Capital raised for accretive acquisitions

Regional REIT 9 August 2019 Update
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Regional REIT

Capital raised for accretive acquisitions

Equity issue completed

Real estate

9 August 2019

Price

105p

Market cap

£453m

Net debt (£m) at 31 March 2019

297.7

Net LTV at 31 March 2019

41.0

Shares in issue

431.5m

Free float

97%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.8)

(2.6)

9.3

Rel (local)

0.5

(2.3)

17.0

52-week high/low

109.59p

89.92p

Business description

Regional REIT owns a highly diversified 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 at least 10% with a strong focus on income.

Next events

Interim results

10 September 2019

Q319 trading update

14 November 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) recently completed a £62.5m equity raise, the proceeds of which will be directed at a strong pipeline of investment opportunities. Once the proceeds are deployed RGL expects the acquired assets to be earnings accretive and provide further opportunities for active asset management and value creation. Increased scale and income diversity are also positive factors while trading liquidity may also benefit.

Year end

Net rental
income (£m)

Adj. earnings (£m)

Adjusted
EPS* (p)

EPRA NAV*/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/17

45.8

25.6

8.6

105.9

7.85

0.99

7.5

12/18

54.4

27.9

7.5

115.5

8.05

0.91

7.7

12/19e

54.7

31.1

7.8

114.5

8.25

0.92

7.9

12/20e

61.4

36.5

8.5

116.2

8.45

0.90

8.0

Note: Adjusted earnings exclude revaluation movements, gains/losses on disposal, and other non-recurring items, and unlike EPRA earnings also exclude performance fees. *Fully diluted.

Growth, diversification and new opportunities

Since listing in November 2015, RGL’s portfolio value has almost doubled including several large portfolio transactions. In the process, portfolio positioning has been optimised, diversification increased and scale added. Acquisitions also provide new opportunities to seek out and opportunistically acquire attractively priced, income-producing assets that will benefit from active management. These may subsequently be sold to realise the value thereby created, as was the case in FY18, and capital recycled. The strategy has generated strong returns since IPO with an EPRA NAV total return to end-FY18 of 10.5% pa, ahead of the company’s long-term target of at least 10%. With a cooling in the investment market RGL now has a large and diverse pipeline (£500m+) of further acquisition opportunities which meet its investment criteria.

Growing DPS fully covered once proceeds deployed

The £62.5m (gross) proceeds raised exceeded the £50m target and was completed at 106.5p, a small 2% discount to the share price immediately ahead of the issue being launched. EPRA NAV per share is initially diluted by c 1% and the new shares will suppress EPS and DPS cover until the proceeds are invested. The company expects the new capital to be deployed fairly quickly, be accretive to earnings and restore full dividend cover. A target DPS of 8.25p (+2.5%) has been set for FY19. We assume £90m of investment by early 2020, including cash resources and modest further debt drawing, keeping LTV below 40% (we estimate around 30% following the capital raise). We forecast further DPS growth in FY20 and full cover.

Valuation: Strong income focus

RGL shares have outperformed the broad UK property sector, the wider market and a narrow group of direct peers over the past year. Still, the prospective yield, approaching 8%, remains among the highest in the sector and we expect DPS to be fully covered by adjusted earnings in FY20 as new equity is deployed.

Equity issue completed

RGL recently completed the capital raise announced in June 2019, issuing 58.7m new shares at 106.5p per share, raising gross proceeds of £62.5m. The new shares issued represent a 16% increase in share capital. The issue price represented a 2% discount to the share price immediately prior to the issue launch and an 8% discount to the 31 December 2018 (FY19) EPRA NAV per share of 115.5p. We estimate that the issue initially dilutes the end-FY18 EPRA NAV per share by a little more than 1% to 113.8p. This allows for our estimate of £2.1m in share issue costs.

The proceeds will be directed towards continued growth and further diversification of RGL’s portfolio. Although the newly issued shares will initially suppress EPS and dividend cover, the company expects investment of the proceeds to be earnings accretive and to provide new opportunities to apply its active asset management strategy and create additional value over time. Allowing for reported portfolio transactions year to date, we estimate that the net loan to value ratio (LTV) will have fallen to c 30% immediately following the issue and before the planned reinvestment. Our revised forecasts include assumed acquisitions of £90m funded by the equity issue proceeds, existing cash resources and modest drawing from debt facilities.

Background to the issue

RGL came to market in November 2015 with an established portfolio of 128 properties valued at £386m. The portfolio has almost doubled in size since with acquisitions, including several large portfolio transactions, making a strong contribution. At the same time, the company has delivered on its aims to reposition towards faster growing regions such as the south-east and south-west of England and away from Scotland. Non-core investments outside of regional offices and light industrial assets have also been materially reduced.

