RGL-me-this v2

Is Regional REIT worth another look? Or would you be mad to?

Dear reader,

**NB: I certainly needed two looks on this one and thank you to the readers who pointed out that I’d missed the consolidation; but that’s now corrected **

Capital Raise

10p. Reminds me of the French “Tant Pis!” (too bad).

Too bad, is accurate for what happened for 515,736,583 shares held by RGL-lers who can’t or won’t afford the 10p per share rights issue. Too bad for 27.4% (303m) of shareholders (as a proportion of underwritten shares) who chose not to participate.

The Capital Raise was for £107m, and an eye watering 68.2% dilution, or zero if you participate, fully underwritten so if you didn’t participate the underwriter (Bridgemere) would.

Over 1.105bn shares were issued, and shareholders of 802m shares decided to pay their dues and avoid the ten pee blues. Or was it too bad for the 72.6% who did? Did they throw good money after bad?

Either way many harrumphs I’m sure.

Following this 1.1bn and 0.5bn = 1,620,886,404 shares in issue.

A consolidation of 10 for 1 immediately after compresses the shares down to about 162,088,600 shares.

And for people like the Oak Bloke (and maybe some of his readers) sitting on the sidelines after I RGL-led out at 25p back in February, is RGL worth another look?

Should we return to the office? Let’s look for clues, reader, the RGL-er is sure to have left some.

First things I decided to exit at 25p and today 13.74p is nearly half price. But remember each of my shares were one of 515m, today it’s 1830m.

On March 2024 the NAV was £310.3m, today £370.9m. Today 13.74p buys 22.89p of assets; back then 25p bought 60.2p of net assets (a 58.5% discount). There is a “as at 21st June valuation which provides an important clue that the portfolio was worth £647.8m so a £40m drop which includes a few million of disposals but further write downs of assets too.

Still, post dilution it’s still a 40% discount, to a book value which time and again is evidenced to be solid or below the realisation price (e.g. on disposals but also based on the rental yield). Let alone what is the land and construction cost to actually construct offices, based on Statista data, which is far above the current NAV price.

So I last looked at RGL following the Q4 update and the FY23 results arrived 2 months later. So we are looking for clues of change. There are some minor points like disposals of £26.1m are now £25m in the y/e report - because costs hadn’t been netted off until the year end audit.

Year End - The Post Period section is interesting. RGL is now disclosing its pipeline of disposals and the size of this would make a sizeable difference to RGL’s situation. But then I realise the Q1 update contains further progress too.

Disposals post period

Since 31 December 2023 to the May 22nd, the Company has completed 9 further disposals and three part sales for an aggregate total of £16.1m (before costs) mainly in line with the 2023 year end valuation and one sale at 17.5% above. (So not at a 40% - 58.5% discount to NAV)

The current disposal programme comprises of 59 assets totalling c £111m:

• 3 disposals contracted for £2m

• 8 disposals totalling c. £22 million under offer and in legal due diligence

• 4 further disposals totalling c. £9 million are in negotiation

• 12 further disposals totalling c. £15 million are on the market

• 32 potential disposals totalling c. £63 million are being prepared for the market

Comparing the year end and Q1 disposal programmes, some properties appear to be regressing. The number on the market halved from 24 to 12 and from £42m to just £15m, while the “potential disposals” grew from 14 to 32.

RGL give no comment as to this regression but it suggests the initial programme contained properties which needed further preparation.

Including contracted disposals, £18.1m at the mid year is well ahead of last year’s £25m for the 2023 full year.

Lettings post period

Since 1 January 2024, the Group has exchanged on seven notable leases to new tenants totalling 69,067 sq. ft. amounting to £1.2m per annum ("pa") of rental income when fully occupied, achieving a rental uplift of 9.1% against December 2023 ERVs.

In addition, five notable leases have renewed amounting to 90,418 sq. ft. and £1.3m per annum ("pa") of rental income, delivering a rental uplift of 5.2% against December 2023 ERVs.

Rent Roll

The Q1 update puts the rent roll at £65.5m for 135 properties (1344 units). This is slightly lower than 2023 at £67.8m but for 144 properties (1483 units). So a 10% fall in units is offset with quite strong increases to rent, and we see some evidence of this via both renewals and new lettings.

But the voids (empty offices) remain above 20% and the potential rent is £84.3m so a £18.8m “drag” on the the numbers per year.

The £111m of disposals shall hopefully fix some of this (i.e. sell empty properties and the void reduces) and the £28.4m refurbishment programme should too. £28.4m is how much they’ve ear marked to improve properties from the capital raise.

Dividends

RGL was famous for its high yield. So what’s happened there? The answer is the dividend was cut in 2023 to 1.2p per quarter (4.8p a year) from a 6.6p level. (which would be a 50% yield to today’s share price incidentally).

The capital raise obviously makes the current dividend far more expensive. £32m last year would become £77.8m paying on 4.8p a year on 1.62bn shares.

Ignoring the consolidation for a moment the dividend is being cut from 4.8p, to an equivalent 0.88p. This reduces the cost from £77.8m to around £14.3m

1.62bn shares becomes 162m shares and 2.2p a quarter “doubles” the dividend (after a decimation).

From the highest dividend payer RGL is now yielding a competitive but unspectacular 6.4% (8.8p on 137.4p - the consolidated price)

£14.3m is well covered by rental income about 2.5x

Dusting off the financial model

I’ve added March 2024 based on the Q1 data. But only the property value, debt and cash are disclosed so I’m assuming other figures are static.

