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Q420 dividend as guided

Regional REIT 2 March 2021 Update
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Regional REIT

Q420 dividend as guided

Q4 DPS and update

Real estate

2 March 2021

Price

78.5p

Market cap

£339m

Net debt (£m) as at 31 Dec 2020*
*Edison estimate based on disclosed LTV

298.6

Net LTV as at 31 Dec 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

(2.9)

2.8

(31.3)

Rel (local)

(5.1)

(1.3)

(32.3)

52-week high/low

116.0p

55.8p

Business description

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

Next events

FY20 results

25 March 2021

Analyst

Martyn King

+44 (0)20 3077 5745

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT’s (RGL’s) Q420 DPS, in line with the company’s previous guidance, takes the aggregate FY20 DPS to 6.4p, and is supported by continuing strong rent collection. The company has previously indicated that it was targeting dividends to be fully covered by EPRA earnings and we expect this to be confirmed when detailed FY20 results are released on 25 March.

Year end

Net rental
income (£m)

Adjusted earnings (£m)

Adjusted EPS* (p)

EPRA NAV*/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/18

54.4

27.9

7.5

115.5

8.05

0.68

10.3

12/19

55.0

31.0

7.8

112.7

8.25

0.70

10.5

12/20e

53.3

27.9

6.5

100.2

6.40

0.78

8.2

12/21e

53.3

28.8

6.7

100.8

6.50

0.78

8.3

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

Dividends supported by strong rent collection

Rent collection continues to strengthen, with 97.8% of rents due in respect of 2020 received by 19 February 2021, adjusting for monthly rent and agreed collection plans, only slightly behind the 98.6% collected in the equivalent period of 2019. Significant H220 transaction activity (£37.7m of disposals and £42.0m of accretive acquisitions have been disclosed) locked in a significantly positive yield arbitrage, supporting the growth in gross contracted rent roll from £62.9m at H120 to £64.2m at year end. On an EPRA basis, occupancy increased to 89.4% (H120: 89.0%). The portfolio was externally valued at £732.4m (H120: £742.3m), with the reduction primarily the result of a 2.9% like-for-like valuation decline, an encouraging improvement on the -4.3% H120 movement. The end-FY20 net loan to value ratio (LTV) was 40.8%, broadly in line with the medium-term target of c 40%. We will update our forecasts with the detailed FY20 results due on 25 March.

Investment strategy focused on regional offices

Late in 2020, RGL presented on its positive outlook for the regional office market (available on its website). It believes that the ‘death of the office’ has been vastly overstated while regional offices are supported by structural demand factors, relatively low rents and limited new supply. As a result, investment will focus solely on offices in the main regional centres outside the M25. The office sector already accounted for 83.5% of the portfolio at end-FY20 and the increased focus will capitalise on the investment manager’s strong expertise and operational platform, and will also provide a clear investment proposition to investors. We would expect the portfolio changes to be completed within 12–18 months, with industrial and other assets sold and the proceeds recycled into attractively yielding office assets. Disposals will also provide flexibility in managing LTV around the 40% target and the board also says it will give consideration to a share buyback where it is accretive to do so.

Valuation: Continuing strong yield attraction

Based on the FY20 DPS of 6.4p, the shares continue to yield 8.2% with a discount of more than 20% to FY20e EPRA NAV per share.

Further details

Rent collection continues to strengthen

RGL’s continuing strong collection performance reflects a number of 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 investment manager’s integrated multi-office platform that enables it to stay close to tenants and respond to their needs, the quality of the tenants, and the quality and affordability of the assets.

At 19 February 2021, Q420 rent collection had increased to 96.1%, adjusting for monthly rent and agreed collection plans, up from the 88.7% reported as at 22 January 2021. On the same basis, the collection rate for FY20 had reached 97.8%, only slightly behind the 98.6% collected in the equivalent period of 2019. RGL says it remains in supportive and ongoing discussions with occupiers regarding 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 1: 2020 rent collection performance at 19 February 2021

