2. Bull, Bear & Beyond – Regional REIT: executive interview

[Music] I'm Martin King, probably an artist at Edison Investment Research, and I'm here today with Stephen Ingles, who's going to talk about the regional REIT capital raise. Stephen is chief executive of London and Scottish Property Investment Management, which is the external investment manager for regional REIT. Stephen, welcome. Good morning, Martin. Most listeners, Stephen, will be familiar with the background to the capital raise, but for those who aren't, could you give a high level background? Sure. I mean, the capital raise or debt solution for replacement of our retail bond has been discussed. Time again, over the last few months, the company has been looking for a solution to repain its retail bond, which is due to be redeemed August 6th of this year. So that's kind of the background. The board has determined that an equity solution is the best solution for shareholders and the long-term future of the company, and thus the recently announced capital raise. Thank you. Can you talk about the proceeds that you are looking to raise and how you're going to deploy this? Yes, I mean, the capital raise is targeting 110.5 million pounds, of that the 50 million pounds will be used to repay the bond, and of the remainder, 26 million are thereabouts for repayment of some of the senior debt facilities or pay down to a level of 50% or below, and the remainder utilized for a creative capex. So capex is going to improve the company's income, and by virtue of improving the income, the capital value like for like. A little bit about the senior debt position, obviously we have senior debt in place, it's 100% fixed or capped, and therefore people wonder why we're repaying capital or repaying some of that senior debt. Now simple answer is that LTVs have been creeping up, so loan to values on each of the individual facilities, have been creeping up towards the bank coverings of 60% LTV. And we just want to take a protective measure or defensive measure if you like by repaying some of that debt down to a level of 50% or below. And that just gives headroom towards the facilities. In the event there are any unknown factors that we might see over the course of the next few months or years, which of course we've seen plenty over the last few years. And it's even one of the key details that shareholders should be aware of. Yeah, I think if you look at the rationale for the race, obviously the boundary payment is key and Timious, we require to do that. Otherwise we would be in default of the bond and all the ramifications of that. The senior debt position I think is a sensible defensive measure, but the key of this is also about growth and growth of the business, growth of income, growth of capital, and thus the additional amount of you like for capex and working capital. That capex allows us to bring forward projects that have been sold for lack of funding on refurbishment projects and some planning gain projects, which are all hugely accretive to the business, as I said earlier in income terms and of course capital terms. So that, if you like, is the exciting part of the future growth of the business. In the meantime, we will continue to sell down non-core assets and assets that we do not believe we can create real value from. And of course we've been successful in that sales programme to date in achieving valuation levels based on December last year values. And therefore we will continue to do that, which will replenish the capex pot if you like, and therefore it becomes a revolver in terms of that cash facility. So can you talk about something important terms of the issue? Sure, I mean the issue is fully preemptive, so that means that all shareholders can take up their allocation and therefore would not be diluted. It's a fully underwritten issue, underwritten by a family office called Bridgemeer, which is a family office of Steve Morgan, who has a huge experience in the capital markets and was formally chairman and major shareholder at Redro, the house builders. He also, as it happens, was a backer of the original funds which were made up of the reach. So he understands the asset class and he understands the company and indeed the management. So a very good counter party. The issue is at 10 pence or the underwrite is at 10 pence and therefore shareholders will be taking new shares at 10 pence. Now clearly that is a big discount from where shares were trading the day before the announcement. And that was at roughly 21 pence a day before announcement. And that discount is driven really by a number of factors, but one of those is also the underwrite element. So the underwrite effect will be determined surprise. However, the fully preemptive nature means that if all shareholders take up the rights, then the underwrite against those shares. In the event, some people decide not to take up their issuance or their element of the issuance, then the underwrite automatically buys that those remaining shares. So that's the nature of it. The fully preemptive nature we think protects shareholders. We had received a number of proposals from equity houses and wealthy individuals to take stakes in the business, but that would have automatically diluted existing shareholders. I would not in our view have protected their interests in the way a preemptive offer does. So just to be clear on that, Stephen, the offer is not open to new investors other than Ridge Mayor. That's right. It's absolutely only open to existing shareholders. And that's how we're protecting their interests. So no third parties can take part in this issuance. Stephen, can you say a bit more about your Kepx plans? Have you got specific projects in mind or is it more general, but also how you expect that to drive income and valuation? Yeah, it is a good point. No, we're not raising a general pot. This is very much a targeted Kepx program. Those Kepx projects have been identified, costed and allocated. And that is very much the reason for that additional amount being raised. Money's will be expanded on a whole range of factors, but mainly with Furbishment projects, new entrances, gyms, toilet facilities and general office fit out. So that you know, the things that you'd expect us to be to be doing over and above that, there is an element for planning gain, as I would call it. We have been selling assets for alternative use. And by this year nature of not having sufficient capital to undertake planning applications and bear in mind we have 145 buildings. So planning applications across a range of our assets is expensive. But we've been missing out on that element of upside. So we've been selling assets where developers are able to gain upside by achieving planning concerns for the likes of residential or