Strategic progress was the key development in H126
RGL’s specific opportunities to grow net rental income by letting vacant space and
selling underperforming properties are best illustrated by the segmental portfolio
presentation. This comprises four portfolio categories, two of which represent properties
that will be retained for the long term for income and capital growth (which we will
call the retained assets, representing 84% of the end-FY26 total) and two that represent
future disposals (which we will call the non-core or disposal assets).
Of the retained assets, core properties are already high quality and mostly occupied,
whereas ‘capex-to-core’ properties are well-located assets that are subject to ongoing
refurbishment to realise their full potential.
Among the disposal assets, ‘value-add’ properties have been identified as offering
significant opportunities to add value by being positioned for alternative use. The
strategic disposal assets are those where no such opportunity exists, or where asset
management plans are mature, and these are likely to be sold more immediately, with
capital redeployed for capex and debt reduction.
The categorisations are dynamic and properties move from one to another as asset plans
evolve. Nor is it the case that properties are only sold from the value-add/strategic
disposal segments.
Segmentation provides a guide to embedded value release
Within the assets to be retained, there is a strong opportunity to grow income by
increasing occupancy, particularly for ‘capex-to-core’ assets when refurbishments
complete. Capex is enhancing rental prospects, demonstrated by average rents achieved
on new lettings running ahead of ERV, and RGL expects market rents for good-quality
assets will continue to increase. Moreover, leasing vacant space does not just increase
gross rental income but also reduces void costs. We estimate that on average across
the portfolio, for every £100 of additional gross rent, void costs may fall by around
£80, with £180 dropping through to net rental income.
Disposals from the value-add and strategic sales segments will reduce gross rental
income and, to a lesser extent, net rental income. However, the blended net initial
yield is well below the cost of borrowing and would therefore be earnings enhancing.
In addition, the value-add strategy is aimed at enhancing disposal values and should
additionally be a source of capital growth.
Disposals on track to meet full year guidance
During H126, RGL completed 12 disposals for an aggregate £21.5m (before costs) at
a blended net initial yield of 5.4%, or 9.8% excluding vacant properties. The yields
indicate a broadly equal split of proceeds between vacant and occupied/part-occupied
assets. RGL has since completed the disposal of two properties, with blended occupancy
of 37%, for an aggregate £4.3m (before costs). The company is on track to complete
sales of more than £55m for the year (FY25: £51m), in line with its previous target
of £50–60m. There are currently 11 assets where sales are contracted, under offer
or in negotiations, with an aggregate value of £32m. During H126, disposal proceeds
funded a £22m reduction in gross borrowings to £244m and should deliver further de-gearing
in H2.
Most (80%) of the H126 disposals were, as expected, from the non-core segments but
there were sales of £4.3m from the core portfolio, where RGL has taken an opportunistic
approach to near-term debt reduction ahead of the refinancing. We expect this opportunistic
and flexible approach to continue in H226 and note that a significant share (c 50%)
of the H226 sales pipeline is from the core segment. RGL cites a particular example
of a property where the lease will expire in 15 months, and where the leasing market
is expected to remain weak, providing an immediate opportunity to both de-risk future income and reduce borrowing.
RGL expects disposals to continue post-refinancing but to be very much focused on
non-core assets.
Robust leasing and rents increasing
Despite the challenging environment, inhibiting occupiers from making long-term commitments,
during H126, RGL secured 26 new lettings, providing £1.9m of annual rental income,
including the previously reported letting of two properties in Nottingham, providing £1.1m of annual rental income and saving £0.7m in annualised void costs.
Additionally, the tenant has undertaken to carry out c £5m of improvement works. The
original business plan had envisaged preparing the property for eventual sale, but
the combination of a 20-year lease and tenant-funded improvements has changed that
plan.
RGL says that further new lettings and lease renewals have been concluded since the
period end.
