Last close As at 07/08/2026
GBP0.98
▲ −1.00 (−1.01%)
Market capitalisation
GBP159m
Research: Real Estate
In a trading update Regional REIT (RGL) says that the regional office and light industrial markets in which it operates remain robust, with strong occupier demand for its assets, and that it is trading in line with management expectations for the year. These expectations include a return to full dividend cover, and the company has declared a Q119 DPS of 1.90p per share, a 3% increase, maintaining its position as one of the highest yielding stocks in the sector.
Regional REIT |
Positive trading and dividend increase |
Trading update |
Real estate |
3 June 2019 |
Share price performance
Business description
Next events
Analysts
Regional REIT is a research client of Edison Investment Research Limited |
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In a trading update Regional REIT (RGL) says that the regional office and light industrial markets in which it operates remain robust, with strong occupier demand for its assets, and that it is trading in line with management expectations for the year. These expectations include a return to full dividend cover, and the company has declared a Q119 DPS of 1.90p per share, a 3% increase, maintaining its position as one of the highest yielding stocks in the sector.
Year end |
Net rental |
Adjusted |
EPRA NAV/ |
DPS |
P/EPRA |
Yield |
12/17 |
45.8 |
8.6 |
105.9 |
7.85 |
1.03 |
7.2% |
12/18 |
54.4 |
7.5 |
115.5 |
8.05 |
0.95 |
7.4% |
12/19e |
55.2 |
8.5 |
116.7 |
8.25 |
0.94 |
7.6% |
12/20e |
55.7 |
8.6 |
117.8 |
8.45 |
0.93 |
7.7% |
Note: *Adjusted earnings exclude revaluation movements, gains/losses on disposal, and other non-recurring items, and unlike EPRA earnings also exclude performance fees.
Occupational demand remains robust
The trading statement provides reassurance about the continued strength of trading, amid heightened Brexit uncertainty. It also details the progress of asset management initiatives in the year to date, with several significant lettings at rents well above previous levels. In FY18, rents increased by an average 11.8% on lease renewals in the office portfolio and the trend is continuing. We make no changes to our forecasts, published after the full year results (see our update note), which look for the contribution from recently completed acquisitions, like-for-like occupancy improvement and rental growth, and lower funding costs to drive growth, with DPS further increased and fully covered by adjusted earnings. Not included in our estimates are the further earnings accretive acquisitions that RGL targets.
Further growth opportunities
Since listing in November 2015, RGL’s portfolio value has almost doubled, to £741m, including several large portfolio transactions. In the process portfolio positioning has been optimised, diversification increased and scale added, supporting the fully integrated in-house asset management platform and improving access to capital markets. Acquisitions also reflect capital recycling, at the heart of RGL’s strategy to opportunistically acquire attractively priced, income-producing assets that will benefit from active management. These may subsequently be sold to realise the value thereby created, as was the case in FY18. With a cooling in the investment market, RGL now has a large and diverse pipeline of investment opportunities and says it is considering an equity fund raise to enable it to take advantage of these.
Valuation: Strong returns with income focus
RGL shares have performed well over the past year, outperforming the broad UK property sector, the wider market and a narrow group of direct peers. Still, the prospective yield, approaching 8%, remains among the highest in the sector and we expect DPS to be fully covered by adjusted earnings in FY19.
Further details from the statement
RGL’s portfolio is focused on income producing regional UK core and core plus office (76.7%) and industrial assets (15.0%). With a general lack of new development in the regions, both sectors continue to benefit from positive supply/demand dynamics in occupational markets. Meanwhile, as Brexit uncertainty has increased the investment market has shown some signs of cooling, with transaction volumes weaker than last year, and this is opening up potential investment opportunities.
Since end-FY18, has acquired Norfolk House, a c 120 sq ft freehold office property with retail units, well situated in central Birmingham, adjacent to New Street station, the Bullring shopping centre and close to the proposed new HS2 station, providing enhanced rail links to London and Manchester. The property is 98.75% occupied with an annual net income of £1.69m and the £20m consideration reflects a net initial yield of 7.92%. The main tenant for the office accommodation is HMRC, occupying 49% of the property. Despite substantial capital expenditure for refurbishment having been undertaken by the vendor, RGL believes that attractive value-enhancing asset management opportunities remain.
