Regional REIT — Advancing strategy and enhancing earnings

Regional REIT (LSE: RGL)

Last close As at 04/11/2024

GBP1.26

−0.60 (−0.47%)

Market capitalisation

GBP205m

More on this equity

Research: Real Estate

Regional REIT — Advancing strategy and enhancing earnings

The substantial acquisition of a £236m portfolio of predominantly regional office assets is a further significant step in repositioning the portfolio, which Regional REIT (RGL) expects to be earnings enhancing, with medium-term opportunities to add significant additional value through active asset management. The office portfolio acquired is highly complementary to RGL’s existing portfolio and provides additional diversification and scale. We will review our forecasts following interim results on 16 September.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Advancing strategy and enhancing earnings

Acquisition

Real estate

1 September 2021

Price

89.2p

Market cap

£385m

Net balance sheet debt (£m) at 31 March 2021

303.2

Net LTV at 31 March 2021

41.3%

Shares in issue

431.5m

Free float

96.7%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Regional REIT owns a highly diversified commercial property portfolio of predominantly offices and light industrial units located in the regional centres of the UK. It is actively managed and targets a total shareholder return of at least 10% with a strong focus on income

Analyst

Martyn King

+44 (0)20 3077 5745

Regional REIT is a research client of Edison Investment Research Limited

The substantial acquisition of a £236m portfolio of predominantly regional office assets is a further significant step in repositioning the portfolio, which Regional REIT (RGL) expects to be earnings enhancing, with medium-term opportunities to add significant additional value through active asset management. The office portfolio acquired is highly complementary to RGL’s existing portfolio and provides additional diversification and scale. We will review our forecasts following interim results on 16 September.

Year end

Net rental
income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

EPRA NTA**/
share (p)

DPS
(p)

P/NTA
(x)

Yield
(%)

12/19

55.0

31.0

7.8

112.6

8.25

0.79

9.2

12/20

53.3

27.9

6.5

98.6

6.40

0.90

7.2

12/21e

53.6

28.9

6.7

99.1

6.60

0.90

7.4

12/22e

55.3

30.4

7.0

99.4

6.90

0.90

7.7

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

RGL has acquired the £236m portfolio from Squarestone Growth, with the consideration comprising c 84.2m newly issued RGL shares at 98.6p (the end-FY20 EPRA NTA per share and ahead of the share price), equivalent to c £83.1m; £76.7m of existing cash resources (boosted by the recently completed £45m industrial portfolio sale) and additional borrowings of £76.2m. Squarestone becomes a significant investor in RGL with 16.3% of the enlarged share capital, and c 74.6m of the shares issued to it are subject to a nine-month lock-in for one-third, 15 months for a further third and 21 months for the balance.

The acquired portfolio comprises 31 assets, of which 27 are offices representing 93.3% by value. The other assets (two industrial plus a restaurant and residential property) are likely to be earmarked for disposal and capital recycling. The net initial yield is 7.8% and the reversionary yield is 11.0%, with EPRA occupancy of 78.4%. The weighted average unexpired lease term (WAULT) to expiry is 4.0 years and the WAULT to first break is 2.6 years (offices 2.4 years). Full details of the portfolio are available on RGL’s website.

The acquisition adds further scale and diversity to RGL’s portfolio (31 December 2020 valuation of £732.4m, of which offices 83.5%) and significantly advances its strategic focus on the office sector, where it identifies strong prospects, especially for good-quality regional assets with affordable rents. Based on the 31 December balance sheet, RGL estimates a pro forma loan to value ratio (LTV) of c 43.8%.

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