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Rent reductions to counter inflation?

bluntnib1
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Rent reductions to counter inflation?

#431292

Postby bluntnib1 » July 29th, 2021, 7:03 pm

Could Reits come under pressure from commercial tenants looking to mitigate the impact of inflation on goods and materials? There is some evidence of this with Pets at Home Grp Plc today announcing they are negotiating rent reductions "in excess of 20%" .

This is the quote from their trading statement, whcih was otherwise positive:

"We, like many others, are witnessing a number of inflationary pressures across
the supply chain, most notably on freight rates, and are proactively
mitigating these challenges through specific initiatives to increase
operational efficiency across our business."

· Our programme of rent renegotiations continues, with recently
negotiated reductions typically in excess of 20%.


In other words they are looking to cut their costs rather than pass price rises on to the consumer.

If this becomes common practive which REITS would be most vulnerable and which would be immune?

Dod101
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Re: Rent reductions to counter inflation?

#431301

Postby Dod101 » July 29th, 2021, 7:51 pm

Well judging by the results announced today I think, both Segro and Primary Health Properties, both REITS, commented that they had got rental increases, so there are two which look to be somewhat immune.

There is, I should imagine, a softer market for tenants to renegotiate in the retail sector but I also think with offices as this whole WFH situation plays out, so the big landlords like British Land and Land Securities are surely vulnerable. If I were really concerned, I would be looking at my REITS and see the sort of tenants they have and what sort of indications they are giving in their financial reports.

It depends though if you think the comments by Pets for Us are likely to lead to rent reductions and if so how widespread the practice will be and how successful. Overall, though I do not think I would be doing much but I have not held either of the two big landlords mentioned above for a long while.

Dod

bluntnib1
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Re: Rent reductions to counter inflation?

#431313

Postby bluntnib1 » July 29th, 2021, 8:36 pm

Yes I would imagine it is sector specific. Healthcare seems safe. The Pets at Home announcement states they have achieved 20% reductions not just asked for them. That is a massive cut.

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Re: Rent reductions to counter inflation?

#431332

Postby Spet0789 » July 29th, 2021, 10:00 pm

Dod101 wrote:Well judging by the results announced today I think, both Segro and Primary Health Properties, both REITS, commented that they had got rental increases, so there are two which look to be somewhat immune.

There is, I should imagine, a softer market for tenants to renegotiate in the retail sector but I also think with offices as this whole WFH situation plays out, so the big landlords like British Land and Land Securities are surely vulnerable. If I were really concerned, I would be looking at my REITS and see the sort of tenants they have and what sort of indications they are giving in their financial reports.

It depends though if you think the comments by Pets for Us are likely to lead to rent reductions and if so how widespread the practice will be and how successful. Overall, though I do not think I would be doing much but I have not held either of the two big landlords mentioned above for a long while.

Dod


PHP not really relevant. They lease for 30 years to the NHS or to GP practices. Either way, very busy tenants.

As an aside, in the whole debate about healthcare provision, how many of the great unwashed know that their lovely GP practice is completely privatised?

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Re: Rent reductions to counter inflation?

#431344

Postby Gerry557 » July 30th, 2021, 7:04 am

I don't know who Pets landlords are. Is there an easy way to identify which Reits are most at risk. Some Reits list top 10 tenants but if they are a smaller tenant it might not be easy to find.

This isn't new, many companies try and get rent reductions and some resort to CVAs and force reductions through. I think Debenhams did this in Ireland and have read about this in England from other companies.

I suppose there is less of an issue if its agreed by negotiation as the landlord might know of other issues that mean they are happy to accept.

Unwanted voids, struggling to find new tenants or their own cash flow issues. Often they can tie them down for longer contracts or additional benefits.

Several Reits have written off outstanding debts over the covid period, to agree longer terms.

I suppose its good to have a range of tenants in different fields so one bad egg is only a small concern. I don't know how I would feel if I thought I was being strong armed. I might be more likely to offer the lower price to another tenant rather than be strong armed.

Dod101
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Re: Rent reductions to counter inflation?

