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Regional REIT
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== Sensitivities == The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. From a sector viewpoint, Edison Investment Research also highlights the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. RGL is not a developer but on a significantly lesser scale is exposed to similar uncertainties as it actively invests in improvements to existing assets with the aim of enhancing long-term income growth and returns. Edison Investment Research considers the main sensitivities to include: * '''Economic risk:''' the war in Ukraine and sharply rising inflation, to a much lesser extent reflected in interest rates, are creating a high level of uncertainty regarding the global and UK economic outlook. Although the incidence and impact of the pandemic has substantially eased, there remains some uncertainty about the potential emergence of new strains. * '''Sector risk:''' some of the inherent cyclical risk to vacancy in commercial property can be mitigated by portfolio diversification and, although RGL is focused on the office sector, its income risk continues to be well diversified across a broad number of occupiers, operating across a range of industries, by property and by geographic region. The pandemic has increased uncertainty about how offices will be used and may negatively affect structural demand, contrary to RGL’s expectations. * '''Energy performance considerations:''' a failure to successfully meet regulatory and/or tenant expectations for energy performance enhancement would likely affect RGL’s ability to let properties on satisfactory terms and may make properties unlettable. In such circumstances, conversion to alternative use may offer mitigation. * '''Funding risks:''' RGL has a good spread of secured and unsecured borrowing facilities with no near-term maturities (first in August 2024) and an average duration of more than five years. All debt is fixed rate or hedged against rising interest rates. Any significant increase in long-term interest rates may be expected to negatively affect market-wide property valuations and hence LTV ratios as well as NAV. * '''Management risk:''' RGL is externally managed and is dependent on the ability of its asset manager to execute successfully on its strategy. Although Stephen Inglis, Derek McDonald and Simon Marriot, respectively CEO, managing director and investment director of the asset manager, LSPIM, are significantly involved in the management of the RGL portfolio, Edison Investment Research notes that LSPIM is backed by an experienced and growing team. {| class="wikitable" |+Exhibit 16: Financial summary<ref>Source: Regional REIT historical data, Edison Investment Research.</ref> !Year end 31 December (£m) !2018 !2019 !2020 !2021 !2022e !2023e |- !INCOME STATEMENT !IFRS !IFRS !IFRS !IFRS !IFRS !IFRS |- |Rental & other income |62.1 |64.4 |62.1 |65.8 |73.4 |75.7 |- |Non-recoverable property costs |(7.7) |(9.4) |(8.8) |(9.9) |(10.5) |(10.8) |- |Net rental & related income |54.4 |55.0 |53.3 |55.8 |62.8 |64.9 |- |Administrative expenses (excluding performance fees) |(10.5) |(10.9) |(11.3) |(10.6) |(11.9) |(12.2) |- |Performance fees |(7.0) |0.0 |0.0 |0.0 |0.0 |0.0 |- |'''EBITDA''' |'''36.8''' |'''44.1''' |'''42.0''' |'''45.2''' |'''51.0''' |'''52.7''' |- |EPRA cost ratio |40.1% |31.6% |32.4% |31.2% |30.5% |30.3% |- |EPRA cost ratio excluding performance fee |28.6% |31.6% |32.4% |31.2% |30.5% |30.3% |- |Gain on disposal of investment properties |23.1 |1.7 |(1.1) |0.7 |0.0 |0.0 |- |Change in fair value of investment properties |23.9 |(3.5) |(54.8) |(8.3) |9.0 |14.1 |- |Change in fair value of right to use asset |0.0 |(0.2) |(0.2) |(0.0) |(0.2) |(0.2) |- |'''Operating Profit (before amort. and