Regional REIT Limited (RGL) Earnings Call Transcript & Summary

Good morning, and welcome to the Regional REIT Limited Full Year Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Stephen Inglis, Chief Executive Officer. Good morning, sir.

Thank you, Paul. Good morning, everyone, and welcome to the presentation of the results of Regional REIT for the period ending 31st December 2025. This morning, I'll take you through the results for 2025 and then spend a bit of time updating you on the continued progress that is being made towards our strategic goals as well as what we are witnessing in the marketplace. As Paul mentioned, we are happy to take questions. We will deal with them at the end of the presentation. Those that we don't get around to, we will, of course, respond to as soon as we possibly can. If I may introduce this morning's team from Regional REIT. I'm joined -- I'm Stephen Inglis, Chief Executive Officer of ESR LSPIM, Regional REIT's Manager. I'm joined by Alistair Hewitt, the Finance Director; by Simon Marriott, our Property Investment Director; and by Adam Dickinson, our Investor Relations Director. I'll start by stating that it's been a difficult year for the company with continuing headwinds of higher interest rates, many key government initiatives creating issues for U.K. businesses, ultimately our customers and of course, the uncertainty created by the broader macroeconomic and geopolitical backdrop. The environment undoubtedly has had an impact on U.K. businesses, which has resulted in a slower leasing market than we had anticipated at the beginning of 2025. Despite this, the company has made good progress over the past 12 months. If we move to Slide 3, please, Adam. We have delivered on our targeted sales program with GBP 51.6 million of sales ahead of our estimate GBP 40 million to GBP 50 million, which was essential in reducing debt and improving the position of the company in relation to void costs. The banking facility, which had been due to expire in August 2026 was refinanced, improving cash flow management. The company also renegotiated the terms of the management contract, creating much greater alignment between the manager and the shareholders but also generating substantial annual operational savings. And of course, we delivered a 10p per share fully covered dividend. As we reported in 2025, during the year, we experienced several large unexpected tenant breaks, which had an initial impact on income in 2025, though the full effect of these will be felt in 2026. As a consequence of this and the Board's wish to retain cash for accretive reinvestment into the portfolio, we are targeting a prudent dividend of 8p per share in 2026. So let me take you through the salient points for the year to 31st December 2025. A few highlights then. We continue with our efforts to reposition the portfolio with capital expenditure in the period up from GBP 8.2 million in 2024 to GBP 11.8 million in 2025. Despite the slow leasing market, we still delivered 64 new lettings and encouragingly at rents 3.9% ahead of ERV, showing further signs of rental growth for the right product. EPRA occupancy at 76% is slightly down on last year, largely as a result of the 3 large breaks exercised in 2025. EPRA EPS in the year was 11.8p per share, which more than fully covered the 10p dividend for the year 2025. Through our strategic sales program, we've been able to manage down the LTV to just over 40% from just over 42% despite the drop in valuation. Gross borrowings, you will note have decreased to GBP 266.2 million with GBP 50.5 million of debt repaid in the period. Moving on, Adam, please, Slide 5. Just looking at the strategic sales program. We sold 18 assets in 2025 for GBP 51.6 million, and the sales program continues to gain momentum. This is evidenced by a further 5 sales completed post year for GBP 12.3 million. And together with this, we have a further 14 sales well advanced, either contracted in hands or where terms have been agreed, which totaled a further GBP 29 million. You will note from the slide that the 2026 sales, the vast majority almost 80% are from the noncore underperforming assets contained in the sales segment of the portfolio and the average occupancy of these on sales undertaken to date, 22% and those sales, which we hope to complete by the half year, only 27%. So on completion, the disposal of these assets will improve net income by GBP 2.1 million, again, emphasizing the importance of disposing of void or largely void assets, which are a significant drain on the net income position of the company given the landlord void costs. Moving on, Adam, please. We continue to reposition the portfolio, and you'll note average rents have been increasing. We are seeing a slight increase in average leasing size and are in discussions on several large space requirements at this time. It's too early to say whether this is a trend or it is encouraging as many of these requirements are tenants upsizing. Slide 7, please, Adam. This is a map familiar to most of you have seen our presentations before, showing the U.K. and obviously, our assets geographically spread across the U.K. are in the major conurbations. I also highlight some of the core deals undertaken over the year. So many of you have seen in the half year but of note and taken in the second half of the year are the letting to Securigroup at 300 Bath Street. Park House, Bristol, where we let 10,000 square feet to Oak Tree Mobility at rent of refurbished space at GBP 23 per square foot. Origin 1 & 2 at Crawley, where we've let just under 8,000 square feet to Menzies and a rent of GBP 27.50 per square foot and DMH Stallard, again at GBP 27.50 per square foot. Encouragingly, where we are spending CapEx and refurbishing space, rents typically are in the range of GBP 20 to GBP 30 a square foot, so considerably higher than the GBP 15.60 average rent across the portfolio. Slide 8, please, Adam. A quick look at the segmentation of the portfolio. Just looking at the major changes, you'll note that the sales element has increased and the value-add element decreased. This is mainly as a result of the slower development market with the long promised planning changes yet to make a material impact and increased costs, particularly the delivery of beds, i.e. residential and PBSA, making schemes less profitable, which has resulted in land values coming under pressure. Where we are holding vacant or largely vacant assets, which, of course, are more readily salable to developers on a case-by-case basis, we are choosing to sell now and recycle that capital in terms of debt and into our CapEx program rather than progressing planning as this results in a reduction of void costs, debt levels and interest payments. Core and CapEx, the core remains over 80% of the portfolio and occupancy levels have held up well with core at over 86% occupancy and CapEx to core growing occupancy as we undertake the refurbishment projects. Slide 10, please, Adam. Now looking at the trends of regional offices in respect to supply and demand. We are seeing continuing demand for offices with a 2025 number in line with recent years and rental growth continues to tick up. You'll see from the top right-hand graph, the average rental growth in 2025 in the regions was 3.2%, slightly ahead of London, and that's very much in line with what we have seen in our portfolio, which to reiterate saw net lettings delivered on average at 3.9% ahead of ERV. Occupiers are from a very broad range of uses, the largest being the professional sector, which accounted for just over 25%, education and health sector, almost 16% and technology at 14%. Slide 11, Adam, please. We'll now look at the supply side and development of new