Regional REIT — Covered dividend with a 12% yield

Regional REIT (LSE: RGL)

Last close As at 29/02/2024

GBP0.21

−0.90 (−4.03%)

Market capitalisation

GBP116m

More on this equity

Research: Real Estate

Regional REIT — Covered dividend with a 12% yield

Regional REIT (RGL) delivered a good income performance in FY22, led by strong leasing (well above pre-pandemic levels) and continued strong rent collection. DPS of 6.6p was fully covered and we forecast the same for FY23. Market-wide valuation yield widening reduced NAV and increased gearing, but RGL notes that it has ample headroom available across its debt facilities, which are fixed at a cost of 3.5%. In this note we explain why we think DPS is sustainable and review some of the key issues that appear to be weighing on the valuation.

Martyn King

Written by

Martyn King

Director, Financials

Regional-REIT_resized

Real Estate

Regional REIT

Covered dividend with a 12% yield

FY22 results

Real estate

17 April 2023

Price

55p

Market cap

£284m

Net debt (£m) at 31 December 2022

390.6

Net LTV at 31 December 2022

49.5%

Shares in issue

515.7m

Free float

88%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.8)

(9.9)

(36.9)

Rel (local)

(5.4)

(9.6)

(37.6)

52-week high/low

87p

49p

Business description

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

Next events

Trading update

24 May 2023

Analyst

Martyn King

+44 (0)20 3077 5700

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) delivered a good income performance in FY22, led by strong leasing (well above pre-pandemic levels) and continued strong rent collection. DPS of 6.6p was fully covered and we forecast the same for FY23. Market-wide valuation yield widening reduced NAV and increased gearing, but RGL notes that it has ample headroom available across its debt facilities, which are fixed at a cost of 3.5%. In this note we explain why we think DPS is sustainable and review some of the key issues that appear to be weighing on the valuation.

Year end

Net rental
income (£m)

EPRA
earnings* (£m)

EPRA
EPS (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/21

55.8

30.4

6.6

97.2

6.50

0.57

11.8

12/22

62.6

34.1

6.6

73.5

6.60

0.75

12.0

12/23e

62.8

33.9

6.6

73.5

6.60

0.75

12.0

12/24e

64.7

34.4

6.7

73.5

6.60

0.75

12.0

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

Leasing gains mitigated valuation pressures

FY22 new lettings increased strongly and were well ahead of pre-pandemic levels. Combined with a good level of retentions at lease maturity, and accretive asset recycling, rent roll was broadly maintained and remains well below the estimated market rental value. Net rental income increased by c 12% despite upward pressure on property costs. EPRA earnings also increased by 12% and, allowing for a higher average share count, EPRA EPS was flat at 6.6p. A 12.1% like-for-like decline in property values reduced NAV per share (to 73.5p) and increased LTV (to 49.5%) but outperformed MSCI data which show a c 17% decline in regional office values. We have reduced our FY23 EPRA EPS and DPS forecasts slightly by 0.1p each, representing an unchanged fully covered DPS of 6.6p.

Income-led strategy

In the cyclical commercial property sector, income returns have historically been significantly more stable than volatile capital values and provide a more consistent measure of value. RGL has consistently targeted a higher-yield portfolio that would provide progressive, regular quarterly dividends. This strategy has been successfully executed since listing in November 2015, generating average income returns of 5.9% pa. However, with rising interest rates following the pandemic, with the fog of uncertainty this has created about the future use of, and demand for, office space, capital returns have recently weighed heavily on total returns. Strong leasing and an accelerating return to the office are nonetheless very positive indicators. A November 2022 study by RGL, of its more than 1,000 tenants, showed that 99% had returned to the office, particularly with hybrid working.

Valuation: High distribution policy

RGL continues to offer one of the highest fully covered yields in the sector (12.0%), more than double that of peers, with an almost 25% discount to NAV.

Covered dividend with a 12% yield

The FY22 results were in line with our expectations and the changes to our forecasts are modest. In this note we focus on the success of RGL’s income-driven strategy and the issues that we believe are holding back valuation. These include continuing uncertainty about the future of the office (RGL provides positive data points), relatively high gearing (although fixed-cost borrowings are well inside covenants) and energy efficiency capex requirements (which RGL expects to fall within existing capex programmes and which are reflected in the current portfolio valuation).

