Half Year 2026 Regional REIT Ltd Earnings Call
Speaker #2: Good afternoon, and welcome to the Regional REIT Limited Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab, situated on the right-hand corner of your screen.
Speaker #2: Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself; however, the company can review all questions submitted today and publish responses where it's appropriate to do so.
Speaker #2: Before we begin, I'd like to submit the following poll, and I'd like to hand you over to the management team. Stephen, good afternoon, sir.
Speaker #3: Thank you very much. Good afternoon, everyone, and welcome to the presentation of the half-year results of Regional REIT for the period ending 30th of June, 2026.
Speaker #3: It is my intention this afternoon to take you through the results for 2026, and then spend a bit more time updating you on what we are witnessing in the marketplace and the continued progress that has been made towards our strategic goals.
Speaker #3: As mentioned earlier, Q&A will be dealt with at the end, and if you can submit your questions, we'll try and get through as many of them as possible.
Speaker #3: If I may, I would now like to introduce this afternoon's team from Regional REIT's manager, ESR Elspin. I'm Stephen Inglis, Chief Executive Officer. Also on the call this afternoon are Simon Marriott, Property Fund Manager, and Adam Dickinson, Investor Relations Manager.
Speaker #3: Well, after another six months of political and economic change and instability, I think we are almost back to where we have been many times before over the course of the last few years.
Speaker #3: There has been turmoil both in the UK and internationally, given the host of events currently ongoing, and that has undoubtedly impacted business confidence and affected the real estate market—both in terms of energy and also in terms of interest rate movements.
Speaker #3: Political turmoil in the UK, with yet another new Prime Minister in six to ten years, and Europe-wide, with disenfranchised voters and the rise of the far right.
Speaker #3: This background impacts the UK economy either directly, in the case of increased energy costs, or more subtly, but also, as I said, impacting business confidence.
Speaker #3: And the vital part of business confidence in growing the economy and creating jobs, which has in turn an impact on the requirement for physical space.
Speaker #3: So, a backdrop of uncertainty and continuing headwinds. However, against this backdrop, we are making steady progress in reducing the company's debt and selling non-performing and underperforming assets.
Speaker #3: Unleashing up space, marginally ahead of the expiries and breaks being exercised. So, despite all of this, I think the company is making good progress and has made good progress over the course of the past six months.
Speaker #3: Adam, if you can take us maybe just like three thank you. So a quick summary of the 2026 half-year highlights. So as I mentioned in my opening remarks, whilst things are undoubtedly difficult and the leasing market remains slightly subdued, we have nonetheless undertaken 26 new lettings, delivering 1.9 million in new rental income, and delivering a 700,000 pounds annualized saving in reductions to void costs.
Speaker #3: We're making good progress on sales, with £21.5 million of sales completed in the period. These were on vacant or partly vacant assets, and this has allowed us to reduce debt and reduce void costs.
Speaker #3: So a creative to income. And we further reduced LTV, which now sits at 38.5%, through repayment from those sales proceeds. And finally, of course, we've delivered a fully covered 4 pence dividend, in line with our target of 8 pence for the full year 2026.
Speaker #3: Slide four, please, Adam. So, just looking at the key highlights, our strategy to reposition the portfolio continues. We remain committed to creating a high-quality, income-focused portfolio. Value currently stands at £526.7 million.
Speaker #3: Down as a result of sales and a small 1.3% valuation reduction. EPRA occupancy is mainly down. This may look at first as counterintuitive, given the leasing activity that I was just commenting on and the sale of vacant units.
Speaker #3: This is mainly due to the CapEx projects completing and coming back into the EPRA numbers. So it's very much a timing issue. Actual occupancy has improved by over 2% during the period.
Speaker #3: Capex in the period at £1.4 million looks low. This is mainly as a result of the significant letting that we have undertaken in the period, where we anticipated expending £5 million of capex.
Speaker #3: However, as part of the deal, the tenant is now undertaking that. And we will obviously commit that capex elsewhere in the portfolio to improve the overall quality of the portfolio and, consequently, the income.
Speaker #3: And on track to do £10 million per annum, which is our previously stated estimate. Earnings per share are in line with our estimate, allowing us to fully cover the 4 pence per share dividend for the half-year.
Speaker #3: And LTV, as mentioned in my opening remarks, is down. Gross borrowings have decreased to £243.8 million, due to those sales and the paydown of debt.