stock. Firstly, let's look at construction. Whilst we are still seeing stock being completed, you'll see from the bottom right-hand chart that this is diminishing. Developments in -- commenced in '23 and '24 are now being completed. And whilst we see delivery in -- a large delivery in 2027, it falls off a cliff in 2028 and little or no new development beyond that. Indeed, in total, Avison Young estimate that only 2.5 million square feet is under construction, a very, very small number in terms of the overall market. And this will continue to fall as there's little or no new starts. If you look at the left-hand graph there, that is construction new starts, and it really is a very diminishing story, very little in the way of new starts at all. So very little new construction. Construction starts the weakest they've been for 15 years. Then existing supply, the top right-hand side, I've mentioned many times the flight to quality, grade A space conforming to EPC A and B is what the majority of occupiers are seeking, and that's been borne out in terms of lettings undertaken in 2025. Prime stock is very limited indeed just 5% of total availability. And as I say, with little or no new developments commencing, this will continue to decrease. Grade A availability, which is the green, is also decreasing with the vast majority of the available stock being grade B or C, and this is not what the vast majority of occupiers are seeking. With demand holding and there being little or no new prime stock expected to be delivered beyond 2028, then tenants are left with a few options. They can continue to occupy substandard accommodation, which is noncompliant and not really meeting their needs or more importantly, the needs of their staff or they can relocate to the next best available space, i.e., grade A accommodation conforming to EPC A or B, which is exactly what we offer and are striving to offer with our CapEx program. We have strong conviction that not all companies require the very best prime space at rents that will soon be in excess of GBP 50 per square foot but rather the majority of the market will seek very good quality grade A space, and this will push rents for this accommodation, which will still be in short supply towards an average above GBP 30 a square foot over the medium term. Remember, I mentioned earlier that our refurbished space is achieving rents of between GBP 20 and GBP 30. We have no doubt that, that rental growth will continue and that rents for good quality grade A space will exceed GBP 30. This still represents a substantial discount to prime. Next slide, please, Adam. We continue to invest in the portfolio and upgrade the quality of our properties. In 2025, we completed 18 projects for just over GBP 10 million. We're currently on site on a further 10 projects for GBP 4 million and due to commence an additional 13 projects, which we estimate will cost in the reach of GBP 9.4 million. And on the right, there are just some thumbnails of a few of the projects completed in 2025. 13, please. Thanks, Adam. Now talking through some of the case studies, which demonstrates our strategy in action. On the left, the CapEx project at Milton Keynes that has completed, delivering improvements that have allowed us to push rents up with the latest renewal taking place at GBP 21 per square foot, up from GBP 18 per square foot previously being charged, an increase of over 16%. The expansion not only delivered improvement in income, but also delivered a 7.5% improvement in value. On the right-hand side, I think is a good example of how a small amount of CapEx can improve the long-term viability of an asset. Here, we invested GBP 200,000 in works, which took the building from EPC C to B and in doing so, helped us secure a lease extension with one of the main tenants. So not huge expenditure to improve the EPC ratings. Next slide, please, Adam. As a reminder of how CapEx can deliver both improved leasing outcomes and a higher sales price, this is a property in Bedford that we sold in 2025. The CapEx works we undertook improved the EPC rating. The tenant renewed on a long-term lease. And at the end of business plan, we sold the asset for a profit to book value. This in itself helped to reduce the company's gearing and helped us in our ability to refinance the facility announced earlier that we refinanced in December 2025. Slide 15, please, Adam. Further examples of improvements. Now again, EPC improvement from C to A build partnerships has led 3,500 square feet of space at GBP 20.63, previous passing rents on this business park, GBP 14 to GBP 16 per square foot, so a large improvement. Slide 16, please, Adam. Another successful project where we've upgraded the building from EPC D to A in this instance, and we successfully leased the vacant accommodation and achieved an 18.5% uplift in the previous passing rent. Value add remains a key segment of the portfolio. And whilst I mentioned earlier, the difficulties still being witnessed in the planning regime, nevertheless, we are still taking many projects through the planning process where we believe there is meaningful value-add opportunities to be unlocked. There's still no intention of undertaking direct development of these assets, rather, we will improve the use, improve the value and sell. ESG remains a very important component in tenants decision-making processes when seeking office accommodation. We continue to make good progress in improving the EPC ratings. And over 60% of our portfolio is now EPC A or B and a further 25% at C. I think given the examples that I showed, the small amounts of money can improve C to an A or C to a B, making them compliant. Given the ongoing sales and CapEx programs, this will allow us to continue to improve the portfolio and the majority of the EPC D and E and below-rated assets are part of the sales program. There remains a structural issue in the U.K. commercial real estate sector in respect of EPCs with the British Property Federation estimating that only 19% of commercial real estate buildings in the U.K. currently meet the 2030 standard. This really highlights the scale of the opportunity for regional REIT. As you can see from this slide, our 4D installation program has been installed in 46 locations with the next phase about to commence. This is a sophisticated monitoring of energy and operating systems and improves both EPC ratings and delivers potentially substantial financial benefits. We have now the opportunity to analyze the information gathered from the first 4 assets, and this identified savings of GBP 160,000 per annum to Regional REIT over and above savings to our occupiers. This, along with the additional 42 properties once implemented, could provide substantial savings to operating costs. We will, of course, provide further updates to shareholders on this as we continue our rollout and analysis information has been witnessed. The solar initiative continues to be rolled out across the portfolio, 6 sites completed online with a further 14 due to be completed soon with additional install phases planned. The current 6 sites are producing 1,385 kilowatts, the equivalent of powering 1,600 homes annually. And of course, there's a carbon reduction, we expect to be at 910 tonnes of reduced CO2 emissions. Total CO2 avoided from both projects is 122,000 tonnes from 10 properties. And this obviously will increase substantially as we analyze and roll out both solar and 4D across the rest of the portfolio. Finally, on this slide, we have officially launched Reflex, Regional REIT's flexible workspace offering, which we intend to roll out across 10 sites in the short term. Okay. Slide 22 is our debt slide. So I'll hand over to Alistair to cover the debt.