student housing or other alternative. And we want to capture that. So no, very much targeted Kepx program. In terms of return on that Kepx project will return between 1.4 and 2 times money. So you know, in the event we're spending 5 million pounds or investing 5 million pounds of property. We'd expect to see 1.4 to 2 times that amount back in terms of capital growth on those assets. So these are talked about it earlier, highly creative Kepx projects. As David, can you tie your Kepx plans into market trends, market developments? There's obviously been a flight to quality amongst occupiers. And also, you know, one of the trends you're seeing in in in use occupational use of the offices. Yeah, I mean, there definitely is a flight to quality and that that was happening even pre pandemic. Everything. This is a post pandemic phenomena. It's not. You know, people have been seeking better quality offices for some time. Mainly to attract better quality talent. So employment and people are most people's assets, most companies assets. And they want them to occupy high quality space. So high quality space though. Just for definition, doesn't mean superprime. So it doesn't have to be brand new. It doesn't have to be built in the last couple of years of glass and steel. It's all about creating greedy space. The quality of space is what it's all about. And that's what we produce. That's why we're refurbishing our buildings. That's why we have a capital expenditure program, which hopefully will now be fully funded. And that to drive forward that drive to quality. And that quality in our buildings is equal to the super prime in terms of the actual. accommodation. So yes, we're seeing the same trends. The other thing that's happening is as we expend money on our assets to improve them to that greedy specification, we're seeing big increases in rents. So companies are prepared to pay for that better quality space. So there is definitely that trend and that movement. But as I said, that's been a longer term trend, not simply a post pandemic trend. And that's good for us. We're offering greedy space, a big discount to the superprime. Our rental tones are far lower in some cases as low as 50% of that superprime space in some of the key cities. And you've also been reporting strong improvements in the energy performance of the portfolio. How much better have you got to go? Yeah, indeed. So we've made massive gains in terms of EPC improvements. And that has been a very positive aspect of our program of expenditure over the last couple of years. We're well over 50% now EPCB. And as you know, that is the ultimate target EPCB by 2030. And we're well on track to achieve that. That's becoming an increasingly important aspect of occupiers requirements. They want to see, particularly for longer laces, EPCB because clearly they don't want to be positioned where they're occupying EPCC or D space in 2030. And secondly, that ties into the whole ESG agenda. And that also has become a much, much more important aspect of the whole real estate market, not just offices, but specifically in offices. The social impact, the S parts is becoming very important. So we are very focused on ESG. And as a consequence, EPCs and the difference in our EPC ratings in the last year and our ESG scores is showing just how focused we are in that aspect of the business. And Stephen, I know you've done a lot of work internally on this, but can you talk about what you're seeing around the return to the office and office use? Yeah, I think we along with most landlords are seeing an encouraging number of people coming back to the office. So as you already say, we've done quite a lot of work in our portfolio on this. We published some numbers in March, which time 99% of our companies occupying our space were back in. But perhaps the more important dynamic is the number of their staff who were back in. And we're now ahead of pre-pandemic occupancy in terms of our portfolio. Pre-pandemic occupancy was estimated at 70%, and we're at 72% and growing. So that's encouraging. So more people are back in the office now than they were pre-pandemic. And indeed, when you look at the hybrid nature of working in the regional markets, certainly our staff are back 4.2 days a week on average. So that tells us that in general terms, it's four days in the office and one day from home. And that's very strong from an office landlord's point of view. So that's very, very encouraging. We are seeing also a pick up in inquiries. So a number of inquiries in the market is growing. We have seen some stagnation of people signing leases for the last 12 months, and we announced that earlier this year. But that's due to indecision given high interest rates and also stubbornly high inflation. Those numbers, of course, would come down substantially. I think we're beginning to see the benefit of that in terms of inquiries and that ultimately will flow through to new lettings. But probably the benefit would be seen until 2025. And most interesting, I think this is a very interesting point, is that for the first time commentators and forecasters are looking at the office sector outperforming other sectors in the marketplace. So CBRE's latest forecasts show offices as the top performer in terms of total performance. I rent and yield. So total returns stronger over the next five years than all the other competing sectors. I think that's the first time that's happened for some time. I'm already so that's very, very encouraging. It is just a forecast. We concentrate, as you know, on the micro part of the business, which is all about driving rents and like for like that should drive capital values. But if we see some market improvement in terms of yield shift, then that's just an extra bonus. So can I ask you to bring all of that together, Steven, and just summarize what things look like now for investors? Sure. So the capital raise obviously will repay our short-term debt, the 50 million pound bond. It will reduce our overall indebtedness and pay down some of the senior facilities to give the company comfort. It takes the company's LTV from approximately 57% to just over 40%. So a massive reduction in the companies LTV and just reset the balance sheet. Strengths and balance sheet, reset the balance sheet. And at the same time provides us working capital to drive forward rental income and capital values of our assets, all of which will hopefully flow through to the share price in due course. Well, thank you for that, Steven. It's been a tough couple of years, but we very much look forward to following your progress, but it's this issue. No, thank you. It has been a tough couple of years, you're quite right. But this capital raise allows us to reset, start the balance sheet, and I think the future looks bright.