Regional REIT — Fully covered high-yielding dividend

Regional REIT (LSE: RGL)

Last close As at 18/03/2024

GBP0.16

1.88 (13.31%)

Market capitalisation

GBP73m

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Research: Real Estate

Regional REIT — Fully covered high-yielding dividend

While Regional REIT’s (RGL’s) uninterrupted quarterly FY20 DPS payments backed by consistently strong rent collection has been known for some time, the recent FY20 results confirmed full cover by EPRA earnings. RGL remains very positive about the prospects for high-quality regional offices with affordable rents and with its diversified portfolio of attractively yielding assets RGL will continue to maximise dividend distributions.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Fully covered high-yielding dividend

FY20 results

Real estate

12 April 2021

Price

82p

Market cap

£354m

Net debt (£m) at 31 December 2020

298.8

Net LTV at 31 December 2020

40.8%

Shares in issue

431.5m

Free float

99%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.7

3.3

(4.2)

Rel (local)

2.5

1.5

(21.6)

52-week high/low

89.8p

59.8p

Business description

Regional REIT owns a highly diversified commercial property portfolio of predominantly office assets 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

Trading update and Q121 DPS declared

19 May 2021

Analyst

Martyn King

+44 (0)20 3077 5745

Regional REIT is a research client of Edison Investment Research Limited

While Regional REIT’s (RGL’s) uninterrupted quarterly FY20 DPS payments backed by consistently strong rent collection has been known for some time, the recent FY20 results confirmed full cover by EPRA earnings. RGL remains very positive about the prospects for high-quality regional offices with affordable rents and with its diversified portfolio of attractively yielding assets RGL will continue to maximise dividend distributions.

Year end

Net rental
income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

EPRA NTA**/
share (p)

DPS
(p)

P/NTA
(x)

Yield
(%)

12/19

55.0

31.0

7.8

112.6

8.25

0.73

10.1

12/20

53.3

27.9

6.5

98.6

6.40

0.83

7.8

12/21e

53.6

28.9

6.7

99.1

6.60

0.83

8.0

12/22e

55.3

30.4

7.0

99.4

6.90

0.83

8.4

Note: *EPRA earnings exclude revaluation movements, gains/losses on disposal and other non-recurring items. EPRA EPS is fully diluted. **EPRA net tangible assets per share. EPS and NTA are fully diluted.

We expect and increase FY21 DPS, fully covered

Consistently strong rent collection for the FY20, 98.2% recently, adjusted for monthly rents and agreed collection plans, underpinned the uninterrupted quarterly DPS, fully covered by EPRA earnings, albeit at a reduced level. Collections reflected a focus on office assets but RGL also points to the benefits of the integrated approach of its asset manager, portfolio diversification and the strength of tenants. EPRA earnings of £27.9m (10% lower than FY19) and EPRA EPS of 6.5p were in line with our expectations. EPRA net tangible assets (NTA) per share of 98.6p (down 12% on FY19) were below our last published forecast as we indicated they would be following publication of the portfolio valuation in late February. We have slightly increased our forecast for FY21 EPRA earnings and DPS, now expecting fully covered aggregate DPS of 6.6p (was 6.5p).

Becoming ‘the regional office specialist’

RGL believes strongly in the future for offices within the commercial market universe, especially good quality regional assets with affordable rents, which will be the focus of investment as RGL becomes a pure play regional office real estate investment trust (REIT). It is keen to take full advantage of a strong pipeline of investment opportunities and what it believes to be a mispricing in quality regional offices, brought into sharper contrast by strong investor enthusiasm for industrial sector assets. Interest in its remaining industrial portfolio to be sold is strong; this may support a sale above book value and suggests a positive yield pick-up as the proceeds are recycled into offices (not reflected in our forecasts). Additionally, the investment refocus capitalises on the asset manager’s strong expertise and operational platform and will provide a clear investment proposition to investors.

Valuation: High yield, fully covered dividend

RGL continues to offer one of the highest yields in the UK REIT sector, with dividends fully covered by EPRA earnings. Its FY21e yield of 8.0% is significantly above close peers with a similar P/NTA.

Becoming ‘the regional office specialist’

In this note we review the recently released FY20 results, portfolio performance and outlook. We also discuss the rationale of RGL’s strategic focus as a pure play regional office REIT, providing a clear investment proposition for investors and reflected in the company’s positioning as ‘Regional REIT, the regional office specialist’.

Resilient FY20 performance with strong rent collection

RGL’s strategy of targeting a large number of occupiers operating across a range of industries, in growth regions outside the M25 delivered a resilient performance in FY20. Consistently strong rent collection throughout the year, recently up to 98.2% adjusted for monthly rents and agreed collection plans, underpinned uninterrupted quarterly dividends, fully covered by EPRA earnings, albeit at a reduced level. EPRA earnings of £27.9m (10% lower than FY19) and EPRA EPS of 6.5p were in line with our expectations. EPRA NTA per share of 98.6p (down 12% on FY19) were below our last published forecasts, as we indicated they would be after publication of the portfolio valuation in late February.

Exhibit 1: Summary of FY20 financial performance

£m unless stated otherwise

FY20

FY19

FY20/FY19

Edison FY20e

EPRA earnings

Rental income

62.1

64.4

-4%

63.4

Property costs

(8.8)

(9.4)

-7%

(10.2)

Net rental income

53.3

55.0

-3%

53.3

Administrative & other expenses

(11.3)

(10.9)

4%

(11.5)

Net finance expense

(14.0)

(13.2)

6%

(13.8)

Change in fair value of right of use asset

(0.2)

(0.2)

(0.1)

EPRA PBT

27.7

30.6

-9%

27.9

Tax

0.2

0.4

0.1

EPRA earnings after tax

27.9

31.0

-10%

27.9

Gain/(loss) on disposal of investment property

(1.1)

1.7

(1.1)

Change in fair value of investment property

(54.8)

(3.5)

(48.1)

Impairment of goodwill

(0.6)

(0.6)

(0.6)

Change in fair value of derivatives

(2.5)

(1.5)

(2.6)

Close out costs on borrowings

0.0

(0.5)

