Regional REIT — FY22 DPS covered and yields c 11% yield

Regional REIT (LSE: RGL)

Currency in GBP

Last close As at 25/03/2023

GBP0.58

0.20 (0.35%)

Market capitalisation

GBP298m

Research: Real Estate

Regional REIT — FY22 DPS covered and yields c 11% yield

Regional REIT (RGL) has confirmed a Q422 DPS of 1.65p, taking the total for the year to 6.6p. It expects this to be fully covered by EPRA earnings when results are published in March, supported by leasing progress and strong rent collection. Market-wide valuation yield widening reduced NAV and increased gearing, but RGL notes that it has ample headroom available across the debt facilities, which are fixed at a cost of 3.5%.

Martyn King

Written by

Martyn King

Director, Financials

Regional-REIT_resized

Real Estate

Regional REIT

FY22 DPS covered and yields c 11% yield

Valuation and
dividend update

Real estate

27 February 2023

Price

62p

Market cap

£320m

Net debt (£m) at 31 December 2022

390.8

Net LTV at 31 December 2022

49.5%

Shares in issue

515.7m

Free float

87.6%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.3

1.8

(28.0)

Rel (local)

6.0

(2.9)

(32.8)

52-week high/low

89.2p

56.5p

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

FY22 results

28 March 2023

Analyst

Martyn King

+44 (0)20 3077 5700

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) has confirmed a Q422 DPS of 1.65p, taking the total for the year to 6.6p. It expects this to be fully covered by EPRA earnings when results are published in March, supported by leasing progress and strong rent collection. Market-wide valuation yield widening reduced NAV and increased gearing, but RGL notes that it has ample headroom available across the debt facilities, which are fixed at a cost of 3.5%.

Year end

Net rental
income (£m)

EPRA
earnings* (£m)

EPRA
EPS (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

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

72.1

6.60

0.86

10.6

12/23e

64.3

34.5

6.7

72.0

6.70

0.86

10.8

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

Operational progress mitigates valuation pressures

The end-December portfolio valuation was £790m (FY21: £906m; H122; £918m). The portfolio equivalent yield increased to 9.0% from 8.6% at H1 (FY21: 8.7%). The like-for-like reduction of 12.1%, all generated in H2 (H1: +1%), was driven by market-wide yield widening. MCI data indicate a negative c 17% capital return for offices outside London and the south-east in 2022. RGL’s outperformance benefited from strong new lettings, amounting to c £5.5m (of which c £2.8m in H2), well above the pre-pandemic (FY19) level. While net borrowing reduced by c 1% in H2, the loan to value ratio increased to 49.5% (H1: 43.2%) due to valuation movements. The balance sheet remains liquid (we estimate end-FY22 cash of more than £50m) and RGL notes ample headroom on all bank covenants. We have adjusted our forecasts to align with the valuation announcement, reducing FY22e NAV per share by 18% to 72.1p, but with no material changes to EPRA earnings. We will review our forecasts in detail with the results in March.

Income-led strategy

RGL has consistently targeted a higher-yield portfolio that would provide progressive, regular quarterly dividends with the potential for capital growth over the medium term. 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. Uncertainty about the future use of, and demand for, office space has hung over the office sector (92% of the RGL portfolio) for the past year or more, but strong leasing and an accelerating return to the office are very positive indicators. A November study by RGL, of its more than 1,000 tenants, showed that 99% had returned to the office, particularly with hybrid working.

Valuation: High yield despite sustained distributions

RGL continues to offer one of the highest fully covered dividend yields in the UK REIT sector, a combination of its income-led strategy and the market valuation of its shares. The FY22 NAV reduction had been significantly discounted by the market and the discount to FY22 NAV remains at c 15%.

Exhibit 1: Financial summary

Year end 31 December (£m)

2019

2020

2021

2022e

2023e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

Rental & other property income

64.4

62.1

65.8

76.8

77.4

Non-recoverable property costs

(9.4)

(8.8)

(9.9)

(14.4)

(13.1)

Net rental & related income

55.0

53.3

55.8

62.3

64.3

Administrative expenses

(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%

33.9%

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)

(125.5)

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

(78.3)

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

(83.6)

34.3

Tax

0.3

0.2

0.0

0.0

0.0

Profit After Tax (FRS 3)

26.5

(31.0)

28.8

(83.6)

34.3

Adjusted for the following:

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

1.9

55.9

7.6

128.7

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

(16.2)

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

0.99

1.00

BALANCE SHEET

Non-current assets

806.0

749.5

925.2

816.0

823.8

Investment properties

787.9

732.4

906.1

789.5

797.5

Other non-current assets

18.1

17.2

19.0

26.5

26.3

Current Assets

69.4

101.1

85.5

79.1

73.0

Other current assets

32.2

33.7

29.4

27.3

30.1

Cash and equivalents

37.2

67.4

56.1

51.8

42.9

Current Liabilities

(36.2)

(49.1)

(58.4)

(60.9)

(62.1)

Borrowings

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(36.2)

(49.1)

(58.4)

(60.9)

(62.1)

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

384.6

384.4

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

371.7

371.5

IFRS NAV per share (p)

112.1

97.5

97.4

74.6

74.5

EPRA NTA per share (p)

112.6

98.6

97.2

72.1

72.0

EPRA NTA total return

4.9%

-5.8%

5.0%

-19.0%

9.2%

CASH FLOW

Cash (used in)/generated from operations

26.0

48.0

56.9

55.1

50.4

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

39.7

34.3

Net investment in investment properties

(25.6)

(0.3)

(98.3)

(12.1)

(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)

(12.1)

(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)

(4.3)

(8.9)

Opening cash

104.8

37.2

67.4

56.1

51.8

Closing cash

37.2

67.4

56.1

51.8

42.9

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)

(391.0)

(400.0)

LTV

38.9%

40.8%

42.4%

49.5%

50.2%

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

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