Acquisitions have supported this portfolio repositioning and the further diversification of the portfolio, and have enabled RGL to build scale and improve its access to capital, including improved debt financing terms. But acquisitions also provide new opportunities to opportunistically acquire attractively priced, income-producing assets that will benefit from active management and may subsequently be sold to realise the value thereby created and recycle capital. Following significant acquisition activity in 2017, RGL took advantage of good investment demand in the earlier months of FY18 to dispose of properties where its asset management plans were complete and, in some cases, where plans were yet to reach maturity but where it had identified that a better risk-adjusted return was available by selling at prevailing market prices, well above valuations.

Continued investment opportunities emerging

The UK economy has weakened in recent months, in part reflecting ongoing and heightened Brexit uncertainty but also a more general global trend. Against this background the UK commercial real estate market has showed signs of cooling and the retail and leisure sector has shown clear signs of stress, with rents and capital values falling. The regional office and light industrial sectors in which RGL invests have remained firm, supported by continued occupational demand, relatively low rental levels and a general lack of new supply. RGL has continued to report strong leasing progress and good results from its active asset management programmes and with the investment market cooling, it has continued to identify substantial and diverse opportunities for further investment.

The company says that it has an identified pipeline of assets in excess of £500m in value that meets its investment criteria and which can be acquired in a relatively short period of time. This includes a portfolio of six office assets, in respect of which RGL has entered an exclusivity agreement, and which the company expects to be both earnings accretive and enhance the characteristics of the portfolio.

Financials

Recently completed property transactions

Since end-FY18 RGL has reported three significant transactions, investing c £20m at a net initial yield (NIY) of 7.9% and selling two properties where asset management plans were mature for a similar amount, at a blended NIY of 6.8%.

In February RGL acquired Norfolk House, a c 120 sq ft freehold office property with retail units, well situated in central Birmingham, adjacent to New Street station, the Bullring shopping centre and close to the proposed new HS2 station, providing enhanced rail links to London and Manchester. The property was 99% occupied at acquisition with an annual net income of £1.69m and the £20m consideration reflects a net initial yield of 7.9%. The main tenant for the office accommodation is HMRC, occupying 49% of the property. Despite substantial capital expenditure for refurbishment having been undertaken by the vendor, RGL believes that attractive value-enhancing asset management opportunities remain.

An office property in Sheffield (Aspect Court, Pond Hill) was sold in June for £8.8m or 24.8% above the end-FY18 valuation and c 40% above the price at which it was acquired in 2016, reflecting a net initial yield of 6.6%. Asset management initiatives since acquisition have re-geared leases and taken back and re-let several floors resulting in increased lease length and a c 18% increase in annualised rental income to £620k.

Also in June, RGL announced that it had contracted to sell Tokenspire Business Park in Beverley for £11.1m, reflecting a net initial yield of 7.0%. The sale price was similar to the end-FY18 valuation but represents an uplift of 30.6% to the March 2016 acquisition price of £8.5m. The five-year post-acquisition business plan, including improvements to the park’s infrastructure to retain existing tenants, attract new tenants and reduce voids was completed ahead of schedule with occupancy increasing from 73.8% to 94.3% and rental income increasing by 24% to c £829k pa.

New equity and debt deployment

The changes to our forecasts are primarily driven by our assumptions for the deployment of the newly raised equity, along with cash resources and some additional debt capital, while maintaining a c 40% LTV which would be in line with RGL’s medium-term targets. Specifically for acquisitions we assume:

£70m of acquisitions during H219 and £20m at the beginning of FY20.

A NIY of 8.5% on all acquisitions and a 4% cost of acquisition to reflect the expectation of a significant corporate acquisition element within the total. The net initial yield that we have assumed is slightly below the average 8.7% NIY on the c £73m (before costs) of acquisitions completed in FY18. We believe the lower 7.9% yield on Norfolk House reflects the quality of the asset and its high level of occupancy at acquisition.

The assumed FY19 acquisitions make a full year contribution in FY20, offsetting the initial dilutive effect of the equity raise. We expect DPS to increase further in FY20 and to be fully covered by adjusted earnings. FY21 is the first year to reflect fully the total acquisition impact and we expect continuing DPS growth and increasing dividend cover.

