Retail eligible bond 4.5% 2024

Regional REIT 20 July 2018 Update
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Regional REIT

Retail eligible bond 4.5% 2024

Launch of bond issue

Real estate

20 July 2018

Price

94.4p

Market cap

£352m

Net debt (£m) at 31 March 2018

319.0

Net LTV at 31 March 2018

43.9%

Shares in issue

372.8m

Free float

97%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.2)

(5.8)

(8.8)

Rel (local)

(0.6)

(10.1)

(12.6)

52-week high/low

104.72p

93.7p

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 10-15% with a strong focus on income.

Next events

Q2 DPS announcement

31 August 2018

Interim results

11 September 2018

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Regional REIT is a research client of Edison Investment Research Limited

Despite continuing Brexit uncertainty and some slowing of UK economic growth regional property markets have remained robust in recent months, with industrial and office properties benefiting from a continuing positive supply-demand balance. Against this backdrop, Regional REIT (RGL) continues to actively manage its portfolio and has also launched an offer of retail-eligible bonds at a fixed rate of 4.5%. The bonds are intended to diversify and enhance RGL’s overall debt portfolio and provide added flexibility as the group targets a medium term reduction in gearing from current levels.

Year end

Net rental
income (£m)

Adj. EPRA
EPS* (p)

EPRA NAV/
share (p)

DPS
(p)

P/EPRA
NAV (x)

Yield
(%)

12/15**

4.6

0.9

107.8

1.00

0.88

1.1

12/16

38.1

7.8

106.9

7.65

0.88

8.1

12/17

45.8

8.6

105.9

7.85

0.89

8.3

Note: *Adj. EPRA EPS excludes exceptional expenses and estimated performance fees. **56-day trading period only.

Regional markets have remained robust

We have suspended our forecasts pending completion of the bond offering. However, we note that in its 17 May 2018 trading statement, RGL pointed to a continuing good performance in the industrial and office occupancy markets of the UK’s regions, despite the economic and political uncertainties posed by Brexit. It said that it expected to benefit from this and remained confident of its ability to grow income, decrease the void rate and increase occupancy in the current year. This positive view was underpinned by the group’s active asset management of existing assets and recent acquisitions. Over the past few months, it has continued to be active in recycling capital and has recently announced the completion of a number of significant property transactions, both acquisition and disposal. Early in July, RGL announced the completion of the sale of a regionally diverse industrial portfolio comprising 15 properties. The sale price was £39.1m, a 24.1% uplift versus the 31 December 2017 valuation, generating a gain of c £7.5m or c 2p per share.

Retail eligible bond offering

The bond offer proceeds will enable RGL to part repay certain external debt facilities, will further diversify its sources of funding, and will extend the average maturity profile of its overall debt. The offer was launched on 18 July 2018 and the offer period runs until 12 noon on 1 August 2018. The bonds are unsecured and will pay a fixed rate of 4.5%, semi-annually in arrears, until maturity on 6 August 2024. The minimum initial subscription is £2,000 and the bonds are available in multiples of £100 thereafter. The bonds are expected to be listed on the Official List of the UK Listing Authority and admitted to trading on the regulated market of the London Stock Exchange (LSE). It is expected that the bonds will be eligible for the LSE’s electronic Order book for Retail Bonds (ORB). We provide a summary of the key terms on page 3.

Capital recycling has continued in FY18

Since end-FY17, RGL has continued to take advantage of opportunities to recycle capital on properties that have met the individual plans set out for them by the investment manager. In its 17 May 2018 trading update, RGL reported on a number of property transactions, including the completion, in Q118, of disposals agreed in H217, amounting to £18.2m net of costs. Average sales prices on the disposals were 19.3% above the H117 valuations. Also during Q118, RGL completed the £4.9m acquisition of an office building at Port Solent, as part of the Northwood Investors transaction entered into in late 2017.

As at 31 March 2018, the investment portfolio was valued at £726.9m, comprising 160 properties and 1,339 individual letting units, with a total of nearly 1,000 tenants with a combined contracted rent roll of £61.7m on a weighted average unexpired lease term of 5.3 years (3.5 years to first break). The net initial yield on the portfolio at the end of FY17 was 6.5% and the reversionary yield was 9.2%.