except.)''' |'''83.8''' |'''42.0''' |'''(14.1)''' |'''37.6''' |'''59.8''' |'''66.6''' |- |Net finance expense |(15.7) |(13.7) |(14.0) |(14.9) |(16.9) |(16.9) |- |Fair value movement in interest rate derivatives & goodwill impairment |(0.1) |(2.0) |(3.1) |6.0 |0.0 |0.0 |- |'''Profit Before Tax''' |'''67.9''' |'''26.3''' |'''(31.2)''' |'''28.8''' |'''42.9''' |'''49.6''' |- |Tax |(0.6) |0.3 |0.2 |0.0 |0.0 |0.0 |- |Profit After Tax (FRS 3) |67.4 |26.5 |(31.0) |28.8 |42.9 |49.6 |- |Adjusted for the following: | | | | | | |- |Net gain/(loss) on revaluation/disposal of investment properties |(47.0) |1.9 |55.9 |7.6 |(9.0) |(14.1) |- |Other EPRA adjustments |0.5 |2.6 |3.2 |(6.0) |0.2 |0.2 |- |EPRA earnings |20.9 |31.0 |28.1 |30.4 |34.1 |35.8 |- |Performance fees |7.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Adjusted earnings |27.9 |31.0 |28.1 |30.4 |34.1 |35.8 |- |Period end number of shares (m) |372.8 |431.5 |431.5 |515.7 |515.7 |515.7 |- |Fully diluted average number of shares outstanding (m) |372.8 |398.9 |431.5 |459.7 |515.7 |515.7 |- |IFRS EPS - fully diluted (p) |18.1 |6.6 |(7.2) |6.3 |8.3 |9.6 |- |EPRA EPS, fully diluted (p) |5.6 |7.8 |6.5 |6.6 |6.6 |6.9 |- |Adjusted EPS (p) |7.5 |7.8 |6.5 |6.6 |6.6 |6.9 |- |Dividend per share (p) |8.05 |8.25 |6.40 |6.50 |6.60 |6.90 |- |Dividend cover |93.1% |94.2% |101.7% |101.7% |100.1% |100.6% |- !BALANCE SHEET ! ! ! ! ! ! |- |'''Non-current assets''' |'''720.9''' |'''806.0''' |'''749.5''' |'''925.2''' |'''950.1''' |'''975.9''' |- |Investment properties |718.4 |787.9 |732.4 |906.1 |931.3 |957.3 |- |'''Other non-current assets''' |'''2.5''' |'''18.1''' |'''17.2''' |'''19.0''' |'''18.8''' |'''18.6''' |- |'''Current Assets''' |'''127.0''' |'''69.4''' |'''101.1''' |'''85.5''' |'''73.7''' |'''63.7''' |- |'''Other current assets''' |'''22.2''' |'''32.2''' |'''33.7''' |'''29.4''' |'''28.1''' |'''28.8''' |- |Cash and equivalents |104.8 |37.2 |67.4 |56.1 |45.5 |35.0 |- |'''Current Liabilities''' |'''(83.7)''' |'''(36.2)''' |'''(49.1)''' |'''(58.4)''' |'''(62.4)''' |'''(62.9)''' |- |Borrowings |(0.4) |0.0 |0.0 |0.0 |0.0 |0.0 |- |'''Other current liabilities''' |'''(83.3)''' |'''(36.2)''' |'''(49.1)''' |'''(58.4)''' |'''(62.4)''' |'''(62.9)''' |- |'''Non-current liabilities''' |'''(334.7)''' |'''(355.5)''' |'''(380.9)''' |'''(449.9)''' |'''(450.4)''' |'''(450.9)''' |- |Borrowings |(285.2) |(287.9) |(310.7) |(383.5) |(384.5) |(385.5) |- |'''Other non-current liabilities''' |'''(49.5)''' |'''(67.6)''' |'''(70.3)''' |'''(66.4)''' |'''(65.9)''' |'''(65.4)''' |- |Net Assets |429.5 |483.7 |420.6 |502.4 |511.0 |525.8 |- |Derivative interest rate swaps & deferred tax liability |1.0 |2.6 |5.0 |(1.0) |(1.0) |(1.0) |- |Goodwill |(1.1) |(0.6) |0.0 |0.0 |0.0 |0.0 |- |EPRA net tangible assets |429.4 |485.7 |425.6 |501.4 |510.0 |524.8 |- |IFRS NAV per share (p) |115.2 |112.1 |97.5 |97.4 |99.1 |102.0 |- |Fully diluted EPRA NTA per share (p) |115.2 |112.6 |98.6 |97.2 |98.9 |101.8 |- !CASH FLOW ! ! ! ! ! ! |- |Cash (used in)/generated from operations |38.8 |26.0 |48.0 |56.9 |56.2 |52.6 |- |Net finance expense |(11.9) |(12.2) |(12.5) |(13.1) |(15.5) |(15.5) |- |Tax paid |(1.5) |(0.8) |0.2 |0.0 |0.0 |0.0 |- |Net cash flow from operations |25.4 |13.0 |35.7 |43.8 |40.6 |37.1 |- |Net investment in investment properties |100.6 |(25.6) |(0.3) |(98.3) |(16.1) |(12.0) |- |Acquisition of subsidiaries, net of cash acquired |(32.6) |(43.9) |0.0 |0.0 |0.0 |0.0 |- |Other investing activity |0.2 |0.2 |0.1 |0.0 |0.0 |0.0 |- |Net cash flow from investing activities |68.2 |(69.4) |(0.2) |(98.2) |(16.1) |(12.0) |- |Equity dividends paid |(29.4) |(32.5) |(26.7) |(27.8) |(34.3) |(34.8) |- |Debt drawn/(repaid) - including bonds and ZDP |(50.5) |3.5 |22.2 |73.8 |0.0 |0.0 |- |Net equity issuance |(1.2) |60.5 |0.0 |(0.1) |0.0 |0.0 |- |Other financing activity |47.7 |(42.7) |(0.8) |(2.7) |(0.9) |(0.9) |- |Net cash flow from financing