FY22 performance summary

We review FY22 financial performance in detail below. In challenging conditions, leasing progress stood out. FY22 new lettings of £5.9m compared with £2.5m in the prior year and £3.8m in FY19, pre-pandemic. Combined with a good level of retentions at lease maturity (c 70%) and accretive asset recycling, rent roll was broadly maintained (£71.8m vs £72.1m at end FY21) and remains well below the estimated market rental value of £92.0m, indicating material income upside potential, primarily from leasing vacant space. Accretive portfolio transactions will add c £1.6m to rent roll as incentives run off, comprising £74.7m (before costs) at an average net initial yield of 8.4% and £84.1m (after costs) of disposals at a blended 4.9% (6.3% excluding vacant properties). The c 12% growth in net rental income primarily reflected a full contribution from prior acquisitions, partly offset by upward pressure on property costs. EPRA earnings also increased by 12% and, allowing for a higher average share count, EPRA EPS was flat at 6.6p. The 12.1% like-for-like decline in property values compared favourably with a 17% decline in regional offices (outside central London) indicated by MSCI data and benefited from the leasing progress.

Income-focused strategy

Since listing in 2015, RGL has consistently pursued an income-focused strategy and maximising dividends. Dividend return (as a percentage of NAV) has averaged 5.9% and has been fully covered by EPRA earnings over the period to end FY22 (the dips in FY18 and FY19 were primarily driven by cash drag from equity raising). Supporting dividends, RGL’s rent collection performance through the pandemic was outstanding (99% in FY20, 98% in FY21 and 99% thus for FY22, with the remaining rent expected to be collected in due course). We believe rent collection performance significantly reflects RGL’s strong, regional asset management platform, maintaining close relationships with tenants. Capital return has been volatile but overall has generated a negative return, predominantly during and since the pandemic, averaging 4.2% pa. The impacts of the pandemic on RGL’s ability to increase occupancy and on office sector valuations have been key factors. We discuss this below.

Combining income with capital, NAV total return has been 3.1% pa since listing. Although below the target of at least 10% pa set at listing in November 2015, based on the share price, total shareholder return was 1.4% over the same period compared to the leading UK Total Return Index, which has generated a negative return of 16.9% over the same period.

Exhibit 1: Returns have been completely driven by income

2015*

2016

2017

2018

2019

2020

2021

2022

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

73.5

73.5

Dividends per share paid (p)

0.00

6.25

7.80

8.00

8.20

7.45

6.30

6.65

50.65

Dividend return

0.0%

5.8%

7.4%

7.6%

7.1%

6.6%

6.4%

6.8%

50.7%

Annual average dividend return

5.9%

Dividend cover (x)

0.86

1.02

1.10

0.93

0.94

1.02

1.02

1.00

1.00

Capital return

6.8%

-0.7%

-0.6%

9.2%

-2.3%

-12.4%

-1.4%

-24.4%

-26.5%

Annual average capital return

-4.2%

NAV total return

6.8%

5.1%

6.7%

16.8%

4.9%

-5.8%

5.0%

-17.5%

24.2%

Average annual return (%)

3.1%

Source: RGL data, Edison Investment Research. Note: *55-day period from 6 November 2015.

Across the UK commercial sector, income returns have historically shown much less volatility than capital returns and this has been true for RGL. External valuation consultants primarily estimate fair values based on comparable recent market transactions on an arm's length basis. At times of uncertainty, the expectations of sellers and buyers may diverge noticeably, reflected in a dearth of transactions and a relative lack of market pricing evidence. The final quarter of 2022 was such a time, although transactions volumes have begun to pick up so far in 2023. Property income may thus be seen as a better guide to long-term value, while permanent capital vehicles such as RGL are at an advantage to open-ended funds that must additionally manage fund outflows and inflows.

Exhibit 2: Income returns versus capital returns

Source: Regional REIT data, Edison Investment Research

We forecast continuing high level of income distributions from RGL

FY22 earnings and dividends were in line with our forecasts and NAV was slightly above. We discuss this in more detail below. Although the company has signalled its intentions to continue its progressive dividend policy, for FY23 we forecast an unchanged DPS of 6.6p (previously 6.7p), fully covered by EPRA earnings, with growth in these resuming in FY24 (6.7p). All debt is fixed or hedged at a cost of 3.5%, removing interest rate uncertainty in respect of FY23, although the £50m 5.5% retail eligible bond will require refinancing at maturity in August 2024 (see below). Investment and asset management fees account for c 50% of administrative expenses and are directly linked to NAV, while a further c 25% are linked to the level of gross property income. The key forecasting uncertainty, including the ability to pay covered dividends, is net rental income, which we expect to be flat in FY23 and slightly higher in FY24. A high level of diversification by geography, tenant and industry exposures1 mitigates macroeconomic risks but a continuation of strong leasing progress will to a significant extent rely on structural developments in the office sector (see below).

