Regional REIT — Update 27 February 2017

Real Estate

Regional REIT

Update and proposed acquisition

Proposed acquisition

Real estate

27 February 2017

Price	103p
Market cap	£282m

Net debt (£m) at 30 September 2016		202.7

Shares in issue	274.2m
Free float	76%
Code	RGL

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(1.4)	(2.4)	1.5
Rel (local)	(2.9)	(8.0)	(16.9)

52-week high/low

111p

88p

Business description

Regional REIT owns a commercial property portfolio predominantly made up of offices and light industrial units located in regional centres of the UK. It is actively managed and targets a total shareholder return of 10-15% pa with a focus on income.

Next events

FY16 results	23 March 2017
Deal completion	24 March 2017
Q4 dividend paid	13 April 2017
Q117 trading update	25 May 2017

Analysts

Julian Roberts	+44 (0)20 3077 5748
Andrew Mitchell	+44 (0)20 3681 2500

financials@edisongroup.com

Edison profile page

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) has announced a gross asset value update, a fourth quarter dividend for 2016 and the conditional acquisition from Conygar of a portfolio of 31 properties valued at c £129m. We will revise our forecasts following publication of FY16 results and completion of the acquisition. The announcements show that RGL has achieved its aim of paying a dividend yielding 7-8% on the IPO price of 100p; the continued robust performance of the UK’s regional office and light industrial property market; and a significant expansion of the portfolio, rent roll and opportunities for active asset management, in line with RGL’s strategy to provide income and capital value growth.

Year end	Net rental income (£m)	EPRA EPS (p)	EPRA NAV/ share (p)	P/EPRA NAV/ share (x)	DPS (p)	Yield (%)
12/15**	4.6	0.9	107.8	0.96	1.0	1.0
12/16e	37.2	7.7	110.6	0.93	7.7	7.5
12/17e	41.4	8.9	113.7	0.91	8.9	8.6
12/18e	43.3	9.5	115.4	0.89	9.5	9.2

Note: *EPRA EPS is adjusted to include exceptional expenses related to listing and includes estimated performance fees. **56-day trading period only.

Gross asset value and dividend announcement

RGL’s property portfolio was valued at £502.4m as of 31 December 2016, from £403.7m a year earlier. The 24.4% increase included £133.6m of acquisitions, £44.9m of disposals and a 2.25% like-for-like valuation gain (which excludes the Wing and Rainbow portfolios acquired in H116). This implies both a limited H2 revaluation gain on assets which were in the portfolio at the start of the year and some revaluation of the new assets since the EU referendum. The 2.4p dividend to be paid on 13 April in respect of Q416 takes the amount relating to the whole financial year to 7.65p, in line with consensus estimates and meeting the company’s stated aim of paying a fully-covered dividend yield of 7-8% on the IPO price of 100p. This puts RGL among the highest-yielding REITs.

Conditional acquisition of regional properties

The company also announced an agreement reached with Conygar (CIC) to acquire a portfolio of regional office, industrial, distribution and retail assets. The portfolio was valued at c £129m as of 30 September 2016 with contracted rents of £9.7m and at a net initial yield of 7% assuming costs of 6.8%. In consideration, RGL will issue CIC £28m of RGL shares (c 26.3m shares, subject to adjustment), assume £69.5m of debt and acquire Conygar ZDP plc, taking responsibility for the company’s zero-preference dividend share liabilities, currently valued at c £35.7m, on completion of the acquisition (expected 24 March 2017).

Valuation: The deal is in line with REIT’s strategy

The proposed acquisition increases RGL’s portfolio by c 25% in value and adds a similar proportion of rental income. The assets also have considerable scope for asset management. We will revise our estimates when and if it completes, but our initial analysis suggests it to be EPS accretive with a possible effect on dividend.

Proposed acquisition of assets from Conygar

Terms and rationale

RGL will acquire the Special Purpose Vehicles (SPVs) which own the underlying assets for a consideration valuing them at c £129m, slightly above the valuation of the assets at 30 September 2016. The consideration will consist of:

■

26,326,644 shares in RGL at a price of 106.347p (equal to NAV per share at 30 June 2016 adjusted as agreed by both parties). This represents 9.6% of the existing share capital of RGL, or 8.8% post-transaction. These shares will be eligible for the Q117 dividend RGL expects to declare on 25 May 2017. The shares will be subject to lock-ins: one third for six months, one third for a year and the remainder for 18 months.

■

The assumption of two banking facilities totalling £69.5m secured on the properties to be acquired. These have a blended interest margin of c 2% and will mature in 2021.

