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Research: Real Estate
With pandemic restrictions lifted and the return to work underway, Regional REIT’s (RGL) H122 results show good and continuing operational progress. The sharp rise in energy prices affected property costs, but this should moderate with government support measures. Combined with income seasonality and fully fixed/hedged borrowing costs, RGL expects a stronger H222 performance and reiterated its full-year DPS target of 6.6p.
Regional REIT |
Continuing to deliver income-led returns |
Interim results |
Real estate |
27 September 2022 |
Share price performance
Business description
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Regional REIT is a research client of Edison Investment Research Limited |
With pandemic restrictions lifted and the return to work underway, Regional REIT’s (RGL) H122 results show good and continuing operational progress. The sharp rise in energy prices affected property costs, but this should moderate with government support measures. Combined with income seasonality and fully fixed/hedged borrowing costs, RGL expects a stronger H222 performance and reiterated its full-year DPS target of 6.6p.
Year end |
Net rental |
EPRA |
EPRA |
NAV**/ |
DPS |
P/NAV |
Yield |
12/20 |
53.3 |
28.1 |
6.5 |
98.6 |
6.40 |
0.63 |
10.3 |
12/21 |
55.8 |
30.4 |
6.6 |
97.2 |
6.50 |
0.64 |
10.5 |
12/22e |
62.3 |
33.5 |
6.5 |
97.3 |
6.60 |
0.64 |
10.6 |
12/23e |
64.3 |
34.5 |
6.7 |
97.3 |
6.70 |
0.64 |
10.8 |
Note: *EPRA earnings exclude revaluation movements, gains/losses on disposal and other non-recurring items. **NAV is EPRA net tangible assets per share.
Encouraging operational progress
With the easing of pandemic restrictions, nearly all tenants have returned to occupation and rent collection is now effectively back to normal, underpinning dividends. H122 occupational demand was strong, with new lettings adding £2.6m of gross rental income when fully occupied, increasing further in Q322 to c £3.3m y-t-d, almost 90% of the full year 2019 total, prior to the pandemic. Capital recycling from lower to higher-yield assets added a net £1.9m pa to income and enhanced overall asset quality. Including the benefit of transactions, EPRA occupancy increased but was lower on a like-for-like basis, reflected in a flat rent roll of c £70m. Like-for-like property gains of 1.0% supported NAV per share, little changed at 97.1p, and DPS paid generated a six-month accounting total return of 3.3%.
Income-led strategy
The sharp increase in energy prices materially increased H122 non-recoverable property costs. Without this, EPRA EPS of 2.9p would have covered DPS of 3.3p. RGL expects property costs to moderate in H222 and to benefit from leasing progress, capital recycling and income seasonality. Meanwhile, borrowing costs are fully hedged at a maximum 3.5%. We expect FY22 DPS to be effectively fully covered despite a reduction in our EPRA earnings forecasts of c 2%. For FY23 we have reduced DPS and earnings growth by 3% and 4% respectively. RGL has consistently targeted a higher-yield portfolio that would provide progressive, regular dividends with the potential for capital growth. Asset yields have been supported by active asset management and capital recycling. The net initial yield is 5.7% but the reversionary yield of 9.2% demonstrates the income potential from letting space into the positive demand-supply conditions that RGL anticipates will continue.
Valuation: High yield despite sustained distributions
RGL continues to offer one of the highest yields in the UK REIT sector, a combination of its consistent income-led strategy and the market valuation of its shares. Its FY22 target DPS of 6.6p reflects a yield of 10.6%, significantly above close peers, and only partly reflected in a narrower discount to NAV.
Strong H122 occupational demand and increasing occupation
With the easing of pandemic restrictions, nearly all tenants (c 99%) have returned to occupation in some form, be it full time or hybrid, while the 14 that have not indicate an intention to shortly do so, and rent collection is now effectively back to normal. Rents due to 30 June 2022 have been 98.7%1 collected, compared with 96.4% in the equivalent period of 2021. Currently, more than 85% of rental income is collected within 30 days of the due date.
Actual rents collected 98.5% and monthly collections 0.2% with no outstanding agreed collection plans.
