Final Results

Real Estate Investors Plc

(“REI” or the “Company” or the “Group”)

Final Results

For the year ended 31 December 2019

Government Commitment to HS2 Boosts Midlands Markets

Real Estate Investors Plc (AIM: RLE), the UK’s only Midlands-focused Real Estate Investment Trust (REIT) with a portfolio of 1.59 million sq ft of investment property across all sectors, is pleased to report its final results for the year ended 31 December 2019.

Economies of scale driving profitability

·      Annualised contracted income of £17.7 million (net of sales) (FY 2018: £17.0 million) up 4.1%

·      Increased revenue to £16.6 million (FY 2018: £15.6 million) up 6.4%

·      Underlying profit before tax* of £8.0 million (FY 2018: £7.2 million) up 11.1%

·      EPRA** EPS of 4.3p (FY 2018: 3.9p) up 12.2%

·      Profit before tax totalled £3.7 million (2018: £8.4 million) allows for property revaluations and hedge costs (both non-cash items)

·      Average cost of debt reduced to 3.4% (FY 2018: 3.7%), with 72% of the Company’s debt fixed

·      Conservative LTV net of cash at 42.2%

Growing and covered quarterly dividend

·      Total dividend per share for 2019 of 3.8125p (FY 2018: 3.5625p) up 7%

·      Final dividend of 1p per share payable in April 2020 as a Property Income Distribution

·      Fully covered dividend, which has now seen year-on-year growth for 7 consecutive years, with total dividends paid to date of £29 million

Well balanced portfolio

·      Completed two acquisitions for £9.25 million (net of costs) and disposals of £2.1 million

·      Total portfolio grew to £228.9 million (FY 2018: £224.8 million) up 1.8%

·      Excluding acquisitions and disposals, portfolio valued at £219.1 million, 1.6% lower, reflecting current market sentiment towards all retail, however, REI retail assets are made up of local concessions and neighbourhood stores which continue to perform well 

·      EPRA** NAV per share of 67.4p (FY 2018: 69.3p)

·      Completed 53 lease events, ending the period with 280 occupiers across 53 assets

·      Occupancy strong at 96.3% (FY 2018: 96.1%)

Decision on HS2 significant boost for the region

·      Certainty on HS2 has renewed the investment appeal of Birmingham and surrounding markets

·      Well placed to capitalise on pent up requirements to trade via:      

o  Sale of mature assets to recycle capital into opportunities with potential for higher returns

o  Capitalise on mis-priced assets from ‘under pressure’ institutional vendors

Paul Bassi, CEO of Real Estate Investors Plc, commented:

“In a flat market place, we have delivered portfolio, revenue, earnings and dividend growth.  Our economies of scale drove underlying profits to £8.0 million, up 11.1%, and EPRA** EPS to 4.3p, up 12.2%.  Our portfolio now stands at £228.9 million and has delivered total dividend payments to our shareholders of £29 million since the commencement of our dividend policy 7 years ago.” 

“Certainty on HS2, the Commonwealth Games in 2022 and Coventry City of Culture next year, all represent a significant boost for the region and will underpin an increase in investment and acceleration on decision making. Re-location of people and corporate offices adds fuel to the local economy and we expect these trends to accelerate. Though all these outcomes are subject to the unknown outputs of Covid-19 impact that cannot be predicted at this stage.”

Financial and Operational Results

Definitions

*      Underlying profit before tax excludes profit/loss on revaluation and sale of properties and interest rate swaps

**       EPRA = European Public Real Estate Association

***     WAULT = Weighted Average Unexpired Lease Term

Enquiries:

About Real Estate Investors Plc

Real Estate Investors Plc is a publicly quoted, internally managed property investment company and REIT with a portfolio of 1.59 million sq ft of mixed-use commercial property, managed by a highly-experienced property team with over 100 years of combined experience of operating in the Midlands property market across all sectors.  The Company’s strategy is to invest in well located, real estate assets in the established and proven markets across the Midlands, with income and capital growth potential, realisable through active portfolio management, refurbishment, change of use and lettings.  The portfolio has no material reliance on a single asset or occupier. 