“Today” is essentially to show the effect of the capital raise. So cash is assumed static. The as at 21st June property value is used (a £40.4m fall including disposals) so maybe a 5% fall in 2Q2024. The retail bond disappears, the bank debt reduces by £26.3m, and working capital increases by the remaining £28.4m. In order to get the LTV “just above 40%” per the RNS I’ve also assumed a further £10m of debt has been paid down (as was the case in Q2, Q3, Q4 last year). So net assets grow to £381.9m.

The final column “tomorrow” I’m modelling the completion of the £111m disposal programme. At a such a point in the future the business would have £111m more cash (or put another way the net debt is now £163.2m), and the LTV is now just 26.3%.

In other words the disposal programme appears beyond what RGL actually need to do to achieve “at or around 40%”. So will the £111m cash actually pay down debt or something else?

Well the other part of my model is what happens with Rentals. Rentals pays for the dividend. And we established earlier on that the dividend is £14.3m a year or £3.6m a quarter.

Based upon £111m of disposals (which is about 1/6 of the portfolio) and assuming that much of this is to rid RGL of properties with voids, then the rental income should not fall by a 1/6. The fall should be much lower. Combined with higher rents I’ve modelled the “tomorrow” as a 5% fall not 16.6% by reducing voids and (naturally) increasing rents. I’ve modelled that property costs fall by 16.6% and overheads return to the £2.7m seen last year. I’ve modelled that Finance Costs reduce as net debt of £166m at 3.3%.

This delivers £9.1m a quarter or £36.4m a year. This is where I’m stripping out both the revenue and cost of recoverable incidentals. These net to zero and I think these just cloud the performance of what matters - the rental income.

Rubbing shoulders with an important Shareholder

One of my readers pointed this out so I have added this to the article as highly relevant. Steve Morgan CBE is a shrewd investor.

And now 18.5% owner with 30.3m shares of 162m

For those unhappy with Inglis, I suspect we will see substantial pulling up of socks, and it’s notable that Morgan is well used to turnarounds. After all he turned a failing housebuilder into a FTSE250 household name: Redrow.

In a 2012 interview with the BBC's, Sarah Dickens, Morgan discussed his reasons for returning to Redrow, which by the time of the interview, had turned the inherited £140 million loss into a £43 million pre-tax profit.^[19]

When he left Redrow, its annual revenue had increased to more than seven times its 2009 figure to £2.1 billion^[26],profits were £406 million^[27] and it was valued at £2.2 billion.^[28]

Risks & the Bear Case

So far I’ve been far more positive than I expected I would be on this. If I’m not careful I’ll be buying back in and that rebased 6.4% yield gives decent income, and is now well covered.

Let’s get the cold water out administer a cold shower on this.

For RGL-ers the capital raise has meant a huge dilution for some, and this will mean many will harrumph and look to sell into any share price rise. So if you buy RGL it’s unlikely to be going up soon, in any meaningful way, because you’ve got losers and bigger losers (in the sense of the NAV reduction and share price reduction, and dividend reduction). The anger towards Inglis is palpable. I know how a dividend reduction at DEC led to a number of readers abandoning ship there due to the reliance on the dividend as income. We may the same here.

The consolidation is due to occur next week (on the 29th I believe) and so 13.74p becomes 137.4p and I suspect we will see pressure after consolidation.

The way this capital raise was left until the 11th hour isn’t great either and raises questions about the management. In the Q4 update, the management were keen to wax lyrical about ESG and my reaction was to question what about the refinance which is just 9 months away?

The £35m-£40m loss in Q2 valuations (as at 21st June) comes as a bit of a shock. Many would say the bottom of the market was last year but the evidence from RGL is that the value of offices is still falling.

The voids remains a problem and it would be good to see an improvement before buying back in. I make the (logical) assumption that empty offices are being disposed of, but what if it’s the occupied ones that businesses want to buy? RGL don’t provide any kind of analysis of the occupancy level of disposed properties. In fact despite disposals the void hasn’t fallen.

In a recent interview the CEO says businesses want a particular type of office - snazzy basically - so in other words, an asset which is falling in value needs cash to turn it around. Ok, RGL has got cash and will have more through disposals, but will £28.4m be enough to do all the “snazzing” needed? What if this money is spent and doesn’t deliver the intended result?

The penultimate bear case question is what about the bank debt? This is at a fixed rate of 3.3% but only for 3 more years. What then? Refinancing will be at much higher rates, probably. It’s true interest rates are probably going to fall so perhaps 5%-6% is possible and £166m at 6% is £10m or £2.5m a month. Going back to the model that is manageable, and the dividend is still covered 2X.

Conclusion

There are some strong bull and bear cases, and the RGL-er has certainly made me puzzle.

A cunning consolidation left by the RGL-er has caused me to re-write this article based on a different set of facts. Possibly in my defence, this is a great example of where the brokers’ data and refinitiv data are wrong. For example I used the Stocko shares number of 816m but that’s wrong it was 515m. I checked HL’s web site and this is wrong too.

The fact the dividend is covered 2.5X provides the breathing space which was a huge concern in shall we say Version 1 of this article.

I think on balance it remains a not now for me on RGL, but if I already held it (I don’t) I’d keep holding it and would have participated in the rights issue. For me it’s back on a watch list, under a category of “Tempting”. What about you?

Regards

The Oak Bloke

Disclaimers:

This is not advice

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".