H122 occupational demand was strong, with 47 new lettings completed, totalling c 146k sq ft, which when fully occupied will provide an additional gross rental income of c £2.6m pa. Further lettings during Q322 have increased the year-to-date total to 62 lettings with an annualised rental value of c £3.3m, almost 90% of the full-year 2019 total, immediately prior to the pandemic.
The investment market has continued to provide opportunities to accretively recycle capital out of non-core assets and properties where asset management plans have been completed, into higher-yielding, higher-quality assets, adding further diversification of the occupier base. Assets amounting to £78.9m (after costs) were acquired at a blended net initial yield of 8.4% and £71.4m (after costs) of assets sold at a blended yield of 5.5%. The 290-basis point spread between purchases and sales locked in a c £1.9m annualised uplift in gross rental income. Three additional properties with completed business plans have been sold since H122 for an aggregate £7.2m, in line with the 30 June 2022 valuation.
EPRA occupancy increased to 83.8% (end-FY21: 81.8%), including a benefit from the new lettings and from transaction activity (with acquisitions at a higher level of EPRA occupancy than the disposals). On a like-for-like basis the end-FY22 EPRA occupancy rate was 82.1% compared with 86.3% at end-H121, with two properties in particular accounting for c 60% of the decline due to the timing of lease expiry and refurbishment.
The gross rent roll ended the period at £72.1m, a similar level to end-FY21, reflecting a net positive £1.9m impact from acquisitions and disposals as well as new lettings and lease renewals, offset by the impact of lease maturities and terminations. RGL entered FY22 with c £14m (11.5%) of income ‘at risk’ from lease maturities and break options over the following 12 months. During H122, 72.1% of expiries/breaks (by unit) were retained, an increase from 69.6% in FY21.
At end-H122 the portfolio was valued at £918.2m (end-FY21: £906.1m and end-H121: £729.1m). H122 growth included like-for-like revaluation gains of 1.0% and the net initial yield of 5.7% was unchanged on end-FY21. By value, the share of office properties had increased to 92.0%,2 or 91.6% by gross rental income. The portfolio remained strongly diversified by the number of properties (159), property units (1,517) and occupiers (1,086 occupiers) as well as by geography.
An increase from 89.8% at end-FY21. In addition to offices, H122 valuation comprised industrial (3.1%), retail (3.5%) and ‘other’ (1.4%) properties.
Within its overall ESG framework, RGL is targeting an EPC rating3 of B or better for all properties by 2030 and made good progress in H122. Capex during the period of £3.1m and quality-enhancing transaction activity supported an increase in the proportion of such properties to 13.2% from 9.9% at end-FY21 (EPC A–C 48.0% vs 43.6% at end-FY21). The company expects that most of the further investment required to meet its EPC targets will form part of the existing rolling programme of capital expenditure and H122 investment was consistent with the c £44m allowed for in the external property valuation (and RGL’s internal estimate of c £40m). It is likely that some of this investment will be undertaken by tenants that are also seeking to enhance their environmental performance and we anticipate further disposals of properties and capital recycling.
Energy Performance Certificate
Positive structural market indicators but economic challenge
More generally across the regional office market, RGL observes an improvement in occupier demand from the pandemic trough. The return to the office is underway but that applies more clearly to tenants rather than employees. Many companies are still in a process of trialling new ways of office working, commonly a hybrid model whereby employees spend perhaps three days per week (typically Tuesday, Wednesday and Thursday) in the office and two days at home. RGL does not expect hybrid working to materially reduce space requirements as it must cater for peak usage. It also notes a growing preference amongst employers to have more staff on site for an increasing amount of time, recognising the collaborative and creative benefits of office working. However, the company continues to believe it will take until the end of 2023 for this balance to be resolved across the market and for market uncertainties regarding the future use of the office, and the demand for office space, to be resolved.
Given its views on future office usage, RGL remains positive about the structural occupational supply-demand balance for secondary regional offices, the market segment in which it invests. It notes that going into the pandemic, supply was tight and although rents had begun to increase, they remained at a relatively low level. Coming out of the pandemic, many occupiers have retained their office space and occupancy remains relatively high. RGL expects that in time, where there is additional demand by occupiers to switch location, upscale or improve the quality of their accommodation to retain or recruit staff, it is likely to meet tight supply, with positive indications for rental growth.