On 1st January 2015, the Company converted to a REIT.  Real Estate Investment Trusts are listed property investment companies or groups not liable to corporation tax on their rental income or capital gains from their qualifying activities.  The Company aims to deliver capital growth and income enhancement from its assets, supporting its progressive dividend policy, which has enjoyed 7 years of consecutive growth.  Further information on the Company can be found at www.reiplc.barques.dev.

Chairman’s and Chief Executive’s Statement

Overview

During 2019, we experienced high levels of political and economic uncertainty which led to an inactive property market. Our strategy and business model remained robust against the challenges that UK businesses and in particular the real estate sector faced, and delivered another year of excellent progress, benefitting in particular from the Company’s focus on resilient subsectors.

Revenues grew to £16.6 million, up 6.4% in the last 12 months and this allowed us to pay a 3.8p covered dividend for 2019, providing a total of £29 million paid to shareholders since the commencement of our dividend payments in 2012.  Our diverse portfolio now stands at £228.9 million and has no material exposure to any asset, sector or occupier and has delivered underlying profits of £8.0 million, up 11.1% year-on-year, our highest revenues and underlying profits since the inception of REI in 2004. 

Our portfolio had 280 occupiers across 53 assets and during the period, we completed 53 lease events and our occupancy levels remain strong at 96.3%.  We experienced strong occupier demand for offices, our largest sector weighting at 37.7%.  Low levels of new build and existing stock being converted to residential under permitted development rights, has also driven strong rental increases across a number of our office assets such as Topaz Business Park, Bromsgrove, which achieved an 18.6% per annum rental increase.  In January 2020, post the year end, we achieved a good start to the year by completing new lettings and lease renewals totalling £726,000 p.a.

Our permitted development potential continues to remain high with approximately 250,000 sq ft of potential residential conversion identified across the portfolio.

We made two excellent mixed-use acquisitions during the year in Leamington Spa, Warwickshire, for the combined sum of £9.25 million and believe that these have been well bought during a period of uncertainty, providing immediate opportunities to add value and secure long-term income from prime real estate assets.

The office portfolio, representing 37.7% of the total portfolio, of which 6.4% is government income, comprises our largest sector weighting and has performed exceptionally well, with strong demand, excellent occupancy levels and capital growth of 4%, achieved in a static marketplace through asset management initiatives and improving demand.  The portfolio has seen some downward valuation pressure on our retail assets of 6.2%, due to the negative sentiment towards the retail sector generally, despite the fact that we do not have any exposure to department stores, indoor shopping centres or out-of-town stand-alone retail.  However, we continue to maintain a long-term track record of outperformance versus the MSCI IPD Quarterly Property Index which during 2019, reported a capital loss of -12% on an ungeared basis during 2019 (Source: MSCI).

We are aware of significant opportunities, with a pipeline of acquisition opportunities. Due to the constraints of our available capital and our policy to retain our gearing at existing levels, we remain extremely selective.  The availability of further capital would allow us to take advantage of these significant mis-priced opportunities, which have been driven by the distress and uncertainty caused by Brexit discussions and forced sellers at open ended funds.

We also remain alert to corporate opportunities and we anticipate a period of consolidation in the real estate sector.

Financial Results

Underlying Profits, up 11.1%

Our portfolio value has grown to £228.9 million, up 1.8%.  Revenue for the period under review is up 6.4% and contracted rental income is at a record £17.7 million p.a., up 4.1%, with underlying profits up 11.1% to £8.0 million.

Our like-for-like rental income declined by £100,000, predominantly due to known lease events that provide asset management opportunities to improve rental income and lease terms and enhance capital value.

Further acquisitions and asset management initiatives will enhance our asset base and income whilst supporting our Net Asset Value growth, together with delivering on our commitment of a progressive dividend policy.

