Raven Property Group |
Logistics growth amid the pandemic |
FY20 results |
Real estate |
19 March 2021 |
Share price performance
Business description
Next events
Analyst
Raven Property Group is a research client of Edison Investment Research Limited |
As a growing and essential part of the supply chain, all of Raven’s warehouses continued to operate throughout the year, occupancy increased and more than 99% of rents were collected. In FY20, rouble weakness obscured this strong operational progress. However, strong demand for space, especially driven by e-commerce activity, combined with low vacancy, a lack of new supply and increased construction, are positive indicators for increased rents and valuations.
Year end |
NOI* |
PAT** |
EPS*** |
DPS |
EPRA NRV/**** |
Yield |
P/adj NAV |
12/19 |
126.5 |
15.8 |
7.7 |
3.50 |
83 |
12.3 |
0.34 |
12/20 |
113.1 |
19.0 |
(6.9) |
1.25 |
49 |
4.4 |
0.58 |
12/21e |
100.3 |
12.9 |
4.1 |
2.50 |
51 |
8.8 |
0.55 |
12/22e |
102.0 |
14.1 |
2.5 |
2.50 |
55 |
8.8 |
0.52 |
Note: *Net rental and related income. **Underlying earnings excluding FX as defined in Exhibit 2. ***Fully diluted underlying earnings including FX. ****EPRA net reinstatement value (NRV).
Underlying operational progress offset by FX
An increase in occupancy to 94% (FY19: 90%) and rouble rent indexation substantially offset continuing drag from the run-off of legacy US dollar leases (now 8% by area versus 16% in FY19). Despite tight market conditions, rents increased only modestly but management expects a move up towards RUB4,500 per sqm (currently c RUB4,100-4,200) during the year, growing thereafter. Valuations edged up 0.5% in roubles but with yields high (c 11%), interest rates low (-1.5% to 4.25% in 2020) and construction costs increasing, rent growth should increasingly drive capital growth. Raven will soon issue circulars in respect of the repurchase and placing of Invesco shares, ahead of a planned general meeting. If approved by shareholders, this will remove a significant share overhang. Details are yet to be announced but we expect the transaction to be accretive and at least cash neutral.
Estimates reduced due to FX
The rouble weakened from c RUB/£81 to c RUB/£100 during the year, c 20%, reducing rouble income and expenses reported in sterling. IFRS accounting also captures translation losses on euro-denominated debt in the rouble-operating subsidiaries. Excluding this, in sterling terms, underlying earnings were £19.0m (FY19: £15.8m) but the unadjusted IFRS loss was £14.2m. Balance sheet translation losses reduced EPRA NRV to 49p (FY19: 83p). An FY20 distribution of 1.25p, by way of a tender offer buyback, will be made. Our reduced sterling forecasts are based on a continuation of FX rates at around current levels. As we discuss in detail within this report, we see positive indicators for property valuation gains and rouble recovery, both of which could have a significantly positive impact.
Valuation: High yield at asset value discount
Based on the FY21e distribution per share, the ordinary share yield is approaching 9% with full upside to potential asset value gains and geared NAV uplifts, as well as any narrowing in the more than 40% discount to EPRA NRV. The preference shares currently yield a little more than 10%.
Operational strength
This note provides a detailed update on our strategic report published in September 2020.
With the majority of Raven’s warehouse space used to support essential sectors such as supermarket chains, all of its warehouse properties continued to operate during FY20 despite a COVID-19 lockdown in the first half of the year. As restrictions were eased, and a second lockdown avoided, the demand for space increased. Following a similar trend to other markets, Russian e-commerce activity saw strong growth, although it remains some way behind and has much further to go. Occupancy increased to 94% (FY19: 90%) and more than 99% of rents were collected. Although the pandemic continues to cloud the general economic outlook, warehouse market demand-supply fundamentals continue to be strong, with low vacancy, a lack of new supply and increased construction costs all indicating the potential for accelerated rental growth.
However, despite the strong operational performance and cash collection in rouble terms, weakness of the rouble continued to weigh on the results as presented in sterling.
Rouble weakness impacted on sterling presentation
To a very large extent, Raven is now a rouble-denominated operating business that reports in sterling and makes shareholder distributions (ordinary and preference share) in sterling at group level. At the level of the rouble-based operating subsidiaries, the main exceptions to this are the residual US dollar-denominated leases (now down to 8% of total warehouse space, but 18% of warehouse net rental income/NOI) and euro-denominated secured debt (40% of total secured debt), both of which we expect to decline further. As a result, changes in the value of the rouble impact on reported earnings and net asset value as reported in sterling.