0.0

Other tax effects

0.0

(0.1)

0.0

IFRS net profit

(31.0)

26.5

(24.3)

Basic & diluted average number of shares (m)

431.5

398.9

8%

431.5

Basic IFRS EPS (p)

(7.2)

6.6

(5.6)

Diluted EPRA EPS (p)

6.5

7.8

-17%

6.5

DPS (p)

6.4

8.3

-22%

6.4

Diluted EPRA NTA per share (p)

98.6

112.6

-12%

100.2

Investment properties

732.4

787.9

732.5

Net LTV

40.8%

38.9%

39.7%

Source: Regional REIT

Key features of the FY20 financial performance include:

Rental and other property income (excluding service charge income recoverable from tenants but including dilapidation receipts etc) was 4% lower, primarily due to a lower average rent roll in the year (although the annualised rate at end-FY20 was little changed compared with end-FY19). The reduction was partially offset by lower non-recoverable property costs leaving net rental income of £53.3m just 3% lower than FY19 (£55.0m). We comment on the strong rent collection below with the charge for bad debts, included in administrative costs, limited to c £1.1m (FY19: 0.5m).

Including the charge for bad debts, administrative costs increased by £0.4m or 4%. The EPRA cost ratio was little changed at 32.4% (FY19: 31.6%).

Net finance expense increased marginally, with higher levels of debt (drawn down to maintain a strong liquidity balance) predominantly offset by a lower average cost of debt.

EPRA earnings were 10% lower year-on-year at £27.9m, including an 8% increase in the average number of shares (resulting from equity raised in FY19). The EPRA EPS of 6.5p was 17% lower.

The IFRS loss of £31.0m also includes:

A loss on disposal of £1.1m, realised primarily by selling several small lot-size vacant properties, mitigating future ongoing costs and freeing capital. The unrealised loss of £54.8m primarily reflects the market-wide impact of COVID-19.

Goodwill impairment (£0.6m) and a £2.5m negative movement in the fair value of interest rate derivatives resulting from lower market interest rates.

EPRA NTA per share (which replaces EPRA NAV under the new EPRA best practice guidance) was 12% lower at 98.6p (FY19: 112.6p). Including dividends paid, EPRA NTA total return of -5.8% was the first negative year since the November 2015 IPO, although the annualised total return from IPO to end-FY20 remains positive at 6.2%.

Net loan to value of 40.8% was broadly in line with the company’s 40% medium-term target.

In its outlook statement, RGL stated that while it recognises continuing economic and market uncertainties resulting from COVID-19 and Brexit, it is confident of maintaining high rent collections this year and of accelerating the momentum of asset management initiatives. The asset manager remains convinced that high-quality, regional offices with affordable rents will continue to see demand for occupiers and that, given the tightness of supply, this is a positive indicator for rent growth.

Continuing strong rent collection has underpinned dividends

Rent collection performance was consistently strong in 2020. RGL expects this to continue and to even improve as companies return to the office in FY21. At 12 March 2021, 98.2% of FY20 rents had been collected, adjusting for monthly (0.5%) and agreed collection plans (1.6%).

This marked a further improvement on the 97.8% reported on the same basis at 19 February 2021, which was only slightly behind the 98.6% collected in the equivalent period of 2019. RGL says it remains in supportive and ongoing discussions with occupiers about the remainder of the outstanding rent and expects to collect the vast majority in due course. On an annual basis, around 99.7% of rents are typically collected under normal conditions.

Exhibit 2: FY20 rent collection performance (%)

FY20 total to 12 March 2021

Data to 19 February 2021

FY20 total to 19 Feb 2021

Q120

Q220

Q320

Q420

Rent paid

98.1

95.1

96.5

91.2

95.2

Adjusted for monthly rents

0.2

0.2

0.2

2.3

0.8

Agreed collection plans

1.0

2.6

1.0

2.6

1.8

Total

98.2

99.4

97.9

97.8

96.1

97.8

Source: Regional REIT. Note: Table may not sum due to rounding.

RGL’s continuing strong collection performance reflects several factors, including:

the weight of offices in the portfolio (office collections have been above average across the market);

the highly diversified income base (by tenant, industry, property and geographic location);

the quality of the tenants, and the quality and affordability of the assets; and

the asset manager’s integrated multi-office platform that enables it to stay close to tenants and respond to their needs.

Update on portfolio and investment strategy

In this section we briefly review the portfolio at 31 December 2020 (end-FY20) and developments during the year, before examining the strategic decision to move the portfolio towards regional offices, differentiating RGL as a pure play in the sector and capitalising on the strengths and expertise of the asset management platform.

Highly diversified income base

Exhibit 3: Summary of key portfolio data

31-Dec-20

31-Dec-19

FY20

FY19

Valuation (£m)

732.4

787.9

Number of properties

153

160

Number of property units

1,245

1,251

Number of tenants

898

804

Contracted rents (£m)

64.2

64.3

Estimated rental value (ERV) (£m)

76.6

77.2

WAULT to first break (years)

3.2

3.5

EPRA occupancy

89.4%

89.4%

Net initial yield

6.9%

6.2%

Reversionary yield

9.4%

9.1%

Source: Regional REIT

The portfolio was externally valued at end-FY20 at £732.4m. With the £53.4m (before costs) proceeds from disposals during the year substantially recycled into £42.4m (before costs) of acquisitions, the £55.5m (7%) decline in the portfolio value predominantly reflects the £54.8m reduction in fair value during the year after capital expenditure of £8.8m that is yet to be fully captured in valuation. Disposals crystalised a £1.1m loss on book value. The portfolio valuation was 7.2% lower on a like-for-like basis, although mirroring the market trend the second-half decline of 2.9% showed an improvement on the first of the year (a decline of 4.3%).

The disposals in FY20 were made at a blended average net initial yield of 5.1% (5.6% excluding vacant properties) with income more than replaced by the acquisitions, reflecting a blended net initial yield of 9.8%. The end-FY20 valuation reflects a net initial yield of 6.9% and with an estimated rental value (ERV) at full occupancy of £76.6m, the reversionary yield was 9.4%.