Q120

Q220

Q320

Q420

2020 to date

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%

99.4%

97.9%

97.8%

96.1%

97.8%

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

Accretive acquisitions have continued

Since our last update, RGL has disclosed the £16.4m acquisition of Beeston Business Park in Nottingham, continuing to recycle sale proceeds at noticeably higher yields, and in line with the strategic focus on regional offices. The c £1.5m pa rent on the Beeston Business Park acquisition, including undisclosed supplementary rents, reflects a net initial yield of 10.1%, with a weighted average unexpired lease term of 11.1 years to expiry and 7.8 years to the first break. The out-of-town mixed-use site comprises 220k sq ft of internal space, including a c 92k sq ft flagship, multi-let, two-floor office building and three industrial units totalling c 128 sq ft, on a total site of 26.5 acres. The business park benefits from excellent transport links, being adjacent to the Beeston Rail Station, which has direct connectivity to London St Pancras International and is located four miles from Nottingham city centre. Additionally, East Midlands Airport is located only 12 miles to the south-west of the business park. The tenants include Metropolitan Housing Trust, Worldwide Clinical Trials and Heart Internet (trading as GoDaddy).

The single largest sale in H120 was Juniper Business Park in Basildon, an industrial warehouse and office park, for £32.7m, 59.4% above the March 2016 acquisition price adjusted for capex and 3.9% above the June 2020 valuation, which we estimate reflects a 5.7% net initial yield.

Reflecting market-wide valuation trends

Recent market-wide trends in capital values have seen a continuing positive performance in the industrial sector and continued clear weakness in the retail sector, with the office sector continuing to see capital value declines but at a much slower pace than in H120. For Q420, in contrast to performance throughout the year, CBRE data indicates a positive ‘all-sector’ UK commercial property capital return, driven by gains in the industrial sector. A number of RGL peers reporting on a quarterly basis have similarly reported positive valuation performance for the three months ended 31 December 2020. RGL does not report quarterly (the Q320 valuation shown in Exhibit 2 is based on H120 valuations adjusted for acquisitions, disposals and capex in the period) and its 31 December 2020 valuation captures the whole of the H220 valuation movement. The 2.9% like-for-like decline in capital values across the RGL portfolio in H220 reflects the market trend to a stronger H2 performance. We estimate that adjusted for capex (c £2m) and the H2 acquisitions, the H220 like-for-like reduction in the value of RGL’s office assets was c 2.5%. We have attributed the Beeston Business Park acquisition between industrial and office sectors in line with the published floor area split. The RGL office performance appears to be broadly in line with market movements although we had expected a slightly stronger performance, taking into account the strength of rent collection, the resilience of occupancy and the quality of the assets demonstrated in the capital presentation in November 2020.

Exhibit 2: Portfolio analysis

31-Dec-20

30-Sep-20

30-Jun-20

31-Dec-19

FY20

Q320

H120

FY19

Share of portfolio value

Office

83.5%

80.3%

79.9%

79.9%

Industrial

11.1%

13.9%

14.3%

13.7%

Retail

4.1%

4.3%

4.3%

5.0%

Other

1.3%

1.5%

1.5%

1.4%

Total

100.0%

100.0%

100.0%

100.0%

Valuation (£m)

Office

611.6

594.1

593.1

628.7

Industrial

81.3

102.8

106.1

107.8

Retail

30.0

31.8

31.9

39.3

Other

9.5

11.1

11.1

11.0

Total

732.4

739.9

742.3

786.9

Source: Regional REIT data

Estimates and valuation

We have made no changes to our forecasts and will review these with the detailed FY20 results on 25 March. In line with previous management statements, we expect the FY20 DPS to have been fully covered by EPRA earnings, although our analysis of the H220 valuation performance suggests that FY20 EPRA NAV per share may be 1–2p below our 100.2p forecast. The end-FY20 40.8% net LTV is broadly in line with the company’s c 40% medium-term target but slightly above the 39.7% that we previously forecast, primarily resulting from the Beeston Business Park acquisition in December 2020 (not yet reflected in our forecast) but also the revaluation movement.

Confirmed by the Q420 DPS declaration, RGL continues to trade at a significant yield premium to the group average with a very similar P/NAV. With a strong focus on dividends, supported by very strong rent collection, the yield continues to stand out as attractive in a low-rate environment. Despite some recent increase in market interest rates, the UK 10-year gilt yield remains well below 1%.

Exhibit 3: Peer performance and valuation comparison.

