Business

Atterbury puts a cat in the RMH chicken coop

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Investors who bought RMB Holdings (RMH) shares hoping for a quick profit got the bad news last week that things are not going as smoothly as expected.

RMH disclosed in its interim results for the year to end-September that Atterbury Property Holdings had reminded it of the conditions of a loan that the latter needs to repay by July 2023.

The conditions make provision for Atterbury to settle the loan in shares in lieu of cash.

Accepting shares to repay the outstanding loan of R489 million will undoubtedly delay the sale of RMH’s remaining assets and another sizeable dividend – just as shareholders had a taste of a special dividend of just less than R1.42 per share.

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RMH noted in its interim report that the special dividend paid in October reduced the net asset value per share from just more than R2.38 per share to 98.8 cents per share, and reiterated its intentions to sell everything to unlock the discount between the share price and the value of its assets.

Investors and speculators are hoping to nearly double their money by buying shares at the current price of 52 cents and getting dividends of 99 cents after RMH sells the last of the assets.

The biggest asset is a stake of 27.5% in Atterbury Property Holdings and, through a loan guarantee agreement with Rand Merchant Bank, another R489 million once Atterbury repays its loan.

Sticky

RMH explains in its results statement that RMB granted a loan to Atterbury in July 2016 and it is due on 8 July 2023.

“On that date, Atterbury is obliged to repay to the lender in full, the outstanding amount of the loan under the loan facility agreement in the amount of R489 million,” it says.

“RMH and its wholly owned subsidiary, RMH Asset Holding Company (RMHAH) have provided separate guarantees to the lender as security for Atterbury’s obligations under the loan facility agreement. RMHAH has an investment of R489 million in a money market unit trust which is ceded to the lender as security for the RMHAH guarantee.”

In short, the investment will become available as soon as the bank gets its cash – but this is where things get sticky.

Atterbury CEO Louis van der Watt tells Moneyweb the current furore erupted when Atterbury sent RMH a letter to remind it of the loan conditions and the fact that the bank had granted Atterbury the option to settle the loan in shares.

RMH admits this. “In terms of the loan facility agreement, if Atterbury is reasonably of the opinion that it does not have sufficient cash resources to repay the loan on 8 July 2023, it may issue a conversion notice to the lender and may potentially be permitted to repay all or part of the amount due to be repaid to the lender not in cash but through the issue of ordinary shares (conversion shares) and thereby convert the loan to equity,” it says in its results statement, adding however that RMH can contest the conversion notice.

Atterbury’s stance

Van der Watt says Atterbury might prefer to issue shares rather than settle the loan in cash.

“We would rather use cash for property development. That is our game. We are a long-term investor. We develop properties with a long-term horizon.

“We are not going to change our strategy because one of our shareholders promised its shareholders a dividend,” says Van der Watt.

He says settling the loan in shares might not fit in with RMH’s plans, saying that its objections are based purely on technical points.

Asked about the probable outcome, he says “we will sit around a table” or settle it “in arbitration”.

RMH is in agreement on this: “The RMH and Atterbury boards are exploring whether this dispute can be resolved. If these issues are not resolved amicably, they will have to be resolved in a formal dispute resolution process.”

Shares

While Van der Watt says Atterbury is financially strong – a sentiment repeated by RMH Property CEO Brian Roberts – the settlement of the loan in shares would have far-reaching consequences.

RMH already wants to sell its 27.5% stake in Atterbury, and would not like to get more. Settling the loan in shares would increase its interest in Atterbury to as much as 44%.

It would be difficult to sell an even larger shareholding in an unlisted property company during the current uncertain economic environment, given that rising interest rates are not good for property values.

An even bigger problem would be to get the valuation right, both for determining the number of shares to settle the outstanding debt and for selling the Atterbury stake afterwards.

RMH shareholders have already objected to the price at which RMH sold its interest in Atterbury Europe, believing that management should have held out for a better price.

The interim statement revealed that RMH’s net asset value decreased by 14% from R3.91 billion at end March 2022 to R3.37 billion at end September, and that it posted a loss after tax of R514 million.

“This was mainly due to the R585 million accounting loss on the sale of Atterbury Europe,” says management, adding that the disposal of Atterbury Europe at 82% of its accounting value, delivered a normal rate of return of 23% over the life of the investment.

Managing expectations …

RMH management seems to be trying to reduce shareholder expectations, listing a host of factors that would have impacted on the value of its property portfolio.

These include:

  • Continued uncertainty as a result of Covid-19, with the state of emergency only being lifted in April 2022;
  • Changing weather patterns, which led to unusual rainfall and in April 2022 saw floods hit KwaZulu-Natal, resulting in an estimated 400 lives lost and R10 billion in damage to infrastructure;
  • The struggling electricity grid, which led to record load shedding in 2022;
  • High unemployment;
  • Rising interest rates; and
  • Rising fuel, wheat, corn and sunflower oil prices as a result of the invasion of Ukraine by Russia.

“All these factors had a negative impact on economic recovery in South Africa and did not leave the property sector unscathed,” it says.

“The board remains committed to the monetisation strategy of the balance of the RMH Property, taking into account prevailing trading conditions, which may have an impact on the timing of the execution of the strategy.”

How all the uncertainties affect shareholders’ ultimate returns will be seen in due course.

Listen to Atterbury co-founder Louis van der Watt discuss his 25 years in property (or read the transcript here): 

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