RGL is cognisant of the challenge to this scenario from the generally anticipated economic downturn, but notes that negative impacts would be widely spread across the commercial property market, including some sectors where valuations have recently increased noticeably more strongly than has been the case for offices.
Fixed debt costs and portfolio diversification mitigate macroeconomic risks
A key element of RGL’s strategy since it listed in November 2015 has been to build a diversified portfolio that spreads income risk across a wide range of occupiers operating across a broad spread of industries.
A more immediate challenge to the commercial property sector is the sharp increase in borrowing costs, for which RGL is well placed with all agreed and drawn debt fixed or hedged (with swaps or caps), with a maximum cost of 3.5% for a duration of five years. The earliest maturity is not until August 2024 (the retail eligible bonds).
The weighted average cost of debt increased a little in H122, to 3.5% from 3.3% at end-FY21, as interest rates increased and the interest rate caps were reached, but has now reached its limit.
The net loan to value ratio (LTV) was 43.2%4 at end-H122, slightly up on end-FY21 (42.4%), mostly reflecting net capital investment in the period, but RGL continues to target a reduction towards its c 40% medium-term target. There is a good level of headroom against borrowing covenants that require LTVs at the loan facility level of no more than c 60%. Group level interest cover was 3.0x at 30 June 2022.
Net borrowings as a percentage of the FY21 externally assessed property value adjusted for subsequent property transactions and capex.
Income-led total returns
RGL came to market in November 2015 targeting a higher yield portfolio that would provide progressive, regular dividends with the potential for capital growth. Active asset management and capital recycling are key elements in sustaining asset yields. RGL’s dividend yield has been consistently one of the highest in the sector and quarterly dividends were maintained during the pandemic, albeit at a reduced level.
Exhibit 1: NAV total return performance*
2015** |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
H122 |
Since IPO |
|
Opening EPRA NAV per share (p) |
100.0 |
106.8 |
106.1 |
105.4 |
115.2 |
112.6 |
98.6 |
97.2 |
100.0 |
Closing EPRA NTA* per share (p) |
106.8 |
106.1 |
105.4 |
115.2 |
112.6 |
98.6 |
97.2 |
97.1 |
97.1 |
Dividends per share paid (p) |
0.00 |
6.25 |
7.80 |
8.00 |
8.20 |
7.45 |
6.30 |
3.35 |
47.35 |
Dividend return |
0.0% |
5.8% |
7.4% |
7.6% |
7.1% |
6.6% |
6.4% |
3.4% |
47.4% |
Capital return |
6.8% |
-0.7% |
-0.6% |
9.2% |
-2.3% |
-12.4% |
-1.4% |
-0.2% |
-2.9% |
NAV total return |
6.8% |
5.1% |
6.7% |
16.8% |
4.9% |
-5.8% |
5.0% |
3.3% |
44.4% |
Average annual return (%) |
5.7% |
Source: Regional REIT data, Edison Investment Research. Note: *NAV is defined as EPRA net tangible assets (NTA) per share. **55 days from 6 November 2021.
The accounting total return5 has been positive in each year since listing, other than in FY20 due to the pandemic. The total return up to end-H122 amounts to 44.4% or an average annual return of 5.7%. Reflecting RGL’s strong income focus, its returns have all been generated by dividends paid with a good level of consistency, as shown in Exhibit 2.
The change in EPRA NTA/NAV plus dividends paid.
Exhibit 2: Trend in dividend return and capital return |
Source: Regional REIT data, Edison Investment Research |
Details of the H122 financial results
Despite the operational progress described above, EPRA earnings growth was held back by the increase in non-recoverable property costs, primarily reflecting the impact of increased energy costs relating to vacant space but also ‘shared’ space (such as reception areas or lifts) within properties that are unallocated to tenants. EPRA EPS of 2.9p was below DPS declared of 3.3p, but dividends would otherwise have been covered. RGL is confident of a stronger earnings performance in H222, reflecting normal income seasonality and a lesser impact from energy cost inflation, in part due to government energy cost support. The company remains committed to its full-year DPS target of 6.6p.