Pre-tax profits of £3.7 million allow for £470,000 of acquisition costs and a reduction in our portfolio valuations of £4.3 million allows for property revaluations and hedge costs (both non-cash items), whilst our office portfolio increased by 4%, our retail assets were downgraded by 6.2%.  Underlying profits of £8.0 million have helped support the growth of our fully covered dividend for 2019 of 3.81p, up 7%, over the period, representing a seventh year of consecutive growth.

Finance and Banking 

Reduced cost of debt

With our longstanding banking relationships and access to debt, we will continue to secure additional bank facilities when appropriate, to support future growth and improve profitability.  We will maintain a policy of being multi-banked across a number of established lenders.

We remain conservatively geared at 42.2% LTV (net of cash) and have significantly reduced the cost of our debt over the last few years and intend to maintain our gearing at the existing levels. 

Our bank facilities were successfully restructured during the year with 72% of our debt fixed, through facilities secured with 6 banks and average cost of debt reducing to 3.4% (2018: 3.7%), down 8.1%.  We continue to review long term rates to fix low cost debt when appropriate.

In December 2019, REI finalised a facility of £8.5 million with Barclays Bank for 4 years at 1.9% over LIBOR secured against a portfolio of assets, drawn down on 30 December 2019.

Dividend

7 years of continued dividend growth

One of our principal objectives has been to deliver attractive, sustainable, higher level dividend returns and we are pleased to have increased our fully covered dividend for 2019 of 3.81p, an uplift of 7% on 2018.

We have paid the first three quarterly dividends of 0.937p and propose to pay a final dividend of 1p. 

The proposed timetable for the final dividend, which will be a Property Income Distribution (PID), is as follows:

Dividend Timetable 

Outlook

Stable Business Platform but Covid-19 Uncertainty Ahead

Our portfolio remains well positioned to benefit from a vibrant regional economy that has finally seen the HS2 project confirmed and, in Q1 2020 to date, we have already evidenced transactional market activity that reveals strong occupier demand and renewed investor appetite.  However, in view of the rapid and changing situation relating to Covid-19, the property market conditions remain uncertain.

Our intention is to continue to add value to our existing assets whilst alert to other opportunities that will further enhance our profitability.

Covid-19

The unprecedented and fast changing circumstances surrounding Covid-19 provide us with an uncertain landscape, however we have a strong, stable business platform and management have a proven track record of performing during periods of uncertainty, as demonstrated in the past.

We are alert to the potential impact of Covid-19, an unforeseen human tragedy on a global scale.  REI has a risk averse strategy, stable portfolio with high levels of occupancy and multi-sector diversification, together with controlled overheads.  We remain vigilant and, in common with all businesses, we are closely monitoring the situation.  To date, there has been no noticeable effect on the business, however it is too early to quantify what the impact may be in the future. 

Should it be necessary, our resourceful team is able to work from home without any restrictions and all provisions have been made to ensure that the business can continue to operate efficiently.  Furthermore, we have received assurance from all third-party providers and partners that they all have contingency measures in place to support REI.  All necessary actions are being taken to safeguard our staff and ensure the continued progress and success of the business, through difficult and unprecedented global circumstances.

Investment Market Overview (Subject to the impact of Covid-19)

Overall property investment volumes slowed across the UK in 2019, as investors reflected on a political standstill – we expect the full year total to be around £45 billion, down from £65 billion in 2018 (Source: CBRE Research).  The Midlands region also saw a decline in volumes during the period.  However, after a subdued 2019, we expect investment volumes to increase throughout 2020, as confidence returns to the market and pricing remains attractive.

There is still a significant weight of capital targeting commercial property in the wider Midlands region. Prime investment yields within Birmingham city centre remain at 5.00%, and we anticipate this to improve as the market strengthens throughout 2020.  Most property forecasters are anticipating a rebound in transaction volumes in 2020, which will impact positively on capital values and investor demand that will be strengthened further with the recent lowering of interest rates.