Gross contracted rent roll was little changed at £64.2m, with a weighted average unexpired lease term (WAULT) of 5.1 years or 3.2 years allowing for tenant lease break options (WAULT to first break). EPRA occupancy remained stable at 89.4%.

Across the market the COVID-19 pandemic reduced new letting activity; however, RGL remained active, renewing leases and agreeing new ones at or above ERV, in many cases achieving a strong uplift to previous rents. A total of 53 new lettings were completed, covering 177.9k sq ft (c 2.5% of the total portfolio space), adding c £2.0m pa to gross rental income when fully occupied. Retention of existing tenants was also strong and may have been boosted by the pandemic as tenants deferred long-term decisions about location and requirements and because of practical difficulties with moving. Of the leases that came up for renewal in 2020, 74.4% (by value) were retained, up from 65.9% in 2019, and the range of 67–70% that has been the norm since IPO. Encouragingly, where leases were renewed it was typically on normal (three- to five-year terms) rather than shorter-term extensions. In the current year, leases accounting for 14.2% (£8.9m) of gross contracted income will mature, or 25.8% (£16.2m) of gross contracted income including lease breaks. This includes a significant lease with Barclays (annual rent of c £1.4m), which expires in November, where the intention to aggregate a number of locations within a new purpose built site was made known some years ago. A dilapidations settlement has already been agreed. As lockdown measures ease, we expect a pick-up in leasing activity and RGL reported an up-tick in enquiries as the easing of the lockdown approaches. The £12.4m gap between contracted rental income and ERV represents a substantial asset management opportunity within the existing portfolio, primarily accounted for by void space and refurbishment projects (with an ERV of £3.7m). By sector, the reversionary potential sits primarily within office assets.

Exhibit 4: Lease expiry/expiry to first break profile

Source: Regional REIT

RGL’s consistent strategy since IPO has been to spread income risk across a large number of occupiers, operating across a range of industries, while targeting growth regions outside the M25 motorway. Its portfolio is highly diversified across more than 150 properties let to almost 900 tenants, that can fairly be said to reflect the broad spread of the UK economy. The largest tenant at end-FY20 represented 3.5% of gross rent roll and the top 15 tenants represented just 26.9%. RGL closely monitors the industry exposure of its tenants (and prospective tenants when assessing acquisitions) not just at the broad sector level but using detailed analysis based on Standard Industrial Classification (SIC) codes. It estimates that 52% of occupiers (by income) are classified as government-designated providers of essential services, continuing to operate during the lockdown.

In line with the strategy expressed at IPO there has also been a geographical repositioning of the portfolio towards more prosperous regions such as the south east (25.2% of the portfolio at end-FY20 compared with 12.7% at IPO) and away from Scotland (roughly halved to 17.3% since IPO).

In terms of sector exposure, the portfolio has already shifted significantly towards the office sector (83.5% by value at end-FY20) and the strategic decision to make this the focus of investment going forward (discussed below) should be seen in this context. Non-core retail and other assets within the portfolio at IPO have been steadily reduced and the shift from industrial to office assets began in 2018 when half the industrial portfolio was sold at a significant premium to book value.

Exhibit 5: Sector positioning at IPO*

Exhibit 6: Sector positioning at end-FY20*

Source: Regional REIT. Note: *By value.

Source: Regional REIT. Note: *By value.

Exhibit 5: Sector positioning at IPO*

Source: Regional REIT. Note: *By value.

Exhibit 6: Sector positioning at end-FY20*

Source: Regional REIT. Note: *By value.

High yield not low quality

Key to RGL’s high income returns and dividend paying capacity is the relatively high yield on its office assets (net initial yield of 6.8% at end-FY20 with a reversionary yield of 9.6%). The asset manager emphasises that rather than being an indication of low asset quality it reflects its strategy to target the provision of high-quality regional offices, fit for national, multinational, and regional and companies of all sizes, in a cost-effective manner. The November investor day webcast provides numerous examples from across the portfolio.

Because the portfolio assets are not typically prime/grade A they are often referred to as ‘secondary’. RGL challenges the usefulness of this phraseology, believing that it overlooks the high quality of most of the assets; built to a high specification, with raised access floors, air conditioned and refurbished to a high standard within the past 10 years. The asset manager believes these could be reasonably and better described as ‘grade A- or B’. For those assets it considers A-, achieved rents are 40–50% lower than for similar quality prime/grade A, although are likely to be in more peripheral locations or well-located business parks. For those assets considered grade B, the gap to prime/grade A assets is 50–70% while remaining very suitable and functional for most occupiers.

Nearly all of the assets in RGL’s office portfolio are low rise and c 62% are located in business parks, with an additional c 6% on edge of towns. RGL has only one high rise office (Arena Point in Leeds) which is contracted for sale. Low rise offices that are less reliant of lift facilities and assets with good parking facilities, enabling staff to drive comfortably to work and avoid public transport, may well benefit in a post COVID-19 environment.

Strategic focus on regional offices

Following a strategic review in November 2020, the board decided to continue the portfolio shift towards the office sector in the main regional centres of the UK, outside the M25 motorway. For the foreseeable future this will be the focus of investment with capital recycled out of the remaining investments in the industrial and other sectors.

The board shares with the asset and investment managers a positive outlook for the regional office sector, believing that high quality assets with affordable rents will continue to see demand from occupiers, combining with limited supply to generate rental growth. The strategic shift will enable the company to capitalise on the asset manager’s strong expertise and operational platform and will provide a clear investment proposition to investors. RGL says that there is a large number of interested parties in the sale of the residual industrial portfolio and we anticipate this is likely to occur during the current year (although this is not reflected in our forecasts). RGL is keen to take full advantage of a strong pipeline of investment opportunities and what it believes to be a mispricing in quality regional offices, brought into sharper contrast by the recent strong investor enthusiasm for industrial sector assets. In this environment it is hopeful of realising a premium over valuation on the sale of the industrial assets. Much smaller in value, the non-core retail and other assets sold as opportunities arise.

RGL set out in great detail the positive reasons for its confidence in the regional office sector and why it believes ‘the death of the office’ scenario in a post-COVID-19 world is misplaced. It presented additional details on the defensive characteristics of its current office portfolio in a capital markets presentation in November 2020. The slides and a webcast of the presentation are available on the company website.