Speaker #3: Slide five, please, Adam. The strategic sales program continues, and the rationale, obviously, is for sales to reduce debt in advance of the refinancing of the December 2027 and December 2028 facilities.
Speaker #3: A little bit more detail on which to follow, and to reduce costs associated with non-core and non-performing assets. So, attempting to sell the non-performing, non-income producing assets, which we were successful in during the first six months.
Speaker #3: The sales program continues, with a further two sales completed post-period end for £4.3 million. There are a further 11 assets either contracted into the last list of hands or in late sales negotiations—that is, where we've agreed terms—accounting for a further circa £32 million of potential proceeds.
Speaker #3: In total then, assuming the sales complete before the year-end, we could well be selling around £58 million, in line with our previous guidance of £50 to £60 million of sales for the full year.
Speaker #3: Slide six, please, Adam. Thank you. So, portfolio repositioning for long-term growth. If we look at the average rent, average rent continues to grow. Yields, as you'll see on the right-hand side, have effectively remained static since June 25.
Speaker #3: So, over the last three periods, that kind of suggests that the valuation market certainly has stabilized, and that we may well be now at the bottom of the market, all things being equal.
Speaker #3: But we continue to see average rents creeping up. Offices make up the vast majority of our portfolio—almost 90% by value. And obviously, the lettings there are in line with what we've previously discussed, but clearly the one big letting: £1.1 million of income across two buildings in Nottingham.
Speaker #3: That's the annualized rent. That's not the income for 2026, given rent-free periods. But that was the annualized rent over the 10-year life of that letting.
Speaker #3: Average requirements in the market are increasing, so we are seeing some upscaling of several tenants—to our benefit in some cases, but obviously to our detriment in others, where we have lost tenants who have moved to bigger buildings.
Speaker #3: And rent collection remains strong—99.7% in the period to date. That will ultimately become 100%. That 0.3% is just an issue of timing, and when those rents are collected.
Speaker #3: And you'll see the full-year figure there of 100%. Okay, slide seven, please. Just looking at, obviously, the map of the UK showing our assets distributed across the main regions and major conurbations of the UK.
Speaker #3: One or two highlights there. Obviously, 1 and 2 Newstead Court is the letting of the first six months—almost 150,000 square feet on a 20-year lease, with a 10-year break.
Speaker #3: And producing over £1 million of annualized rent. But the tenant undertaking, as I mentioned earlier, £5 million of capex works that we had originally looked to undertake, are now not having to expand the capital.
Speaker #3: But still achieving a million pounds rent on a 10-year lease term certain. Lynford Wood Business Park again. Rents improving there. Previous rents at 18 pounds up now to 22 pounds 50.
Speaker #3: Thorpe Park Leeds, likewise, we're seeing good rental growth now at £24 per square foot on the latest letting there. So, progress is being made across the portfolio and in different regions.
Speaker #3: Next slide, please. So, a quick look at the portfolio segmentation. Many of you remember we've actually locked the assets in terms of the segmentation 18 months ago.
Speaker #3: Clearly, assets do change in terms of where they should be. And the classic example of that, in the value-adds, you'll see that building above, which is one of the Newstead Court buildings.
Speaker #3: Clearly, that is no longer value-add. We had looked to demolish these buildings to make way for high-quality industrial. Clearly, we've now done a letting, and that will move effectively to core. Albeit, to allow us to compare like-for-like, the assets are frozen in each box.
Speaker #3: We've made good inroads into the sales program. So, sales are down to roughly £30 million by value, 5.6% of the portfolio. Value add there at £55 million, as I say, distorted slightly by that one asset.
Speaker #3: But we'll talk more about value add later in the presentation. Capex to core and in core. So if you look at the buildings on the right, the value add and sales buildings, we would look to sell in due course.
Speaker #3: And the capex. Next slide, please. Now, looking at the trends for regional offices in respect of the supply and demand—in this slide, the supply side.
Speaker #3: So supply remains constrained, and there's probably going to be even more constraint as time goes on. When you look at the bottom right slide there, or the bottom right box, construction starts for regional offices are at their lowest level in over a decade.
Speaker #3: And that is indicative of the development market as a whole. But the office market specifically—the costs of ground-up construction these days have grown substantially.
Speaker #3: As a consequence of which, really, unless it's pre-let to achieve rents of between £50 and £60, which is what you require to achieve to justify development.
Speaker #3: As I say, I think we'll see very little in the way of new starts over the course of the next few years. On the right-hand side, there obviously is the supply.