  1 The end-FY22 portfolio consisted of more than 150 properties let to more than 1,000 tenants.

Exhibit 3: Forecast summary

Reported

New forecast

Previous forecast

FY22 vs forecast

FY23 forecast change

£m unless stated otherwise

FY22

FY23e

FY24e

FY22e

FY23e

FY24e

£m

%

Rental & other property income

76.3

75.5

76.4

76.8

77.4

N/A

(0.4)

(1.8)

-2.4%

Non-recoverable property costs

(13.7)

(12.8)

(11.7)

(14.4)

(13.1)

N/A

0.8

0.3

-2.4%

Net rental income

62.6

62.8

64.7

62.3

64.3

N/A

0.3

(1.5)

-2.4%

Administrative expenses

(11.4)

(10.8)

(11.1)

(11.6)

(12.3)

N/A

0.2

1.5

-11.9%

Net finance expense

(17.2)

(18.0)

(19.2)

(17.2)

(17.5)

N/A

0.0

(0.5)

2.8%

EPRA earnings

34.1

33.9

34.4

33.5

34.5

N/A

0.5

(0.5)

-1.6%

EPRA cost ratio (exc direct property costs)

16.2%

15.6%

15.8%

33.9%

32.8%

N/A

EPRA EPS (p)

6.6

6.6

6.7

6.5

6.7

N/A

0.1

(0.1)

-1.6%

DPS (p)

6.6

6.6

6.6

6.6

6.7

N/A

0.0

(0.1)

-1.5%

Dividend cover (x)

1.00

1.00

1.01

0.99

1.00

N/A

EPRA NTA per share (p)

73.5

73.5

73.5

72.1

72.0

N/A

1.5

1.4

2.0%

EPRA NTA total return

-17.5%

8.9%

9.0%

-19.0%

9.2%

N/A

Gross borrowing

(440.8)

(433.8)

(433.8)

(442.9)

(442.9)

N/A

Net LTV

49.5%

49.0%

49.5%

49.5%

50.2%

N/A

Source: Regional REIT reported data for 2022. Edison Investment Research forecasts

Dividend policy is to maximise dividends

UK REITs are required to distribute at least 90% of property income in dividends and, while RGL has the flexibility to lower its pay-out ratio, its policy is to maximise dividends. We see any risk to dividend sustainability being primarily the level of EPRA earnings (taking this as a proxy for ‘property income’2). We would also note the need to fund, through existing cash and debt resources.

  2 Property income more closely tracks UK corporate tax accounting, including an impact from capital allowances.

RGL’s rolling capital expenditure programme is c £10m pa. With EPRA earnings fully distributed, if the portfolio enhancement that capital expenditure targets is not recognised in external property valuations, its impact will be to increase gearing (end-FY22 LTV of 49.5%) and reduce capital flexibility.

The only year-on-year decline in EPRA earnings that the company has reported since listing was in 2020 (-9%) as a result of the pandemic. A 10% decline compared with our FY23 forecast would still support a fully covered DPS of more than 5.9p, which would reflect a yield of almost 12%.

The share price appears to discount a material setback to income performance

Despite delivering on its high-income strategy, the share price has been weak, even in the context of a REIT sector negatively affected by rising interest rates. To an extent, this is likely to reflect some disappointment with RGL’s capital returns (the company came to market with a target return of at least 10%), but nonetheless RGL trades with one of the highest if not the highest fully covered dividend yield in the sector, both in absolute and relative terms.

Exhibit 4: Dividend yield since listing

Exhibit 5: Price/NAV since listing

Source: Regional REIT DPS data, Refinitiv prices

Source: Regional REIT NAV data, Refinitiv prices

Exhibit 4: Dividend yield since listing

Source: Regional REIT DPS data, Refinitiv prices

Exhibit 5: Price/NAV since listing

Source: Regional REIT NAV data, Refinitiv prices

In Exhibit 6 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.