Positive supply-demand for high quality regional offices

Due to the supply overhang from the last great property cycle, which peaked in 2012 (later than economic activity due to development activity in progress), regional office rents have been slow to pick up. The relatively high yield on RGL’s office assets reflects low rents (an average £13.26 per sq ft for the office assets at end-FY20) and low capital values (an average c £130 per sq ft). RGL estimates an average new build cost (excluding land costs) of c £200 per sq ft, which continues to inhibit most new development, unlike previous cycles. Available market supply has reduced in recent years (in part through re-purposing towards residential, student and hotel accommodation); and although total office supply increased for the first time in a decade in 2020, availability, total supply and vacancy are all still below the 10-year average. With structural demand factors such as office migration from (more expensive) London to the regions and the political goal of rebalancing economic activity from south to north likely to remain, possibly reinforced by a shift to ‘localism’ (smaller, regional offices located in towns and cities outside the capital), beyond the immediate challenge of the pandemic the asset manager sees a strong opportunity for continued rental growth.

Office use to evolve rather than wither

The counter argument to this positive outlook is primarily that the pandemic may lead to a permanent shift towards home working and that, combined with pressures on employment, this will reduce demand for office space in both the short and longer term. Although the ongoing restrictions have made the pace of return to offices uncertain and in most cases, business are still formulating their strategic responses, RGL’s analysis leads it to conclude that the ‘death of the office’ has been vastly overstated. Core to this conclusion is the broad role the office plays in company culture and productivity, being a place for both concentrated work and collaboration, connection, innovation, and social interaction. While each business will be different and it seems likely that working from home will increase for a great many businesses, it is unlikely to be a choice of either/or and more likely a hybrid model. It remains far from clear that this will translate into a reduced requirement for workspace, especially good quality space with affordable rents. RGL analysis indicates that occupational costs represent perhaps 10% or less of the cost base of a typical business; and for those business that do decide to focus on cost savings, RGL expects prime market assets to suffer most, as was the case following the 2008 global financial crisis. Hybrid models whereby employees spend perhaps three days per week in the office and two days at home may struggle to reduce space requirements once catering for peak use. Hot desking is typically unpopular with staff, who value their own space, a place to store belongings, the certainty of being in proximity to close colleagues, and the ability to work in teams. Social distancing at work and other behavioural changes may also reverse the long-term trend towards increased ‘office density’ – a smaller amount of workspace per worker – and a relatively small decrease in density has the potential to significantly impact the requirement for floor space. US-based data show a 65% reduction in floor space per employee since 1990 and are indicative of the trend in the UK. There was already some evidence of a limited move to lower-density working pre COVID-19 with the additional provision of different areas and services in offices and this may well increase as a result of the pandemic, increasing the demand for space.

Regional offices in a market context

The consensus of market observers appears to be that the industrial sector will continue to lead UK commercial property sector returns in the coming two years despite strong outperformance over the past two years. In this context RGL’s decision to sell its industrial assets and focus on the regional office sector is going against the consensus, although that is less clear-cut than it appears and RGL’s stance is in any case backed by a deep knowledge and experience of the sector.

In Exhibit 7 we show the most recent consensus of independent forecasts compiled by the Investment Property Forum. For 2021, the consensus is for All-UK office values to drop by 3.1%, limiting the sector total return to 1.1% (income and capital change combined), in contrast to the industrial sector where the consensus is for 4.3% capital growth to lift total return to 8.7%. All-UK office market rental values are forecast to decline by 2.4% with industrial rental values continuing to increase. The gap between the office and industrial sector across all measures is forecast to narrow in 2022 and be substantially closed by 2023.

Exhibit 7: IPF consensus forecasts

Rental value growth (%)

Capital growth (%)

Total return (%)

2021

2022

2023

2021/25

2021

2022

2023

2021/25

2021

2022

2023

2021/25

Office

(2.4)

1.0

2.2

1.0

(3.1)

2.3

2.5

1.1

1.1

6.8

6.9

5.4

Industrial

2.1

2.5

2.5

2.3

4.3

4.0

2.5

2.9

8.7

8.3

6.8

7.2

Standard retail

(8.3)

(2.3)

(0.3)

(2.2)

(10.9)

(1.6)

0.2

(1.8)

(6.1)

4.0

5.3

3.0

Shopping centre

(10.5)

(3.6)

(1.6)

(3.4)

(13.1)

(3.8)

(1.6)

(4.1)

(7.0)

3.1

5.4

2.8

Retail warehouse

(5.9)

(1.9)

(0.1)

(1.5)

(7.2)

(0.3)

0.5

(1.3)

(0.7)

6.6

7.4

5.6

All property

(2.7)

0.4

1.4

0.4

(2.5)

1.8

1.8

0.8

2.1

6.6

6.7

5.6

West End office

(2.6)

1.6

2.9

1.5

(2.9)

3.3

3.6

2.1

0.5

6.8

7.2

5.6

City office

(3.4)

1.4

2.7

1.1

(3.3)

2.9

3.3

1.3

0.8

7.1

7.4

5.4

Source: Investment Property Forum, UK Consensus Forecasts Winter 2020/21, February 2021

The average consensus includes a range of differing views and even if it paints an accurate picture of the market as a whole this will not reflect any particular portfolio of differing assets in competing locations. The average consensus for income returns from office and industrial assets is broadly the same across all periods and so the difference in average forecast total returns is due to changes in capital values, always difficult to predict. To a large extent, investor enthusiasm for industrial assets has been focused on distribution and warehouse properties, benefitting from the accelerated challenge to the retail sector from the growth of online buying during the pandemic. RGL’s asset manager sees increasing indications of indiscriminate buying in the industrial sector and wants to take advantage of current market liquidity. In contrast, as shown above, RGL already has a portfolio of good quality regional office assets that generate income returns above the All-UK consensus forecast, despite affordable rents, and recent acquisitions have been achieved at net initial yields of c 10%, in part reflecting lesser competition currently for those office assets that are available.

