Another look at Regional REIT
The Oak Bloke
Jul 22
Dear reader
I last looked at RGL in July 2024 in “RGL-me-this”. Looked twice actually. After all, I wrote an article basing my numbers on the data from both HL and Stocko but both were wrong. Their numbers were incorrect. I rewrote the article but it was the last time I took their data at face value. Oh how the detractors chortled at my error!
I revised my article based on new evidence and came away with a No, on balance at 137.4p.
A year later it is 125p so I was spot on where RGL dropped to 101p post Lib day in April. But it is up about a quarter over the past 3 months.
So worth another look? Upwards from here?
House broker Shore Capital say sure it is. “It’s now in robust strategic shape and increasingly now in charge of its own destiny”.
Hmmm.
They explain: “An ongoing programme continues…. a further pipeline of 40 assets currently valued at £102.6m is either in sale progress, on the market or being prepared for sale and we remain optimistic the majority of it can be successfully realised.”
Hmmm.
Disposals (net of costs) were £28.6m in 2024 and £25m in 2023. Years in which RGL was desperate to raise cash. So how will they accelerate their disposals by 2X to realise the majority? Or are we just talking 50.0001% of that £102.6m? What majority are we speaking of?
The reason I worry about Shore being so sure is I have one eye on the Bank Debt and £99.8m in due in just 12 months. Can they roll that forward? Probably. They are well within their covenants now. They stiffed their shareholders to stay in them in 2024 with a £110.5m equity raise which doubled the number of shares. Luckily for OB readers who followed my article they’d sold out before then.
The 2023 accounts showed a -£80m reduction in property values and 2024 followed with further bad news and the portfolio dropped a further -£50m, although there’s a tiny bounce up in 1Q25 of +£1.9m to £607.8m (NB disposals in the period were £1.6m). The start of a recovery?
“Today” was what I wrote in last July’s article (so the estimated position back last year) and “Tomorrow” was how I modelled for the year end (of 2024). The DEC-24 columns shows the actual result. Debt lower, with drops in working capital too.
Similarly I expected a drop in rental income, but the £14.33m result in 1Q25 shocks me a bit. That’s quite a bit lower. We also see higher property costs in 2024 too. -£19.3m is -£4.8m per quarter. Net profit of £20.9m is -19.7% lower than 2023. Is that a “robust strategic shape” you can see there? Not Shore about that.
Although there is better news that in 2025 seven new lettings and eight renewals worth £1.6m a year were let at 6.32% above ERV (estimated rental value).
That’s only £0.1m above, big deal?
But what if we apply that to the expiry profile let’s see what that means for income.
Nothing dramatic but applying some small rises and a period of zero rises, followed by some more small rises gets me to a renewed rentals of £64m, based on the current portfolio.
Disposals
The current portfolio is not going to remain as is. It’s going to change.
We learn that in 1Q25 they disposed of -£1.6m and post period -£6.2m more. So 2025 is so far going the same speed of disposals in 2023 and 2024 then.
The next bit is where it begins to get exciting. RGL speak of splitting its portfolio into four. Core is the good stuff, and fair play it’s 88.1% occupied and it’s the majority of the portfolio. Nice. A definite ray of sunshine appears, sure as eggs is eggs.
“Capex to Core” are the ones we are told we can expect shall be upgraded and therefore become core and enjoy a higher per square foot rental. I’m assuming a 25% increase and that the occupancy moves from 77.6% to 88.1%.
The third type “Value Add” are all about adding value and doing stuff to achieve a higher disposal value than its current book value. This will be change of use and potentially involve obtaining planning permission. Deduct £31m if you disagree with that idea but RGL speak of “greater potential” and quote examples with strong upside.
The “Sales” segment on the other hand I’m assuming lose about 20% of their value i.e. they get realised for 80% of their valuation.
If that’s the case then here’s the result:
We see that pro-rata to the rentals for the properties with occupancy is £496m of the property portfolio is actually occupied and generating rents (at the end of 2024). By completing the disposals the Core and Capex to Core gets you to £510m. The ERV (100% rent) was £77m but drops to £62.5m and at 88.1% occupancy but with a 5% bump that’s a £57.33m annual rent…..
But that assumes 88.1% occupancy is the best it can get. Clearly that not true in a more robust environment. As the portfolio rises above 90% (on the basis of a recovery in the demand for offices) the prior £60.7m rental income appears achievable. To speed that outcome, rental values are rising again in 2025 and are reflected in the 2025 letttings PSF rates achieved.
The real benefit is that an estimated £150m capital potentially reduces debt down or put another way there’s £200m+ of headroom “to do something”.
I can’t shake the feeling that the plan in that scenario could be to develop one or more of its assets under the “value add”. Using debt and that headroom to fund one or two potential GDVs of gross development values of £100m+ and £200m+ on properties that today are valued circa £10m, leaves potential for RGL plus a developer to make a mutual return. OB idea Watkin Jones is one such example of a potential partner.
Valuation
RGL has always been a good dividend payer and its recent news to increase the dividend to 2.5p per quarter means 10p a year and 10% yield for those lucky enough to buy at the April low, and a still decent 8% yield for today’s punter. Is that tempting?
I can see a £23m adj. net profit from the rentals in a reasonably near future. On a marcap of £204m that’s an 11.5% return.
But then you must compound the expectations that a ~£500m property portfolio of mainly freehold offices can expect to appreciate in value too. By 5% a year? That’s a £25m gain on top.
11.5% becomes a 24% ROE. Now we’re talking.
The ~£500m of property are valued at £106.1m per square foot. That’s £1,141 per square metre. That’s about 60% BELOW the replacement cost of building an office. These construction cost numbers are from 2023 so are proably higher in 2025 too.
Conclusion
Given we see the turning of the tide I’m turning my decision from a SELL to a BUY. I was initially sceptical of the broker’s breezy optimism. Could the refinance be a menace? Yes it could. There is a theoretical risk, although it also seems unlikely to think a bank will not support a property manager with existing cash, in a rising market, and where the debt is quite low, not near to covenants and fully covered by income.
Regards
The Oak Bloke
Disclaimers:
This is not advice – you make your own investment decisions.
For the graphs
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