Q3 Trading update, Dividend & Strategic Review

12 November 2020

REGIONAL REIT Limited

("Regional REIT", the "Group" or the "Company")

Q3 2020 Trading Update

&

Dividend Declaration and Outcome of Strategic Review

 

Regional REIT Limited (LSE: RGL), the regional real estate investment specialist, focused on building a diverse portfolio of income producing regional UK core and core plus office assets, today is pleased to announce a trading update for the period from 1 July 2020 to 30 September 2020, dividend declaration confirmation for the third quarter of 2020, the outcome of the Board's strategic review of the Company's investment objectives, and a potential share buyback.

 

Q3 2020 Trading Update

 

The Group has exchanged on 29 leases to new tenants since 1 January 2020, totalling 171,838 sq. ft., of which eight leases have been exchanged since 30 June 2020, totalling 16,202 sq. ft.. When fully occupied these 29 new leases will provide £1.4m per annum ("pa") of rental income. The eight leases acquired since 30 June 2020 will provide £0.2m of rental income pa.

 

The Group also completed a number of lease renewals during the quarter, achieving rental uplifts of 12.2% versus previous rent. Retention of occupancy by area remains high at 90.2% as 83.9% of units with lease renewals remain occupied¹.

 

[1] Including tenants that are currently holding over, lease renewals, and the acquisition of new replacement tenants.

 

Portfolio as at 30 September 2020:

 

·    150 properties, 1,239 units and 857 tenants, totalling c. £739.9m² of gross property assets; with a gross rent roll of c. £62.4m pa

·    Offices (by value) were 80.3% of the portfolio (31 December 2019: 79.9%), industrial sites 13.9% (31 December 2019: 13.7%), retail 4.3% (31 December 2019: 5.0%), and Other 1.5% (31 December 2019: 1.4%)

·    England & Wales represented 82.7% (31 December 2019: 82.0%) of the portfolio with the remainder in Scotland

·    EPRA Occupancy (by ERV) 88.6% versus 89.0% as at 30 June 2020; 30 September 2020 like-for-like (versus 30 September 2019) EPRA occupancy remained in line at 88.3% (88.4%)

·    Average lot size c. £4.9m (31 December 2019: c. £4.9m)

·    Net loan-to-value ratio c. 39.3%² (31 December 2019: 38.9%). Gross borrowings £361.7m (31 December 2019; £344.0); cash and cash equivalent balances £71.0m (31 December 2019: £37.3m). Cost of debt (including hedging) of 3.4% pa (31 December 2019: 3.5% pa)

 

2 Gross property assets value based upon C&W valuations as at 30 June 2020, adjusted for subsequent acquisitions, disposals and capital expenditure in the period.

 

 

 

Q3 2020 Dividend Declaration

 

As previously indicated, the Company is pleased to declare that it will pay a dividend of 1.50 pence per share ("pps") for the period 1 July 2020 to 30 September 2020, (1 July 2019 to 30 September 2019: 1.90pps). The dividend payment will be made on 8 January 2021 to shareholders on the register as at 20 November 2020. The ex-dividend date will be 19 November 2020. The entire dividend will be paid as a REIT property income distribution ("PID").

 

Further to the announcement made on the 17 September 2020, the Board will pay a dividend of 6.4pps for the full year 2020, which it is expected will be fully covered from EPRA earnings, and equates to an annualised dividend yield of 8.3% at the close of 11 November 2020.

 

Outcome of Strategic Review of the Company's Investment objectives

 

Due to the current economic backdrop, the Board has undertaken an internal strategic review of the Company's investment objectives, to ensure the maximisation of total shareholder returns. The strategic review encompassed, but was not limited to, the regional commercial investment and occupational markets, peer review, the Group's current portfolio composition (80.3% by value of the portfolio being composed of offices as at 30 September 2020) and the specialist attributes of the Asset Management operating platform.

 

Over the long term the Board is convinced that the supply and demand imbalance of the office sector, coupled with the Asset Manager's specialist operating platform and experience, will maximise total shareholders returns. For the foreseeable future, the Board has decided that the Company will focus its investment solely on properties in the office sector in the main regional centres of the UK outside of the M25 motorway. The Company will in due course seek to exit all other commercial property sector investments, including its industrial and remaining retail sites, while promptly recycling the capital into regional offices. This will ensure the Group is able to maximise its investment objectives of delivering shareholders an attractive and sustainable income focused total return over the long term.