■

The acquisition of Conygar ZDP, a wholly-owned subsidiary of Conygar, which will give RGL responsibility for funding Conygar’s ZDPs. These have an agreed value on maturity in 2019 of £39.9m, or £35.7m at the proposed date of completion.

■

Following completion of the acquisition (subject to approval from Conygar’s ordinary and ZDP shareholders), there may be an adjustment for the difference between the estimated net asset value of the SPVs and their NAV at completion. This may mean that further consideration is paid.

The acquisition is conditional on approval by Conygar’s ordinary and ZDP shareholders as well as the two banks providing the debt secured on the portfolio.

From Conygar’s perspective, the deal, priced slightly above the portfolio’s most recent valuation, would leave the company debt free, with an income from its RGL shares which will cover its recurring costs and free the management team to focus on development projects, which are its principal expertise.

For Regional REIT the deal is exactly in line with its existing strategy. The assets are located outside the M25, are diverse in terms of use and tenant mix, and complementary to the existing portfolio, having minimal overlap with the current portfolio in terms of geography and tenants. The properties are of institutional investment quality and present significant opportunities for asset management to increase occupancy, reducing void costs and raising rental income, in line with the asset manager’s expertise and not requiring additional resources to manage. It is possible that some retail assets will be disposed of, enabling the manager to recycle capital. The debt facilities have a low interest margin and broaden the company’s banking relationships, meaning that the deal would diversify RGL’s sources of funding as well as income. It is expected that RGL will have a net LTV ratio of 47% post-transaction.

The portfolio

The 31 assets to be acquired consist of 153 units covering 1.3m sq ft, 82.9% let by rental value to 115 tenants, with minimal overlap with RGL’s existing tenant list. The weighted average unexpired lease term is 5.8 years, or 3.8 years to first break. The gross investment value was £129.5m at 30 September: 20% in Scotland and the remainder across England and Wales outside the M25. Offices make up 60% of the portfolio by value, retail and retail warehouses are 21%, 12% are industrial and 7% are leisure assets. The tenants include government departments such as the Care Inspectorate and Lincolnshire County Council, major international corporates such as Hewlett Packard, Dassault and Alcatel Lucent, and large UK businesses like Odeon and Travis Perkins, as well as many smaller occupiers. The largest single asset by value represents 11% of the portfolio.

Two other points were announced at the same time as the gross asset value and dividend: that RGL will commence a partial impairment of goodwill in its next results, to be announced on 23 March, and that it will show an accrual for the manager’s performance fee.

The performance fee is equal to 15% of returns to shareholders above a hurdle rate of 8% per annum and is subject to a high water mark which is currently the listing price of 100p. This will affect EPRA EPS and EPRA NAV. RGL’s balance sheet showed £2.8m of goodwill at 30 June 2016, c 0.5% of total assets, and its impairment will have a small effect on EPRA NAV.

We will revise our estimates following the publication of FY16 results on 23 March and the expected completion of the acquisition on 24 March. At this stage, if the acquisition were to take place with no adjustment to the consideration paid to Conygar, the liability regarding the ZDPs rising to £39.9m in FY19 and assuming that goodwill is fully impaired by the end of FY18, our model indicates that EPRA EPS could be c 10.0p and 10.5p in FY17 and FY18, respectively (vs current estimates of 8.9p and 9.5p). This would also affect the dividend, because the Property Income Distribution paid by a REIT must be at least 90% of profits from property income. Without changing our revaluation assumptions there is no significant effect on EPRA NAV per share.

