Regional REIT — Dividend rebase pragmatic and sustainable

Regional REIT (LSE: RGL)

Last close As at 19/04/2024

GBP0.21

0.70 (3.38%)

Market capitalisation

GBP111m

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Research: Real Estate

Regional REIT — Dividend rebase pragmatic and sustainable

Regional REIT’s (RGL’s) post-pandemic recovery in new lettings paused in H123, as occupiers adopted a cautious ‘wait and see’ approach, although rents increased and the strong ‘return to the office’ supports RGL’s expectation that leasing will accelerate. With DPS lowered to match reduced income prospects, the shares have fallen sharply, maintaining a sector-high dividend yield. Including asset sales focused on low-income properties, our forecasts show the rebased dividend to be fully covered and gearing reduced.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Dividend rebase pragmatic and sustainable

H123 results

Real estate

27 September 2023

Price

29.15p

Market cap

£150m

Net debt (£m) at 30 June 2023

390.5

Net LTV at 30 June 2023

51.9%

Shares in issue

515.7m

Free float

88%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(30.5)

(36.1)

(52.8)

Rel (local)

(32.9)

(37.5)

(56.2)

52-week high/low

67.7p

29.15p

Business description

Regional REIT is focused on office assets in the regional centres of the UK, outside the M25, highly diversified by property, tenants and the underlying industry exposure of those tenants. It is actively managed and targets a total shareholder return of at least 10% with a strong focus on income.

Next events

Q323 Trading update

9 November 2023

Analyst

Martyn King

+44 (0)20 3077 5700

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT’s (RGL’s) post-pandemic recovery in new lettings paused in H123, as occupiers adopted a cautious ‘wait and see’ approach, although rents increased and the strong ‘return to the office’ supports RGL’s expectation that leasing will accelerate. With DPS lowered to match reduced income prospects, the shares have fallen sharply, maintaining a sector-high dividend yield. Including asset sales focused on low-income properties, our forecasts show the rebased dividend to be fully covered and gearing reduced.

Year end

Net rental
income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/21

55.8

30.4

6.6

97.2

6.50

0.30

22.3

12/22

62.6

34.1

6.6

73.5

6.60

0.40

22.6

12/23e

54.5

27.6

5.3

67.3

5.25

0.43

18.0

12/24e

54.8

25.9

5.0

71.0

4.80

0.41

16.5

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

Adjusting dividend to near-term income pressure

H123 gross income and new lettings both fell short of expectations, with void costs higher. Encouragingly, completed leases were at an average 13% premium to estimated market rents and RGL expects uptake will increase as interest rates are seen to be peaking and occupier confidence improves. Meanwhile, increased asset sales will target lower income/vacant properties to reduce void costs and gearing. The 3.8% H123 decline in valuations was less than the sector average, but still the loan to value ratio (LTV) reached 51.9% despite lower borrowing, a head of the reiterated 40% target. In line with lower income, Q3 DPS was 1.20p vs 1.65p in Q1 and continuing at this level, RGL expects DPS of 5.25p for the year, fully covered.

We forecast the rebased DPS to be sustainable

The shares had appeared to have been anticipating a dividend re-base and the post-interim share price weakness may reflect concerns regarding whether asset sales can be achieved on terms that both sustain income as well as de-gearing. The asset manager notes an active market for the sort of low income/occupancy, small lot size assets it targets for sale, typically for alternative use, and our forecasts assume £75m of sales by end-FY24. We forecast lost rental income will be offset by lower void costs and interest as LTV is reduced to c 45%. FY24e EPRA earnings is nonetheless a third lower than previously forecast, but fully covers the new level of DPS of 4.8p pa. This includes an assumed refinancing of the £50m retail eligible bond at 10% versus the existing 4.5%.

Valuation: Highly exposed to good news

Share price weakness has pushed the FY24e dividend yield to c 16%, while the shares now trade at c 0.5x NAV. Positive indications that occupier demand remains robust and that gearing can be lowered while maintaining dividend cover should be a trigger for a strong re-rating.

Dividend rebase pragmatic and sustainable

Having paid a quarterly DPS of 1.65p, the second quarter DPS was rebased to 1.2p, and the company expects to declare quarterly DPS at a similar rate for the balance of the year, making a total of 5.25p, fully covered by earnings. Assuming that quarterly DPS continues at this new level, as we do, FY24 aggregate DPS will be 4.8p, fully covered by our revised earnings forecasts. In this note we provide details of the interim results and explain why we forecast the re-based dividend level to be sustainable. By way of summary:

Since listing in November 2015, RGL has targeted income-led returns to shareholders, maximising dividend distributions on a fully covered basis. We expect this to continue despite the dividend being re-based in line with the immediate income outlook.

The pressure on distributable income reflects lower portfolio occupancy during and since the pandemic, reducing rental income while increasing the share of property costs, sharply increased by inflation, which must meanwhile be borne by RGL. Additionally, less predictable non-rent income, from dilapidation receipts and lease surrender premia, was meaningfully lower in H123, largely because tenants remained in occupation. We believe this was a factor in determining the timing of the dividend rebasing decision but not an underlying driver.

Capital returns have been negatively affected by the market-wide impact of rising interest rates as well as increased occupancy, in part limiting the recognition of capital investment in valuations.

Property valuation weakness has increased gearing despite a decline in outstanding debt and the company targets a reduction in the loan to value ratio to 40% over time with an immediate focus on property sales, although market valuations remain uncertain.

RGL plans to focus property sales on smaller properties, particularly those that are vacant and where the expected returns on investing to enhance their quality and occupier appeal are insufficient. The sale of vacant properties is particularly attractive, having no impact on portfolio income while removing property costs, supporting the balance between de-gearing and maintaining income.

Despite overall market-wide investment volumes remaining at a low level, the asset manager says that there is an active market in the smaller lot-size assets that it intends will make up the bulk of the sales.

RGL does not plan a ‘fire sale’ of assets but seeks a gradual reduction in LTV towards its 40% target by 2026, when the first secured debt refinancing is due. We forecast sales of £75m by end-FY24 at around book value, with a blended net initial yield (a mix of income generating and vacant properties) of 4%.

A £50m retail eligible bond with a 4.5% coupon matures in August 2024. Among the options being considered by the company are refinancing with similar unsecured debt or repayment using proceeds from asset sales and/or existing cash resources. Our forecasts assume the cost of refinancing, at the end of this year, at an increased cost of 10% pa.

More fundamentally, the investment manager cites a strong return to the office as a positive indicator for underlying occupier demand. A recent RGL tenant survey highlighted that employees who confirmed they are back in the office now attend for an average of 4.2 days per week and that actual occupation was 65% or 93% of the estimated pre-pandemic level of 70%. RGL expects occupier activity to increase as interest rate uncertainty eases and that with no material new supply, rents will continue to increase. Our forecasts assume no benefit from leasing events, implicitly assuming that lease maturities and terminations are offset by new letting, with no change in achieved rents.

