Investors are worried about Brexit, but the disruptive effects are revealing attractive, if risky, investment opportunities. Such opportunities are being explored by regional real-estate investment trust Regional REIT (RGL).
Very attractive yield
Recycling assets
Discount to NAV
Lower finance costs
Dividend not fully covered
Vulnerable to economic downturn
Some institutional property investors have reacted to Brexit uncertainty by opting to switch into cash. This has created a situation in the UK's regional property markets where investment appetite has softened despite little change in occupational demand.
Regional REIT, which has a portfolio comprising 70 per cent offices, 20 per cent industrial, and 10 per cent retail and "other" properties, has capitalised on this. It has a strategy of actively recycling assets by selling properties that are relatively mature in terms of rental growth, and picking up replacement assets where there is scope for refurbishment and redevelopment to boost rents and property values.
To help maximise its buying power, the company has been streamlining its borrowing facilities. A total of £50m was raised last year through a 4.5 per cent retail eligible bond to repay the 6.5 per cent zero-dividend preference shares that formed part of the acquisition package from Conygar. In addition, a new £36m facility was arranged with Scottish Widows, £13m of which was employed to repay the outstanding 5 per cent ICG Longbow facility due to mature in October 2019. At the same time, the £34.3m Royal Bank of Scotland facility has been extended to December 2021.
The bottom line here is that, following repayment of the preference shares, the cost of borrowing will have dropped to around 3.5 per cent. Recent disposals mean that the loan-to-value (LTV) ratio is down to a more modest 37 per cent, from 45 per cent at December 2017.
| REGIONAL REIT (RGL) | ||||
| ORD PRICE: | 93p | MARKET VALUE: | £347m | |
| TOUCH: | 92.7-93.3p | 12-MONTH HIGH: | 103p | LOW: 89p |
| FWD DIVIDEND YIELD: | 8.9% | DEVELOPMENT PROP: | nil | |
| DISCOUNT TO FORWARD NAV: | 25% | |||
| INVESTMENT PROP: | £759m | NET DEBT: | 73% | |
| 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 | 7.5 | 8.25 |
| 2017 | 106 | 45.8 | 8.6 | 7.7 |
| 2018* | 119 | 53.8 | 7.5 | 8.1 |
| 2019* | 124 | 58.1 | 8.9 | 8.3 |
| % change | +4 | +8 | +19 | +2 |
| Normal market size: | 5,000 | |||
| Beta: | 0.45 | |||
| *Peel Hunt estimates. Adjusted NAV and EPS | ||||
While the shadow of Brexit hangs over the outlook, the big property groups continue to forecast rental growth in the regions well ahead of central London. Regional REIT's asset management is also helping. For example, a property at Century Way in Leeds was recently re-let at a 5.9 per cent premium, while a 19.2 per cent rental uplift was achieved at its Delta business park in Swindon.
Financing for its acquisitions and refurbishment work is supported by disposals. A particular highlight from last year was the sale of Arena Point in Leeds to Unite Students, which, following a successful planning application, brought in £12.2m against a June 2018 book value of £3.9m. A total of £85m was raised through disposals, invariably at a premium to book value, while the acquisition of a portfolio of eight assets for £31.4m represented an initial yield of 8.66 per cent and a significant premium to disposal yields.
The dividend yield is one of the highest in the sector, and while this is expected to be only 93 per cent covered by after-tax earnings, recent disposal profits are expected to make up the shortfall.
