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Regional REIT
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=== Portfolio overview === The portfolio was externally valued at end-FY21 at £906.1m and on a pro forma basis<ref>Adjusted for acquisitions, disposals and capex but excluding any revaluation.</ref> was c £874m at end-Q122. Q122 included £33.5m (before costs) of disposals. Subsequent transactions have taken the year-to-date total for disposals to £69.2m with acquisitions amounting to £48.2m. The blended net initial yield on disposals of 5.9% compares with 8.7% on acquisitions, locking in an accretive yield spread. {| class="wikitable" |+Exhibit 12: Key portfolio data<ref>Source: Regional REIT.</ref> ! !31-Mar-22 !31-Dec-21 !31-Dec-20 |- ! !Q122 !FY21 !FY20 |- |Valuation |c £874m |£906.1m |£732.4m |- |Number of properties |160 |168 |153 |- |Number of property units |1,438 |1,511 |1,245 |- |Number of tenants |1,035 |1,077 |898 |- |Contracted rents |£68.5m |£72.1m |£64.2m |- |Estimated rental value, ERV |N/A |£94.6m |76.6 |- |WAULT to first break (years) |N/A |3.0 |3.2 |- |EPRA occupancy |81.6% |81.8% |89.4% |- |Net initial yield |N/A |5.6% |6.9% |- |Reversionary yield |N/A |9.4% |9.4% |} Gross contracted rent roll was £68.5m at end-Q122, down from £72.1m at end-FY21, while EPRA occupancy was little changed at 81.6% versus 81.8%. Edison Investment Research estimates that the reduction in gross rent roll during Q122 was split broadly equally between disposals and additions to properties under refurbishment. The latter reduce the current rent roll but are excluded from EPRA ERV. '''Positive FY21 return driven by fully covered dividends''' Results for the year to 31 December 2021 (FY21) were published on 29 March 2022. Exhibit 13 provides a summary of the FY21 financial performance. DPS increased from 6.4p to 6.5p and was fully covered by EPRA EPS of 6.6p. The period included the £236m (before costs) acquisition of the Squarestone portfolio, adding an initial £21.9m to annualised rent roll. Net property revaluation losses reduced significantly (from £56.1m to £7.7m) with like-for-like property valuation growth of 1.1% offset by £15.4m of property acquisition costs primarily the result of the Squarestone acquisition. Additionally, the fair value movement on interest rate hedging instruments swung from a £2.5m loss to a £6.0m gain because of rising market interest rates. As a result, IFRS net earnings were £28.8m versus a loss of £31.0m in FY21. Held back by property acquisition costs, EPRA net tangible assets (NTA) per share were slightly lower at 97.2p (FY20: 98.6p) but, including dividends paid, the accounting total return was 5.0%. {| class="wikitable" |+Exhibit 13: Summary of FY21 financial performance<ref>Source: Regional REIT data.</ref> !£m unless stated otherwise !FY21 !FY20 !FY21/FY20 |- |Rental income |65.8 |62.1 |5.9% |- |Non-recoverable property costs |(9.9) |(8.8) |12.9% |- |Net rental income |55.8 |53.3 |4.8% |- |Administrative & other expenses |(10.6) |(11.3) |<nowiki>-6.6%</nowiki> |- |Operating profit before gains/(losses) on property |45.2 |42.0 |7.8% |- |Unrealised and realised property gains/(losses) |(7.7) |(56.1) | |- |Operating profit |37.6 |(14.1) | |- |Net finance expense |(14.9) |(14.0) |6.1% |- |Impairment of goodwill |0.0 |(0.6) | |- |Change in fair value of interest rate derivative |6.0 |(2.5) | |- |Profit before tax |28.8 |(31.2) | |- |Tax |0.0 |0.2 | |- |IFRS net profit |28.8 |(31.0) | |- |Adjust for: | | | |- |Unrealised and realised property gains/(losses) |7.7 |56.1 | |- |Impairment of goodwill |0.0 |0.6 | |- |Change in fair value of interest rate derivative |(6.0) |2.5 | |- |EPRA earnings |30.4 |28.1 |8.0% |- |Basic IFRS EPS (p) |6.3 |(7.2) | |- |EPRA EPS (p) |6.6 |6.5 |1.5% |- |DPS (p) |6.50 |6.40 |1.6% |- |EPRA NTA per share (p) |97.2 |98.6 |<nowiki>-1.4%</nowiki> |- |Accounting total return |5.0% |<nowiki>-5.8%</nowiki> | |- |Investment properties |906.1 |732.4 |23.7% |- |Net debt |(383.8) |(298.8) | |- |Net LTV |42.4% |40.8% | |} '''Relatively modest forecast reductions reflect global economic and political outlook''' Edison Investment Research's previously published forecasts can be seen in Exhibit 14. Recognising the increased challenge to the UK growth outlook and accelerated inflationary environment, for RGL Edison Investment Research has slightly reduced forecast net rental income and slightly increased borrowing costs in respect of the small amount of variable rate debt that is hedged using caps rather than swaps. The Q122 average debt cost was 3.4% versus 3.3% at end-FY21. To maintain full dividend cover, Edison Investment Research has reduced its forecast FY22 DPS to 6.6p from 6.7p (FY21: 6.5p) and FY23 to 6.9p from 7.1p. {| class="wikitable" |+Exhibit 14: Forecast revisions<ref>Source: Edison Investment Research.</ref> ! ! colspan="3" |Net rental income (£m) ! colspan="3" |EPRA earnings (£m) ! colspan="3" |EPRA EPS (p) ! colspan="3" |EPRA NTA/share (p) ! colspan="3" |DPS (p) |- ! !New !Old !% chg. !New !Old !% chg. !New !Old !% chg. !New !Old !% chg. !New !Old !% chg. |- |12/22e |62.8 |63.1 |(0.4) |34.1 |34.6 |(1.6) |6.6 |6.7 |(1.6) |98.9 |99.0 |(0.1) |6.60 |6.70 |(1.5) |- |12/23e |64.9 |65.4 |(0.8) |35.8 |36.7 |(2.4) |6.9 |7.1 |(2.4) |101.8 |101.0 |0.8 |6.90 |7.10 |(2.8) |} Edison Investment Research continues to assume no net acquisitions and disposals for the year, but within this reflect the year-to-date transactions and the positive yield spread that these have locked in.<ref>This includes £69.2m of reported disposals at a 5.9% net initial yield (NIY), £48.2m of reported acquisitions at an 8.7% NIY and c £20m of assumed acquisitions at an NIY of 8.5%.</ref> The driver of its forecasts is net rental income, where in FY22 and FY23 Edison Investment Research now assumes a slower benefit from letting activity but offset in FY22 by the positive impact of transactions. Edison Investment Research continues to forecast a relatively modest increase in EPRA occupancy<ref>The ERV of occupied space versus total ERV.</ref> (to c 84% by end-FY23) but note that this excludes properties under refurbishment and development. Edison Investment Research expects refurbishment activity to increase during the forecast period<ref>Our assumption of increased refurbishment activity has a positive impact on EPRA occupancy by reducing EPRA ERV, although the properties are unavailable to let during the period.</ref> as RGL continues to enhance the attractiveness of its assets and meet its energy performance targets, in line with sector trends. With EPRA earnings distributed in full and acquisitions and disposals matched by value, Edison Investment Research's property revaluation assumptions (1.5% pa gross of acquisition costs and capex) leave year-end LTV at approximately 42%. A reduction in LTV towards RGL’s medium-term target of c 40% would appear to require a stronger revaluation uplift than Edison Investment Research assumes or additional net property disposals. Revaluation gains may benefit from leasing progress and/or an improvement in external valuer sentiment as improving investment volumes provide more transactional evidence of underlying market valuations. Disposals would be likely to reduce the rental base. Edison Investment Research estimates that a 1% increase/decrease in the FY22e value of investment properties increases/decreases EPRA NTA by c 1.9%.
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