Exhibit 1: Financial summary

Year end 31 December	£'000s	2015	2016e	2017e	2018e
PROFIT & LOSS		IFRS	IFRS	IFRS	IFRS
Gross rental income		5,361	41,509	45,466	47,574
Non-recoverable property costs		(754)	(4,291)	(4,092)	(4,282)
Revenue		4,608	37,218	41,374	43,292
Administrative expenses		(1,353)	(7,380)	(7,963)	(8,212)
EBITDA		3,255	29,839	33,411	35,081
Gain on disposal of investment properties		87	(75)	0	0
Change in fair value of investment properties		23,784	3,623	7,504	5,152
Operating profit before financing costs		27,126	33,387	40,914	40,233
Performance fees		0	(95)	(974)	(828)
Exceptional items		(5,296)	0	0	0
Finance income		177	97	68	25
Finance expense		(997)	(8,757)	(9,161)	(9,161)
Net movement in the fair value of derivative financial investments		115	(2,024)	0	0
Profit Before Tax		21,124	22,608	30,847	30,268
Tax		0	0	0	0
Profit After Tax (FRS 3)		21,124	22,608	30,847	30,268
Adjusted for the following:
Performance fees		0	95	974	828
Exceptional items		5,296	0	0	0
Net gain/(loss) on revaluation		(23,784)	(3,623)	(7,504)	(5,152)
Net movement in the fair value of derivative financial investments		(180)	1,904	0	0
Gain on disposal of investment properties		(87)	75	0	0
Profit before Tax (norm)		2,370	21,059	24,317	25,944
Period end number of shares (m)		274.2	274.2	274.2	274.2
Average Number of Shares Outstanding (m)		274.2	274.2	274.2	274.2
Fully diluted average number of shares outstanding (m)		274.2	274.2	274.2	274.2
EPS - fully diluted (p)		7.7	8.2	11.2	11.0
EPRA EPS (p)		0.9	7.7	8.9	9.5
Dividend per share (p)		1.0	7.7	8.9	9.5
Dividend cover		N/A	100%	100%	100%
BALANCE SHEET
Fixed Assets		407,492	516,918	532,421	545,573
Investment properties		403,703	514,132	529,635	542,788
Goodwill		2,786	2,786	2,786	2,786
Non-current receivables		1,004	0	0	0
Current Assets		35,803	27,284	22,351	15,497
Trade and other receivables		11,848	13,816	13,195	14,527
Cash and equivalents		23,954	13,468	9,157	970
Current Liabilities		(21,485)	(28,622)	(30,693)	(32,362)
Trade and other payables		(12,576)	(15,354)	(16,917)	(18,169)
Deferred income		(5,906)	(9,588)	(10,097)	(10,514)
Taxation		(2,387)	(1,239)	(1,239)	(1,239)
Bank and loan borrowings - current		(200)	0	0	0
Derivative financial instruments		(416)	(2,440)	(2,440)	(2,440)
Long Term Liabilities		(126,469)	(214,771)	(214,771)	(214,771)
Borrowings		(126,469)	(214,771)	(214,771)	(214,771)
Net Assets		295,341	300,809	309,308	313,937
Derivative interest rate swaps		416	2,440	2,440	2,440
EPRA net assets		295,757	303,249	311,748	316,377
IFRS NAV per share (p)		107.7	109.7	112.8	114.5
EPRA NAV per share (p)		107.8	110.6	113.7	115.4
LTV		25.4%	39.2%	38.8%	39.4%
CASH FLOW
Operating Cash Flow		(2,232)	28,800	35,130	34,589
Net Interest & other financing charges		(411)	(9,244)	(9,093)	(9,136)
Tax		0	0	0	0
Purchase of investment properties		(4,191)	(139,251)	0	0
Sale of investment properties		5,348	40,369	0	0
Capex			(8,000)	(8,000)	(8,000)
Acquisition of subsidiaries, net of cash acquired		26,659	0	0	0
Net proceeds from issue of shares		0	0	0	0
Equity dividends paid		0	(12,340)	(22,349)	(25,639)
Other (including debt assumed on acquisition)		0	1,077	0	0
Net Cash Flow		25,172	(98,588)	(4,312)	(8,187)
Opening net (debt)/cash		(127,886)	(102,714)	(201,303)	(205,614)
Closing net (debt)/cash		(102,714)	(201,303)	(205,614)	(213,801)

Source: Regional REIT, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Regional REIT and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Thematics

Latest

Healthcare-focused trusts: A sector on the mend

MediaWatch – One step forward, two steps back

ConsumerWatch – Don’t look down

Audiovisual

Latest

VEON – executive interview with CFO Joop Brakenhoff

VEON – executive interview with CEO Kaan Terzioğlu

World’s Toughest Row 2024

About Edison

About Edison

Careers

Regional REIT (LSE: RGL)

Regional REIT — Update 27 February 2017

Real Estate

Real Estate

Latest

Murray Income Trust — Income focus keeps paying dividends

AUSTRIACARD — Solid Q324 supports FY24 outlook

HELLENiQ ENERGY — Margins troughed in Q3, expect Q4 improvement

Nanoco Group — Board states case for voting against resolutions

Solid State — Defence contract delay affects expectations

More on Regional REIT

Regional REIT — Preparing the ground

Regional REIT — A clear strategy to realise value

Regional REIT — Recapitalisation returns focus to operations

Regional REIT — Q124 DPS unchanged ahead of refinancing

Latest from the Real Estate sector

Custodian Property Income REIT — Significant uplift in fully covered DPS

Regional REIT — Preparing the ground

Target Healthcare REIT — Rental income continuing to drive returns

Foxtons Group — Further strategic progress towards targets

McBride — Update 27 February 2017

Subscribe to Edison