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Regional REIT — Significant proposed growth and funding

Regional REIT (LSE: RGL)

Last close As at 22/11/2024

GBP1.23

▲ −3.00 (−2.37%)

Market capitalisation

GBP201m

More on this equity

Research: Real Estate

Regional REIT — Significant proposed growth and funding

We have previously commented on the fact that regional commercial property markets, especially for industrial and office properties, have remained firm despite Brexit uncertainties. Steady occupier demand, combined with a general tightness of supply, is supporting rental growth in many areas. Against this background, Regional REIT (RGL) continues to see a wide range of acquisition and asset enhancement opportunities, which meet its investment criteria, giving rise to a strong pipeline of capital deployment opportunities. RGL has conditionally agreed the acquisition of two portfolios and is seeking to raise up to £100m gross from the issue of new shares.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Significant proposed growth and funding

Acquisition and capital raising

Real estate

6 December 2017

Price

103.0p

Market cap

£310m

Net debt (£m) at 30 September 2017

313.3

Shares in issue

300.5m

Free float

80%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.2)

0.5

(5.3)

Rel (local)

1.9

0.9

(13.7)

52-week high/low

108.5p

100.0p

Business description

Regional REIT (RGL) owns a 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 10-15% with a strong focus on income.

Next events

Q4 dividend announcement and portfolio valuation

22 February 2018

Publication of 2017 results

22 March 2018

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Regional REIT is a research client of Edison Investment Research Limited

We have previously commented on the fact that regional commercial property markets, especially for industrial and office properties, have remained firm despite Brexit uncertainties. Steady occupier demand, combined with a general tightness of supply, is supporting rental growth in many areas. Against this background, Regional REIT (RGL) continues to see a wide range of acquisition and asset enhancement opportunities, which meet its investment criteria, giving rise to a strong pipeline of capital deployment opportunities. RGL has conditionally agreed the acquisition of two portfolios and is seeking to raise up to £100m gross from the issue of new shares.

Year end

Net rental
income (£m)

EPRA
EPS* (p)

EPRA NAV/
share (p)

DPS
(p)

P/EPRA
NAV (x)

Yield
(%)

12/15**

4.6

0.9

107.8

1.00

0.96

1.0

12/16

38.1

7.8

106.9

7.65

0.96

7.4

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

Significant acquisition pipeline

In its recent Q3 trading update, RGL reiterated that it was continuing to explore specific acquisition opportunities to further grow the business and enhance income and earnings. It has now reached conditional agreement to acquire two real estate portfolios representing an aggregate investment of £93.4m and with an expected net initial yield of 8.6%. This is a significant potential increase in its existing portfolio, valued at c £651m at 30 September 2017. To finance its plans it has proposed a capital increase seeking to raise gross proceeds of up to £100m (£97m net of expenses). The capital increase proposes the issue of up to approximately 99m new shares, a c 32% increase on the existing number of shares. It is conditional on, among other things, certain resolutions being passed at an EGM, which is expected to take place on 19 December 2017. The new shares are to be issued at an offer price of 101p, slightly below the closing price on 4 December of 103.5p and the fully diluted EPRA NAV per share of 107.3 as at 30 June 2017.

Raising capital for funding

It is proposed that c £50 will be raised from the issue of new ordinary shares in a firm placing and up to a further £50m by way of a placing, open offer and offer for subscription. The firm placing has already been carried out by way of an accelerated book building and, subject to certain resolutions being passed at the extraordinary EGM to be held on 19 December 2017, will see the issue of c 49.5m new shares. The placing, open offer and offer for subscription will see up to a further 49.5m shares issued and shareholders qualifying for the open offer will be able to subscribe for new shares on the basis of one new ordinary share for every eight existing shares held. Full details can be found in the prospectus available on the company website, www.regionalreit.com. Our forecasts are suspended pending completion of the transaction.

Summary of the acquisitions and use of proceeds

RGL says that it continues to see a wide range of acquisition and development opportunities that meet its investment criteria, giving rise to a strong pipeline of capital deployment opportunities. These include the following:

■

Up to £45.8m (including acquisition costs) to finance the agreed acquisitions, which RGL describes as the First New Portfolio Acquisition. This a portfolio of three office properties located in Woking, Cheshunt, and Edinburgh with 25 lettable units and 18 individual tenants. The properties are 88% let (by area) on a weighted average lease term (WAULT) of 6.4 years with 3.3 years to first break. The contracted rent roll is £3.6m and the portfolio has been valued at £43.5m, reflecting a yield of 8%.

■

Up to £4.9m to finance a pipeline investment, which is in advanced negotiations and which RGL expects to complete in March 2018. This is an office property in Portsmouth which, combined with the First New Portfolio Acquisition, would result in a portfolio of 26 lettable units and 19 individual tenants, occupied 90% by area. RGL estimates the combined rent roll at £4.0m, reflecting a yield of 8.1% on a WAULT of 6.6 years (3.4 years to first break).

■

Up to £47.6m to finance the Second New Portfolio Acquisition comprising 17 office properties with 210 lettable units and 136 individual tenants. The properties are 75% let (by area) with a WAULT of 3.1 years or 2.1 years to first break. The contracted rent roll is £4.2m and the portfolio has been valued at £44.8m, reflecting a yield of 9.2%.

The potential acquisitions listed above are significant in terms of the current portfolio, which has already grown strongly since IPO. As at 30 September 2017 the portfolio comprised 151 properties, with 1,113 units and 838 tenants, an aggregate value of c £651m and a contracted rental income of c £55.9m pa.