That slide shows the summary of our debt facilities at the year-end. As Stephen mentioned, we achieved the refinancing of our syndicated facility, and there's also been a continued focus on degearing with GBP 50.5 million repaid in the year, the bulk of that coming from property sales. Post the year-end, we have repaid GBP 7.8 million of debt and are about to repay GBP 3.7 million, taking the total repayments for the year-to-date to GBP 11.5 million. As I mentioned, we've refinanced the facility we had with RBS, Bank of Scotland and Barclays, and we refinanced that with Santander coming in to replace Barclays. That facility now expires in December 2028. The existing hedging that's shown on the table, that's in place until August 2026, but we've now entered into new hedging, which takes us from the period of August '26 to the maturity date in December 2028. That hedging has obviously increased in price given the market rates. So the strike rate in the new hedging is 3.56% against the blend of 0.98% is shown on the table. So an increase of just under 2.6%. The overhedge position at the year-end, I think it notes in the table there was 101% hedging. That's now been rectified. So the debt facility is now back to be fully hedged. Going forward, our focus is shifting towards the refinancing of the Scottish Widows and Aviva facility, which matures in December 2027. We are likely to have to do some housekeeping in that facility to reduce the LTV in advance of the refinancing. But we have started initial discussions with the existing lenders and we look to continue over the next weeks and months. Our aim is to have that facility refinanced by this time next year but we have to be mindful that refinancing early will result in an increased cost as it's a fixed rate facility rather than a swap term facility. So we don't have the same ability to roll forward the hedging as we did with the recently refinanced facility.