Exhibit 3: Summary of H122 financial performance
£m unless stated otherwise |
H122 |
H121 |
H122/H121 |
FY21 |
Rental and other property income |
37.1 |
29.5 |
25.5% |
65.8 |
Non-recoverable property costs |
(8.1) |
(4.2) |
95.1% |
(9.9) |
Net rental income |
28.9 |
25.4 |
14.1% |
55.8 |
Administrative & other expenses |
(5.6) |
(5.5) |
1.7% |
(10.6) |
Operating profit before gains/(losses) on property |
23.4 |
19.9 |
17.5% |
45.2 |
Unrealised and realised property gains/(losses) |
1.4 |
2.5 |
(7.7) |
|
Operating profit |
24.8 |
22.4 |
37.6 |
|
Net finance expense |
(8.4) |
(6.9) |
21.5% |
(14.9) |
Impairment of goodwill |
0.0 |
0.0 |
0.0 |
|
Change in fair value of interest rate derivative |
11.9 |
2.6 |
6.0 |
|
Profit before tax |
28.3 |
18.0 |
28.8 |
|
Tax |
0.0 |
0.0 |
0.0 |
|
IFRS Net profit |
28.3 |
18.0 |
28.8 |
|
Adjust for: |
||||
Unrealised and realised property gains/(losses) |
(1.4) |
(2.5) |
7.7 |
|
Change in fair value of interest rate derivative |
(11.9) |
(2.6) |
(6.0) |
|
EPRA earnings |
15.0 |
13.0 |
15.4% |
30.4 |
Basic IFRS EPS (p) |
5.5 |
4.2 |
6.3 |
|
EPRA EPS (p) |
2.9 |
3.0 |
-2.7% |
6.6 |
DPS (p) |
3.30 |
3.20 |
3.1% |
6.50 |
EPRA NTA per share (p) |
97.1 |
99.1 |
-2.1% |
97.2 |
Accounting total return |
3.3% |
3.6% |
5.0% |
|
Investment properties |
918.2 |
729.1 |
25.9% |
906.1 |
Net debt |
(396.7) |
(290.4) |
(383.8) |
|
Net LTV |
43.2% |
39.8% |
42.4% |
|
EPRA cost ratio (exc direct vacancy costs) |
16.5% |
19.9% |
16.8% |
Source: Regional REIT data, Edison Investment Research
In particular we note:
■
Rental and other property income of £37.1m increased strongly versus H121, primarily reflecting the increased rent roll during the period, and also increased from H221. End-H122 annualised gross rent roll was £72.0m compared with £61.1m at end-H121 (and £72.1m at end-FY21). Among significant FY21 purchases and sales, the H221 £236m (before costs) acquisition of the Squarestone portfolio added an initial £21.9m to annualised rent roll.
■
Net rental income of £28.9m was above the H121 level of £25.4m but was lower than in H221 (£30.4m).
■
Administrative expenses grew modestly year-on-year but included a c £0.8m positive swing in rent receivable provisions from a £0.6m charge in FY21 to a £0.2m gain in H122. The main underlying change year-on-year relates to investment and asset management fees, which have increased in line with higher average net assets and gross rents. Excluding direct vacancy costs the EPRA cost ratio was 16.5% (H121: 19.9%; FY21: 16.8%).
■
Before property revaluation movements, operating profit increased to £23.4m versus £19.9m in H121, but was slightly lower than in H221 (£25.3m).
■
Net property valuation gains of £1.4m comprised a £4.8m investment property revaluation gain offset by a loss on disposal of £3.3m (a gain of £0.8m offset by disposal costs of £4.1m) and a negative £0.1m charge on the right of use asset.
■
Finance expenses increased with higher average borrowings and a slight pick-up in average debt costs as cap rates were reached (limiting a further increase in borrowing costs). IFRS earnings and NAV further benefited from a positive gain in the value of interest rate hedging instruments, reflecting the increase in market interest rates.
■
Adjusted for valuation movements, EPRA earnings were £15.0m (H121: £13.0m; H221: £17.4m) or 2.9p per share (H121: 3.0p; H221: 3.6p).
