Company description: Regional focus
Regional REIT (RGL) is a UK-based real estate investment trust (incorporated in Guernsey) that was admitted to the premium segment of the Official List and to trading on the Main Market of the London Stock Exchange in November 2015. The shares became a constituent of the FTSE All-Share Index in March 2016 and the FTSE EPRA NARIT Index in June 2016. RGL was formed by the combination of two UK commercial property investment funds previously created by the external managers, London & Scottish Investments (LSI), the asset manager, and Toscafund Asset Management (Toscafund), the investment manager. LSI advises the RGL board on the acquisition, management and disposal of the real estate assets and is also responsible for debt funding negotiations, while Toscafund is responsible for the management functions of the company. LSI is a privately owned RGL property investment manager, established in 2012, with an experienced team that will be further strengthened by the appointment of Simon Marriott to the position of investment director, working closely with Stephen Inglis, LSI group property director, chief investment officer, and RGL board member. Through investments in UK commercial property (predominantly office and industrial property) in the main regional centres of the UK, effectively outside the M25 motorway, RGL aims to deliver an attractive total return to investors. It targets a 10-15% total return pa with a strong focus on income in addition to capital growth.
Despite some softening of UK economic growth expectations, both occupier and investment demand for regional property remain positive, especially for industrial property. In addition to the focus on regional property assets, predominantly quality offices and light industrial units, a key element of the RGL investment strategy is to acquire undermanaged and unloved properties and create value through active asset management.
Details of the trading update
RGL continued to be active in lettings during the three months to 30 September. The update provides details on a number of its asset management initiatives, which support existing income through lease renewals and re-gears, and generating additional income through new lettings. The number of new leases to new tenants exchanged since 30 June is now 22, totalling 391,459sq ft of space, and providing c £2.9m of gross rental income when fully occupied. There were also a number of re-gears completed, which provided an average 3.8% uplift in headline rents. Including those tenants who hold-over at the expiry of a lease, 70% of the headline rent has been retained at a lease event.
Measured on a rental value basis, occupancy was overall slightly lower during the period on both a headline basis (82.8% versus 83.3% at 30 June) and like-for-like basis (81.4% versus 82.0%); however, we estimate that some significant new lettings since the period end represent c 1.4% of occupancy. Our forecast for 2017 year-end occupancy remains the same at 85% and reaching 89% at year-end 2018, consistent with management’s target of c 90%.
During the period under review, RGL completed two acquisitions and one disposal, and has exchanged contracts on two further sales since 30 September. The two acquisitions (Woodlands Court and Equinox North) are both freehold office buildings in the Almondsbury area of North Bristol, with an aggregate purchase value of c £11.4m and providing a net initial yield of more than 8%. Asset sales are generally directed at crystallising the value that has been created by asset management initiatives. St James House, an office building in Bath, was sold for £4.6m, 44% ahead of the December 2016 valuation, reflecting an initial yield of 5.75%. One of the recently agreed sales is 18 industrial units on the Thames Trading Estate in Irlam for £2.2m, 40% above the December 2016 valuation, reflecting a net initial yield of 6%. The other agreed sale, for £10.5m on a subject-to-planning basis, to Unite Students, the manager and developer of student accommodation, is a development site in Leeds that was acquired as part of the Wing portfolio in 2016. RGL has said that it expects to generate a profit upon completion, probably in early 2018, of c £9m on the original acquisition price, and we would also expect a significant uplift to the current carried value of the asset. We have assumed a £6.5m realisation gain in our 2018 forecast.
The contracted rent roll ended the period at c £55.9m, an increase from c £54.6m at the last-year, substantially reflecting the net balance of acquisitions versus sales completed in the period. The portfolio value was c £651m at 30 September (30 June c £640m) with the uplift similarly reflecting investment activity, including refurbishment capex that we estimate at c £3.9m during the period and which is intended to support future rental income and property values. RGL does not undertake a quarterly revaluation of the portfolio. Gross debt was slightly increased on H117, from £331.8m to £335.4m, not reflecting the most recent agreed sales, and with the cash balance at £22.1m the net loan to value ratio was c 48.1%.