Financials

We have slightly increased our FY21 recurring income and DPS forecast (EPRA NTA is slightly lower, reflecting the FY20 outcome) and have introduced forecasts for FY22. Although we would expect RGL to make progress with exiting industrial and other assets this year, recycling the proceeds into regional offices, we have not explicitly forecast this. Given prevailing market conditions we believe that a disposal of the industrial assets at a premium to book value may be possible with a positive yield pick-up as the proceeds are recycled.

Exhibit 8: Forecast summary

Net rental income (£m)

EPRA earnings (£m)

EPRA EPS (p)

EPRA NTA (p)

DPS (p)

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

New

Old

% chg.

12/21e

53.6

53.3

0.5%

28.9

28.8

0.3%

6.7

6.7

0.3%

99.1

100.8

-1.7%

6.60

6.50

1.5%

12/22e

55.3

N/A

N/A

30.4

N/A

N/A

7.0

N/A

N/A

99.4

N/A

N/A

6.90

N/A

N/A

Source: Edison Investment Research

Our rental income forecasts are based on our expectation for a relatively flat annualised gross contracted rental income (£63.8m at end-FY21 compared with £64.2m at end-FY20, rising to £64.5m at end-FY22) as RGL works hard to retain maturing income and re-let vacated space in what is likely to be a still-muted market. Underlying the gross contracted rental income forecast is an unchanged ERV with EPRA occupancy broadly at a similar level in FY21 (90%) and increasing slightly in FY22 (91%). We expect lower administration costs, including lower asset and investment management fees (due to a lower average NAV) and a falling away of bad debt charges. We expect net finance expense to benefit from continued low borrowing costs on an unchanged level of debt.

We have assumed no movement (realised or unrealised) in investment property values which we believe is a reasonable assumption given our ERV and occupancy assumptions and the potential to realise gains on the industrial portfolio sale, notwithstanding the consensus view that office valuations will fall moderately in 2021 before increasing slightly in 2022. We estimate that a 1% increase/decrease in the FY21e value of investment properties increases/decreases EPRA NTA by c 1.7%.

Debt fully fixed/hedged with no near-term maturities

RGL has a broad spread of secured and unsecured borrowing with no maturity until August 2024. Drawn debt increased to £366.2m during FY20 (FY19: £344.0m) with the proceeds used to increase the level of liquidity, maintained at above-normal levels through the year as a precaution against market uncertainties. Adjusted for the cash balance of £67.4m, end-FY20 net debt of £298.8m was below the end-FY19 level (£306.8m). Despite this, the net loan to value ratio (LTV) was slightly higher at 40.8% (end-FY19: 38.9%) due to the reduction in property values, but still tracking the c 40% medium-term target.

Exhibit 9: Debt portfolio at 31 December 2020

Original facility (£m)

Outstanding (£m)*

Maturity

Gross loan to value

Interest terms

Royal Bank of Scotland

55.0

52.3

Jun-24**

45.2%

LIBOR + 2.15%

Scottish Widows & Aviva

165.0

165.0

Dec-27

46.9%

3.28% fixed

Scottish Widows & Aviva

36.0

36.0

Dec-28

41.1%

3.37% fixed

Santander

65.9

62.8

Jun-29

37.0%

LIBOR + 2.20%

Total secured facilities

321.9

316.2

Retail Eligible Bond

50.0

50.0

Aug-24

N/A

4.5% fixed

Total facilities

371.9

366.2

Source: Regional REIT. Note: *Includes unamortised loan issue costs. **Maturity extended until June 2025 since period-end.

Since end-FY20, Royal Bank of Scotland has agreed to extend the £55.0m facility for one year from June 2024 to June 2025, extending the weighted average debt duration to 6.5 years (from 6.4 years at 31 December) with no impact on the end-FY20 weighted average cost of debt of 3.3% (which was reduced from 3.5% at end-FY19). All of the debt is fixed or hedged.

The debt facilities include a £50m unsecured retail eligible bond and RGL says that the secured bank facilities provide substantial headroom against covenants. Group interest cover in FY20 was 3.4x (or 3.0x including debt cost amortisation).

Valuation

Active management delivering income-led total returns

RGL aims to provide an attractive total return to shareholders, targeting a total return of more than 10% pa, with a strong focus on income supported by the potential for additional capital growth. Up to end-H119 the cumulative accounting total return (the change in EPRA NAV per share plus dividends paid out) was 40.8% or a compound average annual return of 9.8%, very close to the target. Dividend payments are a major component of returns and have accounted for 65% of the total return over this period. Given our cautious assumptions for capital returns over the next couple of years, outlined above, our forecasts imply a total accounting return over the FY21–22 period of c 7%, effectively all generated by dividend payments. Although lower than historical returns, and below the 10% target, we think this represents an attractive return in the context of generally low interest rates. 10-year gilt has recently increased noticeably from the low point of last year (c 0.1%) but remains comfortably below 1%. We would also view RGL’s target return as a medium-term target, which will be difficult to achieve in all market conditions given the historical volatility of commercial property capital values.

Exhibit 10: NAV total return

2015*

2016

2017

2018

2019

2020

Since IPO

Opening EPRA NAV per share (p)

100.0

106.8

106.1

105.4

115.2

112.6

100.0

Closing EPRA NTA** per share (p)

106.8

106.1

105.4

115.2

112.6

98.6

98.6

Dividends per share paid (p)

0.00

6.25

7.80

8.00

8.20

7.45

37.70

NAV total return (%)

6.8%

5.2%

6.7%

16.8%

4.9%

-5.8%

36.3%

Compound annual return (%)

6.2%

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

In Exhibit 11 we show a comparison with a narrow group of peers that are similarly focused on regional commercial property. RGL’s high dividend yield continues to be at the very top end of both this narrow peer group and the broad UK property sector, particularly in respect of covered dividends. The company’s strong focus on income returns meant that it continued to make quarterly dividend payments through 2020, in contrast to several of its peers that temporarily suspended payments, in some cases where these had been declared, during the early, uncertain months of the pandemic.