Also in FY19 to date, the group has been active in asset management, and exchanged on 19 new leases, with both existing long-term tenants and new tenants, totalling 116,443 sq ft When fully occupied these will provide c £0.8m of rental income.
Exhibit 1: Portfolio summary
31 March 2019 |
31 December 2018 |
|
Q119 |
FY18 |
|
Valuation (£m) |
741.0 |
718.4 |
Gross lettable area (million sq ft) |
7.43 |
|
Number of properties |
151 |
150 |
Number of property units |
1,223 |
1,192 |
Number of tenants |
884 |
874 |
Contracted rents (£m) |
60.5 |
59.7 |
WAULT to first break (years) |
3.4 |
|
Estimated rental value, ERV (£m) |
70 |
|
EPRA occupancy |
88.6% |
89.4% |
Net initial yield |
6.5% |
|
Reversionary yield |
8.8% |
Source: Regional REIT
Further growth opportunities
RGL came to market in November 2015 with an established portfolio of 128 properties valued at £386m. The portfolio has almost doubled in size since with acquisitions, including several large portfolio transactions, making a strong contribution. At the same time, the company has delivered on its aims to reposition towards faster growing regions such as the south-east and south-west of England and away from Scotland. Non-core investments outside of regional offices and light industrial assets have also been materially reduced.
Acquisitions have supported this portfolio repositioning and the further diversification of the portfolio, and have enabled RGL to build scale, to support its fully integrated in-house asset management platform and improve its access to capital, including improved debt financing terms. But acquisitions also reflect the capital recycling that is at the heart of RGL’s strategy whereby it seeks to opportunistically acquire attractively priced, income-producing assets that will benefit from active management and may subsequently be sold to realise the value thereby created. Following significant acquisition activity in 2017, RGL took advantage of good investment demand in the earlier months of FY18 to dispose of properties where its asset management plans were complete and, in some cases, where plans were yet to reach maturity but where it had identified that a better risk-adjusted return was available by selling at prevailing market prices, well above valuations. With the investment market cooling slightly, RGL says that during Q119 it saw no shortage of opportunities for making further earnings accretive acquisitions. It says that the potential deal pipeline is both considerable and diverse and that it is considering an equity fund raise to enable it to take advantage of opportunities.
Financials and valuation
No changes to estimates
We have made no changes to our existing estimates that look for the contribution from recently completed acquisitions, like-for-like occupancy improvement and rental growth, and lower funding costs to drive growth, with DPS further increased and fully covered by adjusted earnings. As noted above, RGL targets further earnings accretive acquisitions that are not included in our estimates. Depending on the mix of funding (equity and debt) applied to any acquisitions, and the price that any equity is issued at, we would expect some modest near-term dilution of EPRA NAV. This would be the case in respect of share issuance below the current NAV per share and any acquisition related costs. However, given RGL’s investment targets we would expect it to be targeting asset management driven post-acquisition improvements in capital values as well as income, such that any dilution of NAV should only be short term.
Active management delivering total return target
RGL targets a medium-term annual total return of more than 10% and the strong 16.6% EPRA NAV total return in FY18 took the total return generated since IPO in November 2015 to 37.5%, or a compound average annual return of 10.6%. The strong income focus is clear, with growing dividends per share contributing 59% of the total return over the period.
Exhibit 2: NAV total return
2015* |
2016 |
2017 |
2018 |
Since IPO |
|
Opening EPRA NAV per share (p) |
100.0 |
107.8 |
106.9 |
105.9 |
100.0 |
Closing EPRA NAV per share (p) |
107.8 |
106.9 |
105.9 |
115.5 |
115.5 |
Dividends per share paid (p) |
0.00 |
6.25 |
7.80 |
8.00 |
22.05 |
NAV total return (%) |
7.8% |
5.0% |
6.4% |
16.6% |
37.5% |
Compound return (%) |
10.6% |
Source: Regional REIT. Note: *55-day period from 6 November 2015.
