banner-n-4

FY21 DPS target met, confirming attractive yield

Regional REIT 24 February 2022 Update
Download PDF

Regional REIT

FY21 DPS target met, confirming attractive yield

Portfolio and dividend update

Real estate

24 February 2022

Price

88.1p

Market cap

£454m

Est. net debt (£m) at 31 December 2021

384.2

Net LTV at 31 December 2021

42.4%

Shares in issue

515.7m

Free float

99%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.4)

(2.1)

13.2

Rel (local)

(2.3)

(2.7)

2.4

52-week high/low

94.5p

75.2p

Business description

Regional REIT is focused on office assets (more than 90%), located in the regional centres of the UK, highly diversified by property, tenants and the underlying industry exposure of those tenants. It is actively managed and targets a total shareholder return of at least 10% with a strong focus on income.

Next events

FY21 results release

29 March 2022

Analyst

Martyn King

+44 (0)20 3077 5745

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) has declared a Q421 DPS of 1.7p, taking the total for the year to 6.5p, which we forecast will be fully covered by EPRA earnings reported when the results to 31 December 2021 (FY21) are reported on 29 March. The attractive dividend yield of 7.4% is one of the highest in the UK REIT sector and RGL believes the office sector is poised for recovery.

Year end

Net rental
income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

NAV/ share** (p)

DPS
(p)

P/NTA
(x)

Yield
(%)

12/19

55.0

31.0

7.8

112.6

8.25

0.78

9.4

12/20

53.3

27.9

6.5

98.6

6.40

0.89

7.3

12/21e

56.3

30.3

6.6

96.9

6.50

0.91

7.4

12/22e

64.0

35.1

6.8

98.0

6.70

0.90

7.6

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

Strong rent collection and valuation growth

The FY21 DPS of 6.5p (FY20: 6.40p) is in line with RGL’s target. The Q4 DPS will be paid as a property income distribution on 8 April 2022. Dividends are supported by continuing strong rent collection. Thus far, the FY21 rent collection rate is 98.6% compared 97.7% at this time last year. FY21 collection comprises 97.31% ‘cash collected’, monthly rents of 0.4% and agreed collection plans of 1.0%. Driven primarily by acquisitions (net of disposals), the portfolio value increased strongly to £906.1m in FY21 (FY20: £732.4m) but growth also included like-for-like valuation gains of 1.1% (with H2 building on H121 gains of 0.4%). This implies there may be upside potential to our FY21 NAV forecast. Acquisitions included a significant and complementary portfolio of predominantly regional office assets for £236m in Q321, reflecting a net initial yield of 7.8% and reversionary yield of 11.0%, providing attractive immediate income with good growth opportunities.

RGL believes office sector is poised for recovery

RGL believes the office is an essential aspect of the working infrastructure and the sector is poised for recovery, particularly for good quality regional assets with affordable rents. This is now the focus of investment following significant transaction activity during FY21, rotating the portfolio further towards offices (now c 90% by value) where it identified a mispricing and taking advantage of investor enthusiasm for industrial assets (now reduced to c 5%). Reflecting strong asset management potential, the portfolio acquisition contributed to a reduction in EPRA occupancy at end-FY21 (81.8% vs 85.7% at H1), as did a well-flagged large lease expiry towards the year-end. During FY21 gross rent roll increased substantially with portfolio growth to £72.1m (FY20: £64.2m), with strong upside potential towards an ERV of £94.6m.

Valuation: High yield and fully covered DPS

RGL continues to offer one of the highest yields in the UK REIT sector. Its FY21 yield of 7.4% is significantly above close peers. Although smaller than the peer average, its discount to our forecast FY21 NAV is 9%.

Exhibit 1: Financial summary

Year end 31 December (£m)

2018

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Rental & other income

62.1

64.4

62.1

66.0

77.0

78.1

Non-recoverable property costs

(7.7)

(9.4)

(8.8)

(9.7)

(13.0)

(12.2)

Net rental & related income

54.4

55.0

53.3

56.3

64.0

65.9

Administrative expenses (excluding performance fees)

(10.5)

(10.9)

(11.3)

(11.3)

(12.3)

(12.4)

Performance fees

(7.0)

0.0

0.0

0.0

0.0

0.0

EBITDA

36.8

44.1

42.0

45.0

51.7

53.5

EPRA cost ratio

40.1%

31.6%

32.4%

28.8%

32.9%

31.5%

EPRA cost ratio excluding performance fee

28.6%

31.6%

32.4%

28.8%

32.9%

31.5%

Gain on disposal of investment properties

23.1

1.7

(1.1)

2.1

0.0

0.0

Change in fair value of investment properties

23.9

(3.5)

(54.8)

(12.6)

4.6

9.3

Change in fair value of right to use asset

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

Operating Profit (before amort. and except.)

