Secure Income Reit Share Discussion Threads

[bondholder] 14/1/2022 11:04

Up 2.3 percent on day no news.

[bondholder] 14/1/2022 11:03

Am I missing something ?

[spectoacc] 04/1/2022 13:49

Don't doubt they'll do the refinancing soon, and that it'll be a good one & accretive.

Happy to sit in a few but also happy to bet against the market and sell the majority on that Merlin lease extension.

[pyufak] 31/12/2021 17:58

Very fair point Nickrl on home rents.

Bondholder - have to think refinancing is imminent given last summer’s presentation highlighting how using just 30-50m of the cash buffer could significant reduce interest costs. I actually think this is a more pressing matter for SIR than the lease extensions given UK now hiking rates, QE tapering in US and Europe too. Bond interest rates have risen towards the end of this year albeit from very low levels. I hope they use up a chunk of the remaining cash to lock in low interest rates long term which would provide additional inflation protection.

Last comment from me I guess is SIR up 6% on this announcement now so the general market (which is what ultimately matters) taken it positively… hat tip to management and a thank you for the last Xmas present.

[bondholder] 31/12/2021 16:47

The thing which is missing now imo is a comprehensive refinancing of SIR debt (4.9 percent average) to lock in low interest rates over a much longer term( 6/10yrs)

[williamcooper104] 31/12/2021 11:17

SUPR worth a look - RPI is capped but the underlying assets - omnichanel super markets that are used for on line supply - are excellent

[nickrl] 31/12/2021 10:27

Pyufak i wouldn't put in past government to meddle in home rents like they've done on energy if rents are seen to be increasing too much. Anyhow gas prices have burst in the UK down from 450p/therm last week to 198p this morning albeit its still well up on the year but the doomsday scenario looks to be parked for now.

[pyufak] 31/12/2021 07:56

I think very fair. For me I will hold - I was on the verge of buying a lot more in Q1 if we remained around £4 as at present I am looking for inflation protection. I need to consider if this changes that. My issue is there isn’t many obvious alternatives in markets which offer this.

RESI REIT I believe has RPI linked +0.5% shared ownership contracts though I will check if capped this weekend. Any other investment trust or REIT suggestions welcome.

[spectoacc] 31/12/2021 07:09

Don't feel I can directly post anything the SIR CEO said, but suffice to say - re @Pyufak's comment above on inflation norms - that RPI is already at 7.1%. There's at least a scenario where it goes to double figures. Getting protected from that is incredibly hard, and SIR was one of the few (partial) hedges.

Yes, uncapped RPI leases likely unsustainable, and may have had to go eventually anyway.

But don't give it up in a deal where you also pay out £33m.

Keeping a small holding in SIR, but sold most of what I've long held from the 2's yesterday. Hasn't suddenly become a bad company, but guess it comes down to whether you value uncapped inflation protection or very long leases the most. The Board (who are also the 2nd largest shareholders) clearly prefer the latter.

[eigthwonder] 30/12/2021 23:39

Merlin is part owned by the Lego family, and that family is fabulously rich and highly committed to their investments - which makes SIR’s side of the deal all the more difficult to fathom; they folded despite holding the better hand

[eigthwonder] 30/12/2021 23:39

Merlin is part owned by the Lego family, and that family is fabulously rich and highly committed to their investments - which makes SIR’s side of the deal all the more difficult to fathom; they folded despite holding the better hand

[williamcooper104] 30/12/2021 23:19

But yes - better to have shorter and better leases than inferior super long leases which could become very generous in a different inflationary environment The valuation uplift probably comes from comparing them to ground leases - what that means is that the valuation uplift is going to be super high duration and much more sensitive to long gilt rates blowing up So if long gilts went out to say 4 percent and medium to long inflation expectations blew out to 4-5 - then the valuation will get murdered - 70-80 percent type write downs being c90 hit to NAV with debt levering the losses

[williamcooper104] 30/12/2021 23:14

Merlin would struggle to put on such a long dated inflation hedge without cash collateralisation; which could easily blow up the company

[pyufak] 30/12/2021 23:09

I guess the other conclusion is that SIR are actively taking a view on long term inflation (which I guess they are doing either forced by Merlin or they feel it’s a good deal to cap here). This I find a tad unsettling as 18 months after a pandemic, which is an event of a scale that could potentially mark economic turning points in mega trends - or perhaps it won’t

[pyufak] 30/12/2021 23:02

Pure speculation on my part but I am unsure Merlin would hold a gun to SIRs head with a CVA for what are really unique assets at this point in time. This is because I would guess there was significant debt involved in the Merlin take over which would benefit from high inflation so they have some inflation protection here. Plus SIR were no wallflower with travellodge last year so why would they treat Merlin differently 18 months later.