More recently, on 20 June 2018, RGL announced the sale of The Point Trade & Retail Park in Glasgow, for £14.1m, 5.6% above the 31 December 2017 valuation, and completed the transaction on 5 July 2018. That was followed by the announced completion of the £35.2m acquisition of five regional offices and one office/distribution property on 26 June, and the announced completion of the sale of a regionally diverse industrial portfolio, comprising 15 properties, for £39.1m. The sale price of the latter represented a 24.1% uplift versus the 31 December 2017 valuation.

Announced sales since the beginning of FY18 are running ahead of announced acquisitions, although the asset manager reports having identified a strong pipeline of prospective investment opportunities.

Further debt management opportunities

RGL uses gearing to enhance returns, where it believes this appropriate. End-FY17 net gearing, represented by the net loan-to-value ratio (LTV) was 45.0%, and was c 44.0% at end-Q118. Based on current market conditions, the board of RGL believes 40% LTV is a reasonable medium-term target, with a maximum level of 50%. The bond offer proceeds will enable RGL to part repay certain external debt facilities, will further diversify its sources of funding, and will extend the average maturity profile of its overall debt. A significant refinancing in December 2017 substantially simplified the group debt structure and increased average maturity from 2.5 to 6.2 years (as at 31 December 2017). We show the end-FY17 group debt facilities in Exhibit 1 and draw particular attention to the zero dividend preference share (ZDP) funding. The ZDP was acquired as part of the Conygar transaction in 2017 and matures in January 2019. Although the interest rate is shown as zero, it accrues at a rate of 6.5% pa, considerably above the blended average cost of debt.

Exhibit 1: Summary of debt facilities as at 31 December 2017

Debt provider

Total facility (£’000s)

Annual interest rate

Maturity

Regional REIT ZDP plc

39,869

0%

January 2019

ICG Longbow

65,000

Fixed 5.00%

August 2019

Royal Bank of Scotland

19,336

Libor plus 2.00%

December 2020

HSBC

20,998

Libor plus 2.15%

December 2021

Santander UK

70,700

Libor plus 2.15%

November 2022

Scottish Widows & Aviva Investors Real Estate Finance

165,000

Fixed 3.28%

December 2027

Source: Regional REIT

Bond issue details

We show a summary of the key terms of the bond in Exhibit 2 and note that the prospectus and other important information are available on the RGL website, www.regionalreit.com. Given the level of the minimum subscription, in addition to institutional and sophisticated investors, the bonds may also appeal to other private investors acting on the advice of their stockbrokers and financial advisers.

Exhibit 2: Key terms of bond issue

Issuer

Regional REIT

ISIN number

XS1849479602

Listing

London Stock Exchange, ORB

Issue size

N/A

Selling restrictions

Only to be sold in UK, Isle of Man, and Channel Islands

Repayment

Bullet

Lead Manager

Peel Hunt

Authorised distributors

AJ Bell, iDealing, Redmayne Bentley initially confirmed

Coupon

4.5% semi-annual in arrears

Maturity

6 August 2024

Issue price

100% of nominal

Minimum investment

£2,000

Denominations

£100

Issuer

ISIN number

Listing

Issue size

Selling restrictions

Repayment

Lead Manager

Authorised distributors

Coupon

Maturity

Issue price

Minimum investment

Denominations

Regional REIT

XS1849479602

London Stock Exchange, ORB

N/A

Only to be sold in UK, Isle of Man, and Channel Islands

Bullet

Peel Hunt

AJ Bell, iDealing, Redmayne Bentley initially confirmed

4.5% semi-annual in arrears

6 August 2024

100% of nominal

£2,000

£100

Source: Regional REIT

Exhibit 3: Financial summary

Year end 31 December (£000's)

2015

2016

2017

PROFIT & LOSS

IFRS

IFRS

IFRS

Gross rental income

5,361

42,994

52,349

Non-recoverable property costs

(754)

(4,866)

(6,502)

Revenue

 

 

4,608

38,128

45,847

Administrative expenses (excluding performance fees)

(1,353)