To ease comparison, the data shown in Exhibit 11 is based on 12-month trailing DPS declared and last published NAV. RGL’s c 8% yield is almost double the peer group average, yet its P/NAV is broadly in line with the average and over the past three and 12 months its share price performance is below the peer group average. Given the continuing prospects for fully-covered, high dividend distributions (we forecast increasing) this seems somewhat perplexing. Picking up on earlier sections of this report we believe that investors may be focusing on:

Gearing. RGL’s net LTV of 40% is above the average of the group (and an average c 33% at last reported dates) but as discussed above is not at a level that causes any concern. Higher gearing will support net asset growth if property valuations improve as the lockdown continues to ease.

Office focus. We have summarised the reasons behind RGL’s confidence in the future of high quality, regional offices with affordable rents. There is nevertheless an ongoing debate about the long-term effects of the pandemic on office use and demand, which is unlikely to be settled until a more widespread return of workers to the office can occur and occupiers can assess their strategic plans more fully.

Recent capital returns. The trend in capital values strengthened during H220 with CBRE data indicating a positive ‘all-sector’ UK commercial property capital return in Q420. Unlike RGL, which reports half-yearly, a number of its peers, reporting on a quarterly basis, have been able to report positive valuation performance for the three months ended 31 December 2020.

Exhibit 11: 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

212

61

0.75

2.1

18%

15%

25%

-2%

Custodian

95

400

0.99

5.2

4%

8%

-2%

-6%

Picton

92

502

0.96

3.0

3%

19%

12%

0%

Real Estate Investors

36

64

0.64

8.5

9%

1%

-16%

-21%

Schroder REIT

41

213

0.70

3.9

0%

8%

18%

-3%

Palace Capital

230

106

0.66

3.3

-2%

12%

-1%

-4%

UK Commercial Property REIT

75

980

0.90

2.4

5%

13%

7%

-4%

BMO Commercial Property Trust

78

624

0.67

2.3

9%

-1%

-3%

-9%

BMO Real Estate Investments

79

190

0.81

4.5

11%

29%

58%

-3%

Average

0.79

4.1

5%

11%

9%

-6%

Regional REIT

82

354

0.80

7.8

8%

6%

-4%

-10%

UK property sector index

1,686

4%

8%

11%

-1%

UK equity market index

3,950

3%

4%

22%

0%

Source: Company data, Edison Investment Research, Refinitiv prices as at 12 April 2021. Note: *Based on last reported EPRA NTA or NAV per share. **Based on trailing 12-month DPS declared.

The company, management and fees

RGL is a UK-based REIT that aims to provide an attractive total return to shareholders, targeting a medium-term total return of at least 10% pa, with a strong focus on income supported by the potential for additional capital growth. The company’s investment portfolio is comprised wholly of UK commercial property assets, predominantly office assets located in the regional centres of the UK outside of the M25 motorway. As noted above, it is the company’s intention to focus solely on investment in the regional office sector for the foreseeable future and it plans to divest of its remaining industrial and other assets, recycling the proceeds into offices.

Since listing on the Main Market of the London Stock Exchange (LSE) in November 2015, RGL has almost doubled the portfolio in size through an opportunistic acquisitive growth strategy, seeking to generate operational and financial economies through increased scale and further diversifying the portfolio to mitigate cyclical and tenant-specific risks to income. A key element of the investment strategy is to acquire under-managed properties where there are opportunities to create additional value through lease renewals and rent increases; minimising voids through effective marketing of vacant space; enhancing the tenant mix and covenant strength; and through refurbishment, extension, or change of use. When properties have met their return objectives they are assessed for sale (or to hold if their income and capital growth outlook looks strong), allowing the recycling of resources into new value-creating opportunities.

Ahead of its listing, RGL was formed by the combination of two UK commercial property investment funds previously created by the external asset and investment managers. London & Scottish Property Investment Management (LSPIM) is the asset manager, responsible for the day-to-day management of the asset and debt portfolios. Toscafund Management (Toscafund) is the investment manager, responsible for management functions of the company.

LSPIM is a privately owned co-investing asset management and property development business, based in Glasgow with offices in Leeds, Manchester and London. The senior management team has day-to-day involvement in the management of RGL assets and is highly experienced with a proven track record of adding value to property portfolios across cycles, through intensive property management, focusing on income generation. With a team of more than 60 individuals it is responsible for the property management of the RGL portfolio, including identifying and evaluating investment opportunities, the collection of rent, leasing and asset management, subject to the overall control and supervision of the board. In our view, this fully integrated asset management platform has made an important contribution to RGL’s strong rent collection during the pandemic.

Management fees are set at 1.1% of net assets up to £500m and 0.9% above £500m, split equally between LSPIM and Toscafund. In addition, a property management fee of 4% of annual gross rental income is payable to LSPIM. An additional incentive is provided to the managers by way of a performance fee, set at 15% of total EPRA NAV per share return (EPRA NAV growth plus dividends declared) above an 8% hurdle, subject to a high-water mark. The performance fee is calculated annually and the intention is that one-third be paid in cash and two-thirds in shares (where new shares may be issued at above NAV). Performance fees were last accrued/paid during FY18; market conditions since have particularly pressured capital returns. With the current high-water mark at 115.5p we do not anticipate performance fees being generated in the near term.

Regional REIT has a six-member board of non-executive directors, including Kevin McGrath (chairman), a chartered surveyor with more than 30 years’ experience in the property sector and property asset management; William Eason, with extensive investment management and board experience; Daniel Taylor, founder and CEO of Westchester Capital, an investment and advisory firm specialising in real estate; Frances Daley, a chartered accountant with considerable experience on corporate finance and senior finance roles; Stephen Inglis (representing LSPIM) and Tim Bee (representing Toscafund).

Detailed biographies of all board members can be found here and we provide biographies for key members of the leadership team at the back of this report.

