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Last close As at 24/03/2023
GBP0.58
▲ 0.20 (0.35%)
Market capitalisation
GBP298m
Research: Real Estate
Regional REIT’s (RGL) Q322 DPS declared of 1.65p is in line with its target of 6.6p for the year (+3%). Despite a deteriorating economic environment, Q322 operational progress included strong leasing activity, good tenant retention, an increase in occupancy and continuing strong rent collection. With all debt fixed/hedged for almost five years, interest costs are unaffected by rising interest rates, although higher bond yields are having a negative impact on asset values across the broad UK market.
Regional REIT |
Operational progress supports DPS |
Q3 trading update and DPS |
Real estate |
11 November 2022 |
Share price performance
Business description
Next events
Analyst
Regional REIT is a research client of Edison Investment Research Limited |
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Regional REIT’s (RGL) Q322 DPS declared of 1.65p is in line with its target of 6.6p for the year (+3%). Despite a deteriorating economic environment, Q322 operational progress included strong leasing activity, good tenant retention, an increase in occupancy and continuing strong rent collection. With all debt fixed/hedged for almost five years, interest costs are unaffected by rising interest rates, although higher bond yields are having a negative impact on asset values across the broad UK market.
Year end |
Net rental |
EPRA |
EPRA |
NAV**/ |
DPS |
P/NAV |
Yield |
12/20 |
53.3 |
28.1 |
6.5 |
98.6 |
6.40 |
0.65 |
10.0 |
12/21 |
55.8 |
30.4 |
6.6 |
97.2 |
6.50 |
0.66 |
10.2 |
12/22e |
62.3 |
33.5 |
6.5 |
88.4 |
6.60 |
0.72 |
10.3 |
12/23e |
64.3 |
34.5 |
6.7 |
88.4 |
6.70 |
0.72 |
10.5 |
Note: *EPRA earnings exclude revaluation movements, gains/losses on disposal and other non-recurring items. **NAV is EPRA net tangible assets (NTA) per share.
Positive income indicators while asset values weaken
New leases agreed in Q322 will add £1.2m to rental income when fully occupied. The year-to-date total is now £3.8m, above the 2019 pre-pandemic level. On lease renewals, retention of existing tenants was also strong at 70%, including leases ‘held over’ pending agreement. Overall, the end-Q322 rent roll was £72.2m, up slightly from mid-year (£72.0m) and EPRA occupancy increased to 84.6% versus 83.8% at June. The Q322 portfolio value of £915m reflects the June valuation, adjusted for subsequent transactions/capex, but not revaluation moves. Valuation yields are softening across all sectors of the market, although we expect RGL’s leasing progress and asset quality enhancement to soften the impact. However, while our EPRA earnings and DPS forecasts are unchanged, we have reduced forecast NAV and expect LTV to move up from the 43.1% reported for Q322 (details below).
Income-led strategy
The commercial property sector is cyclical, but 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 dividends with the potential for capital growth. Asset yields and quality have been supported by active asset management and capital recycling. The Q322 rent roll of £72.2m compares with a full occupancy estimated rental value (ERV) of £93.3m, demonstrating strong income potential, primarily from letting vacant space to support a continuing high level of income. Despite the challenging environment, RGL observes a continuing acceleration in the return to the office.
Valuation: High yield despite sustained distributions
RGL continues to offer one of the highest yields in the UK REIT sector, a combination of its consistent income-led strategy and the market valuation of its shares. Its FY22 target DPS of 6.6p reflects a yield of 10.3%, significantly above close peers, while the shares trade at a 28% discount to FY22e NAV.
Details of estimate changes
Continued leasing progress provides additional comfort to our EPRA earnings forecasts and RGL’s ability to meet its FY22 DPS target.
However, across all main sectors of the UK commercial property market, general economic and political challenges, and uncertainties, including the war in Ukraine, are weighing on asset valuations. The 10-year UK gilt yield has increased from below 1% at the beginning of the year to c 3.5%, having recently been as high as 4.5%. Adding to asset pricing uncertainty, institutional investment demand for commercial real estate has fallen sharply from high levels at the start of the year. The open-ended property retail funds sector is again under pressure to raise liquidity and even the pension fund sector has been forced to reappraise sector weightings.
With a weaker demand-supply balance, rising bond yields and limited market transactions, there is much uncertainty about capital values, despite many sectors reporting good occupier demand and increasing rents.
Across the UK office sector, asset values to end-September were down 1.4%, which includes a 2.6% decline since July. The experience of those listed investors that have reported Q322 valuation changes is that the picture is very mixed, reflecting very diverse portfolios and asset management initiatives. For RGL, our revised forecasts now allow for a c 50bp softening in the valuation yield over FY22, equivalent to a c 5% reduction in our previously forecast portfolio value and a c 9% reduction in NAV/EPRA NTA per share. Assuming no management actions, we expect this to delay RGL’s targeted reduction in net loan to value, or LTV, towards 40% and we forecast c 45% over the next two years.