Exhibit 6: 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

Custodian

93

412

0.94

5.9

5.5

5%

0%

-8%

-2%

Derwent London

2,410

2,706

0.67

3.3

2.2

3%

-8%

-26%

-26%

Helical

316

389

0.59

3.6

2.1

-2%

-12%

-27%

-12%

Picton

77

422

0.75

4.5

3.4

8%

-5%

-24%

7%

Great Portland Estates

521

1,321

0.66

2.4

1.6

3%

-9%

-28%

-25%

Land Securities

647

4,801

0.64

6.1

3.9

8%

-8%

-16%

1%

Real Estate Investors

31

53

0.49

8.2

4.0

7%

5%

-23%

-28%

Schroder REIT

46

223

0.74

7.1

5.2

7%

-6%

-24%

15%

UK Commercial Property REIT

54

699

0.68

6.2

4.2

5%

-9%

-41%

-16%

Balanced Commercial Property Trust

90

631

0.76

5.3

4.0

8%

0%

-22%

27%

CT Property Trust

66

153

0.69

6.1

4.2

3%

-4%

-30%

24%

Workspace

468

897

0.48

4.9

2.4

4%

-6%

-34%

-40%

Average

0.67

5.3

3.6

5%

-5%

-25%

-6%

Regional REIT

55

282

0.74

12.1

9.0

-5%

-8%

-37%

-29%

UK property sector index

1,331

5%

-7%

-31%

-8%

UK equity market index

4,279

7%

0%

1%

34%

Source: Company data, Edison Investment Research, Refinitiv prices as at 14 April 2023. Note: *Based on last reported EPRA NTA or NAV per share. **Based on trailing 12-month DPS declared.

In the following sections we address what we think are the key concerns that are currently weighing on RGL’s valuation, namely:

the prospects for the office sector;

RGL’s relatively high gearing; and

the potential cost of investment to meet energy efficiency requirements.

Home, office or not at all?

Post-pandemic, opinions remain polarised about the future role of the office in working life, with the risk of economic downturn adding to near-term uncertainty. Throughout this period, RGL’s asset manager has consistently expressed the view that employees will not return to the office in numbers before the end of 2023/early 2024, providing occupiers with the visibility to plan for the future. It seems already clear that different employers will take different approaches, with some form of hybrid working being most common, but RGL expects that most will end up with the majority of employees being in the office for most of the time. At the same time, it expects the trend, evident before the pandemic, towards a more attractive working environment, including more space per employee to continue and provide an offset to other structural or cyclical headwinds. In its November 2022 study, RGL identified that 99% of its office tenants had returned to occupation in some form. It has already observed increasing numbers of employees returning (‘physical occupation’) across all regions and plans to release data shortly.

Meanwhile, office supply remains reasonably tight, with secondary space reducing, often for repurposing for residential, student accommodation or hotel use. While Grade A supply is increasing through targeted development, significantly pre-let, RGL’s leasing performance shows robust demand for the middle ground of good-quality accommodation.

Gearing is relatively high, but borrowing is secure

End-FY22 borrowings of £441m were all fixed or hedged at an average cost of 3.5% with an average duration of 4.5 years. RGL has subsequently repaid c £7m of the Scottish Widows & Aviva facility. After adjustment for end-FY22 cash of £50m, UK total return Index the net loan to value ratio (LTV) was 49.5%, increased from 42.4% at end FY21 by the decline in portfolio value. RGL’s LTV is relatively high compared with peers,3 which benefits overall portfolio income but creates additional volatility to NAV, both positively and negatively (as in FY22). The secured debt facilities (£391m) are all well within LTV covenants of 60% and it would require a more than 15% decline in portfolio value for these to be tested. Meanwhile, the high portfolio yield, protected by significant diversification, generates a strong level of interest cover (c 3.4x at end-FY22).