 

Share Buyback

 

The Board constantly monitors the Company's share price, and as part of the strategic review of the Company's investment objectives, the Board also considered the Company's recent share price discount rating against the latest net asset value. The Company's financial position remains strong, with a cash balance of £71.0m, as at 30 September 2020. Where the Board considers it to be accretive to do so, the Company may undertake a buyback of its own shares using proceeds from asset sales. However, the Company will take a balanced approach, continuing to seek to identify attractive new acquisitions which present long term shareholder value.

 

Outlook

 

Our business model continues to remain resilient, despite the current uncertain economic outlook. The Company's Asset Management platform continues to actively engage with our diversified occupiers to ensure strong rent collections, whilst maintaining the momentum of ongoing asset management initiatives to increase capital values. These attributes continue to underpin the Company's uninterrupted quarterly dividend distributions and will ensure the growth of capital returns to our shareholders over the long term.

 

Stephen Inglis, CEO of London & Scottish Property Investment Management, the Asset Manager of Regional REIT commented:

 

"Following a busy and productive period for the Company, which has seen robust momentum maintained in the collection of rents, a number of attractive acquisitions completed, and a strategic review finalised, I am pleased to confirm the Q3 dividend of 1.50 pence per share. As previously announced, the Company will distribute a full year 2020 dividend of 6.4pps that should be fully covered by EPRA earnings, and which offers a highly attractive dividend yield at the current share price.

 

The conclusion of the Board's internal strategic review to dispose in due course of the remaining non-office assets in order to focus investment in the regional office market, will allow the Company to take full advantage of the current sector inefficiencies being observed and that I outlined in detail at the Company's recent capital markets day. It is envisaged that the Company's decision to focus solely on quality office assets for the foreseeable future will drive considerable value creation for shareholders by leveraging the manager's key expertise whilst also serving as a major factor of differentiation for the Company from existing London listed REITs.

 

In light of the Company' performance throughout Covid-19, the Board is of the opinion that the market is undervaluing the Company. Should a persistent and significant share discount rating be observed, the Board will take a balanced approach to the buyback of the Company's own shares where it is considered accretive to do so, using proceeds from asset sales, versus the opportunities in the regional office market which offer income and growth for our shareholders over the long term."

 

Summary of Activity in the Quarter to 30 September 2020:

The Group undertook several asset management projects, generating new lettings and maintaining and improving income through lease renewals and re-gears:

 

·    Ashby Business Park, Ashby De La Zouch - A lease agreement has been signed with Ceva Logistics Ltd. to renew an existing lease for a further five years at a rent of £405,132 (£13.17/ sq. ft.) representing an uplift of 13.5% from the previous rent. The works being undertaken by the landlord, as part of this agreement, are likely to complete by the end of the year, ahead of schedule

·    Miller Court, Tewkesbury - The remaining available space was let to Amiosec Ltd. (10,070 sq. ft.) at a rent of £151,050 pa (c. £15.00/sq. ft.) on a five-year lease with the option to break in 2023

·    Leo House, Wallington - A new rent of £132,000 pa (£17.00/sq.ft.) with existing tenant Crimestoppers Trust, has been agreed, representing an uplift of 19.7% against the previous rent. The lease has been renewed for a further 10 years to July 2030

·    Elmbridge Court, Gloucester - Buyline Ltd. has leased 1,610 sq. ft. for a period of five years with the option to break in 2023 at a rent of £29,785 pa (£18.50/sq.ft.)

·    Silver Court, Watchmead, Welwyn Garden City - 1,224 sq. ft. of space has been let to G-DAK Cyber Solution Ltd. at a rent of £22,650 pa (£18.50 sq. ft.) for a period of five years with the option to break in 2023

·    Telford Court, Chester - Close Brothers Ltd. has renewed its lease for a further 10 years to August 2030 at a rental income of £75,000 pa (£14.76/sq.ft.) on 5,083 sq. ft.

·    Elmbridge Court, Gloucester- Frazer-Nash Consultancy Ltd. has renewed its two leases for a further five years to September 2025 at a combined rental income of £85,000 pa (£17.26 sq. ft.) on 4,925 sq. ft. of space, this represents an increase of 38.2% against the previous rental income

·    Venlaw Building, Glasgow - The Health & Social Care Alliance Scotland renewed its lease for 5,134 sq. ft. plus car parking for a further 10 years to September 2028 at a rental income of £72,000 (£14.02/sq. ft.), which is an increase of 3.6% against previous rental income

 

Sales

Total disposals in the three months to 30 September 2020 amounted to £5.0m, reflecting an uplift of 15.4% against most recent valuation (June 2020).

