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2. Bull, Bear & Beyond – Regional REIT: executive interview
11 Plays1 year ago
Regional REIT (RGL) is a specialist investor in offices across regional centres of the UK, outside the M25. It is actively managed with a strong focus on income returns.
In this interview, Stephen Inglis, CEO of the asset manager to RGL, London & Scottish Property Investment Management, discusses in detail the company’s strategy for extracting value from the portfolio and the future balance of returns between income and capital.
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About ‘Bull, Bear & Beyond’
'Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
Original interview published on 25/09/2024 and reposted as a podcast
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Transcript
Introduction to Regional REIT Capital Raise
00:00:07
Speaker
I'm Martin King, Property Analyst at Edison Investment Research, and I'm here today with Stephen Ingalls, who's going to talk about the regional REIT capital raise. Stephen is Chief Executive of London and Scottish Property Investment Management, which is the external investment manager for regional REIT.
00:00:23
Speaker
Stephen, welcome. Good morning, Martin. Most listeners, Stephen, will be familiar with the background to the the capital raise, but for those who aren't, could you give a high-level background?
00:00:35
Speaker
Sure. I mean, the the capital raise or debt solution for replacement of a retail bond has been discussed time and again over the last few few months.
00:00:46
Speaker
ah The company has been looking for a solution to repaying its retail bond, which is due to be redeemed August 6th of this year. So ah that's kind of the background.
00:00:59
Speaker
The board has determined that an equity solution is the best solution for shareholders and the long-term future of the company and thus the ah recently announced capital raise.
00:01:12
Speaker
Thank you.
Financial Goals of the Capital Raise
00:01:13
Speaker
And can you talk about the proceeds that you are looking to raise and how you're going to deploy those? Yes, i mean, the capital raise is targeting £110.5 million. pounds ah Of that, the £50 million pounds will be used to repay the bond.
00:01:29
Speaker
And of the remainder, £26 million or thereabouts for repayment of some of the senior debt facilities are paid down to a level of fifty percent or below.
00:01:41
Speaker
and the remainder utilised for accretive capex. So capex is going to improve ah the company's income and by virtue of improving the income, the capital value like for like.
00:01:55
Speaker
Now let me talk a little bit about the senior debt position. and Obviously we have ah senior debt in place, it's 100% fixed capped. or capped And therefore, people will wonder why we're repaying capital or repaying some of that senior debt.
00:02:11
Speaker
Simple answer is that to ah LTVs have been creeping up. So loan to values on each of the individual facilities ah have been creeping up towards ah the bank covenants of 60% LTV.
00:02:25
Speaker
And we just want to take a protective measure, a defensive measure, if you like, by repaying some of that debt down to a level of 50% or below. And that just gives headroom ah towards the the facilities ah in the event there are ah any unknown factors that we might see over the course of the next few months or years, of which, of course, we've seen plenty over the last few years.
00:02:48
Speaker
And it's even one of the key details that that shareholders should be aware of. Yeah, I think if you look at the rationale for the raise, obviously the bond repayment is key, and Tamius, we're required to do that.
00:03:02
Speaker
Otherwise, we'd be in default of the bond and all the ramifications of that. ah The senior debt position, I think, is a ah sensible defensive measure.
00:03:14
Speaker
ah But the key of this is also about growth and growth of the business, growth of income, growth of capital and thus the the the additional amount if you like for capex and working capital that capex allows us to bring forward projects that have been stalled for lack of funding on refurbishment projects and some planning gain projects which are all hugely accretive to the business as i said earlier in income terms and of course capital terms
00:03:45
Speaker
ah So that that, if you like, is the exciting part of the future growth of the business. In the meantime, we will continue to sell down non-core assets and assets that we do not believe we can ah create real value from. And of course, we've been successful in that sales program to date in achieving valuation levels ah based on December at last year values.
00:04:08
Speaker
And therefore, you know we will continue to do that, which will replenish the CapEx ah ah pot, if you if you like, and therefore it becomes a revolver in terms of that cash facility.
Shareholder Protection and Underwriting
00:04:22
Speaker
Steve, can you talk about some of the important terms of the issue? Sure. I mean, the the issue is fully preemptive. ah So that means that all shareholders can take up their allocation and therefore would not be diluted. the It's a fully underwritten issuance, underwritten by a family office ah called Bridgemere, ah which is the family office of Steve Morgan, who has a huge experience in the capital markets and was formerly chairman of major shareholder Red Row, the house builders.
