Late last year, property group Redefine rebranded itself as RDI REIT (RDI), which stands for Real Estate Diversified Income. The name change reflects management's ambition to become the UK's leading income-focused real estate investment trust (Reit) "delivering superior, sustainable and growing income". But while forecast income is certainly eye-catching, the discount the shares trade at compared with forecast net asset value (NAV) suggests investors are yet to rally to the cause. However, we think changes to the portfolio over recent years could yet ignite the market's interest and the mammoth forecast yield could prove the real deal.
Attractive dividend
Discount to net asset value
Expanding into London serviced offices
Strong London hotel market
Still exposed to the retail sector
Debt relatively high
A key change made to the portfolio has been a reduction in RDI's exposure to shopping centres, which have seen values fall in recent years. UK centres now represent 19 per cent of the portfolio compared with 33 per cent at the end of August 2015. Meanwhile, German retail properties (chiefly shopping centres) have been reduced from 26 per cent to 15 per cent of the total. Overall retail exposure has fallen from 59 per cent to 45 per cent of the portfolio.
Selling properties has freed up capital to buy flexible office space, retail parks and hotels. Disposals in the six months to February this year brought in £211.8m at an average premium of 8.7 per cent to market value. This included the sale of a German supermarket portfolio for £181.5m, against a market valuation of £163.7m. Not all deals were so lucrative, with the £11m sale of a retail property in Hull coming in £1.9m below book value. However, given the property was a branch of House of Fraser, the deal looks canny in light of the retailer's recent troubles.
Meanwhile, around £162m was spent during the first half acquiring an 80 per cent interest in four London serviced offices, with its strategic partner OSIT continuing as operator. This is designed to exploit a growing trend by corporates for flexible and cost-efficient office space, even more so as technological advances are allowing greater employee mobility. The net cash yield on equity for the properties is expected to be more than 9 per cent.
| RDI REIT (RDI) | ||||
| ORD PRICE: | 33.35p | MARKET VALUE: | £634m | |
| TOUCH: | 33.35-33.6p | 12-MONTH HIGH: | 40p | LOW: 31.2 |
| FWD DIVIDEND YIELD: | 8.4% | TRADING PROPERTIES: | £26.9m | |
| DISCOUNT TO FWD NAV: | 22% | |||
| INVESTMENT PROPERTIES: | £1.6bn | NET DEBT: | 90% | |
| Year to 31 Aug | Net asset value (p)* | Net operating income (£m) | Earnings per share (p)* | Dividend per share (p) |
| 2015 | 41.7 | 74.4 | 3.2 | 3.3 |
| 2016 | 40.4 | 83.4 | 2.9 | 3.2 |
| 2017 | 41.4 | 89.5 | 2.7 | 2.6 |
| 2018* | 42.6 | 101.8 | 2.9 | 2.7 |
| 2019* | 42.9 | 104.5 | 2.9 | 2.8 |
| % change | +1 | +3 | - | +4 |
| NMS: | 30,000 | |||
| BETA: | 0.88 | |||
| *Peel Hunt estimates, adjusted NAV and EPS figures | ||||
Regional office disposals are likely to continue in order to recycle funds into serviced offices in London, where nearly a fifth of all leasing transactions in 2017 related to serviced offices. And estimates suggest that from 7 per cent now, serviced offices will make up almost a third of all central London office stock by 2030.
RDI also increased its stake from 17.2 per cent to 74.1 per cent in International Hotel Properties (IHP); hotels make up around a fifth of the group’s property portfolio. The IHP portfolio comprises nine UK hotels, four of which are franchised to Holiday Inn Express and another four to Travelodge.
Revenue per room grew strongly in 2017, and while further growth is expected, the rate is expected to slow as a result of more rooms opening up. However, occupancy rates are expected to remain high, with London occupancy levels averaging over 80 per cent in the past decade.
Debt at £790m puts the loan-to-value ratio in the 40 to 50 per cent target range, at 48 per cent. RDI has also managed to reduce its EPRA (European Public Real Estate Association) cost ratio (of net overheads and operating expenses against gross rental income) from 20.7 per cent to 15.7 per cent, close to its 15 per cent target.