However; I concede on reflection this afternoon that the inflation cap is the bit that is kinda hard to swallow with this deal. 55 years is a long time and a lot can change regarding inflation norms during this time. If Merlin really wanted this protection financial derivatives can be entered to provide it so I would have to conclude SIR has sold this protection cheaper than an investment bank would be willing to provide it. So I guess for me the deal they’ve struck nets out… I remain a happy holder but as one other poster noted; the beauty pageant all does seem to look towards the more expensive side of valuations

[williamcooper104] 30/12/2021 22:52

And no way has any balance sheet support from its shareholders

[williamcooper104] 30/12/2021 22:52

Merlin now owned by a consortium of Blackstone, CPPIB (huge Canadian pension fund who do their own PE deals) and the Lego founding family So basically it's PE owned

[williamcooper104] 30/12/2021 22:34

Yep; any company can do it - more likely to be to a land lords detriment if it's PE owned as that usually means lots of financial debt and in a CVA loan creditors get to vote on the value of their loan - whereas landlords just get to vote according to their annual rent - eg equivalent of lenders getting a vote based on their annual interest income Lego may own Merlin but that doesn't mean they've corporately guaranteed leases - they could well have kept the balance sheet non-recourse - such that if they want to they could CVA It's much harder for a listed company with equity value to pull of a CVA

[nickrl] 30/12/2021 21:53

Merlin is owned by Lego and i believe any trading companies can have a CVA as Travelodge demonstrated last year.

[spectoacc] 30/12/2021 14:54

I can tell you that's not how they're spinning it. Also the PE ownership probably ruled out a CVA.

Would be interested to know what % of Merlin's costs are rent. 7%+ rent increases will be as nothing compared to eg electric bill increase, and I've yet to see any reasonable ceiling appear on Alton Towers ticket (& hotel) prices :)

Or put another way, +7% on rent doesn't equate to +7% having to go on ticket price, and in any case the tickets & catering seem to have no upper limit.

If the deal had been "extension to 55 years and end of uncapped RPI" I think I'd have been happy enough. But once Merlin's sold on in a couple of years, then perhaps again, and if the new owners fluff it, a 55 year lease is worth nowt & the £33m is long gone. The value's in the unique asset, rather than an arbitrarily long lease term.

[williamcooper104] 30/12/2021 14:41

So from SIRs perspective it's probably the least worse outcome But not exactly something to celebrate

[williamcooper104] 30/12/2021 14:40

Sounds like the tenant couldn't afford uncapped RPI leases (lack of cashflow during covid and compounding leases at 7 percent is going to be painful) and it was a question of a restructure or a CVA

[spectoacc] 30/12/2021 13:54

Thanks both, contrary views always welcome.

I've heard back from the co, & still feel the same. Whilst the point about "better than spending on over-priced assets" is valid, the loss of the RPI linkage (bear in mind RPI already 7.1%, albeit monthly not annual, but still) is highly relevant over an even longer timescale.

Inflation-linked bonds are linked to inflation, no cap - albeit CPI not RPI, but even more reason to rue the loss of uncapped RPI.

SIR hasn't suddenly become a bad co I agree, but was in for the very long-life (& unique) assets, the incredibly valuable uncapped RPI linkage, and the management competence. Only the first of those are bolstered by today's announcement.

A NAV accounting gain on a lease that was never going to be walked away from, at cost of £33m cash and the end of uncapped RPI. Almost surprised they didn't slip a rent-free in there too.

Perhaps fair to say SIR's just moved from "cheap" to "fair value"?

[eigthwonder] 30/12/2021 11:26

I agree that as a piece of paper it continues to look attractive against the inflation backdrop and alternative offerings which themselves look expensive. The agreement will also help pave the way for the re-financing of the debt which is due soon, plus we can be sure that management are very much on our side. But I still can’t but help feeling as though we have had to pay more than expected to do this deal

[pyufak] 30/12/2021 10:43

I am slightly at odds with the crowd here. I am happy with today's announcement. I bought on the vaccine headlines a year ago after watching this REIT for a number of years and I still don't see a better selection of assets. If anything I will look to be buying more - I plan to hold for the very long term for a mix of inflation protection, asset price and income growth.

They had 180m cash to deploy; away from refinancing options to boost the dividend or a one off special dividend to return this to shareholders I was very uncertain what they could do with this money and was worried they may start paying premium prices for assets. This would seem like a good use of some of the funds (albeit the inflation cap is a tad annoying but I can understand why Merlin demanded this - the move to CPI would have happened anyway as RPI is retired towards the end of this decade).

Responding to the comment 'these changes don't help as most investors will be long gone or dead by then'. I politely disagree and personally feel that the more the management think very long terms and make secure income REIT look like a high quality, inflation linked bond paying ~4% real yield - the more pension fund and big asset management money will flow into this REIT. I actually think the REIT looks very cheap when compared to 30y UK inflation linked bonds which currently offer a -2.25% real return annually.