Interest rate rises hit property group Regional REIT’s interim figures

Property firm Regional REIT has been impacted by rapidly rising interest rates, for its six month period to June 30, 2023, it revealed today (September 12).

The firm, which has offices in Old Trafford overseeing properties throughout the North West, reported lower turnover and a pre-tax loss.

Unaudited revenues were £44.415m, compared with £45.211m the previous year. Having achieved a pre-tax profit of £28.252m in 2022, the group posted a pre-tax loss of £12.135m for the 2023 interim period.

Consequently, it has cut its second quarter dividend from 1.65p per share a year ago, to 1.20p. The first half dividend of 2.85p is reduced from 3.30p per share, due to challenging macroeconomic conditions. In accordance with the board’s strategy, the dividend continues to be aligned with earnings going forward.

Total rent collection for the six month period was 98.8% of rent due, ahead of the 97.8% of rent collected for the equivalent period in 2022.

The rent roll was broadly unchanged at £69.8m (30 June 2022: £72.0m; 31 December 2022: £71.8m), while the portfolio valuation of £752.2m dropped from £789.5m, as at December 31, 2022. On a like-for-like basis, the portfolio value decreased by 3.8%, after adjusting for capital expenditure and disposals during the period.

The group’s cost of debt, including hedging, remained low at 3.5% pa, the same as at December 31, 2022, 100% fixed, swapped or capped.

Net LTV (loan to value) of 51.9% compares with 49.5% at December 31, 2022, and, currently, a programme of asset management initiatives and disposals are in train to reduce LTV to the long term target of 40%.

At the period end, 92% (December 31, 2022: 91.8%) of the portfolio by valuation was offices, 3.5% retail (December 31, 2022: 3.6%), three per cent industrial (December 31, 2022: 3.1%) and 1.5% other (December 31, 2022:1.4%).

By income, office assets accounted for 91.4% of gross rental income (June 30, 2022: 91.5%; December 31, 2022: 91.5%) and 4.6% (June 2022: 4.5%, December 2022: 4.5%) was retail. The balance was made up of industrial, 2.7% (June 2022: 2.6%, December 2022: 2.6%), and other, 1.4% (June 2022: 1.5%, December 2022: 1.3%)

The portfolio remained diversified with 150 properties (December 31, 2022: 154), 1,535 units (1,552) and 1,038 tenants (1,076).

The group made disposals amounting to £14.6m, before costs, during the period, yielding 2.4% (9.4% excluding vacant assets). The proceeds have since been used in part to reduce borrowing and fund capital expenditure.

During the period, the company completed 45 new lettings. When fully occupied, these will provide an additional gross rental income of around £1.2m per annum, 13.5% above December 2022 ERV.

Stephen Inglis, CEO of London and Scottish Property Investment Management, the asset manager, said: “It has been another challenging period for the commercial real estate sector as rapidly rising interest rates continued to impact valuations.

“During the six months to 30 June 2023, the company’s portfolio valuation declined on a like-for-like basis by 3.8%, after adjusting for disposals and capital expenditure, outperforming the MSCI UK regional office benchmark, which saw a decline of 7.2% over the same period.

“This has resulted in the increase of the company’s loan to value to 51.9%. Thanks to the defensive debt positioning being 100% fixed, swapped or capped, the weighted average cost of debt remains at 3.5%.”

He added: “The asset manager continues to implement its active asset management strategy, including a programme of asset sales to reduce net borrowings back to the company’s long term c.40% target.

“With the challenging economic backdrop our net rental income has been adversely impacted by higher non-recoverable property costs and lower income from lease surrender, dilapidations payments and other income. As such the board continues to align the dividend with earnings.

“As we look ahead, we remain wholly committed to reducing the LTV, improving occupancy and the portfolio’s weighted average EPC rating as we actively manage the portfolio.”