Regional REIT in last chance saloon with proposed equity raise

Regional REIT has announced a capital raising of £110.5m through a fully underwritten placing. The company has also announced a 1 for 10 share consolidation.

The capital raising, which is being underwritten by Bridgemere Investments, will enable the company to fully repay a £50m retail bond that is due to mature in August.

The remainder of the proceeds will be split with £26.3m used to reduce bank facilities and £28.4m to provide flexibility to fund selective capital expenditure on assets.

As a result, the company’s LTV, which had ballooned to 56.8%, will reduce to 40.6% (on a fresh valuation of the portfolio on 21 June 2024 of £647.8m – 31 December 2023: £700.7m) and provide greater headroom under the loan covenants. The company added that the capital expenditure should enhance earnings in the near term and value in the mid to long-term.

Following completion of the capital raising, and subject to shareholder approval, it is proposed that the shares will be consolidated at the ratio of one share for every 10 ordinary shares.

Key Highlights

• Placing, overseas placing and open offer of 1,105,149,821 new ordinary shares at an issue price of 10 pence will raise £110.5m, around £104.7m net of expenses;
• The capital raising is being fully underwritten by Bridgemere, which is part of the Bridgemere group of companies established by Steve Morgan CBE, providing the requisite certainty to recapitalise the company;
• Bridgemere will subscribe for the placing shares at the issue price and the placing shares will be subject to clawback to satisfy valid applications under the open offer and overseas placing;
• The open offer to qualifying shareholders is on the basis of:
  • 15 new ordinary shares for every 7 existing shares
• The issue price represents a discount of 50.4% to the closing price of 20.2 pence and a discount of 82.3% to the latest published NTA per share of 56.4 pence;
• Assuming that admission of the consolidated shares occur, the board’s current intention is to pay 2.2 pence per share in relation to the 2024 Q2 dividend, which is expected to be declared in September 2024;
• Bridgemere has the right to appoint a director for as such time as it holds 10% or more of the shares;
• Kevin McGrath (chairman) and Dan Taylor (non-executive director), having each served nine years, intend to resign as directors as soon as reasonably practicable following the company’s next annual general meeting after the completion of the capital raising.

Company comments:

Kevin McGrath, chairman, said: “Following a comprehensive review of a wide range of options to accelerate a reduction in indebtedness and the repayment of the £50 million retail bond which matures in August 2024, the Board believes this Capital Raising is the best available solution for shareholders. The Capital Raising, supported by Bridgemere, will enable the Company to strengthen significantly Regional REIT’s financial position, reducing indebtedness and provide the Company with greater financial flexibility and liquidity headroom.”

Stephen Inglis, chief executive of London & Scottish Property Investment Management Limited, the asset manager, added: “Since the Covid-19 pandemic the Company has been operating in a challenging environment resulting in the LTV increasing to 56.8% against a target of less than 40%. The fully underwritten and fully pre-emptive Capital Raising provides the best long-term solution to the upcoming retail bond refinancing, will put the Company on a sound footing reducing the LTV to approximately 40% and provide the flexibility to fund capital expenditure on assets to maximise value and income for shareholders over the long term.”

Extraordinary general meeting

The capital raising remains conditional on the approval by the company’s shareholders at the Extraordinary General Meeting, which will take place at 10am on 18 July 2024.

Background and reasons for capital raise

The office sector has been one of the worst performing property sub-sectors due to a number of reasons including the move to flexible working patterns following the pandemic and the higher interest rate environment. The combination resulted in the portfolio being revalued downwards by £116.7m (12.9%) in 2022 and by a further £88.8m (11.2%) in 2023. The fall in value of the portfolio has resulted in the group’s net borrowings as a percentage of portfolio value (LTV) increasing to 55.1% at 31 December 2023 against a targeted LTV of less than 40% and an upper limit of 50%.

The company is currently engaged in an asset disposal programme to help reduce its LTV. Since 31 December 2023, the company has completed 13 disposals and three part sales for a combined £21.9m.

The £50m retail bond is due for redemption on 6 August 2024. The company said that it considered a number of refinancing options (including both equity and debt solutions) but the board has elected to propose its preferred option, the capital raising.

The board said that it believes the capital raising is in the best interests of shareholders because it reduces the group’s LTV and the group will not be constrained by the requirement to pay interest on any debt solution (which, may not be available, is likely to be expensive and is likely to significantly constrain the group’s activities). The directors do not consider that significant asset sales (outside of its existing asset disposal programme) would provide a viable solution due to constraints under the group’s existing bank facilities.

Share consolidation

With the aim of ensuring that the shares trade at a sensible price, increasing market liquidity and reducing the volatility, as well as making the shares more attractive to a broader range of institutional and public investors, following completion of the capital raising, the company also proposes to undertake a reorganisation of its share capital to reduce the number of shares in issue.

Subject to shareholder approval, shares will be consolidated at the ratio of one share for every 10 shares.

Information on Bridgemere

Bridgemere is part of the Bridgemere group of companies, which was established by Steve Morgan CBE in 1996. The Bridgemere group of companies consists of a portfolio of individual businesses and strategic, long-term investments covering a range of sectors, which include housebuilding, land and property development and leisure.

Steve Morgan CBE founded the housebuilder Redrow Plc in the 1970s, and brings experience and knowledge of the property sector. 

The Bridgemere group of companies were cornerstone investors in Tosca Commercial II LP (launched July 2013) and TUKCP Jersey LP (launched July 2014). These funds, together with associated entities, were reorganised in November 2015 to create Regional REIT.

As a result of the placing, Bridgemere’s interest in the company may exceed 30% depending on the take-up of the open offer and overseas placing. Ordinarily, under Rule 9 of the Takeover Code, this would result in Bridgemere being obliged to make a mandatory offer to acquire all of the issued shares not already owned by Bridgemere in cash. However, the Takeover Panel has agreed to waive this obligation.

However, the Takeover Panel has agreed to waive this obligation, subject to approval by shareholders. Accordingly, the Rule 9 Waiver Resolution will be proposed at the EGM. In the event that the Rule 9 Waiver Resolution is not passed the capital raising will not proceed.