Exhibit 1: Estimate revisions

Net rental income (£m)

Adj. earnings* (£m)

Adjusted EPS* (p)

EPRA NAV* (p)

DPS (p)

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

12/19e

54.7

55.2

-1%

31.1

31.7

-2%

7.8

8.5

-9%

114.5

116.7

-2%

8.25

8.25

0%

12/20e

61.4

55.7

10%

36.5

32.1

14%

8.5

8.6

-2%

116.2

117.8

-1%

8.45

8.45

0%

12/21e

62.9

N/A

N/A

38.0

N/A

N/A

8.8

N/A

N/A

118.2

N/A

N/A

8.65

N/A

N/A

Source: Edison Investment Research. Note: *Adjusted EPRA earnings excludes the investment manager performance fee accrual. EPS and NAV are fully diluted.

More broadly, our key forecasting assumptions are:

In addition to including assumed acquisitions of £90m we have also factored in the disposals of Aspect Court and Tokenspire Business Park. The acquisition of Norfolk House was already reflected in our previous forecasts.

We have assumed a continuing reduction in voids, with like-for-like portfolio occupancy (by value) increasing to 88.0% by end-FY19, 89.0% by end-FY20 and 90.0% by end-FY21 (end-FY18: 87.3%). Reported occupancy will be affected by portfolio transactions. We also allow for c 0.75% pa like-for-like rental growth. RGL has provided a number of updates on continued strong leasing activity in the FY19 year to date. Most recently, in June, it reported on lettings to new and existing tenants representing annualised headline rent of c £546k. Of this, a little more than £100k represented lettings of previously vacant properties, while the balance of lettings produced an average uplift in headline rent of 11.6%.

Our assumption for gross revaluation gains reflects an unchanged c 6.5% net initial yield across the portfolio. This captures the positive impact of like-for-like occupancy and rental growth on the existing portfolio as well some post-acquisition asset management-driven upside from the acquired assets. Gross revaluation gains are equivalent to 1.11.2% of the opening portfolio value during the FY19FY21 period and contribute c 2p pa to NAV. This is partly offset by acquisition costs. We estimate that a 0.25% increase/decrease in NIY would reduce/increase our forecast FY19 EPRA NAV per share by c 7p.

Our forecasts are consistent with RGL’s expectation that dividend cover will be restored on an annualised basis once the proceeds of the equity issue are fully invested. RGL has given a DPS target of 8.25p (+2.5%) for the current year, barring unforeseen circumstances, and we forecast continued DPS growth in FY20 and FY21. In line with the company’s expectation that full DPS cover will be restored once the proceeds of the equity issue are completed, we forecast full cover in FY20 with cover increasing in FY21, the first year in which our assumed acquisitions contribute fully.

Borrowings

At 31 December 2018 (end-FY18) RGL had fully drawn debt facilities of c £380m (including unamortised debt arrangement costs). Allowing for c £105m of cash, net debt was c £275m and the loan to value ratio (LTV) was 38.3%. In February 2019, £39.5m of 6.5% zero dividend preference shares were repaid at maturity and in June 2019 two of the existing bank facilities were extended and increased in size. Santander increased by £22m to £66m and the term was extended from November 2022 to June 2029. The RBS facility was increased by c £28m to £55m and the term was extended from December 2021 to 19 June 2024. At the same time, a small £19m facility with HSBC was repaid. Immediately following this refinancing activity the average cost of borrowing, including hedging, was 3.5%, with the unexpired term extended from 6.7 years to 7.9 years. Current debt facilities amount to c £370m and our forecasts allow for c £356m of this to be drawn during the forecast period, taking LTV to just under 40%, compared with the c 30% that we estimate immediately following the equity issue.

Valuation

Active management delivering attractive total return

RGL targets a medium-term annual total return of more than 10% and we estimate a compound average annual EPRA NAV total return of 10.6% since IPO in November 2015 to the end of FY18. The FY18 return was particularly strong at 16.6%. The group’s strong income focus is clear, with growing dividends per share contributing 59% of the total return over the period.

Exhibit 2: NAV total return

2015*

2016

2017

2018

Since IPO

Opening EPRA NAV per share (p)

100.0

107.8

106.9

105.9

100.0

Closing EPRA NAV per share (p)

107.8

106.9

105.9

115.5

115.5

Dividends per share paid (p)

0.00

6.25

7.80

8.00

22.05

NAV total return (%)

7.8%

5.0%

6.4%

16.6%

37.5%

Compound return (%)

10.6%

Source: Regional REIT. Note: *55-day period from 6 November 2015.

Our forecasts for the years FY19–FY21 reflect a relatively cautious view towards rental growth and valuations compared with recent years. Our forecast FY19 total return of 6.2% includes equity issuance costs, modest initial dilution of EPRA NAV, and acquisition costs related investment of the proceeds. For FY20 and FY21 we forecast total returns of c 9% pa which although lower than the group’s medium-term target compares well with UK 10-year gilt yield that has recently fallen towards 0.5%. Our forecast returns may prove conservative as they capture little of the asset management potential that management targets with acquisitions.

