Regional REIT — Dividend up, vacancy down

Regional REIT (LSE: RGL)

Last close As at 19/04/2024

GBP0.21

0.70 (3.38%)

Market capitalisation

GBP111m

More on this equity

Research: Real Estate

Regional REIT — Dividend up, vacancy down

Regional REIT (RGL) issued a trading update on 25 May providing portfolio statistics and declared a dividend of 1.8p for Q117 and then announced a major new letting on 30 May. Management has continued to reduce tenant concentration and has further rebalanced the portfolio towards offices and away from Scotland, in line with the intentions stated when it listed in November 2015. Regional economies remain robust, supporting occupier demand, while investment in new buildings is still subdued, constraining supply. RGL offers an attractive dividend supported by a growing portfolio of high-yielding assets in markets that may be more resilient to macroeconomic headwinds than London real estate.

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Real Estate

Regional REIT

Dividend up, vacancy down

Trading update

Real estate

5 June 2017

Price

106.75p

Market cap

£322m

Net debt (£m) at 31 March 2017

300.9

Shares in issue

300.5m

Free float

80%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.9)

1.4

1.9

Rel (local)

(4.3)

(1.4)

(15.9)

52-week high/low

111p

88p

Business description

Regional REIT owns a commercial property portfolio of predominantly offices and light industrial units located in the regional centres of the UK. It is actively managed and targets a total shareholder return of 10-15% with a strong focus on income.

Next events

Q1 dividend paid

14 July 2017

Interim results

14 September 2017

Q317 trading update

16 November 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

Mark Cartlich

+44 (0)20 3077 5700

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) issued a trading update on 25 May providing portfolio statistics and declared a dividend of 1.8p for Q117 and then announced a major new letting on 30 May. Management has continued to reduce tenant concentration and has further rebalanced the portfolio towards offices and away from Scotland, in line with the intentions stated when it listed in November 2015. Regional economies remain robust, supporting occupier demand, while investment in new buildings is still subdued, constraining supply. RGL offers an attractive dividend supported by a growing portfolio of high-yielding assets in markets that may be more resilient to macroeconomic headwinds than London real estate.

Year
end

Net rental
income (£m)

EPRA
EPS* (p)

EPRA NAV/
share (p)

DPS
(p)

P/EPRA
NAV (x)

Yield
(%)

12/15**

4.6

0.9

107.8

1.0

0.99

0.9

12/16

38.1

7.7

106.9

7.7

1.00

7.2

12/17e

45.8

8.2

109.3

7.9

0.97

7.4

12/18e

51.7

9.4

110.7

8.8

0.96

8.3

Note: *EPRA EPS is adjusted to include exceptional expenses related to listing and includes estimated performance fees. **56-day trading period only.

Robust occupier demand

The letting of the whole of the recently acquired Brennan House near Farnborough is the 27th new lease in the portfolio in FY17 and came only two months after the property was acquired, supporting management’s indication that regional occupier markets are healthy. The deal takes occupancy in the Conygar portfolio to 89% and in the total portfolio to c 84%, management targets 90% by the end of FY17.

Active management bearing fruit

In the trading update, RGL announced that four other buildings had reached zero vacancy, in three cases after major refurbishment. At 9 Portland Street in Manchester, estimated rental value (ERV) increased 44% as a result of the work undertaken. A 33% ERV uplift was achieved at Donegal House in Bromley following renovation and fully letting the building, and we would expect gains at the other locations too. With yields remaining roughly flat, increases in rent should be accompanied by rises in capital values. Several buildings are currently undergoing refurbishment, and the favourable supply/demand balance suggests that RGL should be able to keep finding good tenants at attractive rents, helping increase both the income and capital value of the portfolio.

Valuation: Attractive dividend

RGL’s prospective dividend yield of 7.4% remains among the highest of all UK REITs, and the portfolio’s geographic spread, high yields and sectoral diversity may also reduce exposure to macroeconomic risks, which the London market might feel most keenly. As well as an attractive income stream, the portfolio provides opportunities to increase capital value through active asset management. Although the share price has appreciated in recent weeks, RGL remains in the middle of the pack on a price/EPRA NAV basis (c 0.98x vs an average of 0.99x) despite the high dividend yield. There may be scope for further gains.