Forecasts
Management is confident that H222 earnings will exceed the H122 level, reflecting the usual seasonality in the business, which includes the tendency for non-rental income (such as surrender premiums and dilapidation payments) to be bunched towards year-end. In our revised estimates, higher rental and other income (primarily other income) offset the impact of higher non-recoverable property costs, and with higher interest costs (as the rate caps are reached) EPRA earnings reduce c 2–4% in FY22 and FY23. We have reduced our forecast for the rate of FY23 dividend growth, but cover is effectively maintained throughout the forecast period.
Exhibit 4: Summary of estimates
£m unless stated otherwise |
New |
Previous |
Change |
||||||
FY22 |
FY23 |
FY22 |
FY23 |
FY22 |
FY23 |
FY22 |
FY23 |
||
Rental & other income |
76.8 |
77.3 |
73.4 |
75.7 |
3.4 |
1.6 |
4.6% |
2.2% |
|
Non-recoverable property costs |
(14.5) |
(13.1) |
(10.5) |
(10.8) |
(3.9) |
(2.3) |
37.3% |
21.3% |
|
Net rental income |
62.3 |
64.3 |
62.8 |
64.9 |
(0.5) |
(0.7) |
-0.8% |
-1.0% |
|
Administrative expenses |
(11.6) |
(12.3) |
(11.9) |
(12.2) |
0.2 |
(0.1) |
-2.0% |
0.6% |
|
Net finance expense |
(17.2) |
(17.5) |
(16.9) |
(16.9) |
(0.3) |
(0.6) |
1.5% |
3.7% |
|
EPRA earnings |
33.5 |
34.5 |
34.1 |
35.8 |
(0.5) |
(1.3) |
-1.6% |
-3.7% |
|
EPRA cost ratio (exc direct property costs) |
34.0% |
32.8% |
30.5% |
30.3% |
|||||
EPRA EPS (p) |
6.5 |
6.7 |
6.6 |
6.9 |
(0.1) |
(0.3) |
-1.6% |
-3.7% |
|
DPS (p) |
6.6 |
6.7 |
6.6 |
6.9 |
0.0 |
(0.2) |
0.0% |
-2.9% |
|
Dividend cover (x) |
0.98 |
1.00 |
1.00 |
1.01 |
|||||
EPRA NTA per share |
97.3 |
97.3 |
98.9 |
101.8 |
(1.6) |
(4.5) |
-1.6% |
-4.4% |
|
EPRA NTA total return |
6.9% |
6.8% |
8.6% |
9.7% |
|||||
Gross borrowing |
(442.9) |
(442.9) |
(439.9) |
(439.9) |
|||||
Net LTV |
42.9% |
43.3% |
42.4% |
42.3% |
|||||
Shares outstanding |
515.7 |
515.7 |
515.7 |
515.7 |
0.0 |
0.0 |
0.0% |
0.0% |
|
Average number of shares |
515.7 |
515.7 |
515.7 |
515.7 |
0.0 |
0.0 |
0.0% |
0.0% |
Source: Edison Investment Research
Our key forecasting assumptions include:
■
No net acquisitions and disposals during H222 and FY23. The £7.2m of disposals since H122 are effectively assumed to be reinvested with no impact on rental income.
■
An increase in gross rental income driven by a continuing pick-up in leasing activity and higher non-rental income. Although the latter is not broken out separately, we estimate a contribution to FY22 income of c £4.0m.
■
A slowdown in H222 non-recoverable property costs from the £8.0m reported in H122, which we understand was struck on a conservative basis given the increasing level of uncertainty at the time and the prospect for government relief from energy price increases.
■
No further increase in the running cost of borrowing during H222 and FY23, at the maximum fixed/hedged rate of 3.5%. Total borrowing costs additionally include amortisation of loan arrangement fees.
■
No further changes (positive or negative) in like-for-like property valuation through H222 and FY23, despite gains in H122 like-for-like growth in property valuations. Based on our other assumptions, this represents a c 25 basis point (bp) widening of the yield by end-FY23. This may prove conservative if successful leasing by RGL is reflected in the external valuation and/or a positive market demand-supply dynamic lifts market rents. However, we are conscious of the strong possibility that rising UK government bond yields will have a negative impact on sector-wide valuations. We estimate that the impact of an additional 25bp yield widening on our forecast NAV would be a reduction of 5.8p (for both FY22 and FY23) with a similar positive impact should yields tighten.
