhere near par. The values of their properties are falling and a meaningful percentage are empty looking for tenants. Another large slice are on leases which expire shortly; where replacement tenants may not be found.

It may well turn out all right, but I think the dangers are too great to take a risk. For example, it is no use getting paid 10% per annum for the next 2 years if at the end of that time you are only repaid at 50p in the pound.

Also, I suspect a liquidation will take longer than 2 years because the company's problems seem to be increasing as time goes by.

[loobrush] 14/12/2012 16:04

Kenny
why should one be wary ?
These are £1.00 preference shares paying appx 10% per annum, company is buying them back in as they are so cheap. The company is being liquidated and when thats complete - maybe 2 years-the prefs will be bought back in. In all a 30% gain at todays price-where else can you put your money to make that kind of return.

[kenny] 11/12/2012 12:43

Be very wary investing here - note today's announcement and in particular the control exercised by the company's senior debt provider.