As a rule of thumb, a yield of 7 per cent or more normally falls into the 'too-good-to-be-true' category. However, we think excessive Brexit angst rather than genuine trading difficulties mean the 8.4 per cent yield offered by shares in Regional REIT (RGL) could prove the real deal.
Massive dividend yield
Shares trade at a discount to NAV
Very diversified tenant base
Strong demand for office space
Zero-dividend preference shares mature next January
Above target gearing
Not only is the yield paid by Regional REIT fully covered by the group's earnings, and predicted to remain so, but its property portfolio is reassuringly diverse based on both tenants and geography. True, its focus on the so-called 'secondary' property market does make the portfolio somewhat more exposed to the health of the economy, but on balance the company looks well placed to continue to raise rents and improve occupancy rather than see trading go into reverse.
The property portfolio consists of 164 properties and 1,026 tenants. The core sector is regional offices, which account for 68 per cent of assets and these are mainly focused on growth areas such as Leeds and Manchester. Around a quarter of the portfolio comprises industrial sites and a further 8 per cent is retail. Tenants come from a broad range of industries, with the largest sector exposure, retail and wholesale tenants, accounting for less than 14 per cent of the total. Meanwhile, occupancy has been rising towards the target level of 90 per cent, having increased from 82.7 per cent to 85 per cent during 2017.
The portfolio is being actively managed following a major net asset value (NAV)-to-NAV transaction with Conygar in February last year. The portfolio is shifting away from Scotland. Having at one point accounted for 35 per cent of the portfolio, Scotland is now down to 22 per cent with a target of about 15 per cent. Meanwhile, exposure is increasing to the south-east of England, which accounts for 27 per cent of the portfolio. The market in the south-east is becoming tighter due to permitted rights development – changing offices into residential use – and because the valuation of many secondary office buildings sits below replacement cost.
Importantly, the office market remains in good health, underpinned by interest from tenants and investors.
In 2017, the company spent £228m on acquisitions with a weighted average net initial yield of around 7.9 per cent, while making £16.9m of disposals at 6.3 per cent. A total of 81 new leases were completed during the year, which should provide around £4m in contracted rental income when fully occupied.
| REGIONAL REIT (RGL) | ||||
| ORD PRICE: | 98.9p | MARKET VALUE: | £ 369m | |
| TOUCH: | 98.2-98.9p | 12M HIGH: | 107p | LOW: 97p |
| FWD DIVIDEND YIELD: | 8.4% | TRADING PROPS: | na | |
| FWD DISCOUNT TO NAV: | 15% | |||
| INVESTMENT PROP: | £737m | NET DEBT: | 85% | |
| Year to 31 Dec | Net asset value (p) | Net operating income (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 108 | 32.1 | 7.5 | 1 |
| 2016 | 107 | 38.1 | 7.8 | 7.65 |
| 2017 | 106 | 45.8 | 8.6 | 7.85 |
| 2018* | 112 | 55.6 | 8.4 | 8.1 |
| 2019* | 117 | 58.7 | 9.1 | 8.3 |
| % change | +4 | +6 | +8 | +2 |
| Normal market size: | 5,000 | |||
| Matched bargain trading | ||||
| Beta: | 0.3 | |||
| *Peel Hunt forecasts, adjusted NAV and EPS figures | ||||
Finances have been given a makeover so that the weighted average maturity on debt has been extended from 2.9 years to six years. The loan-to-property value has already come down from nearly 50 per cent following the Conygar deal to 45 per cent at the end of 2017, and management has a longer-term target of 40 per cent -– recently revised up from 35 per cent. One drain that will need to be addressed is the £35.7m zero-dividend preference shares that came with the acquisition of assets from Conygar (CIC). These mature in January 2019, and repayment needs to be financed, although Regional stressed that there will be sufficient profits arising from sales of existing assets to cover the cost.