With EPRA earnings distributed in full and acquisitions and disposals matched by value, our forecast LTV increases slightly (to 43.7%) by end-FY23, rather than declining in line with RGL’s target. Our LTV forecast may similarly be conservative should valuations increase or if RGL is able to further recycle capital from lower-yielding to higher-yielding assets, allowing a net divestment with no impact on portfolio income, and a reduction in net debt. Without assuming management action, we estimate that the impact of an additional 25bp yield widening on our forecast property valuation would be to increase FY22 LTV to 44.4% and FY23 LTV to 44.7%, with a positive impact (lower LTV) should property yields tighten.
Valuation
Based on our FY22 DPS forecast of 6.6p, RGL provides a highly attractive 10.6% dividend yield, one of the highest in the sector, if not the highest.
In Exhibit 5 we show a comparison with a selected group of peers comprising mid-market diversified property investors and focused office sector investors, many of which are significantly larger than RGL with primarily central London exposure. To ease comparison, the data are based on 12-month trailing DPS declared and last published EPTA NTA/NAV. On this trailing basis (and we forecast on a prospective basis), RGL’s dividend yield continues to be at the very top end of both this selected peer group and the broad UK property sector (we estimate c 5.3% on an unweighted trailing average basis). This is only partly reflected in a narrower discount to NAV.
Exhibit 5: Peer valuation and share price performance comparison
Price (p) |
Market cap. (£m) |
P/NAV* (x) |
Yield** (%) |
NAV yield*** (%) |
Share price performance |
||||
1 month |
3 months |
1 year |
3 years |
||||||
Circle Property |
222 |
63 |
0.79 |
3.2 |
2.5 |
-9% |
-6% |
7% |
15% |
Custodian |
92 |
406 |
0.75 |
5.8 |
4.4 |
-13% |
-10% |
-4% |
-21% |
Derwent London |
2,014 |
2,262 |
0.50 |
3.8 |
1.9 |
-18% |
-28% |
-44% |
-40% |
Picton |
79 |
434 |
0.65 |
4.4 |
2.8 |
-13% |
-14% |
-18% |
-10% |
Great Portland Estates |
433 |
1,100 |
0.52 |
2.9 |
1.5 |
-16% |
-30% |
-44% |
-42% |
Land Securities |
514 |
3,813 |
0.48 |
8.9 |
4.3 |
-21% |
-29% |
-28% |
-40% |
Real Estate Investors |
34 |
60 |
0.57 |
9.5 |
5.4 |
-3% |
-6% |
-16% |
-37% |
Schroder REIT |
43 |
212 |
0.55 |
7.1 |
3.9 |
-18% |
-19% |
-13% |
-20% |
Palace Capital |
241 |
106 |
0.62 |
5.8 |
3.6 |
-15% |
-10% |
-2% |
-15% |
UK Commercial Property REIT |
60 |
778 |
0.53 |
8.3 |
4.4 |
-16% |
-22% |
-22% |
-28% |
Balanced Commercial Property Trust |
83 |
582 |
0.56 |
5.4 |
3.0 |
-22% |
-28% |
-16% |
-29% |
CT Property Trust |
75 |
176 |
0.56 |
5.3 |
3.0 |
-15% |
-13% |
1% |
-7% |
Workspace |
428 |
820 |
0.43 |
5.0 |
2.2 |
-18% |
-34% |
-51% |
-56% |
Average |
0.58 |
5.8 |
3.3 |
-15% |
-19% |
-19% |
-25% |
||
Regional REIT |
62 |
319 |
0.64 |
10.7 |
6.8 |
-13% |
-17% |
-30% |
-40% |
UK property sector index |
1,267 |
-19% |
-25% |
-33% |
-27% |
||||
UK equity market index |
3,841 |
-6% |
-4% |
-6% |
-6% |
Source: company data, Edison Investment Research, Refinitiv prices as at 26 September 2022. Note: *Based on last reported EPRA NTA or NAV per share. **Based on trailing 12-month DPS declared.