Summary of trading update

Following the acquisition of the Conygar portfolio, covered in detail in our February note, and several small disposals, as of 31 March the portfolio comprised 1,115 units in 150 properties let to 833 tenants. It is valued at c £630m and has an annualised contracted rent roll of £54.3m. Having changed the reporting basis from area to ERV, occupancy was 82.8% at 31 March (31 December: 82.7%) on a like-for-like basis. Occupancy has since risen to c 84% with Brennan House on Farnborough Business Park being fully let to Fluor for annual rent of £0.76m. Brennan House was acquired on 24 March as part of the Conygar portfolio and had already been fully refurbished. At 31 March the largest tenant accounted for only 3.0% of gross rental income, down from 3.7% at 31 December, and the most valuable property comprised 5.1% of the portfolio’s total value, down from 6.4%. The net loan-to-value ratio rose to c 48% at 31 March, from 41% at 31 December 2016, as a result of the Conygar acquisition; however, we expect this to fall partly as a result of valuation gains, particularly on refurbished and newly let properties.

Asset management activity has included signing 27 new leases for £1.36m of rent, and a number of regears achieving an average rental uplift of 2.8% on headline rent. Brennan House, Llansamlet Retail Park (Swansea), Hampshire House (Eastleigh), Donegal House (Bromley) and 9 Portland Street (Manchester) are now all fully let. The company has also undertaken a programme of refurbishment, spending £2.1m gross in H117, which is expected to rise to £16.0m for the full year, although the company expects to be able to recover c 40% of that in dilapidations and other recoveries. The work is concentrated on four properties: Aztec West in Bristol, the HBOS campus (known as the Blue Leanie) in Aylesbury, The Crescent in Solihull and Arena Point in Leeds. It is expected that the work will enhance ERVs and will make the spaces more attractive to occupiers.

Changes to estimates

The changes to our estimates are minimal. We have adjusted our FY17 dividend assumption in line with the announced 1.8p quarterly dividend; having previously assumed three 1.9p quarterly dividends topped up with 2.5p in Q4, we now assume three 1.8p dividends and a final 2.5p, which has the effect of raising NAV by a corresponding amount. We had previously assumed occupancy would rise slightly sooner, but maintain our previous long-term run rate of 90% and expect that to be reached by year-end. We have also changed our model to measure this on an ERV basis, with no material effect on our figures. The changes in rental income reflect a slightly slower pace of occupancy increase to start with, picking up later in 2017.

Exhibit 1: Estimate changes

Net rental income (£m)

EPRA EPS* (p)

EPRA NAV/share (p)

DPS (p)

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

12/17e

45.8

46.8

(2)

8.2

8.7

(5)

109.3

109.5

(0)

7.9

8.2

(4)

12/18e

51.7

51.5

0

9.4

9.5

(1)

110.7

111.6

(1)

8.8

8.8

0

Source: Edison Investment Research

Valuation

As discussed in previous notes, RGL’s price to EPRA NAV ratio is roughly central in the peer group, although it has risen since our last note from c 0.94x to 0.98x, as might be expected given its high prospective yield (the second highest of all UK REITs on consensus estimates, see Exhibits 2 and 3). The diverse and high-yielding portfolio continues to offer attractive and stable income, as well as potential capital growth from asset management opportunities. The strategy of regional investment, as well as the relatively high yields of the assets, may also afford some protection from changes in the economic cycle and other macroeconomic factors, which would likely be felt more strongly in the London market.

Exhibit 2: UK REITs by prospective dividend yield

Exhibit 3: UK REITs by P/NAV

Source: Bloomberg, data as at 26 May 2017

Exhibit 2: UK REITs by prospective dividend yield

Exhibit 3: UK REITs by P/NAV

Source: Bloomberg, data as at 26 May 2017

Exhibit 4: Financial summary

Year end 31 December

£'000s

2015

2016

2017e

2018e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

Gross rental income

5,361

42,994

51,736

58,347

Non-recoverable property costs

(754)

(4,866)

(5,898)

(6,652)

Revenue

 

 

4,608

38,128

45,838

51,695

Administrative expenses

(1,353)

(7,968)

(8,813)

(9,521)

EBITDA

 

