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Regional REIT’s valuations hit by rising interest rates

Regional REIT saw its net asset value fall 24.4% in annual results to 31 December 2022, primarily as a consequence of rising interest rates affecting valuations in the property sector.

The group’s EPRA net tangible assets (NTA) was 73.5p per share at the end of the year, compared to 97.2p a year prior. This was in part due to a 12.1% like-for-like drop in the value of its regional office portfolio to £789.5m (2021: £906.1m).

Operationally, the group’s net rental income increased by 12.2% to £62.6m (2021: £55.8m) – reflecting a large portfolio acquisition in August 2021, with a rent roll of £71.8m (2021: £72.1m). The average rent let by sq.ft. increased by 7.0% to £13.65.

EPRA earnings per share was 6.6p (2021: 6.6p), which fully covered the 2022 dividend of 6.6p (2021: 6.5p).

The group’s cost of debt (including hedging) was 3.5% (2021: 3.3%), with 100% fixed and hedged (ensuring the maximum cost of debt will not exceed 3.5%). The weighted average debt duration was 4.5 years (2021: 5.5 years)

The net LTV increased to 49.5% (2021: 42.4%), due to the reduction in portfolio valuation.

Operational highlights

The group’s portfolio consists of 154 properties (2021: 168), 1,552 units (2021: 1,511) and 1,076 occupiers (2021: 1,077).

It sold £84.1m worth of property during 2022, the proceeds of which were recycled into acquiring £74.7m of assets. 

It completed 114 new lettings in 2022, totalling 330,173 sq. ft., which will provide gross rental income of £5.9m. At the end of the year EPRA occupancy (by ERV) was 83.4% (2021: 81.8%).

Manager Stephen Inglis, commented:

“Following the turmoil of the pandemic, 2022 was an operationally strong year with earnings accretive asset recycling of £84.1m (after costs) of disposals and £74.7m (before costs) of acquisitions in areas identified as growth regions across the UK.

“The macro-economic environment provided significant headwinds for REITs in 2022 and was one of the most challenging years we have seen for the property sector in some time, as inflation has driven costs upwards and the increase in interest rates impacted valuations. We have not been immune to these challenges, with rising energy costs putting pressure on net earnings and the portfolio valuation decreasing by 12.9% to £789.5m, versus the MSCI Rest of UK Office decline of 17.3%; reflecting a decrease of 12.1% on a like-for-like basis, after adjusting for acquisitions, disposals and capital expenditure.

“In spite of all of the challenges, robust rent collections of 99% for the twelve months ended 31 December 2022 enabled the delivery of a covered dividend of 6.6pps, which we had indicated at the beginning of 2022. I would like to take this opportunity to thank my team for all their hard work and yet again delivering for our shareholders.

“As previously announced, a November 2022 study of our tenant’s active occupation noted 99% of our tenant roster had returned to the office in some form, with only 12 tenants still to return, and we are witnessing increasing numbers of employees returning across all regions of the UK. I have consistently stated that it will be the end of 2023 and into 2024 before we see any long term trends emerging as companies see employees return to the office in numbers, which will then determine what works best for their business and their employees. It is clear there will not be a one size fits all strategy. However, the clear anecdotal evidence convinces me that most businesses will end up with the majority of people in the office the majority of time, which remains supportive for overall demand in our sector.”

RGL : Regional REIT’s valuations hit by rising interest rates

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