Against sterling, the end-FY20 closing rate was c 24% below end FY19, while the FY20 average rate was c 12% lower. Compared with the euro, the end-FY20 closing rate was slightly more than 30% lower than end FY19. We are not currency forecasters and despite a number of positive indicators for the Russian economy and rouble (see below), including the recent strong recovery in oil prices, in our forecasting we assume a continuation of FX rates around current levels.
Exhibit 1: Rouble weakness affected the results presented in sterling
FY19 |
FY20 |
FY21e |
FY22e |
|
Period end (balance sheet) |
||||
Rouble/£ |
81.15 |
100.43 |
102.00 |
102.00 |
£/€ |
1.17 |
1.10 |
1.17 |
1.17 |
Period average (income statement) |
||||
Rouble/£ |
82.63 |
92.57 |
102.06 |
102.00 |
£/€ |
1.14 |
1.13 |
1.15 |
1.17 |
Source: Raven Property Group historical data, Edison Investment Research forecasts
In the income statement, the impact of rouble weakness was:
■
At the subsidiary level, an increase in the cost of euro-denominated debt and an unrealised foreign exchange loss on the value of that debt.
■
At the group level, a reduction in the sterling equivalent of the rouble income, substantially offset by a similar reduction in rouble costs.
In the balance sheet, the main impact is on the translation into sterling value of rouble-denominated net assets, primarily the investment property portfolio and rouble-denominated debt.
The rouble mismatch in the local operating units arises from the managed transition from US dollars to roubles. Before the decline in Russian interest rates through 2019–20, real rates were unattractively high. Over time, we expect the euro debt to be replaced by rouble debt, matching the income base of the group, through debt amortisation and through refinancing when the terms are appropriate.
Positive operational performance reinforced by FX moves
Exhibit 2 provides a summary of financial performance in FY20, including a reconciliation from IFRS reporting to the group’s measure of ‘underlying earnings’, which approximates to recurring ‘cash earnings’ that support shareholder distributions. Raven has also published earnings and net asset value (NAV) on an EPRA basis for the first time. EPRA net reinstatement value (NRV) and net tangible assets (NTA) are both 49p, well ahead of the IFRS diluted NAV per share of 40p. We will continue to review the EPRA earnings disclosure, but for now consider underlying earnings, as a closer proxy for distribution potential, to be the more useful measure to focus on.
Exhibit 2: Summary of FY20 financial performance
FY20 |
FY19 |
FY20/FY19 |
||||||
£m unless stated otherwise |
Underlying |
Adj |
Reported IFRS |
Underlying |
Adj |
Reported IFRS |
Underlying |
Adjustments |
Investment property |
107.7 |
0.0 |
107.7 |
120.2 |
0 |
120.2 |
-10% |
|
RosLogistics |
5.3 |
0.0 |
5.3 |
6.1 |
0 |
6.1 |
-13% |
|
Raven Mount |
0.1 |
0.0 |
0.1 |
0.2 |
0 |
0.2 |
-79% |
|
Net rental and related income |
113.1 |
0.0 |
113.1 |
126.5 |
0.0 |
126.5 |
-11% |
|
Administrative expenses |
(23.1) |
(1.6) |
(24.7) |
(23.1) |
(2.3) |
(25.4) |
0% |
Depreciation, abortive project costs |
Share based payments and other long-term incentives |
0.6 |
(1.8) |
(1.2) |
(4.9) |
(0.5) |
(5.5) |
Excludes non-cash settled |
|
Share of profit of JV |
(0.1) |
0.0 |
(0.1) |
0.8 |
0.0 |
0.8 |
||
Net finance expense |
(62.2) |
(10.4) |
(72.6) |
(73.0) |
(34.6) |
(107.6) |
-15% |
Loan/issue fees & derivative value change |
Profit before tax, FX, property revaluation, other non-recurring |
28.2 |
(13.8) |
14.5 |
26.3 |
(37.4) |
(11.2) |
7% |
|
FX gain/(loss) |
(53.7) |
0.0 |
(53.7) |
27.5 |
0.0 |
27.5 |
||
Property revaluation |
0.0 |
(5.6) |
(5.6) |
0.0 |
48.3 |
48.3 |
Unrealised revaluation gain |
|
Profit on disposal of JV |
0.0 |
0.5 |
0.5 |
|||||
Profit on re-designation of convertible preference shares |
0.0 |
45.7 |
45.7 |
0.0 |
0.0 |
0.0 |
||
Profit before tax |
(25.5) |
26.4 |
1.0 |
53.7 |
11.3 |
65.1 |
||
Tax |
(9.2) |
(5.9) |
(15.1) |
(10.5) |
(8.5) |
(19.0) |
Tax in respect of adjustments |
|
Profit after tax |
(34.7) |
20.6 |
(14.2) |
43.2 |
2.8 |
46.0 |
||
Profit after tax, excluding FX |
19.0 |
20.6 |
39.5 |
15.8 |
2.8 |
18.6 |
||
Per share items |
||||||||
Basic EPS (p) |
(6.86) |
(2.80) |
7.67 |
8.16 |
-189% |
|||
Diluted EPS (p) |
(6.86) |
(2.80) |
6.35 |
7.50 |
-208% |
|||
Distribution per share (p) |
1.25 |
3.50 |
-64% |
|||||
Basic NAV per share (p) |
41 |
76 |
-47% |
|||||
Diluted NAV per share (p) |
40 |
75 |
-47% |
|||||
EPRA NRV per share (p) |
49 |
83 |
-41% |
Source: Raven Property Group data
The key features of the FY20 income statement in underlying terms were:
■
Group net rental and related income (NOI) was c 11% lower in sterling terms despite a resilient performance in roubles. Improving occupancy and indexation of rouble-denominated rents were positive factors, while the run-off of legacy US dollar-denominated leases at well above market-level rents continued to drag.