For those investors seeking value and enhanced returns, acute shortages of quality supply in the regions makes a compelling case for asset management plays.  We see 2020 being the year where private and institutional investors, from outside the region, look to the Midlands for higher yielding regional stock and we believe that this will create opportunities for REI to dispose of mature assets. REI has a number of properties where asset management has been completed, these can be re-cycled into new opportunities with the potential for higher returns.

The REI Portfolio

Our portfolio is stable, secure and diversified across many sectors, with no material reliance on any single asset or occupier.  The portfolio includes offices (37.7%) of which 6.4% is government income and, due to the lack of new build over the last decade and some existing office stock being converted to residential under permitted development rights, we are noting a significant undersupply of office space and experiencing rental growth across our office ownership, in particular, in our non-city centre stock across the Midlands.  Our traditional retail assets continue to perform extremely well and due to current anti-retail sentiment; we believe are undervalued. Our retail exposure remains focused on convenience, town centre and neighbourhood outlets.

The portfolio is valued at £228.9 million (2018: £224.8 million), an increase of 1.8% and contracted rental income has grown to £17.7 million p.a. (2018: £17.0 million p.a.), up 4.1%. The Company’s property portfolio comprised 280 assets with 53 tenants and a net initial yield of 7.85% with a reversionary yield of 8.63%.

The portfolio remains well placed with excellent occupancy levels in excess of 96% and with potential for positive capital and rental performance in this coming year.

Our retail holdings have seen a 6.2% decline in values throughout the period, which is entirely linked to market sentiment in respect of retail, due to highly publicised insolvencies including Debenhams, House of Fraser and Toys R Us. We do not have any such holdings and anticipate valuation recovery as the marketplace recognises our strong neighbourhood and convenience assets.

We continue to pursue a pipeline of new investment opportunities from our privileged network of property market professionals. We believe a selective approach to acquisitions yields the best investment opportunities in the current market and consider ourselves well positioned with long-term debt facilities and low net gearing to take advantage of opportunities as they arise. We remain committed to a strategy focused on regional property, with a broad tenant mix.   

Acquisitions

In line with our strategy, we acquired mixed-use investment properties during the period for a combined total of £9.25 million, with a blended net initial yield of 8.13%. The investments are both located in Royal Leamington Spa, Warwickshire, with established occupiers including; O2, Toni & Guy, McDonald’s, Tiger UK, Moss Bros and Timpson, with significant potential to improve rental income and capital valuations. 

Since acquiring the properties, we have completed a number of lease events and within a very short period of time expect to have extended the average unexpired lease term and added significant value. These recent acquisitions provide a good working example of our investment objectives and capabilities.

Sales

We did not actively seek to make any new sales during 2019, but we did identify a number of properties in the portfolio that are suitable for sale and we will monitor this position over the coming months, and anticipate securing some sales at or above existing book values.   

Subject to the impact of Covid-19, we anticipate acquiring a further £10 million of assets during H1 2020, to grow our portfolio and income, whilst maintaining a balanced and diversified asset, sector and occupier base. With our established network of regional contacts and our well-established reputation for efficient transactions we will continue to target good income with low gearing in a diversified regional portfolio and continue to focus on delivering stable long-term returns for shareholders.

Occupational Market Overview

Prospects for the West Midlands region remain strong. HS2 has been secured and, with Coventry named as the UK’s City of Culture for 2021 and Birmingham hosting the 2022 Commonwealth Games, the region has a rare opportunity to showcase everything it has to offer on a global stage.

We are seeing unprecedented levels of investment across the entire region in infrastructure, housing, education, innovation and culture. This is making our towns and cities a compelling proposition to domestic and overseas businesses and we expect our region to take advantage of this level of inward investment.  In January 2020, Segro announced a £400 million gateway scheme for Coventry, anticipated to create over 7,000 jobs.

According to Savills, the end of year take-up figures in Birmingham city centre is forecast to exceed 1 million square feet, resulting in Birmingham’s strongest year on record.