The key risks to our forecasts are:

An inability to sell assets:

on terms that sustain net income, and/or

on a scale that delivers the required reduction in gearing over time.

An inability to replace the income on lease maturities and terminations through new leasing events.

Income-led total returns

RGL came to market targeting a higher yield portfolio that would provide progressive, regular dividends with the potential for capital growth. Active asset management and capital recycling are key elements in sustaining asset yields. RGL’s dividend yield has been consistently one of the highest in the sector and quarterly dividends were maintained during the pandemic, albeit at a reduced level.

Exhibit 1 reflects the impact on NAV of dividends paid, typically in the quarter following the dividend being declared. Aggregate DPS paid in H123 of 3.30p includes the dividends declared in respect of Q422 and Q123, each 1.65p. Dividends declared in H123 were 2.85p, comprising the Q1 DPS of 1.65p and the Q223 DPS at the rebased level of 1.2p. RGL expects to declare two further quarterly dividends of 1.2p in respect of FY23, taking aggregate FY23 DPS declared to 5.25p compared with an ongoing annualised run rate of 4.8p.

Exhibit 1: Dividend-driven returns

2015*

2016

2017

2018

2019

2020

2021

2022

H123

Since IPO

Opening EPRA NAV per share (p)

100.0

106.8

106.1

105.4

115.2

112.6

98.6

97.2

73.5

100.0

Closing EPRA NTA* per share (p)

106.8

106.1

105.4

115.2

112.6

98.6

97.2

73.5

66.9

66.9

Dividends per share paid (p)

0.00

6.25

7.80

8.00

8.20

7.45

6.30

6.65

3.30

53.95

Dividend return

0.0%

5.8%

7.4%

7.6%

7.1%

6.6%

6.4%

6.8%

4.5%

54.0%

Capital return

6.8%

-0.7%

-0.6%

9.2%

-2.3%

-12.4%

-1.4%

-24.4%

-9.0%

-33.1%

NAV total return

6.8%

5.1%

6.7%

16.8%

4.9%

-5.8%

5.0%

-17.5%

-4.6%

20.8%

Annual average dividend return

5.8%

Annual average capital return

-5.1%

Average annual return (%)

2.5%

Source: Regional REIT data, Edison Investment Research. Note: *55 day period from 6 November 2015.

RGL continues to target a high level of distribution on a sustainable basis

RGL says that it has rebased dividends to a level that it expects to be sustainable and fully covered. Historically it has maximised distributions to shareholders by distributing EPRA earnings in full but by doing so it is required to fund capital expenditure with cash resources or additional debt. Given the company’s focus on LTV reduction, combined with continuing investment in the portfolio, we would interpret a sustainable level of dividends to be more than fully covered by EPRA earnings while adhering to real estate investment trust (REIT) requirements that at least 90% of income be distributed.

H123 DPS declared of 2.85p was only partially covered by EPRA EPS of 2.5p. RGL’s intention to distribute 5.25p per share in respect of FY23 implies an expectation that full year EPRA earnings will be at least 5.25p per share, or at least 2.75p in H223. We discuss our earnings forecasts below, but they are consistent with this, and we note that RGL’s earnings have been consistently higher in the second half of the year than in the first half. The second half is seasonally slightly longer (184 days versus 181 in the first) but more importantly there is a strong tendency for non-rental income, such as dilapidation receipts and lease surrender premiums, to be agreed towards year-end.

Exhibit 2: Seasonality of earnings and dividend cover

Source: Regional REIT data, Edison Investment Research H223 forecast. Note: The FY18 DPS cover shown above is based on EPRA earnings. Including gains taken on disposal DPS was fully covered.

Why has RGL re-assessed the sustainable level of distributions?

The immediate trigger for rebasing the dividend is weaker than expected leasing activity in H123 with a negative impact on gross income and, more importantly, lower occupancy increasing the share of property costs borne by the company. This has been exacerbated by upwards pressure on those costs from stubborn inflation.

Providing more perspective, ahead of the pandemic, FY19 dividend per share was 7.8p. Since then, the portfolio equivalent yield2 has increased (to 9.5% at end-H123 from 8.2% at end-FY18), while the EPRA cost ratio (before direct property expenses) is lower (17.3% in H123 versus 19.6% in FY19) and gearing is higher (c 52% versus c 40%). These are positive indicators for income potential. However, the net initial yield, which is based on currently contracted rents, less expected property costs, and adjusted for lease incentives, is lower as a result of lower occupancy and increased property costs, exacerbated by high inflation, and reflected in a lower ratio of net property income to gross.

  The equivalent yield is a time weighted average of the net initial yield and the reversionary yield that may be earned at expiry of the current lease, representing the return that a property is expected to produce based upon the timing of the income received.

Exhibit 3: Equivalent and net portfolio yield

Exhibit 4: Occupancy and net revenue margin

Source: Regional REIT data, Edison Investment Research

Source: Regional REIT data, Edison Investment Research

Exhibit 3: Equivalent and net portfolio yield

Source: Regional REIT data, Edison Investment Research

Exhibit 4: Occupancy and net revenue margin

Source: Regional REIT data, Edison Investment Research

Asset sales to benefit net income and gearing

RGL is focused strongly on increasing net income, primarily by letting space and selling costly void space, eliminating the property costs attached to these and providing an opportunity to reallocate the capital to reduced borrowings. RGL’s net LTV of 52.9% is relatively high compared with peers,3 and above the company’s 40% medium-term target and self-determined upper limit of 50%. Gearing is a benefit to overall portfolio income but creates additional volatility to NAV, both positively and, more recently, negatively. It is weakness in property values that has pushed up LTV while borrowing has actually slightly reduced.

  The average LTV of the peer group shown in Exhibit 15 is 27%.

Exhibit 5: Trend in debt and gearing

Source: Regional REIT data, Edison Investment Research

Assuming no benefit from property values, reducing LTV to 40% through asset sales alone implies the sale of c £150m worth of properties, although we would expect sales to be spread over the next couple of years. We have assumed sales of £75m in aggregate through H223 and FY24 and, as with H123, we assume this will include a significant share of vacant properties. This mix was reflected in a 2.4% net initial yield on the H123 sales compared with 9.4% on the occupied properties alone.

UK commercial property market investment transactions remain subdued, but RGL says that there is an active market in smaller lot size assets (of £5m to £10m). Smaller lot sizes are typically substantially equity funded and less influenced by the cost and availability of debt. Low capital values (an average £14.6 per sqm for RGL’s office properties) support the change to a broad range of alternative uses, dependent on location among other factors, such as student accommodation, hotels, residential, nursing homes, nurseries and industrial. The average lot size of the RGL portfolio is £5.0m but, excluding the top 15 assets (valued at £232m or an average £15m), the remaining assets, valued at £520m, have an average lot size of £3.9m. This indicates a broad pool of assets from which disposals can be selected.