#431348

Postby Dod101 » July 30th, 2021, 7:26 am

Spet0789 wrote:
Dod101 wrote:Well judging by the results announced today I think, both Segro and Primary Health Properties, both REITS, commented that they had got rental increases, so there are two which look to be somewhat immune.

There is, I should imagine, a softer market for tenants to renegotiate in the retail sector but I also think with offices as this whole WFH situation plays out, so the big landlords like British Land and Land Securities are surely vulnerable. If I were really concerned, I would be looking at my REITS and see the sort of tenants they have and what sort of indications they are giving in their financial reports.

It depends though if you think the comments by Pets for Us are likely to lead to rent reductions and if so how widespread the practice will be and how successful. Overall, though I do not think I would be doing much but I have not held either of the two big landlords mentioned above for a long while.

Dod


PHP not really relevant. They lease for 30 years to the NHS or to GP practices. Either way, very busy tenants.

As an aside, in the whole debate about healthcare provision, how many of the great unwashed know that their lovely GP practice is completely privatised?


I do not understand what you are trying to say. PHP is a REIT and it is as you and I agree somewhat immune. That helps answer the question asked. What relevance has your second comment? I know you said 'As an aside' but what has it got to do with the death of Nelson?

Dod

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Re: Rent reductions to counter inflation?

#431490

Postby brightncheerful » July 30th, 2021, 2:30 pm

The going rate for rent reductions is 20-30% depending upon the tenant's bargaining strength and the landlord's attitude. In many cases, particularly on renewal of a lease which is inside LTA54 and where renewal is not opposed, the landlord often has no choice as the tenant would go to court if the evidence would support and landlord will not agree.

There is no correlation between market rent and inflation. I wouldn't have though Pets and others would be seeking rent reductions to counteract their operating costs, so much as wanting reductions per se.

As for a REIT's share price that has very little to do with the rental income and is more about the capital value of the investment and the stock market's assessment of the NAV's likelihood. Since NAV is basically what's left when all's said and done, the figures can be manipulated using creative accounting.

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Re: Rent reductions to counter inflation?

#431626

Postby jonesa1 » July 31st, 2021, 9:19 am

brightncheerful wrote:
As for a REIT's share price that has very little to do with the rental income and is more about the capital value of the investment and the stock market's assessment of the NAV's likelihood. Since NAV is basically what's left when all's said and done, the figures can be manipulated using creative accounting.


Isn't the NAV closely linked to the rent than can be levied on the assets? In-demand property with higher rental income is surely valued more highly than property where rents have to be reduced to attract tenants?

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Re: Rent reductions to counter inflation?

#431640

Postby Spet0789 » July 31st, 2021, 10:13 am

Dod101 wrote:
Spet0789 wrote:
Dod101 wrote:Well judging by the results announced today I think, both Segro and Primary Health Properties, both REITS, commented that they had got rental increases, so there are two which look to be somewhat immune.

There is, I should imagine, a softer market for tenants to renegotiate in the retail sector but I also think with offices as this whole WFH situation plays out, so the big landlords like British Land and Land Securities are surely vulnerable. If I were really concerned, I would be looking at my REITS and see the sort of tenants they have and what sort of indications they are giving in their financial reports.

It depends though if you think the comments by Pets for Us are likely to lead to rent reductions and if so how widespread the practice will be and how successful. Overall, though I do not think I would be doing much but I have not held either of the two big landlords mentioned above for a long while.

Dod


PHP not really relevant. They lease for 30 years to the NHS or to GP practices. Either way, very busy tenants.

As an aside, in the whole debate about healthcare provision, how many of the great unwashed know that their lovely GP practice is completely privatised?


I do not understand what you are trying to say. PHP is a REIT and it is as you and I agree somewhat immune. That helps answer the question asked. What relevance has your second comment? I know you said 'As an aside' but what has it got to do with the death of Nelson?

Dod


My point was that we don’t really learn anything about REITS holding retail by looking at PHP. Yes they’re both REITS but I felt it was a bit like replying to a post about EasyJet’s load factors by referring to Amazon’s sales!