RGL’s significantly higher yield versus the peer average is despite it paying covered dividends. This is not explained by P/NAV multiples as RGL’s trailing yield on NAV is also the highest among the peer group. The market appears to be pricing in dividend unsustainability and, effectively, a material dividend reduction, based a decline in income (as borrowing costs are fixed). Notwithstanding economic uncertainty and likely recession, the impact of which would affect the market more broadly, this appears significantly at odds with RGL’s expectations for the regional office market and for its portfolio, as discussed above.
Exhibit 6: Financial summary
Year end 31 December (£m) |
2019 |
2020 |
2021 |
2022e |
2023e |
INCOME STATEMENT |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
Rental & other income |
64.4 |
62.1 |
65.8 |
76.8 |
77.3 |
Non-recoverable property costs |
(9.4) |
(8.8) |
(9.9) |
(14.5) |
(13.1) |
Net rental & related income |
55.0 |
53.3 |
55.8 |
62.3 |
64.3 |
Administrative expenses (excluding performance fees) |
(10.9) |
(11.3) |
(10.6) |
(11.6) |
(12.3) |
EBITDA |
44.1 |
42.0 |
45.2 |
50.7 |
52.0 |
EPRA cost ratio |
31.6% |
32.4% |
31.2% |
34.0% |
32.8% |
Gain on disposal of investment properties |
1.7 |
(1.1) |
0.7 |
(3.3) |
0.0 |
Change in fair value of investment properties |
(3.5) |
(54.8) |
(8.3) |
4.8 |
0.0 |
Change in fair value of right to use asset |
(0.2) |
(0.2) |
(0.0) |
(0.2) |
(0.2) |
Operating Profit (before amort. and except.) |
42.0 |
(14.1) |
37.6 |
52.0 |
51.8 |
Net finance expense |
(13.7) |
(14.0) |
(14.9) |
(17.2) |
(17.5) |
Fair value movement in interest rate derivatives & goodwill impairment |
(2.0) |
(3.1) |
6.0 |
11.9 |
0.0 |
Profit Before Tax |
26.3 |
(31.2) |
28.8 |
46.6 |
34.2 |
Tax |
0.3 |
0.2 |
0.0 |
0.0 |
0.0 |
Profit After Tax (FRS 3) |
26.5 |
(31.0) |
28.8 |
46.6 |
34.2 |
Adjusted for the following: |
|||||
Net gain/(loss) on revaluation/disposal of investment properties |
1.9 |
55.9 |
7.6 |
(1.5) |
0.0 |
Other EPRA adjustments |
2.6 |
3.2 |
(6.0) |
(11.6) |
0.2 |
EPRA earnings |
31.0 |
28.1 |
30.4 |
33.5 |
34.5 |
Period end number of shares (m) |
431.5 |
431.5 |
515.7 |
515.7 |
515.7 |
Fully diluted average number of shares outstanding (m) |
398.9 |
431.5 |
459.7 |
515.7 |
515.7 |
IFRS EPS - fully diluted (p) |
6.6 |
(7.2) |
6.3 |
9.0 |
6.6 |
EPRA EPS (p) |
7.8 |
6.5 |
6.6 |
6.5 |
6.7 |
Dividend per share (p) |
8.25 |
6.40 |
6.50 |
6.60 |
6.70 |
Dividend cover (x) |
0.94 |
1.02 |
1.02 |
0.98 |
1.00 |
BALANCE SHEET |
|||||
Non-current assets |
806.0 |
749.5 |
925.2 |
948.7 |
956.5 |
Investment properties |
787.9 |
732.4 |
906.1 |
922.2 |
930.2 |
Other non-current assets |
18.1 |
17.2 |
19.0 |
26.5 |
26.3 |
Current Assets |
69.4 |
101.1 |
85.5 |
76.7 |
70.2 |
Other current assets |
32.2 |
33.7 |
29.4 |
29.7 |
30.0 |
Cash and equivalents |
37.2 |
67.4 |
56.1 |
47.0 |
40.2 |
Current Liabilities |
(36.2) |
(49.1) |
(58.4) |
(60.9) |
(61.8) |
Borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other current liabilities |
(36.2) |
(49.1) |
(58.4) |
(60.9) |