Opportunities to grow gross rental income

Significant embedded potential

The total externally estimated market rental value, at full occupancy (ERV) reported by RGL at end-H123 was £88.9m, £19.0m or 27% above the contracted passing rent of £69.8m. Using the EPRA yield disclosure, the methodology of which excludes properties that are under refurbishment and development that are not immediately available to let, we show an approximate breakdown of this gap. At end-H123, on an EPRA basis, the annualised contracted cash rent to be paid was £61.7m pa. This excluded lease incentives in place of £6.0m. Lease incentives are included in the gross contracted rent published by RGL. As there will always be an element of lease incentives in place, the most immediate opportunities for increasing rental income are the reduction in voids (£14.7m) and using leasing events to capture the upside from current rents to market levels (£1.9m). The letting of refurbished space at completion also provides opportunities but given RGL’s rolling programme of capex there will always be properties that are not immediately available to let.

Exhibit 6: Rental income bridge to estimated rental value (ERV)

Source: Regional REIT data, Edison Investment Research. Note: *The adjustments relate to properties that are under refurbishment and development, excluded from EPRA ERV.

Letting vacant space

A level of new letting is always required to maintain a given level of occupancy as some level of tenant turnover is inevitable. RGL typically achieves a strong level of retention, at around 70% or above, and in H123 it was 76.3%.4

  The retention rate measures how much of the rent that comes up for renewal in the period for lease expiries (excluding breaks) is retained, including the impact of lease renewals/regears, tenants that are holding over and units where the tenant has vacated but a new tenant is already in place.

Following subdued leasing activity during the pandemic, new lettings in FY22 generated additional gross rents of £5.9m (FY21: £2.5m), well above pre-pandemic levels (FY19: £3.8m). The strength of letting activity continued throughout the year despite the volatility in the gilt market and political uncertainty that followed the government Autumn Statement.

However, despite the positive momentum going into the current year, with inflation and interest rates remaining stubbornly high, occupiers have adopted a cautious ‘wait and see’ approach as the impact of the sharp rise in interest rates remains uncertain. New lettings were just £1.2m (H122: £2.6m) although positively, these were at an average 13.5% above ERV. Despite the strong retention lease income expiring in the period, there was a net reduction in gross contracted rents of £1.4m, excluding the c £0.5m reduction attributable to asset sales.

Exhibit 7: Lease maturity profile as at 30 June 2023 (H123)

Exhibit 8: Lease maturity profile as at 31 December 2022 (FY22)

Source: Regional REIT

Source: Regional REIT

Exhibit 7: Lease maturity profile as at 30 June 2023 (H123)

Source: Regional REIT

Exhibit 8: Lease maturity profile as at 31 December 2022 (FY22)

Source: Regional REIT

The weighted average unexpired lease term was 4.8 years at end-H123, or 3.0 years to first break.5 Coming into FY23, leases representing c £10m of rental income were due to expire over the following year and c £20m over two years. The remaining income to expire during H223 is now c £7m. At a typical c 75% retention rate it requires c £1.75m of gross new letting in H223 to maintain the expiring income and a further c £2.5m in FY24. Additional new lettings are required to replace any exercise of lease break options or other terminations of tenancies. In this context, the asset manager expects an acceleration in leasing activity by the end of the year, as we discuss in the following section.

  A break clause gives the tenant and landlord an option to end the tenancy before the expiry.

Occupier demand remains robust

Regional office supply remains reasonably tight. Secondary space continues to reduce, mainly through repurposing, and while Grade A supply is increasing through targeted development, this is significantly pre-let. Meanwhile, occupier demand for space has remained robust, and the asset manager expects it to benefit from improved occupier visibility with regards to office use as well as improved confidence as the anticipated peak in interest rates is reached. RGL notes that although its H123 leasing performance was less than it had expected, its ability to secure rental uplifts on those leases that were concluded indicates good demand for the middle ground of good-quality accommodation.

Commercial property agent Avison Young estimates that H123 regional office take-up was less than 4% below the five-year average, with city centre space being the largest component despite its share of the total (less than 60%) continuing to trend down in favour of out-of-town locations.

The asset manager has consistently expressed the view that it will not be until the end of 2023/early 2024 that employers will have a clear view of the shape of post-pandemic office use, but meanwhile there is a drive by employers to get workers back to the office, seeking to support collaborative working practices and increase productivity. This is confirmed by RGL’s own market analysis. It had already identified by November 2022 that 99% of its office tenants were in some form of physical occupation, up from just 30% in March, as the pandemic was subsiding. It has since concluded a large and comprehensive study, covering more than 100 of its properties, accounting for more than 240k employees, with an 82% response rate. The survey highlighted that the employees who confirmed they are back in the office now attend for an average of 4.2 days per week and that actual occupation was 65% or 93% of the estimated pre-pandemic level of 70%. Actual occupancy refers to the proportion of leased space that is being used and not to portfolio occupancy. By way of example, if a company had leased space for 100 desks, then the study showed that an average 63 of these of these would be used during business hours, with the balance unoccupied due to absences due to holidays, illness or being out of the office on business.

RGL’s asset manager observes that while different employers will take different approaches, a picture is emerging that most will adopt some form of hybrid working. As such, it expects that most businesses will end up with the majority of employees being in the office for most of the time, whether that be three days a week or four. At the same time, it expects the trend, evident before the pandemic, towards a more attractive working environment, including more space per employee, to continue and provide an offset to other structural or cyclical headwinds.

Meeting occupier requirements

RGL undertakes a rolling programme of capital expenditure aimed at enhancing and maintaining the attractiveness and income-generating capacity of its properties. This has become even more important post-pandemic as more occupiers seek to attract their workforce back to the office into properties that will assist them in meeting their own carbon emission targets. In addition to investments undertaken by tenants, RGL invested c £10m in FY22, or c 1.1% of the opening portfolio value, stepping up to c £7m in H123.

As part of the government’s drive towards net carbon zero by 2050, minimum energy efficiency standards require, with some exceptions, all newly rented commercial property to have an Energy Performance Certificate (EPC) rating of E or above by March this year. The expectation is that the minimum rating will increase to C by 1 April 2027, and to B by April 2030.

RGL says it is on track to achieve a minimum B rating by 2030 and made further progress towards this goal in H123 through a combination of investment, within the rolling capex programme, and sales of lower rated assets that cannot be enhanced on an economic basis. This will continue, consistent with the targeted LTV reduction. At end-H123, the weighted average portfolio EPC rating was C (70), an improvement from C (73) at end-FY22. In combination, EPC B plus and exempt assets were 26.4%, up from 23.6%.