activity |(33.4) |(11.2) |(5.3) |43.2 |(35.2) |(35.7) |- |Net Cash Flow |60.2 |(67.6) |30.1 |(11.2) |(10.6) |(10.6) |- |Opening cash |44.6 |104.8 |37.2 |67.4 |56.1 |45.5 |- |Closing cash |104.8 |37.2 |67.4 |56.1 |45.5 |35.0 |- |Balance sheet debt |(374.6) |(337.1) |(360.1) |(433.1) |(434.3) |(435.4) |- |Unamortised debt costs |(5.8) |(6.9) |(6.0) |(6.9) |(5.7) |(4.5) |- |'''Closing net debt''' |'''(275.5)''' |'''(306.8)''' |'''(298.8)''' |'''(383.8)''' |'''(394.4)''' |'''(405.0)''' |- |LTV |38.3% |38.9% |40.8% |42.4% |42.4% |42.3% |} {| class="wikitable" |+Leadership team !Name !Desciption |- |Independent non-executive chairman: Kevin McGrath |Kevin McGrath, OBE DL, is a chartered surveyor with more than 30 years’ property experience. In addition to RGL, he is chairman of M&M Property Asset Management, having previously been managing director and senior adviser of F&C REIT Asset Management, and before that was a founding equity partner in REIT Asset Management, a property investment, finance and asset management partnership. He is also chairman of INTCAS, an independent technology and support service company. Prior to REIT Asset Management, he was a senior investment surveyor with Hermes Investment Management. |- |CEO London & Scottish Property Investment Management: Stephen Inglis |Stephen Inglis, CEO of London & Scottish Property Investment Management, the asset manager of RGL, serves as NED on the board of Regional REIT. He has over 30 years’ experience in the commercial property market, the majority of which has been working in the investment and development sector. His career to date has been split between London and Scotland, giving him wide knowledge of the UK property market. He is a chartered surveyor and became a member of RICS in 2001 and is also a member of the Investment Property Forum. Since June 2013, he has acquired or sold approximately 250 assets in deals totalling in excess of £1.2bn. |- |MD London & Scottish Property Investment Management: Derek McDonald |Derek McDonald is managing director of London & Scottish Property Investment Management, the asset manager of RGL, which he joined in 2015. He spent 27 years at Bank of Scotland/Lloyds Banking Group in a variety of senior roles in corporate banking, including time in the bank’s corporate banking business in the US, the UK real estate joint ventures business, the European real estate business, the UK business support unit and the Irish business support unit, which dealt with high-value real estate lending. He has led a significant number of high-value transactions at both REVCAP and Lloyds Banking Group and has had line responsibility for large teams of professionals. He has significant experience in building and leading multi-jurisdictional businesses. |- |Investment director, London & Scottish Property Investment Management: Simon Marriott |Simon Marriott is investment director for London & Scottish Property Investment Management, asset manager to RGL, which he joined in 2017. He has over 30 years’ experience in the property industry sourcing, transacting and asset managing, most recently at Cromwell Property Group where he was head of investments and UK real estate. Prior to Cromwell, Simon held a number of senior roles including director of real estate transactions at PwC, senior vice president and managing director of investments at Oxford Properties and head of separate accounts at Invista REIM, managing funds with assets under management of over £2.5bn. He is a chartered surveyor and a member of RICS since 1992, as well as a member of the Investment Property Forum. |} {| class="wikitable" |+Principal shareholders<ref>Source: Regional REIT, 22 March 2022.</ref> !Shareholder name !Shareholder amount (%) |- |OMP-S55 |6.89 |- |Majik Property Holdings |9.13 |}
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