Speaker #3: We're seeing delivery of just under 1.5 million square feet in 2027, of schemes obviously commenced several years ago. 2028 pulls away dramatically, and then when you look at '29, '30, '31, almost no new supply coming to the market at that point.
Speaker #3: And I think that will constrain the market further as we continue to lose buildings to alternative uses and to the demolition of non-core, poor-quality Grade C, D, and E buildings.
Speaker #3: So, I think we will continue to see supply very much constrained. Okay, slide 11. Looking at demand then, so that's the supply side. We are going to see a constrained supply and, indeed, diminishing overall supply in the regional office markets.
Speaker #3: So therefore, what about demand? Well, demand is holding up. I talked about a subdued leasing market— it is. It's taking much longer to get deals over the line.
Speaker #3: However, there still are requirements out there from many, many companies. But decision-making and determining timelines for when that initial interest becomes income—i.e., the buildings are actually leased and then become rent producing—is becoming increasingly difficult.
Speaker #3: So, there are requirements. There is demand. But the time taken for that to flow through into actual lettings is quite considerable. And because of that constrained supply and continued demand, we are continuing to see rental value growth.
Speaker #3: So, the data there: UK offices are seeing rental value growth of 4.7% in the year to June, compared to the City at 3.6%. Across our portfolio, we're achieving, on average, 3% above ERV.
Speaker #3: And of course, ERV has been increased over the course of the last couple of years, in line with the market. So rental growth is there.
Speaker #3: Which kind of supports my thesis that supply is restricted and demand continues. We expect to see that rental growth continue and increase, and indeed increase ahead of the 2030 date for EPC requirements A and B coming into force.
Speaker #3: And the take-up figures there at the bottom right-hand corner. Okay, slide 12, please. So just looking at a couple of case studies. This is a Brutalist architect building.
Speaker #3: But internally, it provides very, very good quality accommodation. So, the majority of this building is let to Global Banking School. We have one vacant floor.
Speaker #3: We have agreed terms with Global Banking School to take the space. In fact, terms have been agreed for almost fifteen reasons, due to Global Banking School's internal requirements and indeed requirements from building warrant to change some of the fabric of the building to meet and satisfy their requirements for a single occupier.
Speaker #3: This deal is only now coming to fruition, so we expect to announce the final letting here in the next few weeks, taking this building to 100% let.
Speaker #3: And of investment grade. Okay, next slide, please. We talked earlier about value-adds and potential change-of-use assets. We have undertaken 15 feasibility studies and taken many of these assets through first-stage planning.
Speaker #3: And for initiatives for change of use, where the change of use values add value to the building compared to current holding cost. We will now see some of these assets coming to market over the course of the next few months.
Speaker #3: Demonstrating that the value-add element and that increase in value for alternative use does actually pay off and increase values quite substantially. So, watch this space in terms of some of these properties coming to market.
Speaker #3: With the benefit of support for PBSA for residential to sell and residential to let, on the whole. But other uses include hospitals, industrial, and a host of others.
Speaker #3: Okay, next slide, please. So, the largest value-add potential asset in the portfolio: Central Park, New Lane, Leeds. This has been a long battle with the local authority.
Speaker #3: This was originally safeguarded as part of the HS2 proposals. And of course, they were canceled a couple of years ago, so HS2 is no longer happening.
Speaker #3: Therefore, one would have imagined that this would have been released from safeguarding. However, the local authority and local MPs have managed to retain the safeguarding for the potential Mass Transit Leeds mass transit system.
Speaker #3: We have been battling with the local authority and Department for Transport to say, well, that wasn’t the intention of the legislation for HS2. The safeguarding is in connection with HS2 only and should not apply in respect of the mass transit moving forward.
Speaker #3: Some good news: the Department of Transport have now confirmed that this will not be required for the mass transit system, and indeed our arguments on safeguarding hold water.
Speaker #3: And this will be signed, but the safeguarding will be released as part of that. That has allowed us to agree a new long-term reversion, at least with ASDA, on the front portion of this site.
Speaker #3: They use the industrial unit for their national training center, which is a very important part of their business, with their headquarters located across the road.
Speaker #3: So that has been agreed—a much higher rent—and we'll kick on from the expiry in 2028 for a further period of 10 years.
Speaker #3: So good news there again. That is in the process of being documented. And that releases, then, the rear element of the site to go through the planning process for residential, and we anticipate that that will be high-density residential.
Speaker #3: And of course, the south side of Leeds and the South Bank has been a significant part of Leeds, showing significant improvement and significant development.