Exhibit 9: Detailed EPC ratings as at end-FY22

Rating

31-Dec-21

31-Dec-22

Movement

B plus

9.90%

16.90%

700bps

C

33.00%

33.30%

30bps

D

32.80%

27.20%

(560)bps

E and below

18.20%

16.00%

(220)bps

Exempt (listed buildings)

6.10%

6.70%

60pbs

Source: Regional REIT

The external valuation reflected in the balance sheet already allows (is reduced by) c £40m, representing the expected costs to RGL of future capex requirements over several years. Energy efficiency improvements are embedded within this, and the figure does not include capex undertaken by the tenants themselves or capex that is recoverable from tenants through service charges.

Funding and debt costs

The further rise in interest rates is currently having no impact on borrowing costs as all debt is fixed rate or hedged at a maximum average cost of 3.5%, with an average duration of 4.0 years.

The first debt maturity, in August 2024, is the company’s £50m unsecured Retail Eligible Bond with a fixed coupon of 4.5%, which is traded on the London Stock Exchange ORB platform. The mid-price at 26 September 2023 was a little over 94.75% of par, reflecting a yield to maturity of c 12%. RGL is considering various options including refinancing with similarly unsecured fixed rate debt, thereby maintaining financial flexibility, or repaying the borrowing from existing cash resources supplemented by sale proceeds, and it expects to update the market by year-end, well ahead of maturity. Despite volatility in debt markets and uncertainty in the commercial property sector, the unsecured debt market remains open, with a range of lenders, retail and institutional, seeking to lock in the higher yields that are currently available. While current yields would significantly increase the cost, the bond represents less than 15% of RGL’s borrowings and this would be manageable. To repay the bond entirely through asset sale proceeds would require c £100m of properties to be sold, allowing for those held as secured debt collateral, a faster rate of disposal than the company currently envisages. Reflecting current market expectations that UK interest rates will soon reach a peak and begin to decline over the next few months, as a working assumption, our forecasts include a refinancing rate of 10%, increasing financing costs by c £2.8m. Each 1% change in the refinancing rate is equivalent to c £0.5m.

The secured debt facilities were £376m drawn at H123, adjusted for the subsequent £5.5m repayment. Each facility has distinct covenants, which generally include historical interest cover, projected interest cover, LTV cover and debt service cover. RGL indicates that LTV covenants would be tested at around 60%. For the debt facility with the highest current LTV (the Royal Bank of Scotland, Bank of Scotland and Barclays facility), 52.7% at end-H123, it would require a c 11% average decline in the value of properties held as security. At the group level, interest cover (excluding non-cash debt amortisation of loan arrangement fees) remained strong at end-H123 (2.8%) albeit down from end-FY22 (3.4%).

The first secured bank loan maturity is in August 2026, by which time we expect RGL to have materially reduced LTV, providing increased flexibility and an enhanced negotiating position with respect to refinancing.

Exhibit 10: Summary of debt portfolio as at 30 June 2023 (H123)

Original facility (£m)

Outstanding (£m)

Maturity

Gross loan to value

Interest terms

Swaps/caps notional

Swaps/caps blended rate

Royal Bank of Scotland, Bank of Scotland and Barclays

128.0

125.7

Aug-26

52.7%

SONIA + 2.40%

128.0

0.97%

Scottish Widows and Aviva

157.5

157.5

Dec-27

51.4%

3.28% fixed

Scottish Widows

36.0

36.0

Dec-28

43.8%

3.37% fixed

Santander

65.9

62.5

Jun-29

47.2%

LIBOR + 2.20%

65.9

1.39%

Total secured bank loan facilities

387.4

381.7

Unsecured Retail Eligible Bond

50.0

50.0

Aug-24

Unsecured

4.5% fixed

Total facilities

437.4

431.7

Source: Regional REIT

Forecasts substantially reduced

Our earnings forecasts for FY23 and FY24 are very substantially reduced although the change to NAV is relatively modest. FY23e EPRA earnings is reduced by c 24% and FY24e by almost 30%, a blend of operational performance with the impact of significant disposals and de-gearing. The FY23 changes are driven by lower gross rental income and higher property costs, only partially offset by lower financing costs. Disposals have a greater impact on FY24 but significantly lower the LTV. For both years we expect DPS to be fully covered, with the level of cover increasing in FY24.

Exhibit 11: Summary of estimate revisions

New forecast

Previous forecast

Forecast change

£m unless stated otherwise

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

Rental & other property income

70.9

69.0

75.5

76.4

(4.6)

(7.4)

-6.5%

-10.7%

Non-recoverable property costs

(16.4)

(14.3)

(12.8)

(11.7)

(3.6)

(2.6)

21.8%

18.3%

Net rental income

54.5

54.8

62.8

64.7

(8.3)

(9.9)

-15.1%

-18.1%

Administrative expenses

(10.8)

(11.1)

(10.8)

(11.1)

(0.0)

(0.0)

0.3%

0.1%

Net finance expense

(16.1)

(17.8)

(18.0)

(19.2)

1.9

1.4

-11.7%

-8.0%

EPRA earnings

27.6

25.9

33.9

34.4

(6.3)

(8.5)

-22.9%

-32.8%

EPRA cost ratio (excl. direct property costs)

16.7%

17.5%

15.8%

15.8%

EPRA EPS (p)

5.3

5.0

6.6

6.7

(1.3)

(1.7)

-23.7%

-33.7%

DPS (p)

5.25

4.80

6.60

6.60

(1.35)

(1.80)

-25.7%

-37.5%

Dividend cover (x)

1.02

1.05

1.00

1.01

EPRA NTA per share (p)

67.3

71.0

73.5

73.5

(6.2)

(2.5)

-9.1%

-3.5%

EPRA NTA total return

-0.6%

12.6%

8.9%

9.0%

Gross borrowing

(406.7)

(356.7)

(433.8)

(433.8)

Net LTV

49.6%

44.8%

49.0%

49.5%

Source: Edison Investment Research

The key forecasting variable for EPRA earnings is net rental income, and our assumptions include:

Disposals of £75m, £15m in H223 (a total £30m for the year) and £60m in FY24.

A net initial yield on disposals of 4%, allowing for a blend of vacant and income generating assets.

Disposals are achieved at book value. A sale at 90% of book value would reduce FY24 net tangible assets (NTA) per share of 71.2p by 1.4p.

No net impact from leasing activity (changes in occupancy or rents at review), with annualised gross rent roll reduced by £3m, as a result of disposals, by end-FY24. The full-year impact of FY24 disposals will reduce FY25 income by £1.2m.

Non-interest income of £2m in H223 and £3m in FY24.

A reduction in nonrecoverable property costs of c £1.5m pa by end FY24.