(7,968)

(7,819)

Performance fees

0

(249)

(1,610)

EBITDA

 

 

3,255

29,911

36,418

EPRA cost ratio

N/M

29.6%

29.7%

EPRA cost ratio excluding performance fee

N/M

29.0%

26.6%

Gain on disposal of investment properties

87

518

1,234

Change in fair value of investment properties

23,784

(6,751)

5,893

Operating profit before financing costs

 

 

27,126

23,678

43,545

Exceptional items

(5,296)

0

0

Net finance expense

(820)

(8,629)

(14,513)

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

115

(1,654)

(340)

Profit Before Tax

 

 

21,124

13,395

28,692

Tax

0

23

(1,632)

Profit After Tax (FRS 3)

 

 

21,124

13,418

27,060

Adjusted for the following:

Net gain/(loss) on revaluation

(23,784)

6,751

(5,893)

Net movement in the fair value of derivative financial investments

(180)

865

(407)

Gain on disposal of investment properties

(86)

(518)

(1,234)

Other EPRA adjustments

0

557

3,064

Deferred tax adjustment

0

0

1,424

EPRA earnings

 

 

(2,926)

21,073

24,014

Performance fees

0

249

1,610

Exceptional items

5,296

0

0

Adjusted EPRA earnings

 

 

2,371

21,322

25,624

Period end number of shares (m)

274.2

274.2

372.8

Fully diluted average number of shares outstanding (m)

274.2

274.3

297.7

IFRS EPS - fully diluted (p)

 

 

7.7

4.9

9.7

EPRA EPS - adjusted (p)

 

 

0.9

7.8

8.6

EPRA EPS

 

 

(1.1)

7.7

8.1

Dividend per share (p) - declared basis

 

 

1.00

7.65

7.85

Dividend cover

N/A

102%

110%

BALANCE SHEET

Non-current assets

 

 

407,492

506,401

740,928

Investment properties

403,703

502,425

737,330

Other non-current assets

3,790

3,976

3,598

Current Assets

 

 

35,803

27,574

66,587

Other current assets

11,848

11,375

21,947

Cash and equivalents

23,954

16,199

44,640

Current Liabilities

 

 

(21,485)

(23,285)

(42,644)

Bank and loan borrowings - current

(200)

0

(400)

Other current liabilities

(21,285)

(23,285)

(42,244)

Non-current liabilities

 

 

(126,469)

(218,955)

(371,972)

Bank and loan borrowings - non-current

(126,469)

(217,442)

(371,220)

Other non-current liabilities

0

(1,513)

(752)

Net Assets

 

 

295,341

291,735

392,899

Derivative interest rate swaps & deferred tax liability

416

1,513

2,802

EPRA net assets

 

 

295,757

293,248

395,701

IFRS NAV per share (p)

107.7

106.4

105.4

Fully diluted EPRA NAV per share (p)

107.8

106.9

105.9

CASH FLOW

Cash (used in)/generated from operations

 

 

(2,232)

31,434

40,251

Net finance expense

(424)

(6,626)

(9,167)

Tax paid

0

(1,715)

(236)

Net cash flow from operations

 

 

(2,656)

23,093

30,848

Net investment in investment properties

1,157

(99,286)

(8,267)

Acquisition of subsidiaries, net of cash acquired

26,659

(5,573)

(51,866)

Other investing activity

13

60

25

Net cash flow from investing activities

 

 

27,828

(104,799)

(60,108)

Equity dividends paid

0

(15,723)

(23,321)

Bank debt drawn/(repaid)

(1,217)

91,417

13,921

Other financing activity

0

(1,744)

67,101

Net cash flow from financing activity

 

 

(1,217)

73,950

57,701

Net Cash Flow

 

 

23,955

(7,756)

28,441

Opening cash

0

23,955

16,199

Closing cash

 

 

23,955

16,199

44,640

Balance sheet debt

(126,669)

(217,442)

(371,620)

Unamortised debt costs

(1,875)

(2,618)

(4,693)

Closing net debt

 

 

(104,589)

(203,861)

(331,673)

LTV

25.9%

40.6%

45.0%

Source: Regional REIT, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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