Sensitivities

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. From a sector viewpoint we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. RGL is not a developer but is exposed to similar but lesser uncertainties as it actively invests in improvements to existing assets with the aim of enhancing long-term income growth and returns. We consider the main sensitivities to include:

Economic risk: the COVID-19 pandemic and Brexit continue to create a high level of uncertainty regarding the UK economic outlook. Following the c 10% decline in UK GDP in FY20 the HM Treasury comparison of independent forecasts for the UK economy published in March 2021 shows the average of independent forecasters expecting a 4.7% recovery in 2021. The range of individual forecasts remains very wide (2.1–6.1%). The average forecast for the increase in the rate of unemployment in 2021 versus 2020 has recently improved slightly but the 6.4% average rate, approaching twice the pre-COVID-19 level. Inflation is forecast to increase notably compared with 2020 (the average forecast for CPI is 2.1% compared with 0.6% in Q420 and the average forecast for RPI is 3.0% versus 1.2% in Q420).

Sector risk: some of the inherent cyclical risk to vacancy in commercial property can be mitigated by portfolio diversification. As noted above, RGL’s income risk is diversified across a large number of occupiers, operating across a range of industries. By sector, although the portfolio is increasingly focused on regional offices, risk within the sector is diversified across a large number of properties and geographic regions. The pandemic has increased uncertainty about how offices will be used, and may impact demand, contrary to RGL’s expectations.

Funding risks: RGL has a good spread of secured and unsecured borrowing facilities with no near-term maturities (first in August 2024) and an average duration of c 6.5 years. All of the debt is fixed rate or hedged against rising interest rates. Any significant increase in long-term interest rates may be expected to negatively affect market-wide property valuations and hence LTV ratios as well as NAV.

Management risk: RGL is externally managed and is dependent upon the ability of its asset manager to execute successfully on its strategy. Although Stephen Inglis, Derek McDonald and Simon Marriot, respectively CEO, managing director and investment director of the asset manager, LSPIM, are significantly involved in the management of the RGL portfolio, we note that LSPIM is backed by an experienced and growing team.

Exhibit 12: Financial summary

Year end 31 December

£m

2016

2017

2018

2019

2020

2021e

2022e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Rental & other income

43.0

52.3

62.1

64.4

62.1

62.6

64.3

Non-recoverable property costs

0.0

(6.5)

(7.7)

(9.4)

(8.8)

(9.0)

(9.0)

Net rental & related income

 

 

43.0

45.8

54.4

55.0

53.3

53.6

55.3

Administrative expenses (excluding performance fees)

(8.0)

(7.8)

(10.5)

(10.9)

(11.3)

(10.8)

(10.8)

Performance fees

(0.2)

(1.6)

(7.0)

0.0

0.0

0.0

0.0

EBITDA

 

 

34.8

36.4

36.8

44.1

42.0

42.8

44.5

EPRA cost ratio

n.a

29.7%

40.1%

31.6%

32.4%

31.6%

30.8%

EPRA cost ratio excluding performance fee

n.a

26.6%

28.6%

31.6%

32.4%

31.6%

30.8%

Gain on disposal of investment properties

0.5

1.2

23.1

1.7

(1.1)

0.0

0.0

Change in fair value of investment properties

(6.8)

5.9

23.9

(3.5)

(54.8)

0.0

0.0

Change in fair value of right to use asset

(0.2)

(0.2)

(0.2)

(0.2)

Operating Profit (before amort. and except.)

 

 

28.5

43.5

83.8

42.0

(14.1)

42.6

44.3

Net finance expense

(8.6)

(14.5)

(15.7)

(13.7)

(14.0)

(13.7)

(13.9)

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

(1.7)

(0.3)

(0.1)

(2.0)

(3.1)

0.0

0.0

Profit Before Tax

 

 

18.3

28.7

67.9

26.3

(31.2)

28.9

30.4

Tax

0.0

(1.6)

(0.6)

0.3

0.2

0.0

0.0

Profit After Tax (FRS 3)

 

 

18.3

27.1

67.4

26.5

(31.0)

28.9

30.4

Adjusted for the following:

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

6.2

(7.1)

(47.0)

1.9

55.9

0.0

0.0

Other EPRA adjustments

(3.4)

4.1

0.5

2.6

3.0

0.0

0.0

EPRA earnings

 

 

21.1

24.0

20.9

31.0

27.9

28.9

30.4

Performance fees

0.2

1.6

7.0

0.0

0.0

0.0

0.0

Adjusted earnings

 

 

21.3

25.6

27.9

31.0

27.9

28.9

30.4

Period end number of shares (m)

274.2

372.8

372.8

431.5

431.5

431.5

431.5

Fully diluted average number of shares outstanding (m)

274.3

297.7

372.8

398.9

431.5

431.5

431.5

IFRS EPS - fully diluted (p)

 

 

4.9

9.1

18.1

6.6

(7.2)

6.7

7.0

EPRA EPS, fully diluted (p)

 

 

7.7

8.1

5.6

7.8

6.5

6.7

7.0

Adjusted EPS (p)

 

 

7.8

8.6

7.5

7.8

6.5

6.7

7.0

Dividend per share (p)

 

 

7.65

7.85

8.05

8.25

6.40

6.60

6.90

Dividend cover

101.6%

109.7%

93.1%

94.2%

101.0%

101.6%

102.1%

BALANCE SHEET

Non-current assets

 

 

506.4

740.9

720.9

806.0

749.5

755.4

761.2

Investment properties

502.4

737.3

718.4

787.9

732.4

738.4

744.4

Other non-current assets

4.0

3.6

2.5

18.1

17.2

17.0

16.8

Current Assets

 

 

27.6

66.6

127.0

69.4

101.1

90.9

87.4

Other current assets

11.4

21.9

22.2

32.2

33.7

26.3

24.5

Cash and equivalents

16.2

44.6

104.8

37.2

67.4

64.6

63.0

Current Liabilities

 

 

(23.3)

(42.6)

(83.7)

(36.2)

(49.1)

(43.4)

(44.9)

Borrowings

0.0

(0.4)

(0.4)

0.0

0.0

0.0

0.0

Other current liabilities

(23.3)

(42.2)

(83.3)

(36.2)

(49.1)

(43.4)

(44.9)

Non-current liabilities

 

 

(219.0)

(372.0)

(334.7)

(355.5)

(380.9)

(380.5)

(380.1)

Borrowings

(217.4)

(371.2)

(285.2)

(287.9)

(310.7)

(311.3)

(311.9)

Other non-current liabilities

(1.5)