  3 Based on the most recently disclosed data for those companies listed in the valuation comparison table (Exhibit 6).

Exhibit 7: Summary of debt portfolio

Original facility (£m)

Outstanding (£m)

Maturity

Gross loan to value

Interest terms

Royal Bank of Scotland, Bank of Scotland, & Barclays

128.0

125.7

Aug-26

50.8%

SONIA + 2.40%

Scottish Widows & Aviva

165.0

165.0

Dec-27

52.0%

3.28% fixed

Scottish Widows

36.0

36.0

Dec-28

42.2%

3.37% fixed

Santander

65.9

64.1

Jun-29

44.9%

LIBOR + 2.20%

Total secured bank loan facilities

394.9

390.8

Unsecured Retail Eligible Bond

50.0

50.0

Aug-24

Unsecured

4.5% fixed

Total facilities

444.9

440.8

Source: Regional REIT

The first debt maturity, in August 2024, is the company’s £50m unsecured Retail Eligible Bond with a fixed coupon of 4.5%. RGL’s preference is to refinance this, at maturity or earlier, with a similar unsecured bond, maintaining financial flexibility. The cost will have increased but the impact on earnings should be relatively muted. A doubling of the current cost (to 9%) would negatively affect EPRA earnings by c £2.3m but RGL hopes to achieve a much lower rate than this. The existing bond, which trades on the London Stock Exchange ORB platform. The mid-price at 14 April 2023 was a little over 94% of par, reflecting a yield to maturity of c 9%. However, market consensus indicates that by the time it reaches maturity, interest rates will have peaked and begun to fall.

Energy efficiency improvements are included in the rolling capex programme

RGL undertakes a rolling programme of capital expenditure aimed at enhancing and maintaining the attractiveness and income-generating capacity of its properties. This has become even more important post-pandemic as more occupiers seek to attract their workforce back to the office into properties that will assist them in meeting their own carbon emission targets. In addition to investments undertaken by tenants, RGL invested £10m in FY22 or 1.1% of the opening portfolio value, in line with the past five-year average.

As part of the government’s drive towards net carbon zero by 2050, minimum energy efficiency standards required, with some exceptions, all rented commercial property to have an Energy Performance Certificate (EPC) rating of E or above by March this year. The expectation is that the minim rating will increase to C by 1 April 2027, and to B by April 2030.

RGL says it is on track to achieve a minimum B rating by 2030 and made significant progress towards this goal in FY22.

Exhibit 8: FY22 progress with EPC ratings

Rating

31-Dec-21

31-Dec-22

Movement

B plus

9.90%

16.90%

700bps

C

33.00%

33.30%

30bps

D

32.80%

27.20%

(560)bps

E and below

18.20%

16.00%

(220)bps

Exempt (listed buildings)

6.10%

6.70%

60pbs

Source: Regional REIT

Progress is being made through a combination of investment, within its rolling capex programme, and portfolio repositioning/capital recycling. The external valuation reflected in the balance sheet already allows (is reduced by) an assumed c £60m of capex and RGL does not expect the investment required to achieve EPC compliance to fall outside of this. RGL has already identified, and has been disposing of, properties that cannot be enhanced on an economic basis and the low average capital value of its office portfolio (£126 per sq ft) increases their attraction for alternative use. By way of example, during H121 RGL disposed of the 19-storey Arena Point office tower in Leeds, with vacant possession, to a purchaser intending to demolish it to make way for student accommodation. The sale price was £10.7m or c £140 per sq ft, 16% above the previous valuation. Arena Point was part of a larger site which included a two-storey casino and pub, known as the Podium Buildings. Acquired as part of a portfolio purchase, the potential for the site to be repositioned for alternative use was recognised. Podium was sold to Unite Students for development as large-scale student accommodation. The sales of Podium and Arena Point together secured profits of £9.3m, representing a geared internal rate of return of 24.6%.

FY22 results in detail

As shown in Exhibit 3 above, the FY22 results were in line with our expectations, reflecting a robust income performance but with NAV negatively affected by market-wide property yield widening.

The key points from the results were:

Net rental income increased by 12% to £62.6m, with stronger (16%) growth in rental and other property income (including dilapidations and, to a lesser extent, lease surrender charges) offset by higher (up 38%) non-recoverable property costs, largely reflecting inflation pressures and energy costs in particular.

Administrative costs increased at a slower pace (8%) than income, with the EPRA cost ratio (excluding direct vacancy costs) reducing to 16.2% from 16.8%. Asset and management fees were higher, linked to average net assets which were higher in the year as a result of the £83m of equity issued in H221 for the acquisition of the Squarestone portfolio.

Interest expense increased with higher average borrowing and an increase in the average cost of borrowing from 3.3% to 3.5%, the level at which interest rate caps became fully effective.

EPRA earnings increased 12% to £34.1m but, allowing for the increase in average shares outstanding, EPRA EPS was unchanged at 6.6p where it fully covered DPS of 6.6p (+1.5%).