■
Underlying administrative expenses were at a similar level to FY19 in sterling terms despite a charge of £2.8m prudently taken in settlement of a vexatious claim brought by a tenant who declared bankruptcy in 2018 while all possible appeal routes are pursued. Translation of rouble costs into sterling was a positive factor.
■
Before unrealised FX movements and property revaluation movements, underlying operating profit increased by 7%.
■
Underlying net finance expense benefited from an increasing proportion of rouble-denominated debt and significantly reduced rouble interest rates, as well as a positive translation effect into sterling. The key Russian Central Bank rate dropped from 5.75% to 4.25% during the year.
■
FX saw a negative £81.2m swing from a positive £27.5m in FY19 to a negative £53.7m in FY20, mainly relating to the translation of euro debt on the balance sheets of rouble-denominated operating subsidiaries, generating an underlying net loss after tax.
■
Underlying net profit before FX was £19.0m, an increase from £15.8m in FY19.
■
The company will make a final distribution of 1.25p by way of a tender offer buyback of one share in every 32 at 40p and intends to return to half-yearly distributions in the current year.
Compared with IFRS earnings, the main adjustments to underlying earnings relate to depreciation, unrealised valuation movements in respect of properties and derivative instruments, amortisation of the convertible preference share redemption premium (historically), long-term incentive payments that are settled in shares and other non-recurring items (including the £45.7m accounting profit on the redesignation of the convertible preference shares into new ordinary and preference shares).
■
In rouble terms, there was a small underlying movement in property valuations (0.5%). Including this underlying movement (the negative translation effect of £256.7m is captured within the other comprehensive income adjustment), property improvement investment of £12.2m and movements in lease incentive adjustments, the reported revaluation loss was £5.6m (including investment property under construction).
■
The IFRS net loss was £14.2m (FY19: profit of £46.0m), while other comprehensive income also included a net foreign currency translation adjustment of negative £146.7m resulting from rouble weakness. Sterling net assets were £233.7m (end FY19: £365.8m) and basic NAV per share was 41p (40p on a diluted basis), down from 76p. EPRA NTA was 49p (FY19: 83p).
■
The cash position remained strong at £53.1m and the loan to value ratio for the secured bank debt was 56.1%.
Key operational developments
■
Portfolio occupancy increased to 94% from 90% at the end of 2019, due to a combination of short- and long-term lettings. Since year-end it has dipped back to 92% due to the expiry of a large number of short-term leases although signed letters of intent (LOIs) account for an offsetting amount of space. New lettings of warehouse space in 2020 amounted to c 289k sqm with a further c 310k sqm of existing leases renegotiated and extended. A number of tenants have also increased the space let. Warehouse occupancy at year end was 94% (1,775k sqm of the 1,895k sqm of space let) with 98% (48k sqm of the c 49k sqm of the space let) in the much smaller office portfolio.
Exhibit 3: Portfolio leasing summary
000 sqm |
2020 |
2021 |
2022 |
2023 |
2024–32 |
Total |
Maturity profile at start of year |
239 |
317 |
269 |
270 |
650 |
1,745 |
Renegotiated/extended |
(101) |
(135) |
(27) |
(9) |
(38) |
(310) |
Maturity profile of renegotiations |
7 |
33 |
9 |
21 |
240 |
310 |
Breaks exercised |
30 |
32 |
(31) |
(6) |
(25) |
|
Vacated/terminated |
(200) |
(5) |
(2) |
0 |
(4) |
(211) |
New lettings |
25 |
117 |
2 |
1 |
144 |
289 |
Maturity profile at end of year |
0 |
359 |
220 |
277 |
967 |
1,823 |
Maturity profile at year-end including breaks |
0 |
483 |
273 |
342 |
725 |
1,823 |
Source: Raven Property Group
Leasing strategy continues to focus on maintaining high occupancy with high quality tenants for the long term, while keeping a diversified tenant mix across sectors and business types. Short term lets are used to minimise voids. Raven also targets tenants who require significant capital investment into their premises and seek to ‘rentalise’ these improvements over the term of the lease, creating enhanced returns. The growth of the e-commerce activities of tenants is also providing an opportunity to invest in higher specification fit-outs including specialised racking.