Speaker #3: We anticipate, as I say, achieving a high-density scheme on the rear site, at which time we will sell to residential developers. Okay, another change of use.
Speaker #3: So, one new stake core obviously featuring a lot in this presentation, given the scale of letting. But clearly we're not going to be demolishing this for industrial anymore.
Speaker #3: It's now a core hold offering, potentially 20-year income, so that just kind of is indicative of what's happening in the marketplace just now.
Speaker #3: I talked about constrained supply earlier. The constrained supply is forcing tenants to perhaps be a little bit more imaginative. For example, in this case, the tenant Glenaire, a US defense and electronics company, required to upscale—there was nothing in the region suitable for them in terms of ready-made space, and therefore they had to be a little bit more imaginative and say, "Well, fine, we'll take what is fundamentally two good buildings in this business park and undertake the works to create the space that we require for our staff."
Speaker #3: So, we've seen this on a few occasions over the course of the last six to twelve months, where constrained markets are forcing tenants to look elsewhere.
Speaker #3: Not necessarily in terms of geographic locations, because they want to retain their existing staff. But more specifically on the types of buildings they prepare to occupy and upgrade. So, I think this will become a feature of the market moving forward.
Speaker #3: Thanks, Adam. So ESG remains very, very important in the minds of occupiers and, of course, as responsible landlords. So we still are very much focused on ESG to deliver sustainability and cost savings.
Speaker #3: EPCs—the Energy Performance Certificates legislation—is still not through, but everybody expects that by 2030 the legislation will require all buildings to be EPC A or B.
Speaker #3: And actually, to a degree, it doesn't really matter about the legislation, because companies themselves are taking it upon themselves as part of their own ESG requirements.
Speaker #3: The vast majority of requirements, barring several outliers, are all for EPC A and B, so it's vital that we provide that quality of space. We are, as you'll see, making good inroads: just over 61% of our portfolio now conforms. Of the rest, 26% is EPC C, with an identified route to upgrading and improving those buildings to EPC A or B.
Speaker #3: And the vast majority of the D and E's and belows will be sold as part of the sales program moving forward. I think it’s worth noting—I mean, we've mentioned this many times before—but the market hasn't responded as quickly as it should have to creating EPC A and B.
Speaker #3: So, it's currently only 19% of UK commercial buildings—that includes industrial—so UK commercial buildings meet the requirement. In the office markets, they vary city to city, region to region.
Speaker #3: But if I take Leeds and Manchester as an example, those markets are roughly 25% conforming. Now, if we look at that in the context of occupation, last occupier numbers are from December '24.
Speaker #3: We're awaiting the December 25 numbers to be confirmed, but roughly 81.6% of the regional office market was occupied at that point in time. 81.6% occupation, with only 25% of buildings conforming—you can understand why we're enthused, and indeed believe that we'll see rental growth for those better quality buildings.
Speaker #3: So, more of the market chasing fewer buildings, or a small part of the market that's conforming. So we expect to see substantial rental growth over the office market, where there's offering, grade-A accommodation and EPC A and B.
Speaker #3: Elsewhere on ESG, we're continuing the rollout of our 4D smart technology. This is effectively the smart technology for identifying energy usage, and where we can find cost savings. We've installed this system across 45 sites so far.
Speaker #3: And that's producing £190,000 of savings to Regional REIT over and above those savings that the tenants themselves are receiving. So those £190,000 of savings are direct savings to the REIT, not to the occupiers.
Speaker #3: Solar continues to be installed, with installation completed now at 17 sites, 14 of which are energy producing. And roughly 880,000 kilowatt-hours are being produced from those 14 sites.
Speaker #3: And we'll continue that rollout over the course of the coming years. Okay, just looking at the income overview—so this is the earnings for H1.
Speaker #3: 2025 versus H1 2026. So, effectively running through the bridge, looking at the earnings, looking at rental property income—obviously down £5.7 million in terms of sales—looking at costs, admin costs, financial income, and finance expenses, coming to the £6.8 million of their earnings, June 26.
Speaker #3: Next slide, Adam, please. And in evaluation, obviously, December 25, there's the disposals—£20.8 million net of costs, disposals £21.5 million gross. Acquisitions—obviously none in the period.
Speaker #3: The gain and loss of disposal properties 2.1 million. Capex 1.4 and evaluation change there that 1.3% reflecting 7.1 million. Due to income differentials and the current valuation of 526.7 million.
