Costs pressures hinder growth

RESULTS

Need To Know

• In-line result. AFFOps and DPS in-line. FY24 guidance miss due to cost pressures.
• Occupancy fell ~0.2% since 1H23. Weakening but yet to suggest a significant threat to operations. 
• P/FFO Multiple remains at the top end of the AREITs. Expect the weaker growth outlook will deter share holder interest at current levels (even with a ~10% discount to NTA). 

FY23 Result overview: 

Funds From Operations per share (FFOps) was 16.9cps (17cps consensus) and Adjusted FFOps was 15.3cps (15.2cps consensus).

DPS 15.2cps in-line (15cps consensus).

Gearing 31.3% vs 31.7% at 1H23. 

Occupancy fell 0.2% to 97.8%. 

NTAps down 3.8% to A$2.55 (~10% discount to current share price). 

Highlights

In-line result. Statutory net loss of ~$123.6m recorded due to movement in property values. Earnings in-line with market expectations. Underlying FFO and AFFO growth was offset by an increase in the Weighted Average Cost of Debt (WACD), holding yoy growth largely flat. 

The balance sheet position is improving with gearing falling 0.4% to 31.3% and 90% of FY24 debt hedged or fixed with a 4.4% WACD. The group will continue to target the lower end of the 30-40% gearing range and a "+50% but closer to 75%" hedging rate on a rolling forward 24 month basis. 

Portfolio occupancy fell ~0.3% and is now back in-line with 31 Dec 22 levels. Whilst it has moved backward, the magnitude is yet to suggest that this is a notable issue. 

Total MAT grew by 4.5% propped up by a 7.5% increase in specialty sales (which was driven by a ~8.2% increase in sales from non-discretionary). Suggests retailer operating conditions are holding stronger than previously expected.

Figure 1: MAT segment breakdown

Investment Implications

Result suggests a weaker outlook for FY24 due to higher debt costs and expense inflation. FY24 guidance ~2-3% below consensus. (FFOps 15.6cps vs 15.9cps and AFFOps 13.7cps vs 14cps). Payout to be held at 100% of AFFOps, implies ~3-4% miss vs consensus DPS. 

No change in balance sheet or growth targets. No notable news from the Metro fund (JV with GIC) although expect minimal acquisitions in the short term. We believe this may underwhelm the market. 

RGN trades at the second lowest P/NTA discount (~10%) and at the second highest 12 month forward P/FFO (15x) of the AREITs. Given that guidance suggests negative earnings growth for FY24, we see greater value elsewhere in the AREIT's. 

We re-affirm our Hold rating.

Figure 2: RGN's 3yr forward FFOps CAGR weakest of the AREITs with the second smallest price to book discount.

Figure 3: 12M forward P/FFO second highest of the AREITs although still remains ~1pt below 5 years average.