It is worth noting that RGL continues to have strong rent collection1 and good liquidity. Year to date, 97.4% rents have been collected compared to 94.8% for the equivalent period of FY21, and ultimately a fiscal collection rate of 99.2%. End-Q322 cash was £48m and there is a good level of headroom against borrowing covenants that require LTVs at the loan facility level of no more than c 60%. Group level interest cover was 3.0x at 30 June 2022.
As at 3 November 2022, 94.7% of the rent due for Q322 had been collected, comprising rent received of 94.1%, monthly rents of 0.5% and agreed collection plans of 0.1%. From 1 January 2022 to 3 November 2022, 97.4% of rent had been collected, comprising of rent received of 97.2%, monthly rents of 0.2% and agreed collection plans of 0.0%.
Exhibit 1: Estimates – changes to NAV only
(£m) |
New |
Previous |
Change |
|||||
FY22e |
FY23e |
FY22e |
FY23e |
FY22e |
FY23e |
FY22e |
FY23e |
|
Rental & other property income |
76.8 |
77.3 |
76.8 |
77.3 |
0.0 |
0.0 |
0.0% |
0.0% |
Non-recoverable property costs |
(14.5) |
(13.1) |
(14.5) |
(13.1) |
0.0 |
0.0 |
0.0% |
0.0% |
Net rental income |
62.3 |
64.3 |
62.3 |
64.3 |
0.0 |
0.0 |
0.0% |
0.0% |
Administrative expenses |
(11.6) |
(12.3) |
(11.6) |
(12.3) |
0.0 |
0.0 |
0.0% |
0.0% |
Net finance expense |
(17.2) |
(17.5) |
(17.2) |
(17.5) |
0.0 |
0.0 |
0.0% |
0.0% |
EPRA earnings |
33.5 |
34.5 |
33.5 |
34.5 |
0.0 |
0.0 |
0.0% |
0.0% |
EPRA cost ratio (exc direct property costs) |
34.0% |
32.8% |
34.0% |
32.8% |
|
|||
EPRA EPS (p) |
6.5 |
6.7 |
6.5 |
6.7 |
0.0 |
0.0 |
0.0% |
0.0% |
DPS (p) |
6.6 |
6.7 |
6.6 |
6.7 |
0.0 |
0.0 |
0.0% |
0.0% |
Dividend cover (x) |
0.98 |
1.00 |
0.98 |
1.00 |
||||
EPRA NTA per share (p) |
88.4 |
88.4 |
97.3 |
97.3 |
(8.9) |
(8.9) |
-9.1% |
-9.2% |
EPRA NTA total return |
-2.2% |
7.5% |
6.9% |
6.8% |
||||
Gross borrowing |
(442.9) |
(442.9) |
(442.9) |
(442.9) |
||||
Net LTV |
45.2% |
45.5% |
42.9% |
43.3% |
||||
Shares outstanding (m) |
515.7 |
515.7 |
515.7 |
515.7 |
0.0 |
0.0 |
0.0% |
0.0% |
Average number of shares (m) |
515.7 |
515.7 |
515.7 |
515.7 |
0.0 |
0.0 |
0.0% |
0.0% |
Source: Edison Investment Research
Exhibit 2: 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 |
77.3 |
Non-recoverable property costs |
(9.4) |
(8.8) |
(9.9) |
(14.5) |
(13.1) |
Net rental & related income |
55.0 |
53.3 |
55.8 |
62.3 |
64.3 |
Administrative expenses |
(10.9) |
(11.3) |
(10.6) |
(11.6) |
(12.3) |
EBITDA |
44.1 |
42.0 |
45.2 |
50.7 |
52.0 |
EPRA cost ratio |
31.6% |
32.4% |
31.2% |
34.0% |
32.8% |
Gain on disposal of investment properties |
1.7 |
(1.1) |
0.7 |
(3.3) |
0.0 |
Change in fair value of investment properties |
(3.5) |
(54.8) |
(8.3) |
(41.1) |
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 |
6.1 |
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 |
0.7 |
34.2 |
Tax |
0.3 |
0.2 |
0.0 |
0.0 |
0.0 |
Profit After Tax (FRS 3) |
26.5 |
(31.0) |
28.8 |
0.7 |
34.2 |
Adjusted for the following: |
|||||
Net gain/(loss) on revaluation/disposal of investment properties |
1.9 |
55.9 |
7.6 |
44.4 |
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 |
0.1 |
6.6 |
EPRA EPS (p) |
7.8 |
6.5 |
6.6 |
6.5 |
6.7 |
Dividend per share (p) |
8.25 |
6.40 |
6.50 |
6.60 |
6.70 |
Dividend cover (x) |
0.94 |
1.02 |
1.02 |
0.98 |
1.00 |
BALANCE SHEET |