83.8

42.0

(14.1)

34.3

56.1

62.6

Net finance expense

(15.7)

(13.7)

(14.0)

(14.5)

(16.4)

(16.4)

Fair value movement in interest rate derivatives & goodwill impairment

(0.1)

(2.0)

(3.1)

2.6

0.0

0.0

Profit Before Tax

67.9

26.3

(31.2)

22.4

39.7

46.2

Tax

(0.6)

0.3

0.2

0.0

0.0

0.0

Profit After Tax (FRS 3)

67.4

26.5

(31.0)

22.4

39.7

46.2

Adjusted for the following:

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

(47.0)

1.9

55.9

10.5

(4.6)

(9.3)

Other EPRA adjustments

0.5

2.6

3.0

(2.6)

0.0

0.0

EPRA earnings

20.9

31.0

27.9

30.3

35.1

36.9

Performance fees

7.0

0.0

0.0

0.0

0.0

0.0

Adjusted earnings

27.9

31.0

27.9

30.3

35.1

36.9

Period end number of shares (m)

372.8

431.5

431.5

515.7

515.7

515.7

Fully diluted average number of shares outstanding (m)

372.8

398.9

431.5

457.1

515.7

515.7

IFRS EPS - fully diluted (p)

18.1

6.6

(7.2)

4.9

7.7

9.0

EPRA EPS, fully diluted (p)

5.6

7.8

6.5

6.6

6.8

7.2

Adjusted EPS (p)

7.5

7.8

6.5

6.6

6.8

7.2

Dividend per share (p)

8.05

8.25

6.40

6.50

6.70

7.10

Dividend cover

93.1%

94.2%

101.0%

101.9%

101.5%

100.8%

BALANCE SHEET

Non-current assets

720.9

806.0

749.5

927.2

943.6

964.7

Investment properties

718.4

787.9

732.4

910.4

927.0

948.3

Other non-current assets

2.5

18.1

17.2

16.8

16.6

16.4

Current Assets

127.0

69.4

101.1

80.9

74.6

65.6

Other current assets

22.2

32.2

33.7

28.9

29.2

29.8

Cash and equivalents

104.8

37.2

67.4

51.9

45.5

35.9

Current Liabilities

(83.7)

(36.2)

(49.1)

(56.2)

(60.8)

(62.2)

Borrowings

(0.4)

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(83.3)

(36.2)

(49.1)

(56.2)

(60.8)

(62.2)

Non-current liabilities

(334.7)

(355.5)

(380.9)

(454.4)

(454.6)

(454.9)

Borrowings

(285.2)

(287.9)

(310.7)

(386.9)

(387.6)

(388.4)

Other non-current liabilities

(49.5)

(67.6)

(70.3)

(67.4)

(67.0)

(66.5)

Net Assets

429.5

483.7

420.6

497.5

502.8

513.3

Derivative interest rate swaps & deferred tax liability

1.0

2.6

5.0

2.5

2.5

2.5

Goodwill

(1.1)

(0.6)

0.0

0.0

0.0

0.0

EPRA net tangible assets

429.4

485.7

425.6

499.9

505.3

515.8

IFRS NAV per share (p)

115.2

112.1

97.5

96.5

97.5

99.5

Fully diluted EPRA NTA per share (p)

115.2

112.6

98.6

96.9

98.0

100.0

CASH FLOW

Cash (used in)/generated from operations

38.8

26.0

48.0

56.5

56.0

54.3

Net finance expense

(11.9)

(12.2)

(12.5)

(13.2)

(15.4)

(15.4)

Tax paid

(1.5)

(0.8)

0.2

0.0

0.0

0.0

Net cash flow from operations

25.4

13.0

35.7

43.4

40.7

38.9

Net investment in investment properties

100.6

(25.6)

(0.3)

(188.5)

(12.0)

(12.0)

Acquisition of subsidiaries, net of cash acquired

(32.6)

(43.9)

0.0

0.0

0.0

0.0

Other investing activity

0.2

0.2

0.1

0.0

0.0

0.0

Net cash flow from investing activities

68.2

(69.4)

(0.2)

(188.5)

(12.0)

(12.0)

Equity dividends paid

(29.4)

(32.5)

(26.7)

(28.1)

(34.3)

(35.7)

Debt drawn/(repaid) - inc bonds and ZDP

(50.5)

3.5

22.2

75.7

0.0

0.0

Net equity issuance

(1.2)

60.5

0.0

83.1

0.0

0.0

Other financing activity

47.7

(42.7)

(0.8)

(1.0)

(0.8)

(0.8)

Net cash flow from financing activity

(33.4)

(11.2)

(5.3)

129.7

(35.1)

(36.5)

Net Cash Flow

60.2

(67.6)

30.1

(15.5)

(6.4)

(9.6)

Opening cash

44.6

104.8

37.2

67.4

51.9

45.5

Closing cash

104.8

37.2

67.4

51.9

45.5

35.9

Balance sheet debt

(374.6)

(337.1)

(360.1)

(436.5)

(437.4)

(438.3)

Unamortised debt costs

(5.8)

(6.9)

(6.0)

(5.4)

(4.5)

(3.6)

Closing net debt

(275.5)

(306.8)

(298.8)

(390.0)

(396.4)

(406.0)

LTV

38.3%

38.9%

40.8%

42.8%

42.8%

42.8%

Source: Company data, 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 £60,000 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 2022 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 £60,000 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 2022 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

Share this with friends and colleagues