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Regional REIT
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== Summary == This note focuses on the outlook for income-driven returns from Regional REIT (RGL). With the ‘return to the office’ accelerating, RGL expects a positive demand-supply balance to generate rental growth, increased occupancy and valuation gains. Q122 DPS increased c 3% to 1.65p. Income risk is mitigated by portfolio diversification, while fully fixed or hedged borrowing costs protect against further interest rate increases. {| class="wikitable" |+Summary<ref>Note: *EPRA earnings exclude revaluation movements, gains/losses on disposal and other non-recurring items. EPRA EPS is fully diluted. **NAV is EPRA net tangible assets per share.</ref> !Year end !Net rental income (£m) !EPRA earnings* (£m) !EPRA EPS* (p) !NAV**/ share (p) !DPS (p) !P/NAV (x) !Yield (%) |- |12/20 |53.3 |28.1 |6.5 |98.6 |6.40 |0.84 |7.7 |- |12/21 |55.8 |30.4 |6.6 |97.2 |6.50 |0.86 |7.8 |- |12/22e |62.8 |34.1 |6.6 |98.9 |6.60 |0.84 |7.9 |- |12/23e |64.9 |35.8 |6.9 |101.8 |6.90 |0.82 |8.3 |} '''RGL anticipates positive office sector performance''' With portfolio repositioning effectively complete (offices are now 91.4% of portfolio value), RGL has become a pure-play regional office REIT, with a clear investor proposition that capitalises on the asset manager’s strong expertise and operational platform. RGL believes the office is an essential aspect of the working infrastructure and the sector is poised for recovery, particularly for good-quality regional assets with affordable rents. Strong demand by UK and international property investors provides support for this expectation. Despite its focus on regional offices, RGL’s portfolio remains highly diversified by property, tenant and region, mitigating income risks while with all borrowings are fixed or hedged at a blended cost of 3.4%. '''Income-led total returns''' Since listing in November 2015, RGL has consistently targeted a higher yield portfolio that would provide progressive, regular dividends with the potential for capital growth, supported by active asset management and capital recycling. Its dividend yield has been consistently one of the highest in the sector. RGL’s positive demand outlook suggests that with office leases typically shorter term (c five years to first break) and set on an open market basis, there should be opportunities for landlords to rebase rents towards current market levels, which may further adjust for inflation. Income upside potential from the existing portfolio is significant, with FY21 office estimated rental value (ERV) more than £20m above contracted rents, mostly reflecting space available for letting. '''Valuation: High yield and fully covered DPS''' Reflecting the potential impact of a deteriorating political and economic environment, Edison Investment Research has reduced its EPRA earnings forecasts by c 2% and the fully covered FY22 DPS to 6.6p (from 6.7p). This continues to reflect an attractive yield of 7.9% while the shares trade at a 14% discount to NAV.
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