My second point was a more general NHS point. So many people seem to go mental about privatisation whenever the NHS looks to improve efficiency while at the same time loving their (privatised) local GP practice.

Dod101
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Re: Rent reductions to counter inflation?

#431642

Postby Dod101 » July 31st, 2021, 10:19 am

Spet0789 wrote:
Dod101 wrote:
Spet0789 wrote:
PHP not really relevant. They lease for 30 years to the NHS or to GP practices. Either way, very busy tenants.

As an aside, in the whole debate about healthcare provision, how many of the great unwashed know that their lovely GP practice is completely privatised?


I do not understand what you are trying to say. PHP is a REIT and it is as you and I agree somewhat immune. That helps answer the question asked. What relevance has your second comment? I know you said 'As an aside' but what has it got to do with the death of Nelson?

Dod


My point was that we don’t really learn anything about REITS holding retail by looking at PHP. Yes they’re both REITS but I felt it was a bit like replying to a post about EasyJet’s load factors by referring to Amazon’s sales!

My second point was a more general NHS point. So many people seem to go mental about privatisation whenever the NHS looks to improve efficiency while at the same time loving their (privatised) local GP practice.


Thanks. Yes I take your point although PHP is a REIT with the tax advantages that that status gives in just the same way as British Land so it is not at all like comparing EasyJet with Amazon. The OP did not specify a class of REITS after all.

Dod

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Re: Rent reductions to counter inflation?

#432056

Postby brightncheerful » August 2nd, 2021, 3:42 pm

jonesa1 wrote:
brightncheerful wrote:
As for a REIT's share price that has very little to do with the rental income and is more about the capital value of the investment and the stock market's assessment of the NAV's likelihood. Since NAV is basically what's left when all's said and done, the figures can be manipulated using creative accounting.


Isn't the NAV closely linked to the rent than can be levied on the assets? In-demand property with higher rental income is surely valued more highly than property where rents have to be reduced to attract tenants?


The investment value is closely linked to the actual rent and estimated rental value, but the NAV allows for the landlord's indebtedness.

Whether the investment value would be affected by a particular tenant's inability to afford the actual rent would depend upon whether that would be true of any other tenant. Also a difference exists between the rent that might be applicable on renewal on a lease, and the rent on rent review.

Prop cos are fond of WALULT = weighted average unexpired lease term - as a quick way to measure contractual rent. Personally, i am wary of assuming that the rent on a short unexpired term would on renewal of the lease, all other factors remaining constant, necessarily be at least the same rent with the same tenant. For example, currently I am dealing with a renewal where the rent passing is about £100K but the tenant will be renewing at about £60K. Assuming 100K was a few years ago valued at say 7% (14.28 yp) the investment value would have been £1.1428M. At 60K and the same yield the value would be £856,800. I think the only way to assess the gross NAV (before allowing for the prop cos liabilities) is to estimate the rental value assuming expiry/renewal now, rather than on expiry in a few years' time. I would think one reason why share prices are not always the same as most recent reported NAV is not just for the gap between when reported and now but also doubts as to the renewal / or re-letting value in future.

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Re: Rent reductions to counter inflation?

#432084

Postby Gerry557 » August 2nd, 2021, 4:58 pm

I checked a few Reit's holdings over the weekend but didn't identify any sign of Pets being a top holding or even a holding for that matter. I suppose small holdings don't get much amplitude or notice.

Goggle didn't help either, maybe I need better search terms.

The other option would be to find some Pets location's and then search for the landlord. As I'm not currently worried about my actual holdings, I can't be bothered to put in the effort.

If you do find some let me know.

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Re: Rent reductions to counter inflation?

#432489

Postby PeanutsMolloy » August 4th, 2021, 2:07 pm

Gerry557 wrote:I checked a few Reit's holdings over the weekend but didn't identify any sign of Pets being a top holding or even a holding for that matter. I suppose small holdings don't get much amplitude or notice.

Goggle didn't help either, maybe I need better search terms.

