07 February 2017

Blog: Redefining the Cycle

by Scott Fulton | 7 February 2017

“May we live in interesting times” is typically described as “the Chinese Curse”, referring to the uncertainty of such a period. However, the Mandarin character for “Crisis” bears the meaning of opportunity. While we live in undoubtedly “interesting times” following the votes for Brexit and The Trump Presidency and may well face undetermined “crises”, Redefine’s Capital Markets Day highlighted how the company is committed to ensuring that it is well placed for any uncertainty and seeks to take advantage of any opportunities which current markets provide.

The company provided a trading update to accompany its Capital Markets Day presentations. This highlighted that Redefine’s strategy has evolved to take account of the emerging market in which it trades. Notably, it revealed “robust occupational demand” across its portfolio such that occupancy, by Estimated Rental Value (ERV), rose from 97.7% in August 2016 to 98.4% today. It also commented on a marked improvement in the underlying trading of its UK hotel portfolio following the uncertainty created by the Referendum in June 2016. Critically, Redefine revealed that it had disposed of, or was in the process of disposing of, £107.8m of portfolio assets at an aggregate sales price some 9.0% ahead of the last reported book values.

This last point played directly to a reduction in net debt which is key to the medium term strategy of the business. Redefine has reduced its proportionate share of debt by £55.4m through asset sales, leaving pro-forma leverage at 49.6% compared to 53.4% in August 2016. This capital management has resulted in a fall in the company’s cost of debt to 3.2% (3.4% August 2016) which, in a full year, should produce £4.0m of P&L savings.

Cognisant of the need to manage the market’s expectations of income given the strategy, Redefine also revised its pay-out ratio guidance to a range of between 90.0% and 95.0%, based on an adjusted EPRA earnings measurement. The company acknowledged that some degree of short term flexibility within this ratio may be required in order to “smooth distributions to shareholders”. Against this guidance, Redefine also offered medium term earnings growth guidance of between 3.0% and 5.0%.

Redefine’s current underlying performance was set within a medium term strategic framework designed to support its aim of becoming the UK’s leading income-focused REIT. This framework is based on four central pillars; a scalable business, an income focused portfolio, an efficient capital structure and a commitment to financial discipline. All are aimed at providing superior, sustainable and growing shareholder returns.

The focus on income is a direct reflection of the markets in which Redefine finds itself operating. While equity capital market valuations for real estate companies are often shown relative to NAV, the company provided a credible case for considering the income generating qualities of a portfolio as a valuation basis. The CMD presentation highlighted the consistency and predictability of income within the Redefine portfolio against the vagaries of NAV within a macro-economic environment which is characterised typically as low growth/low interest rate. A detailed presentation of the current portfolio, across use and geography, revealed a management strategy focused on identifying and maintaining income. These presentations revealed a portfolio which is dominated by secure or growth income assets but where there are considerable asset management and disposal opportunities.

Thus, the Redefine strategy and portfolio were shown to be aligned clearly to managing an uncertain medium term property cycle, reducing leverage where appropriate and smoothing returns to shareholders.

At present, we all live in interesting times and are threatened with “crisis” on a near daily basis. The key to surviving and, perhaps, prospering in this environment is to have a flexible strategy linked to a clearly (re)defined medium term aim.