RGL’s high dividend yield continues to be at the very top end of the broad UK property sector. For FY19 we forecast the DPS to be both higher and fully covered by adjusted earnings, representing a prospective yield approaching 8%.
In Exhibit 3 we show a comparison with a narrow group of peers that are similarly focused on regional commercial property. To ease comparison, this data is based on 12-month trailing DPS declared and last published NAV. Compared with this narrower group, RGL’s yield is also well above the average. Its c 5% share price discount to the end-FY18 EPRA NAV per share is lower than the average for the narrower group of peers and is lower than the average for the broad UK property market (we estimate a c 10% discount). Within the group, those companies with an income focus, like RGL, and covered dividends tend to have the higher P/NAV ratings.
Exhibit 3: Peer comparison
Price |
Market cap |
P/NAV |
Yield |
Share price performance |
||||
One month |
Three months |
12 months |
From 12m high |
|||||
Circle Property |
204 |
58 |
0.74 |
2.9 |
4% |
11% |
5% |
-20% |
Custodian |
119 |
483 |
1.10 |
5.5 |
4% |
4% |
-1% |
-3% |
Picton |
96 |
516 |
1.03 |
3.7 |
3% |
7% |
7% |
-4% |
Real Est Inv |
55 |
102 |
0.79 |
6.5 |
-2% |
7% |
1% |
-12% |
Schroder REIT |
57 |
297 |
0.83 |
4.5 |
-1% |
-2% |
-6% |
-15% |
Palace Capital |
270 |
124 |
0.64 |
7.0 |
-4% |
-10% |
-24% |
-26% |
UK Commercial Property Trust |
91 |
1188 |
0.97 |
4.0 |
3% |
6% |
6% |
-2% |
BMO Commercial Property Trust |
120 |
961 |
0.87 |
5.0 |
0% |
-1% |
-17% |
-22% |
BMO Real Estate Investments |
94 |
227 |
0.89 |
5.3 |
0% |
5% |
-7% |
-9% |
Average |
0.88 |
4.9 |
1% |
3% |
-4% |
-13% |
||
Regional REIT |
109 |
407 |
0.95 |
7.4 |
3% |
7% |
14% |
-1% |
UK property index |
1,664 |
4.0 |
-3% |
-4% |
-10% |
-11% |
||
FTSE All-Share Index |
3,924 |
4.7 |
-3% |
0% |
-7% |
-9% |
||
Source: Regional REIT data, Edison Investment Research. Note: *Last reported EPRA NAV per share and trailing 12-month DPS declared. Prices as at 31 May 2019.
Over the past year RGL shares have performed more strongly than the narrow peer group, the broad UK property sector and the FTSE All-Share Index. We attribute this to its ability to demonstrate strong asset management returns, commitment to a progressive dividend policy and reduced LTV. Given the high prospective yield, the prospect of a return to fully covered dividends in FY19 has the potential to support a further re-rating of the shares.
