Region Group (RGN): This morning, shopping centre landlord RGN released their results for 2023, the company’s results were largely inline with expectations, though revealed higher expense and higher interest costs. The Core Portfolio has a 2% weight to RGN, with the Income a 3.5% weight.

 

Key Points:

  • Profits Up:  up +2.6% $174 million, with rental increases counterbalancing increases in debt costs.
  • Distributions flat : Distributions were flat 15.2 cents per unit
  • Operational Performance: RGN continues to manage its portfolio well with occupancy at 98%, with a strong average lease term of 6.2 years. Tennant sales in the centres were stronger than expected at +4.5%, led by food and liquor (+3.4%), pharmacy/medical (+7%) and Kmart/BigW (+9%) all of which benefited from inflation and budget conscious consumers trading down. Currently, 59 anchors were paying turnover rent in addition to base rent up from 39 anchors two years ago. Reduced consumer sentiment has historically favoured supermarkets and non-discretionary tenants.
  • Balance Sheet: Gearing at 31% at the low end of 30-40% target range though has crept up with expansion in cap rates. RGN’s average debt cost 3.5% with a term 4.4 years and minimal expiries until 2027.
  • Valuation: the most important metric for the August 2023 reporting season, RGN has their portfolio independently valued which saw the cap rate increase to 5.85%, a very conservative valuation compared with peers (see below) and based on recent supermarket sales, this saw NTA reduce to $2.55.
  • Guidance:  RGN management guided to a weaker outlook based on higher debt costs and growth capex for a Woolworths home delivery facility and increased roll out of solar panels and refurbishments of several sites. Higher sustained food inflation will be a positive and RGN typically offer downbeat guidance.

Portfolio Strategy:  RGN offers the portfolio exposure to non-discretionary retailing via a diversified portfolio of neighbourhood shopping centres typically anchored by a Woolworths or Coles supermarket with an accompanying Dan Murphy’s or BWS. Unlike better known retail landlords such as Scentre or Stockland; RGN’s tenants are not particularly exposed to the impact of online sales or the Coronavirus impacting tourism, with consumer staples and alcohol,  as well as medical and personal services such as haircuts,  are not easily delivered online and bought almost entirely by local Australian residents.  Long leases to quality tenants such as Woolworths, Coles and Aldi give a high degree of confidence that RGN can maintain and grow their distributions over time.

RGN finished down 3% to $2.27.