 

3,255

30,160

37,025

42,174

Gain on disposal of investment properties

87

518

0

0

Change in fair value of investment properties

23,784

(6,751)

7,504

5,152

Operating profit before financing costs

 

 

27,126

23,927

44,528

47,326

Performance fees

0

(249)

(1,591)

(2,862)

Exceptional items

(5,296)

0

0

0

Finance income

177

193

240

109

Finance expense

(997)

(8,822)

(12,486)

(13,499)

Net movement in the fair value of derivative financial investments and impairment of goodwill

115

(1,654)

(557)

(557)

Profit Before Tax

 

 

21,124

13,395

30,133

30,517

Tax

0

23

0

0

Profit After Tax (FRS 3)

 

 

21,124

13,418

30,133

30,517

Adjusted for the following:

Performance fees

0

249

1,591

2,862

Exceptional items

5,296

0

0

0

Net gain/(loss) on revaluation

(23,784)

6,751

(7,504)

(5,152)

Net movement in the fair value of derivative financial investments

(180)

1,097

0

0

Gain on disposal of investment properties

(87)

(518)

0

0

Profit before Tax (norm)

 

 

2,370

20,997

24,221

28,227

Period end number of shares (m)

274.2

274.2

300.5

300.5

Average Number of Shares Outstanding (m)

274.2

274.2

294.6

300.5

Fully diluted average number of shares outstanding (m)

274.2

274.2

294.6

300.5

EPS - fully diluted (p)

 

 

7.7

4.9

10.2

10.2

EPS - normalised (p)

 

 

0.9

7.7

8.2

9.4

EPRA EPS

 

 

0.9

7.7

8.2

9.4

Dividend per share (p)

 

 

1.0

7.7

7.9

8.8

Dividend cover

n.a.

100%

104%

107%

BALANCE SHEET

Fixed Assets

 

 

407,492

506,401

649,371

661,196

Investment properties

403,703

502,425

646,928

660,080

Goodwill

2,786

2,229

1,672

1,114

Non-current receivables

1,004

1,747

771

1

Current Assets

 

 

35,803

27,574

33,797

30,294

Trade and other receivables

11,848

11,375

10,808

8,605

Cash and equivalents

23,954

16,199

22,989

21,689

Current Liabilities

 

 

(21,485)

(24,798)

(32,468)

(34,722)

Trade and other payables

(12,576)

(14,601)

(20,642)

(22,395)

Deferred income

(5,906)

(8,022)

(9,652)

(10,152)

Taxation

(2,387)

(662)

(662)

(662)

Bank and loan borrowings - current

(200)

0

0

0

Derivative financial instruments

(416)

(1,513)

(1,513)

(1,513)

Long Term Liabilities

 

 

(126,469)

(217,442)

(323,642)

(325,642)

Borrowings

(126,469)

(217,442)

(323,642)

(325,642)

Net Assets

 

 

295,341

291,735

327,057

331,126

Derivative interest rate swaps

416

1,513

1,513

1,513

EPRA net assets

 

 

295,757

293,248

328,570

332,639

IFRS NAV per share (p)

107.7

106.4

108.8

110.2

EPRA NAV per share (p)

107.8

106.9

109.3

110.7

LTV

25.4%

40.1%

46.5%

46.0%

CASH FLOW

Operating Cash Flow

 

 

(2,232)

31,434

43,877

43,769

Net Interest & other financing charges

(411)

(24,064)

(34,312)

(39,093)

Tax

0

0

0

0

Purchase of investment properties

(4,191)

(144,143)

(129,000)

0

Sale of investment properties

5,348

44,857

0

0

Capex

0

(8,000)

(8,000)

Acquisition of subsidiaries, net of cash acquired

26,659

(5,573)

28,000

0

Net proceeds from issue of shares

0

0

0

0

Equity dividends paid

0

0

0

0

Other (including debt assumed on acquisition)

0

(1,040)

25

25

Net Cash Flow

25,172

(98,529)

(99,410)

(3,299)

Opening net (debt)/cash

 

 

(127,886)

(102,714)

(201,243)

(300,653)

Closing net (debt)/cash

 

 

(102,714)

(201,243)

(300,653)

(303,952)

Source: Company data, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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