Regional REIT — Operational progress supports DPS

Regional REIT (LSE: RGL)

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Research: Real Estate

Regional REIT — Operational progress supports DPS

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.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Operational progress supports DPS

Q3 trading update and DPS

Real estate

11 November 2022

Price

64p

Market cap

£330m

Net debt (£m) at 30 September 2022

394.3

Net LTV at 30 September 2022

43.1%

Shares in issue

515.7m

Free float

87.4%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.4

(12.6)

(27.7)

Rel (local)

(2.4)

(10.5)

(25.3)

52-week high/low

95p

59p

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

Q322 DPS paid

12 January 2023

Analyst

Martyn King

+44 (0)20 3077 5745

Regional REIT is a research client of Edison Investment Research Limited

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
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

0.65

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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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.

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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 2022 Edison Investment Research Limited (Edison).

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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.

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Healthcare

Ultimovacs — On track for upcoming UV1 catalysts

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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