Speaker #3: And then, just looking at the balance sheet overview—so again, summarizing effectively the two slides that we've just run through—looking at that.
Speaker #3: NAV at 305.8 million at the far right hand corner. Okay, so moving on to debt. So we have debt expiries in December 28 and December sorry December 27 and December 28.
Speaker #3: If I can deal firstly with the Scottish Widows and Aviva debt in December 2027. We are obviously very much focused on that, and the majority of sales that have been undertaken in the first half, and indeed will be undertaken in the second half, are focused on that specific facility.
Speaker #3: That will mean selling some income, but that income is where we've identified further risk down the line. For example, we will be selling—and indeed are under offer to sell—a large building where we know the tenant will vacate in 15 months' time.
Speaker #3: The leasing market in that specific location is thin, and therefore we're de-risking by selling now. People say, 'Well, why are you selling and who's buying?' But we're selling to an operator who holds various assets in the same location.
Speaker #3: So there's an element of local knowledge and marriage value for them. So that will be reified, alongside the Scottish Widows facility in December '28.
Speaker #3: So we're in discussions both with our incumbent debt providers—and Scottish Widows are there—to refinance both facilities, and also with other lenders outside of Scottish Widows.
Speaker #3: We want some competitive tension, but I think the answer will be if we can refinance the Scottish Widows and it makes sense to do so, because they'll give us the benefit of the current pricing through to the expiry of those facilities.
Speaker #3: So, current pricing to December 27 in respect of that facility, and indeed current pricing to December 28 on that element. With the sales, we expect to be refinancing at roughly $100 million of debt.
Speaker #3: And that refinancing will on current pricing will be 3% above current levels. So just over 6% all in cost. Whilst we're also looking at the RBS Bank of Scotland Santander facility that was a facility we entered into a year or so ago and it was a three-year facility with the option of two further one year extensions.
Speaker #3: We've already made the application for the one-year extension from December 28, and that's currently a credit with the banks. We anticipate receiving that very shortly.
Speaker #3: So the widows facility, if we refinance for them, is likely to be for seven years. With an external party, maybe five years. But that would then allow us some breathing space in terms of the expiries—out until the first one in June 2029.
Speaker #3: And the sales program, effectively, will continue but only on non-core assets. So we will have dealt with the bank facilities. We'll have reduced LTV to somewhere around 35% by the year-end on current sales.
Speaker #3: And indeed, we will have no banking facilities to deal with until Santander, June 29. Okay, a reminder of our strategic priorities. So, driving income—how do we do that?
Speaker #3: Well, we increased occupancy and rental growth across the portfolio, strengthening the core portfolio and continuing to improve EPC ratings. That’s vital in obtaining tenants, and the quality tenants that have requirements in the marketplace.
Speaker #3: They will, as I mentioned earlier, only commit to grade A space and EPC ratings of A and B moving forward. We're committed to reducing debt through targeted disposals; that continues, and we're well on our way to achieving our target by the year-end.
Speaker #3: And we're committed to fully covering the dividend. We are fully covered for the half year and will be at the full year. And we'll pursue or produce to add value ahead of disposals.
Speaker #3: So that's the value-add element of the portfolio. And again, we're making good progress with those assets. Next, Adam, please. So, to sum up, we've now taken you through the H1 results of the company.
Speaker #3: We're very hopeful that the insights and the immediate outlook, as well as the longer-term outlook in relation to the supply and demand dynamics, also appeal to you.
Speaker #3: But we do believe that the supply and demand dynamics over the short term offer the regional office UK market a very opportune time to show rental growth, and by showing rental growth, show value improvement.
Speaker #3: With interest rates stabilizing, we don't expect to see huge growth in terms of value by yield compression. However, we can drive value by improving the quality and quantity of the rent.
Speaker #3: But yet again, we seem to be in a period of instability. However, we can deal with what's in front of us, which is our portfolio and the UK markets.
Speaker #3: So, that brings us to the end of the formal part of the presentation. And now we're very happy to take any questions.
Speaker #1: That's great. Thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions by using the Q&A tab situated on the right-hand corner of your screen.
Speaker #1: Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation—and give responses as appropriate to do so—and I'll pick up from you at the end.
Speaker #2: Thank you, Lily. Thank you, Stephen. I may start with the first question that was submitted earlier today. Can you give an update on the lead development, please, and what is the legal position? Has that been settled?
Speaker #3: Yeah I think I probably touched on this in terms of the presentation clearly it is an important asset and I can understand why the question has come in.