Overall, we forecast net rental income to increase from the H123 level despite significant property sales, with the loss of gross rental income substantially offset by an associated reduction in property costs, and a normalisation of non-rental income. It is important to note that while the latter has been a regular contributor to income, visibility is low.

The c £75m disposal proceeds are used to repay secured debt while the maturing retail bond is refinanced with unsecured debt at 10%.

The additional borrowing costs offset the growth in net rental income and EPRA earnings decline from 5.3p in FY23 to 5.2p in FY24. Reflecting four quarterly payments of 1.2p per share, FY24 DPS is 4.80p compared with 5.25p in FY23 but cover increases to 1.05x.

Exhibit 12: Edison net rental income estimates

H123*

H223

H124

H224

Opening gross contracted rent

71.7

69.8

69.2

68.0

Net leasing

(1.4)

0.0

0.0

0.0

Acquisition/disposals

(0.5)

(0.6)

(1.2)

(1.2)

Closing contracted rent

69.8

69.2

68.0

66.8

Income statement

Gross rental income

34.3

34.6

33.9

33.3

Non-rental income

0.0

2.0

1.5

1.5

Rent and related income

34.3

36.6

34.6

34.4

Non-recoverable property costs

(8.3)

(8.0)

(7.4)

(6.8)

Net rental income

26.0

28.6

27.2

27.6

Source: Regional REIT data, Edison Investment Research. Note: *The H123 split between gross rental income and non-rental income is an Edison estimate. Total rent and related income, and net rental income are as reported.

Other forecasting assumptions include:

A constant c 6.5% EPRA net initial yield, reflected in property valuation gains in FY24 equivalent to a little over 2% of portfolio value or 3.5p. The gain is generated by the disposal of lower yielding assets.

The net LTV declines to c 45% by end-FY24 or c 38% excluding the unsecured borrowing.

Valuation

RGL has consistently provided one of the highest dividend yields in the sector, reflecting its focus on income to drive returns. Over the past year, as interest rates have increased, dividend yields across the sector have substantially increased and that is true for RGL. However, at c 15% ahead of the interim results, the yield had moved beyond attractive to a point where it was already signalling a lack of investor confidence about dividend sustainability. Despite the dividend rebasing to a level that the company believes is sustainable in the context of asset sales and de-gearing, the yield remains unusually high. In part this reflects a lack of investor confidence in ‘the future of the office’ in a post-pandemic, artificial intelligence era, but if the regional office market develops as the company expects, and if the balance between earnings and de-gearing is successfully achieved, the FY24e dividend yield of 16% and c 50% discount to NAV will prove to be a highly attractive entry point.

Exhibit 13: Dividend yield history

Exhibit 14: P/NAV history

Source: Regional REIT DPS data, Refinitiv prices, Edison Investment Research

Source: Regional REIT NAV data, Refinitiv prices, Edison Investment Research

Exhibit 13: Dividend yield history

Source: Regional REIT DPS data, Refinitiv prices, Edison Investment Research

Exhibit 14: P/NAV history

Source: Regional REIT NAV data, Refinitiv prices, Edison Investment Research

In Exhibit 15 we show a comparison with a selected group of peers comprising mid-market diversified property investors and focused office sector investors, many of which are significantly larger than RGL with primarily central London exposure. To ease comparison, the data are based on 12-month trailing DPS declared and last published EPTA NTA/NAV. However, for RGL the dividend yield is based on the annualised rate of Q223 DPS (4.8p).

RGL’s share price has significantly trailed the peer group over the past year, with the decline accelerating since release of the interim results. Not only is the dividend yield back at an unusually high level, the dividend, which we expect to be fully covered by EPRA earnings, represents a more than 7% yield on the last reported NAV, more than double the peer group average. By both measures the market price implies that the rebased dividend continues to be well above a sustainable level. This is at odds with the company’s expectations and the office sector and supported by our analysis, offering the potential for a significant re-rating over coming months.

Exhibit 15: Peer valuation and share price performance comparison

Price
(p)

Market cap (£m)

P/NAV*
(x)

Yield**
(%)

NAV yield***
(%)

Share price performance

1 month

3 months

1 year

3 years

Custodian Property Income

84

369

0.85

6.6

5.6

2%

0%

-4%

-7%

Derwent London

1,909

2,144

0.55

4.1

2.3

5%

-5%

2%

-20%

Helical

221

273

0.45

5.3

2.4

-7%

-13%

-26%

-10%

Picton Property Income

69

375

0.69

5.1

3.5

1%

-2%

-5%

6%

Great Portland Estates

432

1,096

0.57

2.9

1.7

7%

4%

6%

-22%

Land Securities

605

4,508

0.65

6.4

4.2

3%

7%

25%

23%

Real Estate Investors

28

47

0.44

9.1

4.0

-7%

-8%

-18%

0%

Schroder REIT

42

203

0.67

7.9

5.3

1%

1%

1%

38%

UK Commercial Property REIT

54

696

0.66

6.3

4.2

2%

9%

-5%

-16%

Balanced Commercial Property Trust

69

482

0.59

7.0

4.1

4%

4%

-10%

11%

Workspace

504

967

0.54

5.1

2.8

1%

8%

25%

4%

Average

0.61

6.0

3.6

1%

1%

-1%

1%

Regional REIT

29

150

0.44

16.5

7.2

-31%

-35%

-51%

-54%

UK property sector index

1,203

1%

3%

1%

-14%

UK equity market index

4,137

3%

2%

9%

27%

Source: Company data, Edison Investment Research, Refinitiv prices as at 27 September 2023. Note: *Based on last reported EPRA NTA or NAV per share. **Based on trailing 12-month DPS declared with the exception of RGL, which reflects the Q223 DPS of 1.2p on an annualised basis.

Interim results details

The interim results disappointed versus the company’s and market expectations, primarily in terms of the immediate impact of lower non-rental income and the more enduring effects of the slowdown in letting activity.

Exhibit 16: Summary of H123 financial performance

£m unless stated otherwise

H123

H122

H123/H122

FY22

Rental and other property income

34.3

37.1

-7%

76.3

Non-recoverable property costs

(8.3)

(8.1)

3%

(13.7)

Net rental income

26.0

28.9

-10%

62.6

Administrative & other expenses

(5.3)

(5.6)

-4%

(11.4)

Net finance expense

(7.9)

(8.4)

-6%

(17.2)

EPRA earnings

12.7

15.0

-15%

34.1

Unrealised and realised property gains/(losses)

(30.0)

1.4

(122.0)

Change in fair value of interest rate derivative

5.1

11.9

22.7

IFRS earnings

(12.1)

28.3

-143%

(65.2)

Basic IFRS EPS (p)

(2.4)

5.5

(12.6)

EPRA EPS (p)

2.5

2.9

6.6

DPS (p)

2.85

3.30

6.60

Dividend cover (x)

0.86

0.88

1.00

EPRA NTA per share (p)

66.9

97.1

73.5

Accounting total return

-4.6%

3.3%

-17.5%

Investment properties

752.2

918.2

789.5

Net debt

(390.5)

(396.7)

(390.6)

Net LTV

51.9%

43.2%

49.5%

EPRA cost ratio (excl. direct vacancy costs)

17.3%

16.5%

16.2%

Source: Regional REIT data, Edison Investment Research

In particular, we highlight:

Rental and other property income was £2.8m or 7% lower than in H122, substantially driven by lower non-rental income (dilapidation receipts and, to a lesser extent, lease surrender premiums), which we understand to have been c £2m lower. EPRA occupancy was also lower at end-H123 compared with end-H122. Compared with H222, rental and other income was £4.9m lower, in part reflecting the normal seasonality referred to above in addition to lower non-rental income in H123 and a stronger than usual contribution in H222.