00:04:56
Speaker
He also, as it happens, was a backer of the original funds, which would made up the REIT. So he understands the asset class and he understands the company and indeed the management.
00:05:07
Speaker
So a very good counterparty. and the The issuance is at 10 pence, or the underwriter is at 10 pence, and therefore shareholders will be taking new shares at 10 pence. Now, clearly that is a big discount from where shares were trading the day before the announcement.
00:05:25
Speaker
and that that was at roughly 21 pence day before announcement. And that discount is ah driven really by a number of factors, but one not one of those is also the the underwrite element. So ah the underwriter effectively determines the price.
00:05:44
Speaker
However, the fully preemptive nature means that if all shareholders take up their rights, then the underwriter gets no shares. In the event some people decide not to take up that their are issuance or their element of the issuance, then the underwriter automatically buys those remaining shares.
00:06:03
Speaker
and So that that's the nature of it. The fully preemptive nature, we think, protects shareholders. We had received a number of proposals ah from equity houses and and wealthy ah individuals ah to take stakes in the business, but that would have automatically diluted existing shareholders and would not, in our view, have protected their interests in the way a pre-emptive offer does.
00:06:29
Speaker
So just to be clear on that, Stephen, the offer is is not open to new investors other than Ridgemere. No, that's right. It's absolutely only open to existing ah shareholders and that that's how we're protecting their interests. So no third parties can take part in this issuance.
CapEx Program and Market Trends
00:06:46
Speaker
Stephen, can you say a bit more about your CapEx plans? Have you got specific projects in mind or is it more general? But also how you expect that to drive income and valuation?
00:06:57
Speaker
Yeah, it's a good point. No, we we're not raising a general pot. This is very much a targeted ah capex program. ah Those capex projects have been identified, costed and allocated.
00:07:10
Speaker
And you that that is very much the the reason for that that additional amount being raised. The monies will be expended on a whole range of factors, but mainly refurbishment projects, new entrances, gyms,
00:07:26
Speaker
toilet facilities and and general office fit out. ah So that you things that you'd expect us to be doing. Over and above that, there is an element ah for planning gain, as I would call it.
00:07:39
Speaker
ah We have been selling assets for alternative use. and by the sheer nature of not having sufficient capital to undertake planning applications and bear in mind we have 145 buildings so and planning applications across a range of our assets is expensive ah but we've been missing out on that element of upside so we've been selling assets where developers are able to gain upside by achieving planning cons consents for the likes of residential or student housing or other alternative uses.
00:08:11
Speaker
And we want to capture that. So, no, very much a targeted CapEx programme. ah In terms of return on that CapEx, our projects will return between 1.4 and 2 times money. So, you know in the event we're spending £5 million pounds or investing £5 million pounds of property, we'd expect to see 1.4 to 2 times that amount back in terms of capital growth on those assets.
00:08:37
Speaker
So these are, ah talked about it earlier, highly accretive CapEx projects. ah Stephen, can you tie your CapEx plans into ah market trends, market developments? There's obviously been a flight to quality amongst occupiers.
00:08:53
Speaker
And also, are the trends you're seeing in in in use occupational use of the offices? Yeah, I mean, there there definitely is a flight to quality and that that' was happening even pre-pandemic. Everything this is a post-pandemic phenomena.
00:09:08
Speaker
It's not. ah you know People have been seeking better quality offices for some time, mainly to attract better quality talent. So, ah Employment and people are most people's assets, most companies assets, and they want them to occupy high quality space. So high quality space, though, ah just for for definition, doesn't mean super prime.
00:09:30
Speaker
So it doesn't have to be brand new. It doesn't have to be ah built in the last couple of years of glass and steel. It's all about creating grade A space. The quality of space is what it's all about. And that's what we produce.
00:09:42
Speaker
That's why we're refurbishing our buildings. That's why we have a capital expenditure program, ah which hopefully will now be fully funded, to drive forward but that drive to quality.
00:09:53
Speaker
And that quality in our buildings is equal to ah the superprime in terms of the actual accommodation. ah So yes, we're we're seeing the same trends. ah The other thing that's happening is as we spend money on our assets to improve them to that grade specification, ah we're seeing big increases in rents.
00:10:13
Speaker
ah So companies are prepared to pay for that better quality space. ah So there is definitely that that trend and that movement. But as I said, that has been a longer term trend, not simply a post pandemic trend.