Price
(p)

Market cap (£m)

P/NAV*
(x)

Yield**
(%)

Annualised yield*** (%)

Share price performance

One month

Three months

12 months

From 12M high

Circle Property

177

50

0.62

2.5

N/A

1%

-6%

-17%

-19%

Custodian

93

389

0.96

5.3

5.4

2%

5%

-14%

-18%

Picton

88

479

0.92

3.1

3.6

4%

16%

-10%

-14%

Real Estate Investors

34

62

0.52

7.5

6.0

-3%

-6%

-34%

-37%

Schroder REIT

41

214

0.70

3.8

6.1

3%

11%

-17%

-20%

Palace Capital

205

94

0.59

3.7

4.9

5%

-8%

-32%

-34%

UK Commercial Property REIT

69

897

0.82

2.7

2.7

5%

-5%

-15%

-19%

BMO Commercial Property Trust

71

570

0.61

2.5

5.9

-7%

-6%

-26%

-29%

BMO Real Estate Investments

75

180

0.76

5.3

4.5

8%

15%

-2%

-8%

Average

0.74

4.2

4.9

2%

3%

-19%

-22%

Regional REIT

79

339

0.77

8.2

7.6

-2%

4%

-31%

-33%

UK property sector index

1,626

3%

3%

-6%

-10%

UK equity market index

3,761

1%

3%

1%

-3%

Source: Refinitiv, company data. Prices as at 1 March 2021, Note: *Based on last reported EPRA NAV per share. **Based on trailing 12-month DPS declared. ***Based on last quarterly/monthly DPS declared.

Exhibit 4: Financial summary

Year end 31 December

£m

2016

2017

2018

2019

2020e

2021e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Rental & other income

43.0

52.3

62.1

64.4

63.4

62.9

Non-recoverable property costs

0.0

(6.5)

(7.7)

(9.4)

(10.2)

(9.6)

Net rental & related income

 

 

43.0

45.8

54.4

55.0

53.3

53.3

Administrative expenses (excluding performance fees)

(8.0)

(7.8)

(10.5)

(10.9)

(11.5)

(11.0)

Performance fees

(0.2)

(1.6)

(7.0)

0.0

0.0

0.0

EBITDA

 

 

34.8

36.4

36.8

44.1

41.8

42.4

EPRA cost ratio

n.a

0.3

0.4

0.3

0.3

0.3

EPRA cost ratio excluding performance fee

n.a

0.3

0.3

0.3

0.3

0.3

Gain on disposal of investment properties

0.5

1.2

23.1

1.7

(1.1)

0.0

Change in fair value of investment properties

(6.8)

5.9

23.9

(3.5)

(48.1)

0.0

Change in fair value of right to use asset

(0.2)

(0.1)

0.0

Operating Profit (before amort. and except.)

 

 

28.5

43.5

83.8

42.0

(7.5)

42.4

Net finance expense

(8.6)

(14.5)

(15.7)

(13.7)

(13.8)

(13.5)

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

Profit Before Tax (norm)

 

 

18.3

28.7

67.9

26.3

(24.4)

28.8

Tax

0.0

(1.6)

(0.6)

0.3

0.1

0.0

Profit After Tax (FRS 3)

 

 

18.3

27.1

67.4

26.5

(24.3)

28.8

Adjusted for the following:

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

6.2

(7.1)

(47.0)

1.9

49.2

0.0

Net movement in the fair value of derivative financial investments

0.9

(0.4)

(0.5)

1.5

2.6

0.0

Other EPRA adjustments including deferred tax adjustment

(4.3)

4.5

1.0

1.1

0.5

0.0

EPRA earnings

 

 

21.1

24.0

20.9

31.0

27.9

28.8

Performance fees

0.2

1.6

7.0

0.0

0.0

0.0

Adjusted earnings

 

 

21.3

25.6

27.9

31.0

27.9

28.8

Period end number of shares (m)

274.2

372.8

372.8

431.5

431.5

431.5

Fully diluted average number of shares outstanding (m)

274.3

297.7

372.8

398.9

431.5

431.5

IFRS EPS - fully diluted (p)

 

 

4.9

9.1

18.1

6.6

(5.6)

6.7

EPS - normalised (p)

 

 