Non-recoverable property costs remain elevated as a result of inflationary pressures and the relatively high level of voids. Energy costs are a key component, and these have been fixed through to end-FY23.

Net rental income of £26.0m was £2.9m or 10% lower than in H122 (H222: £19.1m).

Admin costs were lower year-on-year. This was a combination of lower investment, property and asset fees (c £0.8m lower at c £3.4m), primarily driven by lower average NAV, partly offset by an increase in other costs (by c £0.6m to c £1.6m), otherwise well-controlled but reflecting a normalisation to modest bad debt charge from recent post-pandemic recoveries.

The EPRA cost ratio excluding direct property expenses was 17.3% (H122: 16.5%; FY22: 16.2%), but including the high level of property costs it was 39.9% (H122: 36.9%; FY22: 32.9%).

EPRA earnings was £2.3m or 15% lower at £12.7 compared with H122 (H222: £19.1m) and EPRA EPS was 2.5p (H122: 2.9p).

The IFRS loss included property revaluation losses of £30m, partly offset by a gain in the fair value of interest rate derivatives used to protect against higher interest rates. Property values were 3.8% lower on a like-for-like basis compared with end-FY22, driven mainly by the lower gross rent roll, while the EPRA net initial yield widened to 6.52% from 6.42%.

EPRA NTA per share was 66.9p, 9.0% lower compared with end-FY22 (73.5p) and adjusted for DPS paid, the EPRA NTA total return was -4.6%.

Highly diversified portfolio

RGL is focused on offices in regional centres across the UK, outside the M25. Despite this sector focus, income risk is mitigated by broad diversification across c 150 properties, let to more than 1,000 tenants, operating across a wide range of business activities that can be fairly said to reflect the broad spread of the UK economy. The largest property represents 2.4% of rent roll and the largest 15 tenants 20.3%.

Exhibit 17: Focus on regional offices

Exhibit 18: Office portfolio by location type

Source: Regional REIT data

Source: Regional REIT data

Exhibit 17: Focus on regional offices

Source: Regional REIT data

Exhibit 18: Office portfolio by location type

Source: Regional REIT data

Within the office portfolio, the largest exposures is to business park locations (c two-thirds) and central business districts.

Exhibit 19 shows the top 15 properties in the portfolio.

Exhibit 19: Fifteen largest properties

Property location

Sector

Market value (£m)

% of portfolio

Annualised gross rent (£m)

% gross rental income

EPRA occupancy

WAULT to first break (years)

300 Bath Street, Glasgow

Office

21.4

2.8%

1.2

1.8%

87.6%

2.4

Eagle Court, Birmingham

Office

20.2

2.7%

1.6

2.3%

67.6%

0.6

Hampshire Corporate Park, Eastleigh

Office

19.8

2.6%

1.7

2.4%

100.0%

3.5

Beeston Business Park, Nottingham

Office/ind.

17.2

2.3%

1.4

2.0%

100.0%

5.1

800 Aztec West, Bristol

Office

16.5

2.2%

1.5

2.2%

100.0%

0.9

Manchester Green, Manchester

Office

16.5

2.2%

1.4

2.0%

79.1%

4.1

Orbis 1,2 & 3, Derby

Office

16.2

2.1%

1.8

2.6%

100.0%

3.9

Norfolk House, Birmingham

Office

15.3

2.0%

1.4

1.9%

97.7%

6.8

Linford Wood Business Park, Milton Keynes

Office

15.2

2.0%

1.5

2.1%

91.1%

2.1

Capital Park, Leeds

Office

13.4

1.8%

0.7

1.0%

45.9%

4.6

Portland Street, Manchester

Office

12.9

1.7%

1.1

1.5%

95.9%

2.4

Oakland House, Manchester

Office

12.9

1.7%

1.0

1.5%

78.5%

2.1

Templeton On The Green, Glasgow

Office

12.0

1.6%

1.3

1.9%

92.7%

3.9

Origin 1 & 2, Crawley

Office

11.7

1.6%

1.1

1.6%

100.0%

1.5

Buildings 2, Bear Brook Office Park, Aylesbury

Office

11.3

1.5%

1.0

1.5%

94.5%

4.0

Top 15 total

232.4

30.9%

19.8

28.4%

3.1

87.4%

3.1

Source: Regional REIT data

The top 15 tenants include many high-quality, recognisable names, active in economically defensive areas.

Exhibit 20: Fifteen largest tenants

Tenant

No. of locations

Sector

Annualised gross rent (£m)

% gross rental income

WAULT to first break (years)

Virgin Media

2

Information & communication

1.8

2.5%

0.7

Shell Energy Retail

5

Electricity, gas steam & air conditioning supply

1.4

2.0%

0.5

Sec. of State Communities & Local Govt.

1

Public sector

1.1

1.5%

4.1

EDF Energy

1

Electricity, gas steam & air conditioning supply

1.0

1.5%

7.2

First Source Solutions

1

Administrative & support services

1.0

1.4%

3.8

E.ON

1

Electricity, gas steam & air conditioning supply

0.9

1.4%

1.8

John Menzies

1

Professional, scientific & technical

0.9

1.3%

0.1

NNB Generation

1

Electricity, gas steam & air conditioning supply

0.9

1.2%

0.7

Global Banking School

1

Education

0.8

1.2%

9.4

SPD Development

1

Professional, scientific & technical

0.8

1.2%

2.3

Aviva Central Services

1

Other service activities

0.8

1.1%

1.4

Odeon Cinemas

1

Information & communication

0.8

1.1%

12.3

SpaMedica

6

Human health & social work

0.7

1.0%

2.9

Edvance

1

Electricity, gas steam & air conditioning supply

0.7

1.0%

1.1

Care Inspectorate

2

Public sector

0.7

1.0%

4.8

Total

14.2

20.3%

3.3

Source: Regional REIT data

Additional company details, management and fees

RGL is a UK-based REIT, which aims to provide investors with consistently attractive income returns with the potential for additional capital growth. It listed on the Main Market of the London Stock Exchange in November 2015, having been formed by the combination of two UK commercial property investment funds previously created by the external asset and investment managers. London & Scottish Property Investment Management (LSPIM) is the asset manager, responsible for the day-to-day management of the asset and debt portfolios. Toscafund Asset Management (Toscafund) is the investment manager, responsible for the company’s management functions.