RGL continues to be in advanced discussions on replacing five of its existing debt facilities, representing c £164m of the c £296m outstanding at H117 with a new 10-year facility, and has reached agreement, subject to documentation, to refinance another. Overall, the refinancing is expected to extend average debt maturity to 6.3 years from 2.0 years and will simplify the debt structure, with no increase in costs expected by management.
We have made no changes to our EPRA earnings but have adjusted our balance sheet for both the completed and agreed transactions, assuming that the latter will complete. We have included an assumed gain on disposal of the Leeds development site as stated above, but have not assumed any material uplift versus the mid-2017 carried values in respect of the other sales. As a result of the assumed disposal gain, our fully diluted 2018 EPRA NAV per share estimate increases 2% to 118.8p from 116.6p. Our end-2018 estimated net LTV reduces to 45.5% from 46.4%.
RGL will pay a third quarterly dividend per share (DPS) of 1.80p for the three months ending 30 September 2017 on 22 December 2017 to shareholders on the register as at 24 November 2017. The ex-dividend date is 23 November 2017. This represents an increase of c 3% on the prior year DPS and is in line with RGL’s intention to pay three similar quarterly dividends during the year with a fourth, potentially higher, dividend for the fourth quarter that will ensure it meets the REIT distribution requirement to pay out at least 90% of taxable income. We forecast a fourth quarter dividend of 2.45p, making a total of 7.85p for the year.
Exhibit 1: Financial summary
Year end 31 December |
|
£000s |
2015 |
2016 |
2017e |
2018e |
PROFIT & LOSS |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
Gross rental income |
|
|
5,361 |
42,994 |
51,042 |
55,388 |
Non-recoverable property costs |
|
|
(754) |
(4,866) |
(6,370) |
(5,580) |
Revenue |
|
|
4,608 |
38,128 |
44,672 |
49,808 |
Administrative expenses (excluding performance fees) |
|
|
(1,353) |
(7,968) |
(8,586) |
(9,465) |
EBITDA |
|
|
3,255 |
30,160 |
36,086 |
40,344 |
Gain on disposal of investment properties |
|
|
87 |
518 |
(41) |
6,500 |
Change in fair value of investment properties |
|
|
23,784 |
(6,751) |
9,938 |
22,839 |
Operating profit before financing costs |
|
|
27,126 |
23,927 |
45,982 |
69,683 |
Performance fees |
|
|
0 |
(249) |
(1,986) |
(1,632) |
Exceptional items |
|
|
(5,296) |
0 |
0 |
0 |
Finance income |
|
|
177 |
193 |
207 |
120 |
Finance expense |
|
|
(997) |
(8,822) |
(12,687) |
(13,661) |
Net movement in the fair value of derivative financial investments and impairment of goodwill |
|
|
115 |
(1,654) |
168 |
0 |
Profit Before Tax |
|
|
21,124 |
13,395 |
31,684 |
54,510 |
Tax |
|
|
0 |
23 |
(11) |
0 |
Profit After Tax (FRS 3) |
|
|
21,124 |
13,418 |
31,673 |
54,510 |
Adjusted for the following: |
|
|
|
|
|
|
Performance fees |
|
|
0 |
249 |
1,986 |
1,632 |
Exceptional items |
|
|
5,296 |
0 |
0 |
0 |
Net gain/(loss) on revaluation |
|
|
(23,784) |
6,751 |
(9,938) |
(22,839) |
Net movement in the fair value of derivative financial investments |
|
|
(180) |
865 |
(447) |
0 |
Gain on disposal of investment properties |
|
|
(86) |
(518) |
41 |
(6,500) |
Profit before Tax (norm) |
|
|
2,371 |
20,765 |
23,315 |
26,802 |
Period end number of shares (m) |
|
|
274.2 |
274.2 |
300.5 |
300.5 |
Average Number of Shares Outstanding (m) |