(0.8)

(49.5)

(67.6)

(70.3)

(69.2)

(68.2)

Net Assets

 

 

291.7

392.9

429.5

483.7

420.6

422.3

423.6

Derivative interest rate swaps & deferred tax liability

1.5

2.8

1.0

2.6

5.0

5.2

5.2

EPRA net assets

 

 

293.2

395.7

430.5

486.3

425.6

427.5

428.8

IFRS NAV per share (p)

106.4

105.4

115.2

112.1

97.5

97.9

98.2

Fully diluted EPRA NTA per share (p)

106.1

105.4

115.2

112.6

98.6

99.1

99.4

CASH FLOW

Cash (used in)/generated from operations

 

 

31.4

40.3

38.8

26.0

48.0

44.6

47.8

Net finance expense

(6.6)

(9.2)

(11.9)

(12.2)

(12.5)

(12.8)

(12.9)

Tax paid

(1.7)

(0.2)

(1.5)

(0.8)

0.2

0.0

0.0

Net cash flow from operations

 

 

23.1

30.8

25.4

13.0

35.7

31.8

34.9

Net investment in investment properties

(99.3)

(8.3)

100.6

(25.6)

(0.3)

(6.0)

(6.0)

Acquisition of subsidiaries, net of cash acquired

(5.6)

(51.9)

(32.6)

(43.9)

0.0

0.0

0.0

Other investing activity

0.1

0.0

0.2

0.2

0.1

0.0

0.0

Net cash flow from investing activities

 

 

(104.8)

(60.1)

68.2

(69.4)

(0.2)

(6.0)

(6.0)

Equity dividends paid

(15.7)

(23.3)

(29.4)

(32.5)

(26.7)

(27.2)

(29.1)

Debt drawn/(repaid) - inc bonds and ZDP

91.4

13.9

(50.5)

3.5

22.2

0.0

0.0

Net equity issuance

0.0

71.3

(1.2)

60.5

0.0

0.0

0.0

Other financing activity

(1.7)

(4.2)

47.7

(42.7)

(0.8)

(1.4)

(1.4)

Net cash flow from financing activity

 

 

74.0

57.7

(33.4)

(11.2)

(5.3)

(28.6)

(30.5)

Net Cash Flow

 

 

(7.8)

28.4

60.2

(67.6)

30.1

(2.8)

(1.6)

Opening cash

24.0

16.2

44.6

104.8

37.2

67.4

64.6

Closing cash

 

 

16.2

44.6

104.8

37.2

67.4

64.6

63.0

Balance sheet debt

(217.4)

(371.6)

(374.6)

(337.1)

(360.1)

(360.9)

(361.6)

Unamortised debt costs

(2.6)

(4.8)

(5.8)

(6.9)

(6.0)

(5.3)

(4.5)

Closing net debt

 

 

(203.9)

(331.8)

(275.5)

(306.8)

(298.8)

(301.6)

(303.2)

LTV

40.6%

45.0%

38.3%

38.9%

40.8%

40.8%

40.7%

Source: Regional REIT, Edison Investment Research

Contact details

Revenue by geography

Toscafund Asset Management LLP
5th Floor, Ferguson House,

15 Marylebone Road
London NW1 5JD
+44 (0) 207 845 6100
www.regionalreit.com

Contact details

Toscafund Asset Management LLP
5th Floor, Ferguson House,

15 Marylebone Road
London NW1 5JD
+44 (0) 207 845 6100
www.regionalreit.com

Revenue by geography

Leadership team

Non-executive chairman Regional REIT: Kevin McGrath

CEO London & Scottish Property Investment Management: Stephen Inglis

Kevin McGrath DL OBE is a chartered surveyor with more than 30 years’ property experience. In addition to RGL he is chairman of M&M Property Asset Management having previously been managing director and senior adviser of F&C REIT Asset Management, and before that was a founding equity partner in REIT Asset Management, a property investment, finance and asset management partnership. He is also chairman of INTCAS, an independent technology and support service company. Prior to REIT Asset Management, he was a senior investment surveyor with Hermes Investment Management.

Stephen Inglis, CEO of London & Scottish Property Investment Management, the asset manager of RGL, serves as NED on the board of Regional REIT. He has over 30 years’ experience in the commercial property market, the majority of which has been working in the investment and development sector. His career to date has been split between London and Scotland giving him wide knowledge of the UK property market. He is a chartered surveyor and became a member of RICS in 2001 and is also a member of the Investment Property Forum. He has, since June 2013, acquired or sold approximately 250 assets in deals totalling in excess of £1.2bn.

MD London & Scottish Property Investment Management: Derek McDonald

Inv. director, London & Scottish Property Investment Management: Simon Marriott

Derek McDonald is managing director of London & Scottish Property Investment Management, the asset manager of RGL, which he joined in 2015. He spent 27 years at Bank of Scotland/Lloyds Banking Group in a variety of senior roles in corporate banking, including time in the bank’s corporate banking business in the US, the UK real estate joint ventures business, the European real estate business, the UK business support unit and the Irish business support unit, which dealt with high-value real estate lending. He has led a significant number of high value transactions at both REVCAP and Lloyds Banking Group and has also had line responsibility for large teams of professionals. He has significant experience in building and leading multi-jurisdictional businesses.

Simon Marriott is investment director for London & Scottish Property Investment Management, asset manager to RGL, which he joined in 2017. He has over 30 years’ experience in the property industry sourcing, transacting and asset managing, most recently at Cromwell Property Group where he was head of investments and UK real estate. Prior to Cromwell, Simon held a number of senior roles including director real estate transactions at PwC, senior vice president managing director investments at Oxford Properties and head of separate accounts at Invista REIM, managing funds with assets under management of over £2.5bn. He is a chartered surveyor and a member of RICS since 1992 and is also a member of the Investment Property Forum.

Principal shareholders (Source: Regional REIT website)

(%)

Toscafund Investments

9.04

Unicorn UK Ethical Fund

5.02

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 2021 Edison Investment Research Limited (Edison).

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

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

1185 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

1185 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 2021 Edison Investment Research Limited (Edison).

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

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

1185 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

1185 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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