RDI REIT shares fall as it works through challenging market

Shares in RDI REIT were in the red on Thursday, after it reported a 0.2% improvement in net rental income on a like-for-like basis for its first half, or 1.9% when excluding £0.7m of hotel refurbishment charges.

The London-listed real estate investment trust said its EPRA occupancy remained high in the six months ended 28 February at 96.9%, which was a slight fall from 97.1% at the end of August.

It maintained a long weighted average unexpired lease term of 6.5 years to first break and 8.1 years to lease expiry, excluding hotels managed by RBH and the London serviced office portfolio.

A total of 100 lease events were completed in the period, at 3.4% ahead of estimated recovery value, while the board reported that its UK retail occupancy and net income remained “broadly stable” with “strong” leasing activity across the retail parks portfolio.

Footfall across the UK shopping centre portfolio increased 1.1%, which the board pointed out was an outperformance against the national average, where footfall was down 3.3%.

On the financial front, underlying earnings per share were 6.94p, down 5.2% year-on-year, while EPRA diluted net asset value per share declined 4.4% to 204.4p.

The like-for-like portfolio value was off 2.5%, or 1.8% on a constant currency basis, which the company said was impacted by lower values for the UK shopping centres portfolio, and the strengthening of sterling against the euro.

Excluding UK retail, valuations were said to be “broadly stable”.

First half dividend of 4.0 pence per share. Full year dividends to be weighted towards second half with expectation to revert to regular payout ratio alongside full year results

Looking at its operations, RDI said RBH-managed hotels continued to trade in line with expectations, with occupancy increasing “marginally” to 83.9% and average room rates and revenue per available room increasing 1.4% and 2.3%, respectively.

London serviced offices continued to trade ahead of expectations, with occupancy improving to 94.5%, EBITDA per square foot rising 0.9% over the period and EBITDA conversion remaining “high” at 63.4%.

RDI said it was focusing its capital allocation to sectors backed by occupational demand, with the £26.3m acquisition of Southwood Business Park Industrial Estate, Farnborough reflecting a net initial yield of 6.2%, and the commitment of £26m in forward funding of two distribution units at Link 9 in Bicester, targeting a yield on cost of 6.5%.

The firm achieved a “material reduction” to retail exposure through the proposed disposal of four UK shopping centres financed by Aviva at £177.2m, or 11.0% by market value, and the planned German retail portfolio disposal of £244.2 million, or 15.1% by market value.

Its board said a stronger capital structure was being prioritised, with its loan-to-value ratio increasing to 48.5% from 46.2% at the end of August.

The company’s pro-forma loan-to-value was 45.4% excluding the Aviva-financed UK shopping centre portfolio, where a consensual sales process had been agreed.

Further reductions in the ratio would be delivered through the disposal of the German portfolio, enabling a single geographic focus, the board explained.

It set a revised medium-term loan-to-value ratio target of between 30% and 40%, in line with its stronger capital structure.

The £275m UK debt facility had been extended for five years on favourable terms, the directors added.

“While this has been a challenging period on a number of fronts, operational performance has remained robust,” said RDI REIT chairman Gavin Tipper.

“Excluding the impact of the Aviva financed UK shopping centre portfolio, the core business delivered strong results and is well positioned for the future.

“I am confident that the current initiatives to further reduce retail exposure and facilitate a stronger capital structure will deliver sustained long term shareholder value.”

Chief executive Mike Watters added that the company had faced some “challenging” market conditions during the period, which had emphasised the defensive nature of the firm’s income, following the progress made against its strategic objectives over the previous three years.

“Strong operational results continue to be achieved across the majority of our portfolio which highlights the strength of the underlying business and the success of our asset management efforts.

“Following unprecedented weak sentiment towards the UK retail sector and the resulting negative impact on asset valuations, RDI has reached an inflexion point that will see us taking decisive action to accelerate delivery against our strategic priorities,” Watters explained.

“These include a lower leverage capital structure, more focused capital allocation and continued reduction to retail exposure.”

He said those priorities would support a simplified, single geography investment proposition with an enhanced portfolio weighted towards the board’s preferred sectors of beds, sheds and desks.

“Notwithstanding the near term impact on earnings, we remain confident that delivery against our strategic objectives will best position RDI for the future whilst enabling us to maximise shareholder returns from a more robust business that offers attractive income growth opportunities.”

As at 1340 BST, shares in RDI REIT were down 6.99% at 127.8p.