LSPIM is based in Glasgow, with regional offices in Leeds, Manchester and London, supporting its fully integrated asset management platform. The senior management team is highly experienced, with a proven track record of adding value to property portfolios across cycles. In April 2023, ARA Asset Management6 acquired a majority shareholding in the company from its founder and CEO, Stephen Inglis, who retains a significant minority interest. The management team remains unchanged but now benefits from the resources of a large global real estate platform.

  ARA Asset Management, based in Singapore, manages a multi-platform fund management business, covering REITs and private funds in real estate, infrastructure and credit, with a total of S$116bn in gross assets under management. It is a part of Hong Kong-listed ESR Group, one of the largest real estate managers globally.

Management fees are set at 1.1% of net assets up to £500m and 0.9% above £500m, split equally between LSPIM and Toscafund. In addition, a property management fee of 4% of annual gross rental income is payable to LSPIM.7

  A performance fee is payable, set at 15% of total EPRA NAV per share return (EPRA NAV growth plus dividends declared) above an 8% hurdle, subject to a high-water mark. Performance fees were last accrued/paid during FY18 and in current market conditions, with a high-water mark of 115.5p, we do not anticipate performance fees being generated in the near term.

The non-executive board consists of five members, chaired by Kevin McGrath, a chartered surveyor with more than 30 years’ experience in the property sector and property asset management. Other members are Daniel Taylor, founder and CEO of Westchester Capital, an investment and advisory firm specialising in real estate; Frances Daley, a chartered accountant with considerable experience in corporate finance and senior finance roles; Massy Larizadeh, with over 30 years’ experience across the financial services and commercial real estate sectors; and, with a particular interest in environmental, social and governance issues, Stephen Inglis (representing LSPIM) and Tim Bee (representing Toscafund).

Detailed biographies of all board members can be found here and we provide biographies for key members of the leadership team on page 18 of this report.

Principal shareholders

The two largest shareholders are Majik Property Holdings (47.1m shares or 9.1%of the total)8 and OMP-SS5 (35.5m shares/6.9%).9 These both originate from RGL’s acquisition of a £236m regional office portfolio from Squarestone Growth in August 2021. The consideration was part settled by the issue of 84.2m new RGL shares at 98.6p per shares. Of the shares issued, 74.6m shares were subject to lock-up arrangements which have now expired.

  Notified to the company on 6 September 2021.

  Notified to the company on 10 September 2021.

Sensitivities

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. From a sector viewpoint, we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. RGL is not a developer but, on a significantly lesser scale, is exposed to similar uncertainties as it actively invests in improvements to existing assets with the aim of enhancing long-term income growth and returns. We consider the main sensitivities to include:

Economic risk: the war in Ukraine and sharp rising inflation and interest rates have created a high level of uncertainty regarding the global and UK economic outlook.

Sector risk: some of the inherent cyclical risk to vacancy in commercial property can be mitigated by portfolio diversification and, although RGL is focused on the office sector, its income risk continues to be well diversified across a broad number of occupiers, operating across a range of industries, by property and by geographic region. The pandemic has increased uncertainty about how offices will be used and may negatively affect structural demand, contrary to RGL’s expectations.

Energy performance considerations: a failure to successfully meet regulatory and/or tenant expectations for energy performance enhancement would likely affect RGL’s ability to let properties on satisfactory terms and may make properties unlettable.

Interest rate risks: all debt is fixed rate or hedged against rising interest rates with an average duration of four years as of 30 June 2023. Increased interest rates have been the main contributor to weakness in commercial property valuations across the market, increasing RGL’s LTV and reducing NAV.

Funding risk: RGL’s secured borrowing facilities are spread across four different lenders with the first maturity in August 2026. The investment properties provide collateral for the loans and the company continues to operate comfortably within covenant limits. The £50m 4.5% unsecured bond matures in August 2024.

Management risk: RGL is externally managed and is dependent on the ability of its asset manager to execute successfully on its strategy. Stephen Inglis, Derek McDonald and Simon Marriott, respectively CEO, managing director and investment director of the asset manager, LSPIM, are the key personnel responsible for the management of the RGL portfolio, backed by an experienced team, and now further benefit from the substantial global resources of ARA Asset Management, the new majority owner of LSPIM.

Exhibit 21: Financial summary

Year end 31 December (£m)

2019

2020

2021

2022

2023e

2024e

INCOME STATEMENT

Rental & other property income

64.4

62.1

65.8

76.3

70.9

69.0

Non-recoverable property costs

(9.4)

(8.8)

(9.9)

(13.7)

(16.4)

(14.3)

Net rental & related income

55.0

53.3

55.8

62.6

54.5

54.8

Administrative expenses

(10.9)

(11.3)

(10.6)

(11.4)

(10.8)

(11.1)

EBITDA

44.1

42.0

45.2

51.2

43.7

43.7

EPRA cost ratio, excluding direct vacancy costs

18.7%

19.6%

16.8%

16.2%

16.7%

17.5%

Gain on disposal of investment properties

1.7

(1.1)

0.7

(8.6)

(0.4)

0.0

Change in fair value of investment properties

(3.5)

(54.8)

(8.3)

(113.2)

(29.5)

18.0

Change in fair value of right to use asset

(0.2)

(0.2)

(0.0)

(0.1)

(0.1)

(0.1)

Operating Profit (before amort. and except.)

42.0

(14.1)

37.6

(70.8)

13.7

61.6

Net finance expense

(13.7)

(14.0)

(14.9)

(17.2)

(16.1)

(17.8)

Fair value movement in interest rate derivatives & goodwill impairment

(2.0)

(3.1)

6.0

22.7

5.1

0.0

Profit Before Tax

26.3

(31.2)

28.8

(65.2)

2.7

43.8

Tax

0.3

0.2

0.0

0.0

0.0

0.0

Profit After Tax (FRS 3)

26.5

(31.0)

28.8

(65.2)

2.7

43.8

Adjusted for the following:

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

1.9

55.9

7.6

121.9

29.9

(18.0)

Other EPRA adjustments

2.6

3.2

(6.0)

(22.6)

(5.0)

0.1

EPRA earnings

31.0

28.1

30.4

34.1

27.6

25.9

Period end number of shares (m)

431.5

431.5

515.7

515.7

515.7

515.7

Fully diluted average number of shares outstanding (m)

398.9

431.5

459.7

515.7

515.7

515.7

IFRS EPS - fully diluted (p)

6.6

(7.2)