Speaker #3: So I think I mentioned we have been in discussions with the Department of Transport, who have responsibility for this site. So, although it's Leeds City Council in terms of area, and Leeds City Council would normally be the planning authority, in the case where the site is effectively blighted or safeguarded, it's actually the Department of Transport that has the authority.
Speaker #3: So we have now had confirmation that they will release this site. It took a lot of negotiation and fighting. We sat alongside ASDA as they threatened to relocate from Leeds city centre because their car park was also part of this exercise.
Speaker #3: Which has also been released, so I'm pleased to say we will hopefully document that in the coming weeks. We will be submitting first stage planning inquiries over the course of the next couple of weeks.
Speaker #3: We're already we're already to go with that and there that will start the the the process in terms of planning I also mentioned the ASDA situation so ASDA are keen to continue to occupy the front area of this and we'll take a 10 year reversion release at an increased rent and again we'll hopefully announce that in the coming weeks all tied together obviously as part of the exercise.
Speaker #2: Yeah, thank you, Stephen. Question on the cash position of the company: approximately $39 million of unrestricted cash reported as of June 30, 2026.
Speaker #2: Of that, how much represents service charge monies, tenant deposits, rent received in advance, or other working capital amounts that cannot realistically be used for permanent debt repayment?
Speaker #2: What amount does management regard as genuinely surplus, deployable cash after allowing for operational liquidity and committed capex?
Speaker #3: Yeah, good question. Long question. Let me try and deal with it in component parts. So, in terms of service charge monies and tenant deposits, that clearly is not our money.
Speaker #3: That is the tenant's monies. So none of that is in the 39 million. Rent received in advance yes that's a small proportion clearly we accept or collect our rents quarterly in advance.
Speaker #3: But I guess the easiest way to deal with it is in cash terms. So, we retain a cash buffer of £10 million, an element of restricted cash—£1.8 million currently.
Speaker #3: And that's restricted by the banking facilities, but will be released as and when we meet the requirements of each individual facility. That sum varies substantially.
Speaker #3: It was almost zero in December; $205,000 in June 25. I think we’re at $3 or $4 million. So, that number varies substantially, but that will be released. And then the remainder really is committed and proposed CapEx projects and normal operating activities’ costs.
Speaker #3: So all of the money has a purpose and is identified. So true surplus i.e. where we don't have a purpose for it very little and obviously the cap buffer the cash buffer of 10 million we we retain as an insurance policy effectively or any unknown matters that that crop up.
Speaker #2: Thank you, Stephen. And then a couple of questions on occupancy. So firstly, core portfolio occupancy fell from 86% at December '25 down to 82% at June '26, while overall occupancy is 74.3%.
Speaker #2: What caused the decline in core occupancy and what occupancy level does management expect for both the core and total portfolio at December 26 and 27?
Speaker #2: And then another one is more: when do you think you will achieve occupancy at 80% plus level?
Speaker #3: Okay, so the main reason for that fall in core occupancy is that we have sold some income. Now, we clearly want to target the non-performing assets and the assets where we have substantial hold costs, i.e., the vacant assets.
Speaker #3: And we've done a good job in in the first six months in doing that. I've mentioned earlier 700,000 pounds of saving which comes from those sales.
Speaker #3: However we have sold some income so that that is really the the main part along with some lease expiries not renewing and some breaks being exercised in normal course of events.
Speaker #3: We gained £1.9 million of rent but lost £1.8 million of rent from those lease expiries and breaks being exercised. So that's the main reason for the fall in that core element.
Speaker #3: In terms of in terms of occupancy levels by the year end and by the end of 27 26 rather we are looking at 84% occupancy by the end of 26.
Speaker #3: An outcome from driving rents in terms of increased occupancy of our buildings, and selling vacants, so that's really where we're targeting. So that 80% figure plus is going to come into force probably beginning of '27.
Speaker #3: So we are keen sorry beginning of of of 28 where we're keen to progress with the leasing up activity we have over 200,000 square feet of space that hasn't been refurbished where there is strong interest but converting that interest I think I mentioned earlier subdued so converting that interest to actual lettings and income has taken some or does take some time and we're not the only company witnessing that.
Speaker #3: It seems it's just offices.
Speaker #2: Thank you. And then a couple of questions on the debt position. Bear in mind a 240 million we currently have in debt the 103 million of Scottish widows and of the fever facility matures in December 27 and currently has an LTV of 47%.