Exhibit 3: Peer comparison

Price (p)

Market cap (£m)

P/NAV (x)

Yield (%)

Share price performance

1 month

3 months

12 months

From 12M high

Circle Property

189

53

0.68

3.3

-2%

-4%

-8%

-12%

Custodian

116

475

1.09

5.6

-2%

2%

-4%

-5%

Picton

89

487

0.96

3.9

-7%

-4%

-2%

-11%

Real Estate Investors

56

103

0.80

6.5

0%

0%

0%

-10%

Schroder REIT

56

290

0.82

4.6

-2%

-3%

-10%

-17%

Palace Capital

290

134

0.69

6.6

-3%

2%

-12%

-14%

UK Commercial Property Trust

84

1089

0.89

4.4

-5%

-6%

-6%

-10%

BMO Commercial Property Trust

110

879

0.80

5.5

-5%

-10%

-25%

-27%

BMO Real Estate Investments

84

202

0.79

6.0

3%

-11%

-14%

-16%

Average

0.83

5.2

-3%

-4%

-9%

-14%

Regional REIT

105

451

0.91

7.7

-3%

-3%

10%

-5%

UK property index

1,582

4.3

-7%

-8%

-13%

-13%

FTSE All-Share Index

3,981

4.7

-3%

1%

-6%

-7%

Source: Company data, Edison Investment Research. Note: *Last reported EPRA NAV per share and trailing 12-month DPS declared. Prices as at 8 August 2019.

Exhibit 3 shows a share price performance and valuation comparison between RGL and a peer group of companies similarly focused on regional commercial property. To ease comparison, the data is based on 12-month trailing DPS declared and last published NAV. Compared with this group, RGL’s yield is also well above the average and it also compares favourably with the broader UK property sector. RGL’s discount to NAV is narrower than the peer group average although within the group those companies with an income focus tend to have higher than average P/NAVs.

Over the past year RGL shares have performed noticeably more strongly than the peer average, the broad UK property sector and the FTSE All-Share Index. We attribute this to its ability to demonstrate strong asset management returns, its commitment to a progressive dividend policy and the reduction in LTV during FY18. The high prospective yield (FY19e of 7.9%) and the prospect of a return to fully covered dividends as the equity issue proceeds are invested represent scope for a further relative re-rating of the shares.

Exhibit 4: Financial summary

Year end 31 December (£000's)

2016

2017

2018

2019e

2020e

2021e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Rental income

42,994

61,610

74,019

74,195

82,651

84,207

Property costs

(4,866)

(15,763)

(19,644)

(19,463)

(21,263)

(21,295)

Net rental income

 

 

38,128

45,847

54,375

54,732

61,388

62,912

Administrative expenses (excluding performance fees)

(7,968)

(7,819)

(10,540)

(10,486)

(11,325)

(11,511)

Performance fees

(249)

(1,610)

(7,046)

0

(925)

(1,148)

EBITDA

 

 

29,911

36,418

36,789

44,246

49,138

50,253

EPRA cost ratio

N/A

29.7%

40.1%

28.9%

29.2%

28.9%

EPRA cost ratio excluding performance fee

N/A

26.6%

28.6%

28.9%

27.8%

27.3%

Gain on disposal of investment properties

518

1,234

23,127

0

0

0

Change in fair value of investment properties

(6,751)

5,893

23,881

3,745

9,167

10,000

Operating profit before financing costs

 

 

23,678

43,545

83,797

47,991

58,305

60,253

Exceptional items

0

0

0

0

0

0

Net finance expense

(8,629)

(14,513)

(15,715)

(13,176)

(13,547)

(13,424)

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

(1,654)

(340)

(142)

0

0

0

Profit Before Tax

 

 

13,395

28,692

67,940

34,815

44,758

46,829

Tax

23

(1,632)

(567)

0

0

0

Profit After Tax (FRS 3)

 

 

13,418

27,060

67,373

34,815

44,758

46,829

Adjusted for the following:

Net gain/(loss) on revaluation/disposal of investment properties

6,233

(7,127)

(47,008)

(3,745)

(9,167)

(10,000)

Net movement in the fair value of derivative financial investments

865

(407)

(459)

0

0

0

Other EPRA adjustments including deferred tax adjustment

557

4,488

987

0

0

0

EPRA earnings

 

 