Exhibit 4: Financial summary
Year end 31 December (£000s) |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
||
PROFIT & LOSS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
Rental income |
5,361 |
42,994 |
61,610 |
74,019 |
74,034 |
74,637 |
||
Property costs |
(754) |
(4,866) |
(15,763) |
(19,644) |
(18,822) |
(18,976) |
||
Net rental income |
|
|
4,608 |
38,128 |
45,847 |
54,375 |
55,212 |
55,662 |
Administrative expenses (excluding performance fees) |
(1,353) |
(7,968) |
(7,819) |
(10,540) |
(10,309) |
(10,385) |
||
Performance fees |
0 |
(249) |
(1,610) |
(7,046) |
(36) |
(344) |
||
EBITDA |
|
|
3,255 |
29,911 |
36,418 |
36,789 |
44,867 |
44,933 |
EPRA cost ratio |
N/A |
N/A |
29.7% |
40.1% |
27.7% |
28.2% |
||
EPRA cost ratio excluding performance fee |
N/A |
N/A |
26.6% |
28.6% |
27.7% |
27.7% |
||
Gain on disposal of investment properties |
87 |
518 |
1,234 |
23,127 |
0 |
0 |
||
Change in fair value of investment properties |
23,784 |
(6,751) |
5,893 |
23,881 |
3,356 |
3,762 |
||
Operating profit before financing costs |
|
|
27,126 |
23,678 |
43,545 |
83,797 |
48,224 |
48,695 |
Exceptional items |
(5,296) |
0 |
0 |
0 |
0 |
0 |
||
Net finance expense |
(820) |
(8,629) |
(14,513) |
(15,715) |
(13,176) |
(13,176) |
||
Net movement in the fair value of derivative financial investments and impairment of goodwill |
115 |
(1,654) |
(340) |
(142) |
0 |
0 |
||
Profit Before Tax |
|
|
21,124 |
13,395 |
28,692 |
67,940 |
35,048 |
35,519 |
Tax |
0 |
23 |
(1,632) |
(567) |
0 |
0 |
||
Profit After Tax (FRS 3) |
|
|
21,124 |
13,418 |
27,060 |
67,373 |
35,048 |
35,519 |
Adjusted for the following: |
||||||||
Net gain/(loss) on revaluation/disposal of investment properties |
(23,870) |
6,233 |
(7,127) |
(47,008) |
(3,356) |
(3,762) |
||
Net movement in the fair value of derivative financial investments |
(180) |
865 |
(407) |
(459) |
0 |
0 |
||
Other EPRA adjustments including deferred tax adjustment |
0 |
557 |
4,488 |
987 |
0 |
0 |
||
EPRA earnings |
|
|
(2,926) |
21,073 |
24,014 |
20,893 |
31,691 |
31,757 |
Performance fees & exceptional items |
5,296 |
249 |
1,610 |
7,046 |
36 |
344 |
||
Adjusted earnings |
|
|
2,371 |
21,322 |
25,624 |
27,939 |
31,727 |
32,100 |
Period end number of shares (m) |
274.2 |
274.2 |
372.8 |
372.8 |
372.8 |
372.8 |
||
Fully diluted average number of shares outstanding (m) |
274.2 |
274.3 |
297.7 |
372.8 |
372.8 |
372.8 |
||
IFRS EPS - fully diluted (p) |
|
|
7.7 |
4.9 |
9.1 |
18.1 |
9.4 |
9.5 |
Adjusted EPS, fully diluted (p) |
|
|
0.9 |
7.8 |
8.6 |
7.5 |
8.5 |
8.6 |
EPRA EPS, fully diluted (p) |
|
|
(1.1) |
7.7 |
8.1 |
5.6 |
8.5 |
8.5 |
Dividend per share, declared basis (p) |
|
|
1.00 |
7.65 |
7.85 |
8.05 |
8.25 |
8.45 |
Dividend cover |
N/A |
101.6% |
109.7% |
93.1% |
103.2% |
101.9% |
||
BALANCE SHEET |
||||||||
Non-current assets |
|
|
407,492 |
506,401 |
740,928 |
720,886 |
752,542 |
762,305 |
Investment properties |
403,703 |
502,425 |
737,330 |
718,375 |
750,031 |
759,794 |
||
Other non-current assets |
3,790 |
3,976 |
3,598 |
2,511 |
2,511 |
2,511 |
||
Current Assets |
|
|
35,803 |
27,574 |
66,587 |
126,986 |
59,347 |
55,098 |
Other current assets |
11,848 |
11,375 |
21,947 |
22,163 |
22,137 |
22,482 |
||
Cash and equivalents |
23,954 |
16,199 |
44,640 |