|||||
Non-current assets |
806.0 |
749.5 |
925.2 |
902.8 |
910.6 |
Investment properties |
787.9 |
732.4 |
906.1 |
876.3 |
884.3 |
Other non-current assets |
18.1 |
17.2 |
19.0 |
26.5 |
26.3 |
Current Assets |
69.4 |
101.1 |
85.5 |
76.7 |
70.2 |
Other current assets |
32.2 |
33.7 |
29.4 |
29.7 |
30.0 |
Cash and equivalents |
37.2 |
67.4 |
56.1 |
47.0 |
40.2 |
Current Liabilities |
(36.2) |
(49.1) |
(58.4) |
(60.9) |
(61.8) |
Borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other current liabilities |
(36.2) |
(49.1) |
(58.4) |
(60.9) |
(61.8) |
Non-current liabilities |
(355.5) |
(380.9) |
(449.9) |
(449.7) |
(450.3) |
Borrowings |
(287.9) |
(310.7) |
(383.5) |
(387.5) |
(388.6) |
Other non-current liabilities |
(67.6) |
(70.3) |
(66.4) |
(62.2) |
(61.7) |
Net Assets |
483.7 |
420.6 |
502.4 |
468.9 |
468.7 |
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 |
456.0 |
455.8 |
IFRS NAV per share (p) |
112.1 |
97.5 |
97.4 |
90.9 |
90.9 |
EPRA NTA per share (p) |
112.6 |
98.6 |
97.2 |
88.4 |
88.4 |
EPRA NTA total return |
4.9% |
-5.8% |
5.0% |
-2.2% |
7.5% |
CASH FLOW |
|||||
Cash (used in)/generated from operations |
26.0 |
48.0 |
56.9 |
52.8 |
52.5 |
Net finance expense |
(12.2) |
(12.5) |
(13.1) |
(15.4) |
(16.1) |
Tax paid |
(0.8) |
0.2 |
0.0 |
0.0 |
0.0 |
Net cash flow from operations |
13.0 |
35.7 |
43.8 |
37.3 |
36.4 |
Net investment in investment properties |
(25.6) |
(0.3) |
(98.3) |
(14.5) |
(8.0) |
Acquisition of subsidiaries, net of cash acquired |
(43.9) |
0.0 |
0.0 |
0.0 |
0.0 |
Other investing activity |
0.2 |
0.1 |
0.0 |
0.0 |
0.0 |
Net cash flow from investing activities |
(69.4) |
(0.2) |
(98.2) |
(14.5) |
(8.0) |
Equity dividends paid |
(32.5) |
(26.7) |
(27.8) |
(34.0) |
(34.4) |
Debt drawn/(repaid) - inc bonds and ZDP |
3.5 |
22.2 |
73.8 |
3.0 |
0.0 |
Net equity issuance |
60.5 |
0.0 |
(0.1) |
0.0 |
0.0 |
Other financing activity |
(42.7) |
(0.8) |
(2.7) |
(0.9) |
(0.8) |
Net cash flow from financing activity |
(11.2) |
(5.3) |
43.2 |
(31.9) |
(35.3) |
Net Cash Flow |
(67.6) |
30.1 |
(11.2) |
(9.1) |
(6.8) |
Opening cash |
104.8 |
37.2 |
67.4 |
56.1 |
47.0 |
Closing cash |
37.2 |
67.4 |
56.1 |
47.0 |
40.2 |
Balance sheet debt |
(337.1) |
(360.1) |
(433.1) |
(437.2) |
(438.5) |
Unamortised debt costs |
(6.9) |
(6.0) |
(6.9) |
(5.6) |
(4.4) |
Closing net debt |
(306.8) |
(298.8) |
(383.8) |
(395.9) |
(402.7) |
LTV |
38.9% |
40.8% |
42.4% |
45.2% |
45.5% |
Source: company data, Edison Investment Research
|
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Research: Healthcare
Ultimovacs’ Q322 results highlighted an eventful period for the development of the company’s lead cancer vaccine, UV1. Notably, this included supportive three-year overall survival rates (71%) and efficacy signals in hard-to-treat patients from the Phase I UV-103 study in malignant melanoma. At end-Q322, Ultimovacs had a net cash position of NOK469.1m (no debt), which we estimate will fund operations into H124, beyond a handful of key clinical readouts in 2023. Based on the better than anticipated operating expenses, rolling our model forward and updating our foreign exchange (FX) assumptions, our valuation increases to NOK7.9bn or NOK231/share (NOK7.2bn or NOK209/share previously).
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