The majority of our office buildings are in out of town locations, and 2018 witnessed the highest level of out-of-town activity since 2015 with 358,115 sq ft leased. With available space in out-of-town markets at an all-time-low (452,929 sq ft), we anticipate rising rents and capital values.

In the retail sector, January 2020 witnessed some green shoots of recovery with BDO reporting a 5.7% jump in like-for-like-in-store sales for the month across UK High Streets, with the sector experiencing its strongest month since 2014, likely due to the easing of the political turmoil.

Our continued retail focus on convenience, town centre and neighbourhood shopping (a strong sub-sector), with no department stores/indoor shopping centres or out of town stand-alone retail, has resulted in only two small retail units affected by insolvency in the year, representing 0.56% of income.

There is strong occupier demand for neighbourhood and convenience retail and our deliberate focus on this subsector has seen overall occupancy across the portfolio remain at a robust level of 96.3%.

Portfolio Mix

The current sector weightings are:

Asset management 

Office sector provides stability and growth

Despite the negative sentiment that has prevailed within the retail sector, REI’s strategy of holding a mixed used portfolio has paid dividends.  The asset management initiatives employed have partially offset the impact of the retail sector sentiment.  Our strongest sector has been offices, where values have increased by 4%.  The majority of that increase has come from lease renewals, where the strong relationships forged with the tenants, together with an understanding of their business needs, has resulted in sensible deals that have benefitted both parties.  Combined with targeted refurbishments, enabling old space to be let at better terms, this has delivered a solid performance for 2019.

Key asset management initiatives undertaken during the period include:

Avon House, Bromsgrove

AFH PLC occupied the entirety of the building by way of three separate leases with simultaneous expiries. The three leases were surrendered and a 10-year full repairing lease for the whole building was signed from September 2019. The annual rent was held at passing subject to an RPI review at the 5^th year. The benefit to REI was that we were able to reduce our operational shortfalls within the building by way of eliminating our service charge caps whilst securing a 10-year term to an established and well-respected wealth management company. This resulted in a valuation gain from December 2018.

Topaz Business Park, Bromsgrove

In 2019 we were able to conclude various initiatives including an open market letting at our Topaz office scheme, setting a new rental tone of £19psf for the business park. The rest of the park is fully let and we have completed a reversionary lease to Instinctive Technologies, with effect from March 2020 for an additional 5 years to 2025 as well as a lease renewal to Park Place Technologies for further 5 years to 2024. The overall annual rent for the park has increased by 18.6% to £340,402 p.a. and coupled with the positive sentiment for well-placed office stock resulted in a valuation gain from December 2018.

Westgate House, Warwick

In December 2019 Moore & Tibbitts (M&T), who occupy part of the first floor, surrendered their lease for a new 10-year lease taking additional space within the building. In order to facilitate this REI undertook works to take back part of Boots’ 1^st floor storage space thus creating the additional office accommodation required for M&T. As part of the deal Boots agreed a new 6-year lease, a year ahead of their previous contractual expiry. Due to pro-active asset management REI were able to retain M&T in the building whilst being able to capitalise in the conversion from storage space to office space, resulting in an increased rent and improved WAULT.

Both of the deals highlight the positive sentiment that each tenant has towards Westgate House demonstrating its well-placed position within the popular town centre.

*Our land holdings are excluded from the yield calculations

REI’s Regional Review

Economy/Business/Employment

·      Birmingham achieved the fastest growing economy outside of the South East and East of England during Q2 2019, according to the Centre for Economic & Business Research (CEBR), with GVA growth of 1.5% and is set to be one of the fastest growing economies by the end of 2020 with GVA expected to grow by 1.2% across the city in the year to Q4 2020, taking the total value of the economy to £28.3 billion

·      West Midlands business confidence was the highest in the UK throughout Q4 2019, according to the latest Business Barometer from Lloyds Bank Commercial Banking, with an overall confidence of 23%