Moving on to IFRS earnings, higher interest rates increased the fair value of interest rate hedging instruments, providing a partial offset to net property revaluation movements (realised and unrealised).

EPRA NTA per share of 73.5p was 24% lower, negatively affecting NAV total return (-17.5%) and driving the increase in net LTV to 49.5%.

Exhibit 9: Summary of FY22 financial performance

£m unless stated otherwise

FY22

FY21

FY22/FY21

Rental and other property income

76.3

65.8

16.1%

Non-recoverable property costs

(13.7)

(9.9)

37.7%

Net rental income

62.6

55.8

12.2%

Administrative & other expenses

(11.4)

(10.6)

7.9%

Net finance expense

(17.2)

(14.9)

15.5%

EPRA earnings

34.1

30.4

12.1%

Unrealised and realised property gains/(losses)

(122.0)

(7.7)

Change in fair value of interest rate derivative

22.7

6.0

IFRS earnings

(65.2)

28.8

Shares outstanding (m)

515.7

515.7

Average number of shares (m)

515.7

459.7

12.2%

Basic IFRS EPS (p)

(12.6)

6.3

EPRA EPS (p)

6.6

6.6

DPS (p)

6.60

6.50

1.5%

EPRA NTA per share (p)

73.5

97.2

-24.4%

Accounting total return

-17.5%

5.0%

Investment properties

789.5

906.1

-12.9%

Net debt

(390.6)

(383.8)

Net LTV

49.5%

42.4%

EPRA cost ratio (excluding direct vacancy costs)

16.2%

16.8%

Source: Regional REIT data

Exhibit 10: Financial summary

Year end 31 December (£m)

2019

2020

2021

2022

2023e

2024e

INCOME STATEMENT

Rental & other property income

64.4

62.1

65.8

76.3

75.5

76.4

Non-recoverable property costs

(9.4)

(8.8)

(9.9)

(13.7)

(12.8)

(11.7)

Net rental & related income

55.0

53.3

55.8

62.6

62.8

64.7

Administrative expenses

(10.9)

(11.3)

(10.6)

(11.4)

(10.8)

(11.1)

EBITDA

44.1

42.0

45.2

51.2

52.0

53.6

EPRA cost ratio, excluding direct vacancy costs

18.7%

19.6%

16.8%

16.2%

15.6%

15.8%

Gain on disposal of investment properties

1.7

(1.1)

0.7

(8.6)

0.0

0.0

Change in fair value of investment properties

(3.5)

(54.8)

(8.3)

(113.2)

0.0

0.0

Change in fair value of right to use asset

(0.2)

(0.2)

(0.0)

(0.1)

(0.1)

(0.1)

Operating Profit (before amort. and except.)

42.0

(14.1)

37.6

(70.8)

51.8

53.5

Net finance expense

(13.7)

(14.0)

(14.9)

(17.2)

(18.0)

(19.2)

Fair value movement in interest rate derivatives & goodwill impairment

(2.0)

(3.1)

6.0

22.7

0.0

0.0

Profit Before Tax

26.3

(31.2)

28.8

(65.2)

33.8

34.3

Tax

0.3

0.2

0.0

0.0

0.0

0.0

Profit After Tax (FRS 3)

26.5

(31.0)

28.8

(65.2)

33.8

34.3

Adjusted for the following:

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

1.9

55.9

7.6

121.9

0.0

0.0

Other EPRA adjustments

2.6

3.2

(6.0)

(22.6)

0.1

0.1

EPRA earnings

31.0

28.1

30.4

34.1

33.9

34.4

Period end number of shares (m)

431.5

431.5

515.7

515.7

515.7

515.7

Fully diluted average number of shares outstanding (m)

398.9

431.5

459.7

515.7

515.7

515.7

IFRS EPS - fully diluted (p)

6.6

(7.2)

6.3

(12.6)

6.6

6.6

EPRA EPS (p)

7.8

6.5

6.6

6.6

6.6

6.7

Dividend per share (p)

8.25

6.40

6.50

6.60

6.60

6.60

Dividend cover (x)

0.94

1.02

1.02

1.00

1.00

1.01

BALANCE SHEET

Non-current assets

806.0

749.5

925.2

825.6

835.5

845.3

Investment properties

787.9

732.4

906.1

789.5

799.5

809.5

Other non-current assets

18.1

17.2

19.0

36.2

36.0

35.9

Current Assets

69.4

101.1

85.5

80.4

72.6

64.6

Other current assets

32.2

33.7

29.4

30.3

30.8

31.2

Cash and equivalents

37.2

67.4

56.1

50.1

41.8

33.4

Current Liabilities

(36.2)

