The property investment trust that pays a fully covered yield of 7.5%

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The property investment trust that pays a fully covered yield of 7.5%
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Income investors will always be attracted to higher yielding opportunities, but it is rare to find one where the income is fully covered by a sustainable stream of earnings like the Regional REIT (LON: RGL).

The £815m Regional REIT (LON:RGL) invests in a diversified portfolio of UK regional offices that benefits from a strong tenant base. This is an area of the market that looks well placed to prosper following years of undersupply.

Most mainstream UK property investment trusts are trading at sizeable discounts to NAV because of the uncertainty over Brexit and challenges facing the retail sector. RGL, however, looks to be in a stronger position, hence the reason its share price is very close to the underlying value of the assets.

Regional REIT is more of an income opportunity as it pays a fully covered dividend yield of almost 7.5% with quarterly distributions. Its strategy is to identify attractive off-market acquisition targets and then improve the rental income and valuation through asset management. The property will then either be sold or held for income.

At the end of June the portfolio consisted of 149 different properties located around the UK, of which almost 80% by value were offices and 14% light industrial. These were let to a total of 828 tenants with a weighted average unexpired lease term of 5.5 years.

Annualised total return of 9.8%

From the IPO in November 2015 to the end of June, the date of the latest accounts, the fund generated a total shareholder return of 40.8%, which includes a creditable 2.8% during the challenging conditions that prevailed in the first six months of the year. This is equivalent to an annualised total return of 9.8%.

Net debt at the end of June was equal to 40% of the gross investment in properties, a figure that is in line with the manager’s long-term target ratio. The average cost of these loans is 3.5% and they have a weighted average unexpired term to maturity of 7.8 years. Almost three-quarters of the debt is fixed, with the balance hedged to guard against any increase in rates, which suggests that they are well protected.

There has been a considerable reduction in investment levels in commercial property throughout the UK due to investors delaying decision making until the UK’s future with Europe becomes clearer. Hopefully the forthcoming general election will take us closer to some sort of resolution that will unlock the pent up demand.

Favourable supply and demand dynamics

According to Cushman & Wakefield, availability for regional office stock in the first half of the year decreased to 7.7m square feet, the lowest level for 13 years and 35% below the ten-year quarterly average, reflecting a vacancy rate of 7.1%. The limited development pipeline will most likely put pressure on supply and vacancies, especially as half of the office buildings that are currently under construction have been pre-let.

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At the end of June the fund’s property portfolio was valued at £721.7m and had an EPRA occupancy rate of 87.5%. The gross rental income was £57.8m and if fully occupied would have been £71.4m. In the first six months of the year the EPRA earnings per share of 3.8p were fully distributed as dividends, with the manager adopting a progressive dividend policy.

Since the end of June the fund has raised additional share capital of £62.5m that has been used to finance two significant acquisitions of offices. These offered net initial yields of 8.9% and 8.7% respectively, with the manager seeing ‘an increasingly attractive pipeline’ of opportunities.

As long as the economy isn’t derailed by Brexit, the Regional REIT looks like a decent bet to provide a high and rising source of income.

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