7.8

8.6

7.5

7.8

6.5

6.7

EPRA EPS, fully diluted (p)

 

 

7.7

8.1

5.6

7.8

6.5

6.7

Dividend per share (p)

 

 

7.65

7.85

8.05

8.25

6.40

6.50

Dividend cover

101.6%

109.7%

93.1%

94.2%

101.0%

102.8%

BALANCE SHEET

Non-current assets

 

 

506.4

740.9

720.9

806.0

739.7

745.5

Investment properties

502.4

737.3

718.4

787.9

722.4

728.4

Other non-current assets

4.0

3.6

2.5

18.1

17.3

17.1

Current Assets

 

 

27.6

66.6

127.0

69.4

109.1

101.8

Other current assets

11.4

21.9

22.2

32.2

32.9

27.1

Cash and equivalents

16.2

44.6

104.8

37.2

76.1

74.8

Current Liabilities

 

 

(23.3)

(42.6)

(83.7)

(36.2)

(44.3)

(40.1)

Borrowings

0.0

(0.4)

(0.4)

0.0

0.0

0.0

Other current liabilities

(23.3)

(42.2)

(83.3)

(36.2)

(44.3)

(40.1)

Non-current liabilities

 

 

(219.0)

(372.0)

(334.7)

(355.5)

(377.2)

(377.3)

Borrowings

(217.4)

(371.2)

(285.2)

(287.9)

(306.9)

(306.9)

Other non-current liabilities

(1.5)

(0.8)

(49.5)

(67.6)

(70.3)

(70.4)

Net Assets

 

 

291.7

392.9

429.5

483.7

427.2

429.9

Derivative interest rate swaps & deferred tax liability

1.5

2.8

1.0

2.6

5.2

5.2

EPRA net assets

 

 

293.2

395.7

430.5

486.3

432.4

435.1

IFRS NAV per share (p)

106.4

105.4

115.2

112.1

99.0

99.6

Fully diluted EPRA NAV per share (p)

106.9

105.9

115.5

112.7

100.2

100.8

CASH FLOW

Cash (used in)/generated from operations

 

 

31.4

40.3

38.8

26.0

41.6

44.2

Net finance expense

(6.6)

(9.2)

(11.9)

(12.7)

(12.9)

(12.6)

Tax paid

(1.7)

(0.2)

(1.5)

(0.8)

0.0

0.0

Net cash flow from operations

 

 

23.1

30.8

25.4

12.4

28.7

31.6

Net investment in investment properties

(99.3)

(8.3)

100.6

(25.6)

16.3

(6.0)

Acquisition of subsidiaries, net of cash acquired

(5.6)

(51.9)

(32.6)

(43.9)

0.0

0.0

Other investing activity

0.1

0.0

0.2

0.2

0.1

0.0

Net cash flow from investing activities

 

 

(104.8)

(60.1)

68.2

(69.4)

16.4

(6.0)

Equity dividends paid

(15.7)

(23.3)

(29.4)

(32.5)

(24.5)

(26.1)

Debt drawn/(repaid) - inc bonds and ZDP

91.4

13.9

(50.5)

3.5

18.7

0.0

Net equity issuance

0.0

71.3

(1.2)

60.5

0.0

0.0

Other financing activity

(1.7)

(4.2)

47.7

(42.1)

(0.5)

(0.8)

Net cash flow from financing activity

 

 

74.0

57.7

(33.4)

(10.6)

(6.3)

(27.0)

Net Cash Flow

 

 

(7.8)

28.4

60.2

(67.6)

38.9

(1.4)

Opening cash

24.0

16.2

44.6

104.8

37.2

76.1

Closing cash

 

 

16.2

44.6

104.8

37.2

76.1

74.8

Balance sheet debt

(217.4)

(371.6)

(374.6)

(337.1)

(356.4)

(356.5)

Unamortised debt costs

(2.6)

(4.8)

(5.8)

(6.9)

(6.4)

(6.2)

Closing net debt

 

 

(203.9)

(331.8)

(275.5)

(306.8)

(286.6)

(288.0)

LTV

40.6%

45.0%

38.3%

38.9%

39.7%

39.5%

Source: Regional REIT historical data, Edison Investment Research forecasts

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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.

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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.

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Germany

London +44 (0)20 3077 5700

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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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