Speaker #2: What level of debt and LTV does management expect immediately before refinancing and what refinancing interest rate or range is currently being expected or assumed?
Speaker #3: Yeah, again, I think I've probably covered this in the presentation. So, the level of debt we expect is to be £100 million, and expiry is the December 2028 expiry.
Speaker #3: 45% is the figure that widows requires to get to when we've been speaking to other banks ranges between 40 and 45 45 seems a a relatively comfortable figure for most of the banks.
Speaker #3: And therefore, clearly, we need to get the current LTV of 47.3% down. That's the sales. So, £100 million, 45% LTV, and the cost will almost certainly be 3% above where we are currently.
Speaker #3: So, early—early 6%—we have seen a lot of movement over the course of the last couple of weeks just in terms of the five-year rate which debt is priced. So, I guess it'll depend where rates sit when it comes to finalizing the loan documentation.
Speaker #3: We are anticipating that will be in place by the end of Q1 next year, and the rationale for that is clearly that the audit will be undertaken at that point as part of the full year results.
Speaker #3: ...exercise, and we don't want a material uncertainty clause in our accounts, given that that debt will then be within 12 months, or expiry within 12 months.
Speaker #3: So, I think that's the long and short of it. I think it's highly likely that we will refinance with Scottish Widows.
Speaker #2: Thank you, Stephen. And a similar question on the debt: what LTV are we actually targeting?
Speaker #3: Yeah, I mean, we've indicated levels of debt previously to be mid-30%, i.e., 35%. We'll be at 35% by the year end, assuming the sales that we have contracted and anticipate will complete, happen.
Speaker #3: So, that 35% level, the Board seemed relatively comfortable with. There's various thoughts in terms of should we be targeting 30%, should we be targeting lower. Certainly, it will naturally come down if we improve the quality and value of the portfolio and, indeed, as we continue to sell non-performing assets, you'd expect that 35% to drift down. But at the moment the Board seemed comfortable, and the Company seems comfortable, at 35% LTV.
Speaker #2: Thanks Stephen. And then more of a general question on the management structure. I realize that you have to paint the picture as rosy but the markets don't seem to recognize that as long as the long-term investors have suffered high management charges falling dividends and stagnant if not falling share price what is the board doing to encourage the markets and and now is now is the turnaround and how is the turnaround and to avoid long-term shareholders from existing?
Speaker #3: Yeah I I mean the the the management fees have have have reduced substantially as well. Management fees obviously were originally just based on NEV and rental so as as that NEV came down and rents came down management fees also have been reduced substantially.
Speaker #3: The board did renegotiate the management contract a year or so ago which obviously announced to the market which then split the investment management fee between NEV and share price so very much aligning the interests of of the manager alongside the interests of the shareholders.
Speaker #3: That alignment is probably right and proper, but it reduces fee income even further for managers. So, are they high costs? Well, high in proportion to what?
Speaker #3: Clearly it's a complicated portfolio to run. So I I I would argue that the management fees are are not particularly high when you look at internalized costs and and certainly salary levels of our company are far substantially below those of internalized PLCs.
Speaker #3: So, you know, we continue to fight hard. I mean, I also have a large shareholding, as most people know. So, you know, my interests are aligned both as a manager and as a shareholder, and we continue to drive forward our program.
Speaker #3: We haven't been in complete control of our own destiny, given falling values and pressure from banks. I think that will be far released come 2027, when, you know, we have refi'd, we have reduced debt to a far more comfortable level, and we begin to see some meaningful inroads into the net income position, i.e., getting rid of some of those void costs.
Speaker #3: So the managed management continue to work hard day by day. Is the market tough? Of course it is. Has been really since Covid but I actually am seeing you know light at the end of this tunnel sales program going well reducing overall indebtedness giving us control of our own destiny back and you know we we will see that growth come through in terms of supply demand.
Speaker #3: So as long as demand holds doesn't have to improve as long as it holds and supply continues to contract then then you'll see our our portfolio continue to increase occupancy.
Speaker #2: Thanks, Stephen. And on a similar vein, in terms of supply and demand in the office stock market, how long is it likely to take for the excess office stock supply to be absorbed?
Speaker #3: Yeah excess office supply is mostly of buildings that are no longer fit for purpose and need you know a lot of construction a lot of refurb costs and refurb and new build is difficult given the construction market I talked about the development market earlier with values effectively flatlining and costs increasing then it makes development and indeed refurbishment increasingly difficult to justify you know bit of a double-edged sword our valuations have been hit very very hard over the course of the last few years post Covid as the occupier market you know shrunk and and now is increasing again as as companies who downsize substantially post Covid are now increasing the amount of space that they'd acquire to bring people back into the office.
