CityWire

Refinancing risk sinks shares in Regional Reit

Shares in Regional Reit plunge 39% year to date as investors fret about office investor’s enlarged debt burden and falling occupancy.

Shares in Regional Reit RGL have tanked 39% this year despite a lower-than-expected decline in the value of the regional office portfolio.

At the start of this month, Regional reported a 5.9% like-for-like fall in its assets outside of the M25 orbital road in the six months to 31 December.

This was better than the 11% decline in the MSCI UK Monthly Property index but failed to reassure investors, who worry about the trust’s debt and falling occupancy. They have have continued to dump the shares, resulting in a fall of 24%, or 6.8p, this month.

Shares began the year at 35p and now sit at 21.5p. They have plunged from 44.7p last September, leaving Regional on a 64% discount to Deutsche Numis’ estimated net asset value (NAV) per share of 59.6p. The last NAV from the company was 64.4p per share in June.  

The yield on the shares has also widened to 22%, despite the dividend suffering a 27% cut in September as the fund paid just 1.2p in the second quarter, down from 1.65p in the previous three months.

At the heart of investors’ concern is the weight of Regional’s debt burden, as the fall in valuation increased its net loan-to-value (LTV) to 55.1%, although the company says debt remains fully hedged at an average cost of 3.5% with an weighted average maturity of 3.5 years.

Management sold six assets over the second half of 2023 in a bid to pay down debt and reduce its LTV, receiving proceeds of £26.1m before costs.

This took the total number of disposals for 2023 to 10, and further sales are expected as Stephen Inglis, chief executive of London and Scottish Property Investment Management, battles to bring the LTV back to its 40% target.

Deutsche Numis analyst Andrew Rees said a ‘near-term priority’ for the Reit will be the £50m retail bond due for repayment in August this year.

‘Reducing debt will therefore require an acceleration of disposal activity from current levels although we note this remains a challenging market to sell regional offices,’ he said.

‘Without an improvement, or even stabilisation, in occupier appetite, we believe the outlook for Regional remains uncertain and this is reflected in the share price.’

Occupancy has been another area of concern since lockdown prompted a shift to working from home, which left many companies without the need for expensive offices.

While Regional had been confident that local offices – which make up 92% of the fund – would be part of the work-from-home trend that would allow employees access to office facilities closer to home rather than travelling into major cities, the theory has yet to play out.

There are also significant costs in upgrading properties to the top EPC energy certificate rating of B.

The number of properties in the portfolio dropped to 144 in 2023 from 154 in 2022, while the number of occupiers has reduced from 1,076 to 978. On top of lower levels of both offices and occupiers, occupancy overall has fallen from 83% in 2022 to 80% in 2023.

Inglis said 2023 was ‘one of the most challenging years for Reits in recent memory’ and Regional was not immune.

He said valuations have been impacted but his asset management initiatives ‘continued to mitigate some of the impact on the portfolio’.

‘The leasing market was slower than anticipated largely due to the uncertainty around working patterns and the geopolitical situation impacting inflation and interest rates, but with some stability we are witnessing increasing numbers of enquiries for our assets,’ said Inglis.

The Reit declined to comment on the fall in the share price.