Redefine International is starting to reap the benefits of what chief executive Mike Watters described as a “massive clean-up” of both its portfolio and balance sheet.
The company completed its conversion to REIT status in December last year and is now at the end of a gruelling restructure of £847m of debt it inherited through its reverse takeover of government office-focused property company Wichford in 2011.
However, in an era of increasing specialisation by real estate companies, can Redefine’s steadfast commitment to diversity, with a portfolio that spans German shops to London hotels, continue to drive performance as it matures as a REIT?
The London- and Johannesburg-listed firm has performed well in its first year since conversion, with pretax profit jumping from £60.1m to £102.8m in the 12 months to 30 August.
It also cut its debt from 57.8% to a more sustainable 48.1% thanks to a wave of refinancing, asset disposals and a 4.7% uplift in the value of its portfolio. Redefine’s debt is still high compared with the sector average of 35%, according to analysts at Liberum. However, after refinancing £162.5m of debt due to expire by 2016 this year, with loans from HSBC, Berlin Hyp and Aareal Bank, there are no major maturities looming, and its weighted average debt maturity is 9.3 years.
This frees the group to continue its eclectic investment strategy. Its broad spread of investments is broken down into UK commercial (14.4% of the portfolio by value), retail (33.7%) and hotels (19.3%), and a range of European properties (25.8%).
The remaining 6.8% comprises a handful of UK sheds and a 9.9% stake in Cromwell Property Group, a listed Australian propco specialising in government-tenanted assets.
“Redefine is something of an outlier because of its level of diversity. There has been a trend for REITs to specialise more in recent years, but Redefine goes against the grain,” said one investment bank analyst.
“The only true comparable would be Kennedy Wilson Europe Real Estate, which does office, retail and industrial in the UK, Ireland, Spain and Italy.”
But going against the grain is not necessarily a bad thing. According to research by NewRiver Retail, which monitored 40 UK-listed companies with a market cap of more than £100m last year, Redefine was the only generalist to appear in the top five, with a 77% return.
Watters is quick to point out that there is a unifying theme to Redefine’s spread of holdings: income.
“We don’t just jump in and out of sectors at random. Our focus is very strongly on income,” he said. “It is good to have a spread of risk, and we like to be in a position to allocate capital according to which areas of the market are performing best.”
For example, government offices, Watters explained, have been “the biggest losers”, while hotels and retail have piqued the company’s interest thanks to the UK’s economic recovery. This has seen Redefine shed £35m of shares in Cromwell, cutting its stake from 13.1% to 9.9% over the financial year, as well as repositioning in the UK.
“Government-tenanted offices have gone from around 20% of our portfolio this time last year to less than 10% today. As the public sector continues to cut its requirements for office space, we have to look at whether our regional office properties are going to be able to maintain their income,” he said.
Meanwhile, Redefine has been deploying money into hotels and retail – helped by £86.8m raised through share placings this year. It bought the Edinburgh Doubletree Hilton for £24m in September and the £84m Weston Favell shopping centre in Northampton in October last year with Aviva.
The fruits of Redefine’s pruning of its portfolio are now starting to show up in its balance sheet. Rental income leapt from £19.6m last year to £27.4m at the end of August. This has not been lost on analysts.
“Management have worked incredibly hard to improve income quality, with further potential expected,” said an Oriel Securities analyst. Oriel gave the REIT a “hold” rating last month.
Cleaning up a complex balance sheet and weeding out lower-returning assets has given Redefine the headroom to do the entrepreneurial, fundamentals-driven deals it does best.
Redefine International
Chief executive: Mike Watters
Market cap: £667.7m
NAV per share: 40.5p
Net debt: £704.5m
Share price: 51.1p
LTV: 48.1%
AUM: £1.1bn
UK holdings include 27 Kwik Fit service outlets, malls, hotels and the 104,852 ft Churchill Court office park in Crawley, West Sussex. It owns a 37-strong European portfolio of offices and retail in Germany, the Netherlands and Switzerland. It also holds a 9.9% stake in Cromwell Property Trust.
sophia.furber@estatesgazette.com