Okay. Thank, Alistair. Okay, Adam, if we can move on. So key metrics overview. I mean this is a summary of what we've just been discussing. So I don't intend to go into this in any detail. As we have discussed earlier and have previously announced to the market, the year-end, we had GBP 552.2 million of assets, reduction from the previous year coming from sales and a small proportion being the valuation decrease of 5% like-for-like. On the small acquisition, this relates to a purchase of Leeds, which is the final piece of the jigsaw on a large development site that we are taking forward in Leeds City Center. And now it means we have complete control over the entire site. And then at the bottom there, you see dividends declared in the year at 10p per share. Next few slides are the bridges in terms of first one, obviously, in terms of value, showing the -- how we arrived at the GBP 552 million of value. Slide 25, the bridge of income and earnings, showing the GBP 19.1 million that was estimated and we obviously came in, in line with the anticipated numbers. Slide 26, the balance sheet overview, again, showing the GBP 315 million EPRA NTA as at 31st December 2025. Okay. So looking at strategic priorities. We remain committed to reducing debt and aim to have LTV below 40% in the very near term. We continue to focus on driving income at a headline level by creating better quality space to fuel leasing activity but also on a net basis by reducing void costs and by a combination of new lettings and the sale of lower occupancy nonperforming assets. We continue to improve our EPC numbers and our overall ESG ratings, which is key and represents a pathway to fueling demand. We remain focused on pursuing opportunities to add value to some of the assets by fully investigating change of use options. And we are, of course, committed to paying an attractive fully covered and sustainable dividend. So to round up, clearly, we remain in a period of instability given everything that is going on in Ukraine and the Middle East. The U.K. real estate market will not be immune from cost pressures and the cost of energy in particular. And therefore, we are hopeful that this will be a short-term scenario. The impact, however, to the occupational and investment markets is still unknown, and therefore, we must continue to deliver on our plan to reduce gearing and improve net income through all of the measures I have previously discussed. We must strive to put the company in a stronger position that it can be to withstand whatever is ahead. There remains a structural supply and demand imbalance in the regional office sector, which is only likely to strengthen given the severe lack of new site starts. With our attractive energy-efficient spaces across the U.K., Regional REIT is well placed to benefit from ongoing demand as market conditions stabilize. That is the end of our presentation, and we will now happily deal with some of the questions that have been submitted.

