Regional REIT (RGL) is trading in line with management’s expectations, is seeing a good level of interest in both its office and industrial properties, and has continued to be active in letting since 30 June. As a result, it expects occupancy rates to increase across the portfolio in the near term, supporting income from the growing portfolio (c £650m in assets). Lettings since the end of September indicate progress towards the 85% occupancy rate that we target for end-2017 and then towards 90% by the end of 2018. On this basis, RGL’s highly attractive and growing dividend is fully covered by forecast earnings, while its regional focus should prove more resilient to macroeconomic headwinds than London real estate.
RGL says that it continues to see good performance in regional UK industrial and office occupancy markets and that it remains confident of its growth prospects, with active asset management underpinning income. Although occupancy (by value) was actually slightly lower at 30 September than at mid-year (82.8% versus 83.3%), subsequent lettings already agreed represent, we estimate, c 1.4% in occupancy improvement towards the 85% we target by year-end. While H217 will benefit from a full-period contribution from earlier acquisitions, the successful letting of major refurbishment projects expected to complete promises to be a significant driver of rental income growth.
Portfolio activity (sales/purchases) since 30 June has been relatively modest compared with earlier periods, although a recently agreed sale of a development site in Leeds is expected to release a profit of c £9.0m and generate a c 2% uplift in forecast 2018 fully diluted NAV per share. Otherwise, our estimates are unchanged. RGL notes that it continues to explore opportunities to enhance the organic growth that it expects by further, opportunistic acquisitions. We provided a sensitivity analysis of the potential impact in our October note.
RGL’s prospective dividend yield of 7.5% is the highest of all UK REITs, while its price/EPRA NAV of 0.96% sits within the middle of the range despite a strong focus on asset management with potential for capital gains. The geographic spread of its non-London portfolio, its sector and tenant diversity, and high asset yield all mitigate macroeconomic risks. The successful launch and letting of major refurbishment projects during H217/H118 is an important near-term catalyst.