21,073

24,014

20,893

31,070

35,591

36,829

Performance fees & exceptional items

249

1,610

7,046

0

925

1,148

Adjusted earnings

 

 

21,322

25,624

27,939

31,070

36,516

37,977

Period end number of shares (m)

274.2

372.8

372.8

431.5

431.5

431.5

Fully diluted average number of shares outstanding (m)

274.3

297.7

372.8

399.1

431.5

431.5

IFRS EPS - fully diluted (p)

 

 

4.9

9.1

18.1

8.7

10.4

10.9

Adjusted EPS, fully diluted (p)

 

 

7.8

8.6

7.5

7.8

8.5

8.8

EPRA EPS, fully diluted (p)

 

 

7.7

8.1

5.6

7.8

8.2

8.5

Dividend per share, declared basis (p)

 

 

7.65

7.85

8.05

8.25

8.45

8.65

Dividend cover

101.6%

109.7%

93.1%

94.4%

100.1%

101.7%

BALANCE SHEET

Non-current assets

 

 

506,401

740,928

720,886

808,835

844,835

860,835

Investment properties

502,425

737,330

718,375

806,324

842,324

858,324

Other non-current assets

3,976

3,598

2,511

2,511

2,511

2,511

Current Assets

 

 

27,574

66,587

126,986

55,362

45,563

39,368

Other current assets

11,375

21,947

22,163

18,966

20,758

21,150

Cash and equivalents

16,199

44,640

104,823

36,395

24,805

18,218

Current Liabilities

 

 

(23,285)

(42,644)

(83,685)

(35,566)

(38,641)

(39,334)

Bank and loan borrowings - current

0

(400)

(40,216)

0

0

0

Other current liabilities

(23,285)

(42,244)

(43,469)

(35,566)

(38,641)

(39,334)

Non-current liabilities

 

 

(218,955)

(371,972)

(334,672)

(335,612)

(351,152)

(351,692)

Bank and loan borrowings - non-current

(217,442)

(371,220)

(334,335)

(335,275)

(350,815)

(351,355)

Other non-current liabilities

(1,513)

(752)

(337)

(337)

(337)

(337)

Net Assets

 

 

291,735

392,899

429,515

493,019

500,606

509,177

Derivative interest rate swaps & deferred tax liability

1,513

2,802

971

971

971

971

EPRA net assets

 

 

293,248

395,701

430,486

493,990

501,577

510,148

IFRS NAV per share (p)

106.4

105.4

115.2

114.3

116.0

118.0

Fully diluted EPRA NAV per share (p)

106.9

105.9

115.5

114.5

116.2

118.2

CASH FLOW

Cash (used in)/generated from operations

 

 

31,434

40,251

38,817

39,540

49,497

49,407

Net finance expense

(6,626)

(9,167)

(11,923)

(11,636)

(12,007)

(11,884)

Tax paid

(1,715)

(236)

(1,467)

0

0

0

Net cash flow from operations

 

 

23,093

30,848

25,427

27,903

37,489

37,523

Net investment in investment properties

(99,286)

(8,267)

100,601

(84,204)

(26,833)

(6,000)

Acquisition of subsidiaries, net of cash acquired

(5,573)

(51,866)

(32,629)

0

0

0

Other investing activity

60

25

220

0

0

0

Net cash flow from investing activities

 

 

(104,799)

(60,108)

68,192

(84,204)

(26,833)

(6,000)

Equity dividends paid

(15,723)

(23,321)

(29,429)

(31,686)

(36,247)

(37,110)

Debt drawn/(repaid) - inc bonds and ZDP

91,417

13,921

(547)

(39,816)

15,000

0

Net equity issuance

0

71,256

(1,190)

60,375

0

0

Other financing activity

(1,744)

(4,155)

(2,270)

(1,000)

(1,000)

(1,000)

Net cash flow from financing activity

 

 

73,950

57,701

(33,436)

(12,127)

(22,247)

(38,110)

Net Cash Flow

 

 

(7,756)

28,441

60,183

(68,428)

(11,590)

(6,587)

Opening cash

23,955

16,199

44,640

104,823

36,395

24,805

Closing cash

 

 

16,199

44,640

104,823

36,395

24,805

18,218

Balance sheet debt

(217,442)

(371,620)

(374,551)

(335,275)

(350,815)

(351,355)

Unamortised debt costs

(2,618)

(4,843)

(5,752)

(5,212)

(4,672)

(4,132)

Closing net debt

 

 

(203,861)

(331,823)

(275,480)

(304,092)

(330,682)

(337,269)

LTV

40.6%

45.0%

38.3%

37.7%

39.3%

39.3%

Source: Regional REIT accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT . Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT . Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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