|
|
274.2 |
274.4 |
294.6 |
300.5 |
Fully diluted average number of shares outstanding (m) |
|
|
274.2 |
274.4 |
294.6 |
300.5 |
IFRS EPS - fully diluted (p) |
|
|
7.7 |
4.9 |
10.8 |
18.1 |
EPRA EPS - adjusted (p) |
|
|
0.9 |
7.8 |
7.9 |
8.9 |
EPRA EPS |
|
|
(1.1) |
7.7 |
7.2 |
8.4 |
Dividend per share (p) - declared basis |
|
|
1.00 |
7.65 |
7.85 |
8.35 |
Dividend cover |
|
|
n.a. |
102% |
101% |
107% |
BALANCE SHEET |
|
|
|
|
|
|
Non-current assets |
|
|
407,492 |
506,401 |
663,395 |
690,234 |
Investment properties |
|
|
403,703 |
502,425 |
659,928 |
686,767 |
Other non-current assets |
|
|
3,790 |
3,976 |
3,467 |
3,467 |
Current Assets |
|
|
35,803 |
27,574 |
32,445 |
40,437 |
Trade and other receivables |
|
|
11,848 |
11,375 |
14,039 |
14,573 |
Cash and equivalents |
|
|
23,954 |
16,199 |
18,406 |
25,864 |
Current Liabilities |
|
|
(21,485) |
(23,285) |
(34,360) |
(35,317) |
Trade and other payables |
|
|
(12,576) |
(14,601) |
(20,736) |
(21,218) |
Bank and loan borrowings - current |
|
|
(200) |
0 |
0 |
0 |
Other current liabilities |
|
|
(8,709) |
(8,684) |
(13,623) |
(14,100) |
Non-current liabilities |
|
|
(126,469) |
(218,955) |
(334,803) |
(338,661) |
Bank borrowings |
|
|
(126,469) |
(217,442) |
(296,448) |
(297,686) |
Zero divident preference shares (ZDP) |
|
|
0 |
0 |
(37,320) |
(39,940) |
Other non-current libilities |
|
|
0 |
(1,513) |
(1,035) |
(1,035) |
Net Assets |
|
|
295,341 |
291,735 |
326,677 |
356,693 |
Derivative interest rate swaps |
|
|
416 |
1,513 |
963 |
963 |
EPRA net assets |
|
|
295,757 |
293,248 |
327,640 |
357,656 |
IFRS NAV per share (p) |
|
|
107.7 |
106.4 |
108.7 |
118.7 |
Fully diluted EPRA NAV per share (p) |
|
|
107.8 |
106.9 |
108.8 |
118.8 |
LTV |
|
|
-5.9% |
40.6% |
48.1% |
45.5% |
CASH FLOW |
|
|
|
|
|
|
Cash (used in)/generated from operations |
|
|
(2,232) |
31,434 |
37,794 |
39,136 |
Net finance expense |
|
|
(424) |
(6,626) |
(8,892) |
(9,683) |
Tax paid |
|
|
0 |
(1,715) |
51 |
0 |
Net cash flow from operations |
|
|
(2,656) |
23,093 |
28,953 |
29,453 |
Net investment in investment properties |
|
|
1,157 |
(99,286) |
(17,990) |
2,500 |
Acquisition of subsidiaries, net of cash acquired |
|
|
26,659 |
(5,573) |
209 |
0 |
Other investing activity |
|
|
13 |
60 |
8 |
0 |
Net cash flow from investing activities |
|
|
27,828 |
(104,799) |
(17,773) |
2,500 |
Equity dividends paid |
|
|
0 |
(15,723) |
(17,834) |
(24,494) |
Bank debt drawn/(repaid) |
|
|
(1,217) |
91,417 |
9,265 |
0 |
Other financing activity |
|
|
0 |
(1,744) |
(404) |
0 |
Net cash flow from financing activity |
|
|
(1,217) |
73,950 |
(8,973) |
(24,494) |
Net Cash Flow |
|
|
23,955 |
(7,756) |
2,207 |
7,459 |
Opening cash |
|
|
0 |
23,955 |
16,199 |
18,406 |
Closing cash |
|
|
23,955 |
16,199 |
18,406 |
25,864 |
Closing debt |
|
|
(126,669) |
(217,442) |
(333,768) |
(337,626) |
Closing net debt |
|
|
(102,714) |
(201,243) |
(315,362) |
(311,762) |
Source: Company date, Edison Investment Research
Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) of Myonlineadvisers Pty Ltd (AFSL: 427484) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. |
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Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) of Myonlineadvisers Pty Ltd (AFSL: 427484) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 12, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
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