Speaker #3: So I think, you know, looking ahead, the surplus stock that's out there, i.e., that 20% of unoccupied space, is mostly in grade C, D, and E buildings.
Speaker #3: So not fit for purpose. Many of the buildings occupied will fall into the same category as tendencies come to an end or or tendencies are able to exercise break options they will look to upgrade space.
Speaker #3: And the answer to that is that there's very little Grade A accommodation conforming to EPC A and B available, which will drive rents.
Speaker #3: But it also will mean that hopefully our renewal rates will remain stronger as tenants won't have options to relocate so I'm hoping over a double-edged approach for us.
Speaker #3: One in terms of leasing up the space that we've refurbished and secondly in in respect of retaining tenants in in their existing accommodations. So I think renewal rates will increase as well as new lettings.
Speaker #2: Thanks, Stephen. And then, more of a general question in terms of the strategy: value-adds come at the bottom of the strategic list, with selling assets at the top, roughly.
Speaker #2: Is this an opportunity, and I suppose when do we see the selling going to stop?
Speaker #3: The the the sales for refining will will stop at the end of this year so so they're they're on forward. There'll be you know good rational rational reasoning why we're selling.
Speaker #3: We'll be selling because we don't see a future in a specific asset. We don't think it will perform in terms of rental growth because it may be the wrong type of asset, the wrong location, and/or there are risks to us in terms of refurb costs going forward.
Speaker #3: So we'll we'll be back to selling for strategic reasons post the year end. We'll and selling will stop? No because as as assets become let or or vacant we may well sell for you know the reason that we get an offer that's substantially ahead of of current holding value and it makes sense to do that.
Speaker #3: And and that's what we've always done. We've we've always turned the portfolio where there's a profit to take or to minimize forthcoming risks. And that will continue but in terms of sales for refi that that part will complete the end of this year.
Speaker #2: Thank you. And I think the last question, which was sent by a couple of people, is: if the refinancing bank facilities go up across the board, what impact will that have on the dividends?
Speaker #3: Well the the intention is to hold a dividend a similar levels in the next year or so and the reason for that is showing a small increase link in terms of brokers forecasts consensus forecasts for for for 27.
Speaker #3: So the 8, I think 8.2p or so, and the reason for that is we recognize the increased costs. To put it in context, if you are to refi that £100 million at a 3% higher rate, then it's £3 million per annum additional interest cost.
Speaker #3: Now, we need to offset that cost by increasing the sales of vacant properties and therefore reducing our void costs. Obviously, we've done £700,000 in the first six months of this year.
Speaker #3: And also, by letting up space of currently vacant accommodation—and for those that have listened to me many times before—for every £1 of rent, it's £1.80 to £2 to the bottom line, given those very high vacancy void costs of service charge, insurance, and, of course, the interest charges.
Speaker #3: So we we we have a plan we'll offset those costs we'll try and hold the dividend as best we can but I I and and you know we can do that within the existing parameters of of where we are.
Speaker #3: So you know it will will have an impact on on dividend? No we we're hoping not. We we should still be able to make our 8p plus dividend.
Speaker #2: Thanks, Stephen. I think that's all the questions today. I'll hand back to Lily now.
Speaker #1: That's great. Thank you for answering those questions you can from investors and of course the company can review all questions submitted today and we'll publish those responses on the InvestorMeet company platform.
Speaker #1: Just before redirecting investors to provide you with their feedback, which is particularly important to the company, Stephen, could I please just ask you for a few closing comments?
Speaker #3: Yeah I think we've covered quite a lot over over this afternoon. This is really just a a six month update as all half year results are you know we'll we'll provide more detail with the full year as to you know where where we sit.
Speaker #3: We anticipate making all of our strategic targets which will allow us to continue to pay that dividend and then hopefully as markets begin to improve and as we drive income forward we can then look to to increase that dividend year on year post next year so 28 onwards.
Speaker #3: So you know thank you all for attending I think we have made very good inroads we're getting towards the end of that strategic repositioning of the portfolio and and therefore you know I'm I'm pleased that that we're at this stage we'll get there hopefully by the year end and then drive the company forward into 27 28 and beyond.
Speaker #3: Thank you very much for paying attention today.
Speaker #1: That's great. Thank you for updating investors today. Can I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations.