·      The West Midlands is the UK’s leading region outside of London and the South East for attracting foreign direct investment (FDI), according to figures from the Department for International Trade with 171 new FDI projects in the West Midlands, creating 9,424 new jobs in 2018/2019

·      The West Midlands recorded the highest employment growth of all UK regions in the year to November 2019, with 81,000 jobs created

·      The West Midlands’ private equity-backed buy-out market saw an increase in the number of deals recorded in 2019, according to the Centre for Management Buy-Out Research (CMBOR) at Imperial College Business School, with 17 deals in the period involving businesses head-quartered in the region

Property

·      Birmingham investment volumes increased by 50% in 2019, with a total volume of £628 million

·      City centre office take up totalled 780,019 sq ft in 2019, up 3.4% on 2018 and up 6% on 10-year average

·      Post year end, BT announced a move to a Birmingham landmark building, taking 283,000 sq ft in the largest speculative office development outside of London, Three Snowhill

·      Q3 2019, saw Birmingham boast two of the three largest regional offices deals in the UK with the Government Property Agency’s 110,800 sq ft letting at city centre Platform 21 building and automotive manufacturer ZF’s take-up of 90,000 sq ft at Solihull’s Blythe Valley Park making up two of the three largest office deals of the quarter outside London

·      Birmingham and Liverpool are the two top choices for foreign investors looking to place bets on UK regional cities next year, according to an analysis by Consorto with investors attracted by Birmingham’s average office yields of 5.00% and £25 million of City centre regeneration plans in the pipeline

·      Birmingham ranks first as UK regeneration hot spots report in September 2019 revealed by Glide, showing that Birmingham’s council area has the most opportunities for regeneration for investment in empty residential and commercial properties

·      The Government has boosted its presence in the region by announcing that it is set to open a hub in a prominent Birmingham building in 2021, which will be home to 1,700 civil servants, the second hub for Birmingham and follows 3 Arena Central, which will house 3,600 staff when it opens in 2021

·      According to Savills, an additional 3,145 households are expected each year over the next decade, with the West Midlands receiving £350 million to meet demand, funding 215,000 new homes by 2031

Manufacturing/Engineering/Technology

·      Jaguar Land Rover has reported record US sales for 2019 with the manufacturing giant selling 125,787 cars in the year, up 3% on 2018

·      Birmingham has been named as a major hub for start-up tech firms with the city becoming the second most popular region for that sector outside London, with 570 tech start-ups formed in the city in 2019, bringing the total number to 14,509, employing over 40,000 people

·      JCB’s sales jumped 22% to £4.1 billion during its latest financial year, outpacing the global construction equipment market which grew by 18% to an all-time high of one million machines

Travel/Tourism

·      In February 2020, the Government announced that the vast HS2 infrastructure project will be delivered by the end of the decade, which will not only boost the regional economy but will deliver prosperity

·      Passenger numbers take off at Birmingham Airport with almost 12.7 million passengers passed through Birmingham Airport in 2019, a rise of 1.6 per cent according to new figures

·      Birmingham New Street has overtaken London Euston to become the fifth busiest rail hub in the UK with passenger numbers increasing by a third to 47.9 million since the station was transformed to include Grand Central development

·      Region remains ambitious and resilient as visitor numbers soar with the city remaining in the top 3 destinations for shopping in the UK, with a £3.74 billion expenditure

·      The West Midlands has unveiled a tourism strategy to grow the West Midlands’ visitor economy by more than £1 billion with the aim of creating 19,000 jobs with The West Midlands Regional Tourism Strategy highlighting plans to grow the region’s economic value from £12.6 billion in 2018 to £13.7 billion during the next decade, a 9% increase

Our Stakeholders

Our thanks to our shareholders, advisors, occupiers and staff for their continued support and assistance.

John Crabtree OBE D. Univ                                                     Paul Bassi CBE D. Univ

Chairman                                                                                Chief Executive

16 March 2020                                                                       16 March 2020