Guest Pitch: Real Estate Investors (RLE:L)

Liquidation: 35%-50% Upside (at £0.32/share)

This idea was shared by Daniel.

RLE is a London listed REIT that begun a winddown after concluding a strategic review in January 2024. Management guided for a three year liquidation at the time. By the way, the stock isn’t available on Interactive Brokers — but you can pick it up through certain local and European brokers such as Freetrade Premium, Degiro, etc.

RLE consists of £122m of commercial property in the English Midlands, concentrated in the West Midlands urban area, the UK’s second largest conurbation of around 3m people. It also holds £2.4m of residential development land in South Wales and £7m in cash. The capital structure is conservative with LTV at 26.4%. Since beginning their wind down, they have completed £19m in sales at an average of 7% above their valuations. While opting to sell properties individually, they have said they are open to a “portfolio or corporate transaction”.

In final results released on 25 March, they stated there are “signs that the investment market is bottoming out and we anticipate stable and improving values ahead.” They also expect larger asset sales in H2 2025 and see themselves as sticking to their three year timeline.

Performance has been mixed but generally in line with the commercial real estate market. Net initial yield is 6.92%, with a strong reversionary yield of 9%. WAULT to Expiry is 5.7 years. The portfolio was 82% occupied as of Dec 24, with almost half of rent coming from the office sector, the rest being a mix of retail and leisure. Looking through the portfolio it is more defensive than it first seems:

• The top tenant is DHU Healthcare, comprising 7% of total and 15% of office portion, which provides NHS 111 (non emergency helpline) to eleven million people and other urgent care services to the NHS. This lease has been signed recently after a refurb.
• The largest office, Avon House (4.4% of total rent, 9% of office rent), is under lease with a wealth manager until 2035.
• 3.6% of total and 7.5% of office portion is let to the Government through a Jobcentre.
• 6% of total rent from pharmacies, including national chains Holland & Barrett / Boots etc.
• 4.5% of total rent from supermarkets.
• A number of multinationals, including SGS, Grafton (FTSE 250), BT (FTSE 100), O2 (Telefónica), Microsoft, Serco (FTSE 250), McDonalds, B&M (FTSE 250), and Toshiba among the rent roll.

So whilst there are some more discretionary-leaning assets like hotels and private schools, I think the 10% effectively government-derived rent and large exposure to food, pharmacy and utilities derisks the proposition.

A larger unoccupied office building has been sold for residential conversion with completion estimated by the end of June, which will “materially reduce holding costs” as well as lift the overall occupancy rate. It seems like a couple of the other unoccupied properties are retail units.

Total debt is £38m, 25% of which is fixed with overall cost at 6.5% until current facilities expire in May/June 2026 and management deem it prudent to continue carrying a cash reserve in case they need to provide bank security. Refinancing should not be an issue as they were carried out in both 2024 and 2025, reflecting the intention to continue repaying as disposals complete.

Over 64% of the portfolio has an EPC (energy performance certification) rating of A-C, which has a large effect on tenant attractiveness due to environmental regulations, corporate pledges and the UK’s high energy prices.

Alignment seems okay. CEO owns 10% (another 20% owned by two active managers, 5.5% owned by Asset Value Investors). The Finance Director also holds shares. Existing LTIP awards have generally been reduced by 1/3 to 2/3. Exec and NED base salaries have been reduced by a third and bonuses slashed in half.

The REIT is sitting on a 5% yield after paying out 1.9p last year. Management intend to continue distributing all future rental income.

At the current price of 32p, assuming a final 1p dividend in Q1 2026, 95% EPRA NAV achievement by Q1 2027 and a further 3% in liquidation fees, results in 48p of proceeds and an IRR of ~22%. Whilst a delay could push this lower, it is noteworthy that all sales so far have been above NAV and the portfolio is generating enough to pay more than 1p in dividends until liquidation in two years time. It should also be mentioned that they managed to sell another £21m of properties in 2022 at 8.5% above 2021 valuations, and £18m during 2023 at 3% above 2022 values, in what was certainly a challenging environment at the time. They seem to consistently achieve sales at above NAV over many years.

The only other writeup I can find on this is from Substack (Matt Brazier) who expects at least 9% annualised returns even with an arbitrarily harsh 80% realisation, but like me expects around 20% annualised TR.

 

Risks

Delays to the timeline are possible, as they have not sold a third of the portfolio with 1 out of 3 years having passed. From an initial glance the development land also seems harder to sell.