Fantastic. Thank you very much indeed for your presentation. [Operator Instructions] I'd like to remind you that the recording of this presentation along with a copy of slides and the published Q&A can be accessed via investor dashboards your investor dashboard. As you can see, we've received a large number of questions throughout today's presentation. Thank you to all the investors for submitting those. I'd now like to hand you over to Adam Dickinson to host the Q&A. Adam, can I please just ask you to read out the question where appropriate to do so direct it to the team, I'll pick up from you at the end.

Thank you, Paul. Stephen, a number of questions have come in. One of them, could you just provide a little bit more color on the valuation decrease in 2025?

Yes. I mean the -- I think I mentioned at the half year, I did mention at the half year that we saw a stabilization in terms of yields at the June half year valuation. That was also the case in December. So this isn't a market decrease. Yields have actually stabilized. This was down to a change in income and specifically the 3 large tenants that we lost over the course of 2025. Those 3 tenants alone accounted for just over 50% of the valuation change. So as the market has stabilized in terms of yields. Those yields obviously are multiple, then you apply the multiple to the income to get to your end value. So it was a loss of income that created the issue for us, not a declining market conditions.

Thank you. And then another couple of questions on CapEx. What is the CapEx program for 2026? And will it be equal to 2025? And in terms of when allocating the CapEx for CapEx to core, what is the return expected or targeted?

Yes. I think we obviously stated the numbers earlier in the presentation of what is on site now and what is likely to come on site. So expenditure likely to be in line with 2025, the GBP 10 million to GBP 12 million figure. We obviously accelerated some of our CapEx program in 2025, and we want to continue that momentum over the course of '26 and indeed '27. So yes, we want to create high-quality let ready space in order to capture the demand that's out there. So we will continue at the same level. In terms of returns, we have an internal return target that we look to hit, which is 1.5x the capital deployed. So we want to see that capital improvement in terms of the value and also 10% in terms of income. So we want to try and generate a 10% income return from that CapEx in order to obviously fulfill our desire to pay as high a dividend as possible. So they are the kind of parameters that we work to. There is flexibility in that. Some of our CapEx is required sometimes for defensive CapEx if there are specific items required to be done to buildings, which sometimes doesn't add value. But on the whole, our CapEx is accretive for CapEx that we are improving value and improving lettability.

Question on disposals. Could you give a little bit of rationale for the type of assets that are being sold?

Yes. I think I did see a question earlier in connection with you did sell some income last year rather than purely the non-income and poor performing assets. That is true. The -- I mentioned in the presentation, the Bedford property. That was an end of business plan asset. Would we have liked to have held that? Yes, but we had to put the facility that we refinanced in December into a position to be refinanced, and therefore, that was sold to pay down debt in order to refinance that facility. We did sell some income last year for the same reason. But the desire is definitely to focus on the poor performing assets from an income perspective that are a drag on NOI, and I think we've demonstrated that in terms of the sales that we've undertaken so far this year and those that we hope to complete over the coming weeks and months that are under offer or indeed already contracted. So when we look at those numbers, they are quite meaningful. The sales so far occupancy level is only 22% and a drag on NOI. And on the sales that we are hoping to complete in the short term, occupancy just over 27%, again, a large drag on NOI. So void costs are a major issue, and we're trying to tackle them by a combination of sales and upgrading space and leasing it. And of course, as we lease that space, those obligations become the occupiers.