The other option would be to find some Pets location's and then search for the landlord. As I'm not currently worried about my actual holdings, I can't be bothered to put in the effort.

If you do find some let me know.


Ediston Property REIT (EPIC) has at least 4 retail parks where Pets At Home are a tenant. Still a great fund to hold for income and revaluation from a low base, as highlighted in another thread.
Pets has 400+ stores, so who knows whether EPIC is one of the landlords desperate enough to concede a reduction of the magnitude of 20%+. Unlikely IMHO.

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Re: Rent reductions to counter inflation?

#432511

Postby Gerry557 » August 4th, 2021, 4:05 pm

PeanutsMolloy wrote:
Gerry557 wrote:I checked a few Reit's holdings over the weekend but didn't identify any sign of Pets being a top holding or even a holding for that matter. I suppose small holdings don't get much amplitude or notice.

Goggle didn't help either, maybe I need better search terms.

The other option would be to find some Pets location's and then search for the landlord. As I'm not currently worried about my actual holdings, I can't be bothered to put in the effort.

If you do find some let me know.


Ediston Property REIT (EPIC) has at least 4 retail parks where Pets At Home are a tenant. Still a great fund to hold for income and revaluation from a low base, as highlighted in another thread.
Pets has 400+ stores, so who knows whether EPIC is one of the landlords desperate enough to concede a reduction of the magnitude of 20%+. Unlikely IMHO.


Epic is a recent buy by me. I did have a quick look at the last set of results and didn't find Pets as a big tenant and basically stopped there. Your research is probably better. I had a look at Pets locations and decided I could not be bothered cross checking. I suppose many retail landlords might have them as a small tenant percentage wise so not really a concern. It might be if they all start asking for the same 20%

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Re: Rent reductions to counter inflation?

#432522

Postby PeanutsMolloy » August 4th, 2021, 5:08 pm

Gerry557 wrote:
PeanutsMolloy wrote:
Gerry557 wrote:I checked a few Reit's holdings over the weekend but didn't identify any sign of Pets being a top holding or even a holding for that matter. I suppose small holdings don't get much amplitude or notice.

Goggle didn't help either, maybe I need better search terms.

The other option would be to find some Pets location's and then search for the landlord. As I'm not currently worried about my actual holdings, I can't be bothered to put in the effort.

If you do find some let me know.


Ediston Property REIT (EPIC) has at least 4 retail parks where Pets At Home are a tenant. Still a great fund to hold for income and revaluation from a low base, as highlighted in another thread.
Pets has 400+ stores, so who knows whether EPIC is one of the landlords desperate enough to concede a reduction of the magnitude of 20%+. Unlikely IMHO.


Epic is a recent buy by me. I did have a quick look at the last set of results and didn't find Pets as a big tenant and basically stopped there. Your research is probably better. I had a look at Pets locations and decided I could not be bothered cross checking. I suppose many retail landlords might have them as a small tenant percentage wise so not really a concern. It might be if they all start asking for the same 20%


Many congrats, a good buy. I first nibbled at 67p and accumulated every time it dipped below 70p, prior to Stadium being cleared out. Not going to sell for the moment, as I agree with the strongly positive comments on the EPIC thread.
As regards exposure to tenants, you're right. At least 4 retailers individually represent bigger exposure for EPIC than Pets (B&Q, B&M, M&S and Boots) and though it's in 4 of its 11 Retail Parks and no doubt a distinctive draw for footfall, there are other significant tenants in all 4:

Barnsley East: Dunelm, Harveys, Pets at Home, B&M
Wrexham: Boots, Pets at Home, TK Maxx, Sportsdirect.com, Currys, DW Sports, Frankie and Benny’s, Costa Coffee
Daventry: Homebase, Halfords, Pets at Home, XLRE Sports and B&M
Rhyl: B&Q, Pets at Home, Carpetright, Curry’s, Halfords, Pizza Hut, Iceland

I doubt that Epic would feel it necessary (or given the precedent it would set, appropriate) to agree significant rent reductions without compensating concessions.
I certainly won't be a seller for a while yet.


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