Regional REIT |
Retail eligible bond 4.5% 2024 |
Launch of bond issue |
Real estate |
20 July 2018 |
Share price performance
Business description
Next events
Analysts
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 |
Adj. EPRA |
EPRA NAV/ |
DPS |
P/EPRA |
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
|
|