There are £400k of related party transactions in 2024, mostly concerning fees charged by companies linked to the CEO. This could be nothing but worth bringing up.
There is a risk some office properties may not achieve their valuations, but they are all small scale and can serve a wide range of tenants, or even potentially be earmarked for residential conversion, same the disposed site has. Over 30% of office rent is government-backed or signed until 2035, with a significant amount of the remainder leased to creditworthy multinationals.

The portfolio is quite geographically concentrated. This is very much a tail risk but an event like a severe regional flood could cause material impairments. It is also quite exposed to things like Birmingham Council (Europe’s largest) attempting £300m of cuts to avoid insolvency, as well as the threat of additional store rationalisation by Boots after the private equity takeover of Walgreens Boots Alliance.

 

Snapshot of the portfolio based on rental income

• 36 assets in the Midlands region of the United Kingdom
• 132 tenants with strong diversification (largest one generates 7% rental income)
• £124.6m gross property assets as of December 2024
• £89.5m net assets
• 82% occupancy
• £9m annual contracted rent
• 5.8 years WAULT (weighted average unexpired lease term) as of December 2024

Historical acquisitions/disposals (in £m):

 

Below is a quick exchange I had with Daniel (author of the pitch) on this case

Dt:
Please correct me if I’m off, but I think the potential upside here is quite a bit smaller. If my calculations below are correct, then would appreciate your thoughts on these.

On top of your estimates, I think we should also layer in:

• Transaction fees (3%) of £2.6m
• Cash burn until liquidation of £5m. Last year they already burned £0.5m after finance costs and capex, but I’d expect that to ramp meaningfully going forward.
• Management’s incentive fee of £1.1m (calculated as 5% of returns above market value as of Dec 31, 2023)

…the liquidation value lands at around £74m, or 35% upside with 16% IRR over two years. But there are other concerns as well:

• Portfolio values have been dropping over the past two years—like-for-like down 5% in 2024 and 8.4% in 2023. So your 95% NAV realisation estimate looks a bit optimistic.
• Occupancy is falling, and rent roll is eroding. Stripping out disposals, RSE lost £0.5m in annual rent over the past two years purely from tenant exits and lease renewals. Renewals being signed at lower rents doesn’t look great.
• The timeline is heavily dependent on a UK real estate recovery. From RSE’s latest presentation:

Due to the current subdued marketplace, our normal buyer pool for assets of £2 million+ remains inactive (such as property companies, REITs, UK funds, private pension funds, high net worth individuals, overseas and private equity buyers). As a result, some assets are being held for income until we see an opportunity to sell.

And from the annual report (emphasis mine):

We are expecting market improvement ahead as interest rates gradually reduce, enabling us to expedite our sales programme and sell larger corporate and institutional-grade assets as 2025 progresses—albeit the pace of the programme is wholly dependent on investors returning to the market.

• The recent industry outlook from Aberdeen (from a month ago) doesn’t sound very encouraging either. It confirms that investors are still on the sidelines and that “trading volumes will remain muted in the near term.” So RSE’s asset sales might remain slow.

Let me know if you see this differently.

Daniel:
I’ll try and defend my case and say that 95% realisation is broadly achievable on the basis that a 5% nominal decline in capital values over the next 24 months is unlikely + their historic performance of selling above NAV. Per that report Aberdeen don’t expect “widespread” declines for UK CRE, their forecast is for 5-6% increases this year within office and retail.

According to the CBRE May report, both office and retail values have risen so far this year, with rents also up. They see “increased investor interest in offices, with investment volumes in Q1 showing a marked increase over the same quarter last year”, though.

Interestingly, in their April report they said:

we perceive that the gap between buyers and sellers in relation to pricing has narrowed. The cut to the UK Bank Rate last week, together with expectations of future cuts, should feed through into borrowing costs and bond yields moving forward. If this happens, then we see the market being well positioned for an uptick in activity through the remainder of the year

This aligns with what RLE were seeing at the backend of March. So I do think there is a genuine office recovery happening. Add to this that most of RLEs offices are small (quite a few sub >£2m imo), which Aberdeen say is the category with the most confidence, and also that this is a size where you can more easily sell to owner-occupiers, especially as rates come down (as RLE have done) and I think there will be adequate liquidity over the next 12-24 months.

I do agree with the other points though, cash burn is probably right if they will need to refurb some more properties to facilitate sales. Timeline hinges on recovery and macro. They don’t give much detail on the rent reductions but in the latest report they do say:

There are currently £230,110 p.a. of pipeline lettings that will improve our occupancy and contracted rental income levels and will reduce void costs across the portfolio.