(49.1)

(58.4)

(56.6)

(64.9)

(65.5)

Borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(36.2)

(49.1)

(58.4)

(56.6)

(64.9)

(65.5)

Non-current liabilities

(355.5)

(380.9)

(449.9)

(446.5)

(440.5)

(441.5)

Borrowings

(287.9)

(310.7)

(383.5)

(385.3)

(379.6)

(380.9)

Other non-current liabilities

(67.6)

(70.3)

(66.4)

(61.3)

(61.0)

(60.6)

Net Assets

483.7

420.6

502.4

402.9

402.7

402.9

Derivative interest rate swaps & deferred tax liability

2.6

5.0

(1.0)

(23.8)

(23.8)

(23.8)

Goodwill

(0.6)

0.0

0.0

0.0

0.0

0.0

EPRA net tangible assets

485.7

425.6

501.4

379.2

378.9

379.2

IFRS NAV per share (p)

112.1

97.5

97.4

78.1

78.1

78.1

EPRA NTA per share (p)

112.6

98.6

97.2

73.5

73.5

73.5

EPRA NTA total return

4.9%

-5.8%

5.0%

-17.5%

8.9%

9.0%

CASH FLOW

Cash (used in)/generated from operations

26.0

48.0

56.9

48.5

59.7

53.9

Net finance expense

(12.2)

(12.5)

(13.1)

(15.2)

(16.4)

(17.6)

Tax paid

(0.8)

0.2

0.0

0.0

0.0

0.0

Net cash flow from operations

13.0

35.7

43.8

33.3

43.4

36.3

Net investment in investment properties

(25.6)

(0.3)

(98.3)

(5.2)

(10.0)

(10.0)

Acquisition of subsidiaries, net of cash acquired

(43.9)

0.0

0.0

0.0

0.0

0.0

Other investing activity

0.2

0.1

0.0

0.1

0.0

0.0

Net cash flow from investing activities

(69.4)

(0.2)

(98.2)

(5.1)

(10.0)

(10.0)

Equity dividends paid

(32.5)

(26.7)

(27.8)

(34.0)

(34.0)

(34.0)

Debt drawn/(repaid) - including bonds and ZDP

3.5

22.2

73.8

14.3

0.0

0.0

Net equity issuance

60.5

0.0

(0.1)

0.0

0.0

0.0

Other financing activity

(42.7)

(0.8)

(2.7)

(14.5)

(7.7)

(0.7)

Net cash flow from financing activity

(11.2)

(5.3)

43.2

(34.2)

(41.7)

(34.7)

Net Cash Flow

(67.6)

30.1

(11.2)

(6.0)

(8.3)

(8.4)

Opening cash

104.8

37.2

67.4

56.1

50.1

41.8

Closing cash

37.2

67.4

56.1

50.1

41.8

33.4

Balance sheet debt

(337.1)

(360.1)

(433.1)

(435.0)

(429.5)

(430.9)

Unamortised debt costs

(6.9)

(6.0)

(6.9)

(5.8)

(4.3)

(2.9)

Closing net debt

(306.8)

(298.8)

(383.8)

(390.6)

(392.0)

(400.4)

LTV

38.9%

40.8%

42.4%

49.5%

49.0%

49.5%

Source: Regional REIT historical data, Edison Investment Research forecasts

General disclaimer and copyright

This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

More on Regional REIT

View All

Latest from the Real Estate sector

View All Real Estate content

Research: TMT

Vection Technologies — Rapid H2 growth de-risks ambitious FY23 target

Vection Technologies reported a 60% uplift in its total contract value (TCV) to A$16m from the TCV metric announced at the half year, driven by new contract wins, upsells from existing clients and recognising delayed contracts from Q223. Delivering rapid contract growth in H223 instils further confidence in management’s FY23 revenue guidance of A$24–26m for its IntegratedXR technology stack, reflected in the 9% rise in share price following the announcement. As illustrated by our previous note, promising pilot projects, including a potential A$30m tender in the defence sector, should bolster the company’s growth trajectory. A proven track record of converting c 100% of TCV into revenue by year-end further de-risks the group’s FY23 growth target and our forecasts, which are unchanged.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free