6.3

(12.6)

0.5

8.5

EPRA EPS (p)

7.8

6.5

6.6

6.6

5.3

5.0

Dividend per share (p)

8.25

6.40

6.50

6.60

5.25

4.80

Dividend cover (x)

0.94

1.02

1.02

1.00

1.02

1.05

BALANCE SHEET

Non-current assets

806.0

749.5

925.2

825.6

783.9

752.8

Investment properties

787.9

732.4

906.1

789.5

742.9

711.9

Other non-current assets

18.1

17.2

19.0

36.2

41.0

40.9

Current Assets

69.4

101.1

85.5

80.4

67.1

65.1

Other current assets

32.2

33.7

29.4

30.3

28.7

27.6

Cash and equivalents

37.2

67.4

56.1

50.1

38.4

37.5

Current Liabilities

(36.2)

(49.1)

(58.4)

(56.6)

(61.9)

(59.2)

Borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(36.2)

(49.1)

(58.4)

(56.6)

(61.9)

(59.2)

Non-current liabilities

(355.5)

(380.9)

(449.9)

(446.5)

(412.9)

(363.4)

Borrowings

(287.9)

(310.7)

(383.5)

(385.3)

(351.7)

(302.5)

Other non-current liabilities

(67.6)

(70.3)

(66.4)

(61.3)

(61.2)

(60.8)

Net Assets

483.7

420.6

502.4

402.9

376.2

395.3

Derivative interest rate swaps & deferred tax liability

2.6

5.0

(1.0)

(23.8)

(28.9)

(28.9)

Goodwill

(0.6)

0.0

0.0

0.0

0.0

0.0

EPRA net tangible assets

485.7

425.6

501.4

379.2

347.3

366.4

IFRS NAV per share (p)

112.1

97.5

97.4

78.1

72.9

76.6

EPRA NTA per share (p)

112.6

98.6

97.2

73.5

67.3

71.0

EPRA NTA total return

4.9%

-5.8%

5.0%

-17.5%

-0.6%

12.6%

CASH FLOW

Cash (used in)/generated from operations

26.0

48.0

56.9

48.5

50.6

42.2

Net finance expense

(12.2)

(12.5)

(13.1)

(15.2)

(15.0)

(16.7)

Tax paid

(0.8)

0.2

0.0

0.0

0.0

0.0

Net cash flow from operations

13.0

35.7

43.8

33.3

35.6

25.5

Net investment in investment properties

(25.6)

(0.3)

(98.3)

(5.2)

16.7

49.0

Acquisition of subsidiaries, net of cash acquired

(43.9)

0.0

0.0

0.0

0.0

0.0

Other investing activity

0.2

0.1

0.0

0.1

0.0

0.0

Net cash flow from investing activities

(69.4)

(0.2)

(98.2)

(5.1)

16.7

49.0

Equity dividends paid

(32.5)

(26.7)

(27.8)

(34.0)

(29.4)

(24.8)

Debt drawn/(repaid)

3.5

22.2

73.8

14.3

(23.1)

(50.0)

Net equity issuance

60.5

0.0

(0.1)

0.0

0.0

0.0

Other financing activity

(42.7)

(0.8)

(2.7)

(14.5)

(11.7)

(0.6)

Net cash flow from financing activity

(11.2)

(5.3)

43.2

(34.2)

(64.1)

(75.4)

Net Cash Flow

(67.6)

30.1

(11.2)

(6.0)

(11.8)

(0.9)

Opening cash

104.8

37.2

67.4

56.1

50.1

38.4

Closing cash

37.2

67.4

56.1

50.1

38.4

37.5

Balance sheet debt

(337.1)

(360.1)

(433.1)

(435.0)

(401.6)

(352.5)

Unamortised debt costs

(6.9)

(6.0)

(6.9)

(5.8)

(5.1)

(4.2)

Closing net debt

(306.8)

(298.8)

(383.8)

(390.6)

(368.3)

(319.2)

LTV

38.9%

40.8%

42.4%

49.5%

49.6%

44.8%

Source: Regional REIT historical data, Edison Investment Research

Contact details

Portfolio value by sector

Toscafund Asset Management LLP
5th Floor, Ferguson House,
15 Marylebone Road
London NW1 5JD
+44 (0) 207 845 6100
www.regionalreit.com

Leadership team

Independent non-executive chairman: Kevin McGrath

CEO London & Scottish Property Investment Management: Stephen Inglis

Kevin McGrath, OBE DL, is a chartered surveyor with more than 30 years’ property experience. In addition to RGL, he is chairman of M&M Property Asset Management, having previously been managing director and senior adviser of F&C REIT Asset Management, and before that was a founding equity partner in REIT Asset Management, a property investment, finance and asset management partnership. He is also chairman of INTCAS, an independent technology and support service company. Prior to REIT Asset Management, he was a senior investment surveyor with Hermes Investment Management.

Stephen Inglis, CEO of London & Scottish Property Investment Management, the asset manager of RGL, serves as NED on the board of Regional REIT. He has over 30 years’ experience in the commercial property market, the majority of which has been working in the investment and development sector. His career to date has been split between London and Scotland, giving him wide knowledge of the UK property market. He is a chartered surveyor and became a member of Royal Institution of Chartered Surveyors in 2001 and is also a member of the Investment Property Forum. Since June 2013, he has acquired or sold approximately 250 assets in deals totalling in excess of £1.2bn.

COO London & Scottish Property Investment Management: Derek McDonald

Investment director, London & Scottish Property Investment Management: Simon Marriott

Derek McDonald is managing director of London & Scottish Property Investment Management, the asset manager of RGL, which he joined in 2015. He spent 27 years at Bank of Scotland/Lloyds Banking Group in a variety of senior roles in corporate banking, including time in the bank’s corporate banking business in the US, the UK real estate joint ventures business, the European real estate business, the UK business support unit and the Irish business support unit, which dealt with high-value real estate lending. He has led a significant number of high-value transactions at both REVCAP and Lloyds Banking Group, and has had line responsibility for large teams of professionals. He has significant experience in building and leading multi-jurisdictional businesses.

Simon Marriott is investment director for London & Scottish Property Investment Management, the asset manager of RGL, which he joined in 2017. He has over 30 years’ experience in the property industry, sourcing, transacting and asset managing, most recently at Cromwell Property Group where he was head of investments and UK real estate. Prior to Cromwell, Simon held a number of senior roles including director of real estate transactions at PwC, senior vice president and managing director of investments at Oxford Properties and head of separate accounts at Invista REIM, managing funds with assets under management of over £2.5bn. He is a chartered surveyor and a member of Royal Institution of Chartered Surveyors since 1992, as well as a member of the Investment Property Forum.

Principal shareholders

(%)

Majik Property Holdings

9.1

OMP-SS5 (Old Mutual)

6.9


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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