(61.8) |
Non-current liabilities |
(355.5) |
(380.9) |
(449.9) |
(449.7) |
(450.3) |
Borrowings |
(287.9) |
(310.7) |
(383.5) |
(387.5) |
(388.6) |
Other non-current liabilities |
(67.6) |
(70.3) |
(66.4) |
(62.2) |
(61.7) |
Net Assets |
483.7 |
420.6 |
502.4 |
514.8 |
514.6 |
Derivative interest rate swaps & deferred tax liability |
2.6 |
5.0 |
(1.0) |
(12.9) |
(12.9) |
Goodwill |
(0.6) |
0.0 |
0.0 |
0.0 |
0.0 |
EPRA net tangible assets |
485.7 |
425.6 |
501.4 |
501.9 |
501.7 |
IFRS NAV per share (p) |
112.1 |
97.5 |
97.4 |
99.8 |
99.8 |
EPRA NTA per share (p) |
112.6 |
98.6 |
97.2 |
97.3 |
97.3 |
EPRA NTA total return |
4.9% |
-5.8% |
5.0% |
6.9% |
6.8% |
CASH FLOW |
|||||
Cash (used in)/generated from operations |
26.0 |
48.0 |
56.9 |
52.8 |
52.5 |
Net finance expense |
(12.2) |
(12.5) |
(13.1) |
(15.4) |
(16.1) |
Tax paid |
(0.8) |
0.2 |
0.0 |
0.0 |
0.0 |
Net cash flow from operations |
13.0 |
35.7 |
43.8 |
37.3 |
36.4 |
Net investment in investment properties |
(25.6) |
(0.3) |
(98.3) |
(14.5) |
(8.0) |
Acquisition of subsidiaries, net of cash acquired |
(43.9) |
0.0 |
0.0 |
0.0 |
0.0 |
Other investing activity |
0.2 |
0.1 |
0.0 |
0.0 |
0.0 |
Net cash flow from investing activities |
(69.4) |
(0.2) |
(98.2) |
(14.5) |
(8.0) |
Equity dividends paid |
(32.5) |
(26.7) |
(27.8) |
(34.0) |
(34.4) |
Debt drawn/(repaid) - inc bonds and ZDP |
3.5 |
22.2 |
73.8 |
3.0 |
0.0 |
Net equity issuance |
60.5 |
0.0 |
(0.1) |
0.0 |
0.0 |
Other financing activity |
(42.7) |
(0.8) |
(2.7) |
(0.9) |
(0.8) |
Net cash flow from financing activity |
(11.2) |
(5.3) |
43.2 |
(31.9) |
(35.3) |
Net Cash Flow |
(67.6) |
30.1 |
(11.2) |
(9.1) |
(6.8) |
Opening cash |
104.8 |
37.2 |
67.4 |
56.1 |
47.0 |
Closing cash |
37.2 |
67.4 |
56.1 |
47.0 |
40.2 |
Balance sheet debt |
(337.1) |
(360.1) |
(433.1) |
(437.2) |
(438.5) |
Unamortised debt costs |
(6.9) |
(6.0) |
(6.9) |
(5.6) |
(4.4) |
Closing net debt |
(306.8) |
(298.8) |
(383.8) |
(395.9) |
(402.7) |
LTV |
38.9% |
40.8% |
42.4% |
42.9% |
43.3% |
Source: Regional REIT historical data, Edison Investment Research forecasts
|
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Research: Healthcare
Arovella has entered into a strategic collaboration with Imugene, investigating the company’s lead cell-therapy programme CAR19-iNKT (ALA-101) with Imugene’s onCARlytics (CF33-CD19) platform in treating solid tumours. The agreement will see both companies jointly conduct pre-clinical studies for the ALA-101/CF33-CD19 combination, with initial results from the animal studies expected in H123. Combinational oncology treatment regimens are often associated with superior clinical outcomes compared to monotherapies, so we see this partnership as highly positive for the development of ALA-101. Additionally, the study, if successful, may expand the scope of ALA-101’s clinical potential to solid tumours (c 90% of all cancer cases) offering future opportunities for the cell-therapy programme, in our view. We continue to value Arovella at $31m or A$0.05/share.
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