Since floating a year ago, Regional Reit (RGL) has made impressive progress towards its goal of paying a dividend of 7-8 per cent of its 100p float price as part of a targeted annual total return of 10-15 per cent. Indeed, brokers are already forecasting a fully covered 7.2 per cent payout this year.
- Sector-leading dividend
- Shares trade at a discount to forecast NAV
- Strong demand for regional space
- Modest loan-to-value ratio
- Referendum worries could still damage valuations
- Fairly short average lease maturity
The attractive returns are expected to come from a strategy of focusing on secondary regional property outside the M25 to exploit the historically high - but now narrowing - valuation gap that exists both between London and the regions and between prime and secondary property. The Reit's experienced team is also targeting acquisitions where it believes it can substantially boost rents and values through active property management.
Regional Reit's original portfolio was formed by the combination of properties owned by its manager, London & Scottish Investments, and investment house Toscafund Asset Management. The investment strategy centres on acquiring offices and industrial sites. These are usually bought from distressed sellers or organisations with less management expertise, and in parts of the country where a lack of new development has created an advantageous imbalance between supply and demand.
| REGIONAL Reit (RGL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 107.25p | MARKET VALUE: | £294m | |
| TOUCH: | 106-107.25p | 12M HIGH: | 111p | LOW: 88p |
| FWD DIVIDEND YIELD: | 8.3% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FWD NAV: | 6% | |||
| INVESTMENT PROP: | £501m | NET DEBT: | 65% | |
| Year to 31 Dec | Net asset value (p) | Net rental income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2015 | 108 | 4.6 | 0.9 | 1.0 |
| 2016* | 111 | 37.2 | 7.7 | 7.7 |
| 2017* | 114 | 41.4 | 8.9 | 8.9 |
| % change | +3 | +11 | +16 | +16 |
Normal market size: 10,000 Matched bargain trading Beta: 0.1 *Edison forecasts. Adjusted NAV and EPS | ||||
The opportunity to exploit existing space is significant, with occupancy levels of 81.8 per cent at the June half-year end and expectations that this can be taken to 85 per cent by the year-end and 90 per cent in the longer term. The risks associated with holding secondary property are being balanced by the diversity of the portfolio, which at the half-year stage was made up of 128 properties, housing 974 separate units and 719 different tenants.
The Reit has also been improving the geographic spread of the portfolio and its focus by selling off more mature Scottish properties and buying offices and light industrial units in England and Wales. Acquisitions in the first half totalled £128.1m at a net initial yield in excess of 8 per cent, while disposals totalled £41.2m at around 5 per cent. The two principle acquisitions were the Wing portfolio, with a net initial yield of 8.5 per cent, and the Rainbow portfolio at 8.2 per cent. The key point here is that on acquisition occupancy rates for the two averaged around 78 per cent, giving considerable potential for increased occupancy and rents. Contracted rental income rose from £35.9m in December 2015 to £43.7m in June, and if the portfolio were fully let this would rise to £51.9m.
Acquisitions boosted total borrowings from £128.6m at the end of December 2015 to £217.8m at the half-year stage, and the net loan-to-value (LTV) ratio rose from 25.4 per cent to 38.1 per cent, with a targeted LTV of 35 per cent.
Average debt maturity is 3.4 years. A spike in lease renewals will come next year and the year after. This presents a big potential opportunity to increase rents but also a risk should economic conditions weaken. From this perspective, the Brexit vote increases uncertainty, but management says market sentiment has remained strong and, following a slowdown ahead of the vote, activity is expected to have picked up in the second half.
