30th Mar 2022 17:32
(Alliance News) - Shore Capital reiterated its 'buy' recommendation for London-based real estate investment trust Regional REIT Ltd on Wednesday after it posted "robust" annual results on Tuesday.
Shares in Regional REIT closed 0.2% lower in London on Wednesday at 87.90 pence each, and has shed 6.2% in 2022, so far.
"We believe the company is well placed to achieve underlying rental growth of 3% over the next 4 years coupled with an average NAV-based return of 10%. We therefore ascribe a 5% premium to our base case scenario, giving an implied fair value of parity with FY22F NAV at 100p per share. This implies 14% upside to the current share price and we reiterate our buy recommendation," Shore said.
For 2021, Regional REIT swung to pretax profit of GBP28.8 million from loss of GBP31.2 million the year before, due to a narrowed loss in the fair value of investment properties, and a 4.3% increase in net rental and property income to GBP55.8 million from GBP53.3 million.
"The trading environment in regional offices looks to offer a cautiously optimistic outlook for growth and, with a portfolio increasingly weighted toward this, the company looks well placed to benefit from our expectation of improving asset valuations. Furthermore, continued strong rent collection and the capture of reversionary value should help underpin a progressive dividend stream," Shore analyst Andrew Saunders said.
It declared a dividend of 6.50 pence per share in 2021, up from 6.40p in 2020.
Saunders noted the firm is looking to refine its portfolio, moving progressively towards regional offices which accounted for 89.8% of the portfolio by value at the end of 2021, rising from 83.5% the year prior.
"We would expect Regional REIT to continue to increase its exposure to regional offices and anticipate further capital recycling of industrial assets along with ongoing investment into upgrading the EPC credentials of existing underperforming assets," he continued.
Adding: "We were reassured to see the like-for-like portfolio benefit from a valuation increase of 110bps, following periods of recent uncertainty in office valuations, and expect improved market visibility for valuers will benefit the portfolio valuation favourably in 2022."
Regional REIT's rent roll rose 12% to GBP72.1 million from GBP64.2 million, while as at December 31, net asset value per share dips to 97.4 pence from 97.5p, in spite of a 24% rise in portfolio value to GBP906.1 million from GBP732.4 million."
A part of this growth can be attributed, Shore noted, to the regional office market outperforming London, both in terms of capital being committed in the investor market and rental growth in the occupier market.
"The former seeing annual investment 12.0% above the five-year average relative to lower London volumes, that were down relative to trend with 2021 falling 6.0% below the five-year average," Saunders said.
He added: "Rental value growth held up better for the rest of UK office markets in the 12 months ended December 2021 with growth of 1.4%, whereas central London offices only experienced modest growth of 0.2% during 2021.
"The supply of regional offices has also reduced progressively over recent years, as permitted development has seen many city-centre assets repurposed/redeveloped as hotels, student accommodation and residential. This reducing supply has generally been supportive to rents and yields and should remain a positive long-term factor in our view."
By Paul McGowan; [email protected]
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