00:10:27
Speaker
And that's good for us. yeah were We're offering grade A space at big discounts to superprime. our Our rental tones are far lower. In some cases, as low as 50% of that superprime space in in some of the key cities.
00:10:43
Speaker
And you've also been reporting strong improvements in the energy performance of the portfolio. How much further have you got to go? Yeah, indeed. So we've made massive gains in terms of EPC improvements.
00:10:54
Speaker
And that has been you know but a very positive aspect of our programme of expenditure over the last couple of years. and We're well over 50% EPCB.
00:11:05
Speaker
And as you'll know, that is the ultimate target EPCB by 2030. And we're well on on track to to achieve that. ah That's becoming an increasing ah increasingly important aspect of occupiers requirements.
00:11:21
Speaker
They want to see, particularly for longer leases, EPCB. Because clearly they they don't want to be a positioned where they're occupying, you know, EPCC or DSpace in 2030.
00:11:32
Speaker
And secondly, that ties into the whole ESG agenda. and And that also has become a much, much more important aspect of the whole real estate market, not just offices.
00:11:42
Speaker
but specifically in offices, the social impact, the S part is becoming very important. So ah you know we are very focused on ESG and as a consequence, EPCs and the difference in our EPC ratings in the last year our ESG scores is showing just how focused we are in that aspect of the business.
Office Occupancy and Market Outlook
00:12:05
Speaker
And Stephen, I know you've done a lot of work internally on this, but can you talk about what you're seeing around the return to the office and office use? Yeah, i think I think we, along with most landlords, are seeing an encouraging number of people coming back to the office. So as you're right to say, we've done quite a lot of work in our portfolio on this.
00:12:25
Speaker
We published some numbers in March, at which time 99% of our companies occupying our space were back in. uh but perhaps the more important dynamic is the number of their staff who are back in and we're now ahead of pre-pandemic occupancy uh in terms of our portfolio pre-pandemic occupancy was was estimated at 70 percent uh and we're at 72 percent and growing uh so that's that's encouraging so more people are back in the office now than they were a pre-pandemic
00:12:58
Speaker
And indeed, when you look at the hybrid nature of working in the regional market, certainly our staff are back 4.2 days a week on average.
00:13:09
Speaker
So that tells us that, you know, in in general terms, it's four days in the office and one day from home. And that's very strong from ah an office landlord's point of view. So that that's very, very encouraging. and We are seeing also a pickup in inquiries.
00:13:24
Speaker
It's a number of inquiries and the market is growing. ah We have seen... some stagnation of people signing leases for the last 12 months, and we announced that earlier this year, but that's due to indecision given high interest rates and also stubbornly high inflation.
00:13:43
Speaker
Those numbers, of course, have come down substantially. i think we're beginning to see the benefits of that in terms of inquiries, and but that ultimately will flow through to new lettings, but probably the benefit won't be seen until 2025.
00:13:56
Speaker
And most interesting, I think this is a very interesting point, is that for the first time, commentators and and forecasters are looking at the office sector outperforming other sectors in the marketplace. So CBRE's latest forecasts show offices as the top performer in terms of total performance, i.e. rent and yield.
00:14:17
Speaker
So total returns stronger over the next five years than all of the other competing sectors. I think that's the first time that's happened for some time, Martin. So that's very, very encouraging.
00:14:27
Speaker
It is just a forecast. We concentrate, as you know, on on the micro part of the business, which is all about driving rents. And like for like, that should drive capital values. But if we see some market improvement in terms of yield shift, then that's just an extra bonus.
Conclusion and Investor Benefits
00:14:44
Speaker
So can I ask you to bring all of that together, Stephen, and just summarise what things look like now for for investors? Sure. So the capital raise obviously will repay our short-term debt, the £50 million pound bond.
00:14:59
Speaker
It'll reduce our overall indebtedness and pay down some of the senior facilities to give the company comfort. It takes the company's LTV from approximately 57% to just over 40%, so a massive reduction in the company's LTV, and just resets the balance sheet, strengthens the balance sheet, resets the balance sheet, and at the same time provides us working capital to drive forward rental income and capital values of our assets, ah all of which will hopefully flow through to the share price in due course.
00:15:32
Speaker
Well, thank you for that, Stephen. It's been a tough couple of years, but we very much look forward to following your progress post this issue. No, thank you. It has been a couple a tough couple of years. You're quite right. But so ah this capital raise allows us to reset, sort of the balance sheet, and I think the future looks bright.