In addition, approximately £4.0m of the capital raise proceeds will be absorbed by the costs of the previously announced refinancing of certain of the group’s debt facilities. With its Q3 trading update RGL confirmed that discussions were at an advanced stage on replacing five of its existing debt facilities, representing c £164m of the c £296m outstanding at H117 with a new 10-year facility, and has reached agreement, subject to documentation, to refinance another. It said that the refinancing is expected to extend average debt maturity to 6.3 years from 2.0 years and it will also simplify the debt structure. The total cost of the refinanced debt is expected to be 3.3-3.4% fixed.

RGL intends to put in place a £19.4m debt facility as soon as possible following completion of the First New Portfolio Acquisition, of which £17.4m will be in respect of the assets acquired and £2.0m to part-finance the pipeline investment. Terms have been agreed at a cost of Libor plus 2.0%.

A second new debt facility is planned on completion of the Second New Portfolio Acquisition, for which a fixed cost of 2.15% has been agreed.

Exhibit 1: Historical financial summary

Year end 31 December

£'000s

2015

2016

H117

PROFIT & LOSS

IFRS

IFRS

IFRS

Gross rental income

5,361

42,994

22,964

Non-recoverable property costs

(754)

(4,866)

(3,480)

Revenue

 

 

4,608

38,128

19,484

Administrative expenses (excluding performance fees)

(1,353)

(7,968)

(4,261)

EBITDA

 

 

3,255

30,160

15,223

Gain on disposal of investment properties

87

518

(41)

Change in fair value of investment properties

23,784

(6,751)

7,504

Operating profit before financing costs

 

 

27,126

23,927

22,686

Performance fees

0

(249)

(905)

Exceptional items

(5,296)

0

0

Finance income

177

193

107

Finance expense

(997)

(8,822)

(5,872)

Net movement in the fair value of derivative financial investments and impairment of goodwill

115

(1,654)

168

Profit Before Tax

 

 

21,124

13,395

16,184

Tax

0

23

(11)

Profit After Tax (FRS 3)

 

 

21,124

13,418

16,173

Adjusted for the following:

Performance fees

0

249

905

Exceptional items

5,296

0

0

Net gain/(loss) on revaluation

(23,784)

6,751

(22,839)

Net movement in the fair value of derivative financial investments

(180)

865

(447)

Gain on disposal of investment properties

(86)

(518)

41

Profit before Tax (norm)

 

 

2,371

20,765

(-6,167)

Period end number of shares (m)

274.2

274.2

300.5

Average Number of Shares Outstanding (m)

274.2

274.4

288.5

Fully diluted average number of shares outstanding (m)

274.2

274.4

300.5

IFRS EPS - fully diluted (p)

 

 

7.7

4.9

5.6

EPRA EPS - adjusted (p)

 

 

0.9

7.8

3.2

EPRA EPS

 

 

(1.1)

7.7

2.9

Dividend per share (p) - declared basis

 

 

1.00

7.65

3.60

Dividend cover

N/A

102%

88%

BALANCE SHEET

Non-current assets

 

 

407,492

506,401

643,872

Investment properties

403,703

502,425

640,405

Other non-current assets

3,790

3,976

3,467

Current Assets

 

 

35,803

27,574

46,871

Trade and other receivables

11,848

11,375

14,642

Cash and equivalents

23,954

16,199

32,229

Current Liabilities

 

 

(21,485)

(23,285)

(36,271)

Trade and other payables

(12,576)

(14,601)

(24,529)

Bank and loan borrowings - current

(200)

0

(400)

Other current liabilities

(8,709)

(8,684)

(11,342)

Non-current liabilities

 

 

(126,469)

(218,955)

(332,474)

Bank borrowings

(126,469)

(217,442)

(295,429)

Zero dividend preference shares (ZDP)

0

0

(36,010)

Other non-current liabilities

0

(1,513)

(1,035)

Net Assets

 

 

295,341

291,735

321,998

Derivative interest rate swaps

416

1,513

963

EPRA net assets

 

 

295,757

293,248

322,961

IFRS NAV per share (p)

107.7

106.4

107.1

Fully diluted EPRA NAV per share (p)

107.8

106.9

107.3

LTV

-5.9%

40.6%

47.3%

CASH FLOW

Cash (used in)/generated from operations

 

 

(2,232)

31,434

18,921

Net finance expense

(424)

(6,626)

(4,106)

Tax paid

0

(1,715)

51

Net cash flow from operations

 

 

(2,656)

23,093

14,866

Net investment in investment properties

1,157

(99,286)

(900)

Acquisition of subsidiaries, net of cash acquired

26,659

(5,573)

209

Other investing activity

13

60

8

Net cash flow from investing activities

 

 

27,828

(104,799)

(683)

Equity dividends paid

0

(15,723)

(7,014)

Bank debt drawn/(repaid)

(1,217)

91,417

9,265

Other financing activity

0

(1,744)

(404)

Net cash flow from financing activity

 

 

(1,217)

73,950

1,847

Net Cash Flow

 

 

23,955

(7,756)

16,030

Opening cash

0

23,955

16,199

Closing cash

 

 

23,955

16,199

32,229

Closing debt

(126,669)

(217,442)

(331,839)

Closing net debt

 

 

(102,714)

(201,243)

(299,610)

Source: Company accounts, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. 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 Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. 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 Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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