Regional buys bargains from ‘embarrassed’ open-end property funds

‘I don’t want to crow too much because it’s embarrassing for the funds but they are taking a significant haircut,’ says manager of high-yielding real estate investment trust.

Regional (RGL ), one of the best-performing UK real estate investment trusts this year, has barely dipped into the £62.5 million it raised from investors in July but has already started snapping up bargains from distressed open-ended property funds.

Last month the £439 million listed fund, which focuses on commercial property outside the M25 London orbital road, bought a portfolio of six offices in Birmingham, Bristol, Cardiff, Chester, Glasgow, and Manchester for £25.9 million.

The 172,4442 square feet of assets let to 27 tenants on average unexpired leases of 4.9 years were priced to go. The properties are expected to generate rent of £2.36 million, equating to a net initial yield of 8.87%.

It also spent £2.5 million on a fully-let industrial property in Scotland with a net initial yield of 15.2% and 6.7 year unexpired lease.

Simon Marriott, investment director at London & Scottish Property, the trust’s fund manager, said the transactions were evidence that closed-end funds like Regional were able to exploit forced selling by open-ended property funds struggling with investors pulling their money out.

‘I don’t want to crow too much because it’s embarrassing for the funds [we are buying from] but they are taking a significant haircut,’ he told Investment Trust Insider after its half-year results.

‘The pressure to sell [for open-ended funds] is getting more intense,’ he said. ‘It is self-perpetuating – they are selling to fund the redemptions they have had already but many funds are gated so when they reopen there will be another queue of redemptions so the pressure [to sell] will not ease up, and hopefully that means more bargains for us.’

The Reit, which targets offices and industrial estates and has only 6% in retail, tested investor confidence in June with a oversubscribed placing of new shares issued at discount to their net asset value (NAV).

Marriot said most of the money for the acquisition had been ‘recycled’ from earlier disposals leaving it with plenty of cash and borrowing to pursue the ‘deep pipeline’ he saw of properties at good valuations.

He said Regional had become a ‘buyer of choice’ and predicted there would ‘definitely be more [fire-sales]’ on which to spend its war-chest.
At the half-year end, before the latest acquisitions, Regional owned 149 properties with 1,178 units and 828 tenants, 78% of them offices.

Using the property industry EPRA standard, Regional’s NAV dipped 1.2p or 1% to 114.3p per share in the six months to 30 June as a result of capital spending refurbishing properties.

Dividends of 3.8p were covered by earnings and leave Regional on track for its full-year target of 8.25p per share and a prospective yield of 7.8%, one of the highest in its sector.

Total returns on net assets, including dividends, rose 2.8%.

Brexit uncertainty has led to investor uncertainty over property portfolios and has pushed some Reits to lower their loan-to-value (LTV) to better weather any downturn in the market.

Regional, however, is happy with gearing of 40%. Derek McDonald, managing director of the asset manager, said Regional had ‘sorted out’ its borrowings with two re-financings that had reduced its cost of debt from 3.8% to 3.5%.

‘All of our debt is fixed or hedged so we do not have interest rate risk,’ he said.

‘I was a banker for years and I have been fascinated since moving to this world [of trusts] that people perceive a greater risk if the LTV is at 40% rather than at 30% - there’s not…the margins between them is no different.’

He said the fund could afford to see a third of the value of its assets fall before the LTV and trust’s income came under pressure.

‘In the sector there is pressure to go down to 30% [gearing] but we are comfortable at 40% - if we lowered the LTV, we’d lower the dividend,’ said McDonald.

Regional shares have shot up nearly 17% this year and closed the gap to their NAV from 18% to around 10%. This is an improvement on the previous three years when NAV has grown 29% but shareholder returns lagged at 15.5%, according to Numis Securities data.

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