 

Subsequent Events post 30 September 2020:

Since the quarter end, the Group has successfully completed the following lettings, sales and acquisitions:

 

Lettings

·    1 Burgage Square, Merchant Square, Wakefield - Unit 1 (17,629 sq. ft.) has been successfully let on a back-to-back basis to the Secretary of State for Housing Communities & Local Government. This has been let on a 17-year lease with the option to break in 2032 at a rental income of £196,222 pa (£11.13/sq. ft.). This follows a surrender of the lease to The West Yorkshire Community Rehabilitation Company Ltd.

·    Unit B, Fleming Court, Castleford - Wakefield & District Housing Ltd. has renewed its lease for 5,095 sq. ft. of space for a further six months at a rental income of £68,000 pa (£13.35/sq. ft.)

·    Norfolk House, Smallbrook Queensway, Birmingham - A 12-month reversionary lease has been signed with The Secretary of State for Housing Communities and Local Government for 19,420 sq. ft. at a rent of £258,626 pa (£13.32/sq.ft)

 

Sales

·    Juniper Park, Basildon, was sold on 1 October 2020 for £32.7m, reflecting a 59.4% uplift from the acquisition price, including subsequent capital expenditure and 3.9% above the valuation as at the 30 June 2020

 

Acquisitions

Total acquisitions from 30 September 2020 to date amounted to £25.6m, with rent of £2.7m, reflecting a NIY of 9.7%, and weighted average unexpired lease term ("WAULT") to first break of 3.7 years

 

·    Waterside Business Park, Swansea, and 2410 Aztec West, Bristol, both these two-floor offices assets were acquired on 2 October 2020 for a total of £10.2m, with a combined rent of £1.1m pa, reflecting a NIY of 10.1% and a WAULT to first break of 4.2 years

·    Global Reach, Cardiff, a four-floor office asset was acquired on 28 October 2020 for £8.4m, with a rent of £0.8m pa reflecting a NIY of 8.9%, and WAULT to first break of 2.6 years

·    Braehead, Scotland, a manufacturing facility with associated yard space and an office asset was acquired on 5 November 2020 for £7.1m, with a rent of £0.8m pa, reflecting a NIY of 10.1%, and a WAULT to first break of 4.3 years

 

Forthcoming Events

 

25 February 2021	Q4 2020 Dividend Declaration and Portfolio Valuation
25 March 2021	Full year 2020 Preliminary Results Announcement
19 May 2021	May 2020 Trading Update and Outlook Announcement
	Q1 2021 Dividend Declaration Announcement
	Annual General Meeting

 

Note: All dates are provisional and subject to change

- ENDS -

 

Enquiries:

 

Regional REIT Limited
Press enquiries through Buchanan
Toscafund Asset Management	Tel: +44 (0) 20 7845 6100
Investment Manager to the Group
Adam Dickinson, Investor Relations, Regional REIT Limited
London & Scottish Property Investment Management	Tel: +44 (0) 141 248 4155
Asset Manager to the Group
Stephen Inglis
Buchanan Communications	Tel: +44 (0) 20 7466 5000
Financial PR
Charles Ryland, Henry Wilson, George Beale

 

About Regional REIT

Regional REIT Limited ("Regional REIT" or the "Company") and its subsidiaries (the "Group") is a United Kingdom ("UK") based real estate investment trust that launched in November 2015. It is managed by London & Scottish Property Investment Management Limited ("LSPIM"), the Asset Manager, and Toscafund Asset Management LLP ("Toscafund"), the Investment Manager.

 

Regional REIT's commercial property portfolio is comprised wholly of income producing UK assets and comprises, predominantly, offices and industrial units located in the regional centres outside of the M25 motorway. The portfolio is highly diversified, with 150 properties, 857 tenants as at 30 September 2020, with a valuation of £739.9m.

 

Regional REIT pursues its investment objective by investing in, actively managing and disposing of regional core and core plus property assets. It aims to deliver an attractive total return to its Shareholders, targeting greater than 10% per annum, with a strong focus on income supported by additional capital growth prospects.

 

The Company's shares were admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange on 6 November 2015. For more information, please visit the Group's website at www.regionalreit.com.

 

Cautionary Statement

This document has been prepared solely to provide additional information to Shareholders to assess the Group's performance in relation to its operations and growth potential. The document should not be relied upon by any other party or for any other reason. Any forward-looking statements made in this document are done so by the Directors in good faith based on the information available to them up to the time of their approval of this document. However, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

 

LEI: 549300D8G4NKLRIKBX73