104,823 |
37,210 |
32,616 |
||
Current Liabilities |
|
|
(21,485) |
(23,285) |
(42,644) |
(83,685) |
(42,286) |
(43,057) |
Bank and loan borrowings - current |
(200) |
0 |
(400) |
(40,216) |
0 |
0 |
||
Other current liabilities |
(21,285) |
(23,285) |
(42,244) |
(43,469) |
(42,286) |
(43,057) |
||
Non-current liabilities |
|
|
(126,469) |
(218,955) |
(371,972) |
(334,672) |
(335,612) |
(336,152) |
Bank and loan borrowings - non-current |
(126,469) |
(217,442) |
(371,220) |
(334,335) |
(335,275) |
(335,815) |
||
Other non-current liabilities |
0 |
(1,513) |
(752) |
(337) |
(337) |
(337) |
||
Net Assets |
|
|
295,341 |
291,735 |
392,899 |
429,515 |
433,991 |
438,193 |
Derivative interest rate swaps & deferred tax liability |
416 |
1,513 |
2,802 |
971 |
971 |
971 |
||
EPRA net assets |
|
|
295,757 |
293,248 |
395,701 |
430,486 |
434,962 |
439,164 |
IFRS NAV per share (p) |
107.7 |
106.4 |
105.4 |
115.2 |
116.4 |
117.5 |
||
Fully diluted EPRA NAV per share (p) |
107.8 |
106.9 |
105.9 |
115.5 |
116.7 |
117.8 |
||
CASH FLOW |
||||||||
Cash (used in)/generated from operations |
|
|
(2,232) |
31,434 |
40,251 |
38,817 |
43,711 |
45,358 |
Net finance expense |
(424) |
(6,626) |
(9,167) |
(11,923) |
(11,636) |
(11,636) |
||
Tax paid |
0 |
(1,715) |
(236) |
(1,467) |
0 |
0 |
||
Net cash flow from operations |
|
|
(2,656) |
23,093 |
30,848 |
25,427 |
32,074 |
33,722 |
Net investment in investment properties |
1,157 |
(99,286) |
(8,267) |
100,601 |
(28,300) |
(6,000) |
||
Acquisition of subsidiaries, net of cash acquired |
26,659 |
(5,573) |
(51,866) |
(32,629) |
0 |
0 |
||
Other investing activity |
13 |
60 |
25 |
220 |
0 |
0 |
||
Net cash flow from investing activities |
|
|
27,828 |
(104,799) |
(60,108) |
68,192 |
(28,300) |
(6,000) |
Equity dividends paid |
0 |
(15,723) |
(23,321) |
(29,429) |
(30,571) |
(31,317) |
||
Debt drawn/(repaid) - inc bonds and ZDP |
(1,217) |
91,417 |
13,921 |
(547) |
(39,816) |
0 |
||
Other financing activity |
0 |
(1,744) |
67,101 |
(3,460) |
(1,000) |
(1,000) |
||
Net cash flow from financing activity |
|
|
(1,217) |
73,950 |
57,701 |
(33,436) |
(71,387) |
(32,317) |
Net Cash Flow |
|
|
23,955 |
(7,756) |
28,441 |
60,183 |
(67,613) |
(4,595) |
Opening cash |
0 |
23,955 |
16,199 |
44,640 |
104,823 |
37,210 |
||
Closing cash |
|
|
23,955 |
16,199 |
44,640 |
104,823 |
37,210 |
32,616 |
Balance sheet debt |
(126,669) |
(217,442) |
(371,620) |
(374,551) |
(335,275) |
(335,815) |
||
Unamortised debt costs |
(1,875) |
(2,618) |
(4,843) |
(5,752) |
(5,212) |
(4,672) |
||
Closing net debt |
|
|
(104,588) |
(203,861) |
(331,823) |
(275,480) |
(303,277) |
(307,871) |
LTV |
25.9% |
40.6% |
45.0% |
38.3% |
40.4% |
40.5% |
Source: Regional REIT, Edison Investment Research
|
|
Research: Industrials
FY19 was a mixed year for Renewi with variable portfolio performances and two particular external challenges faced (at ATM and Derby). Despite this, the company still delivered profitability in line with the prior year. Net debt reduction and operational improvements will be key focus areas for FY20 and beyond and these remain key near-term sentiment drivers in our view. The share price has started to recover over the last couple of months although the rating suggests this has further to go.