Exhibit 4: Portfolio split by area |
Exhibit 5: Warehouse tenants by sector |
Source: Raven Property Group, 31 December 2020 |
Source: Raven Property Group, 31 December 2020 |
Exhibit 4: Portfolio split by area |
Source: Raven Property Group, 31 December 2020 |
Exhibit 5: Warehouse tenants by sector |
Source: Raven Property Group, 31 December 2020 |
■
Rouble-denominated leases now account for 83% of total warehouse space, up from 71% at end 2019, with the share of US dollar-denominated rents halving to 8% of the total (end FY19: 16%). Voids and a small amount of space let on euro-denominated leases account for the balance. The average rouble warehouse rent is RUB4,973 per sqm, with a weighted average term to maturity of 4.1 years, and average minimum annual indexation of 5.6%. The average US dollar rent is $177 per sqm with a weighted average term to maturity of 2.1 years.
Both the warehouse and office markets in which Raven operates are now effectively rouble markets and Raven’s remaining US dollar leases will fully unwind over the next two to three years. Average US dollar rent is more than double the average rouble-denominated rent, partly reflecting the high-spec nature of much of the space (eg cold store units), and making a direct comparison difficult. However, it remains the case that Raven’s remaining US dollar leases are above current market rents and their unwinding continues to act as a drag on revenues. Void reduction, rouble indexation and reversion to market rents in respect of rouble leases signed over the past two to three years are positive offsetting factors, while market conditions offer potential for a general recovery in market rents.
■
The portfolio (including properties under development) was externally valued by Jones Lang LaSalle (JLL) at £1.1bn (FY19: £1.3bn). As noted above, there was little change in the underlying like-for-like rouble valuation of the portfolio (+0.5%) despite the significant reduction in Russian official benchmark interest rates (by 1.5% to 4.25% over 12 months and 3.5% over 24 months) and yields remain high, particularly compared with more developed European markets, while rents are increasing, albeit slowly at present.
Exhibit 6: Raven portfolio valuation yields*
2020 |
2019 |
|
Moscow warehouse |
8.50–11.70% |
10.80–12.10% |
St Petersburg warehouse |
12.20–12.30% |
12.10–12.30% |
Regional warehouse |
11.75–12.20% |
11.80–12.30% |
St Petersburg office |
11.75–12.00% |
11.75–12.00% |
Source: Raven Property Group. Note: *The figures above represent the discount rates applied to the cash flows from the properties, derived from the prime cap rates published by JLL and adjusted for individual property factors.
Update on warehouse market conditions
Management notes that continued reductions in market vacancy, a lack of new supply and increased construction costs are creating classic conditions for rental growth. While economic uncertainty remains (although forecasters expect a recovery in Russian GDP in 2021), the warehouse sector nevertheless seems ideally set to benefit from an accelerated structural shift driven by e-commerce, with all the major retailers developing their strategies to reflect this. Moreover, on a comparative European measure, rents are very low and for the majority of end-users, form a very small percentage of their total cost base. Raven anticipates market rents rising to R4,500 per sqm during the year, and growth continuing thereafter.
Economic rebound forecast
Russian GDP declined by 3.1% in 2020 due to the direct and indirect impacts of the COVID-19 pandemic. This was the sharpest correction since the global financial crisis 11 years ago, but compared with many other economies represented a relatively resilient performance and was around half the rate of decline seen across the eurozone area. The Russian Central Bank recently indicated that the economy is on track to grow 3–4% in 2021. With consumer price inflation running at c 5%, the prospect of a reversal in some of the past two years’ decline in interest rates may provide support to the rouble, along with the recent strength in oil prices after last year’s sharp fall.
Exhibit 7: Rouble versus sterling |
Exhibit 8: Brent crude oil price in US$ |
Source: Bloomberg, 15 March 2021 |
Source: Bloomberg, 15 March 2021 |
Exhibit 7: Rouble versus sterling |
Source: Bloomberg, 15 March 2021 |
Exhibit 8: Brent crude oil price in US$ |
Source: Bloomberg, 15 March 2021 |
Tight supply driven by demand
With continuing strong demand for warehouse space relative to supply, market vacancy has continued to fall in both Moscow and St Petersburg.
JLL estimates end-2020 vacancy of 2.8% in Moscow, which represents 70.5% of Raven’s warehouse portfolio, and even slightly lower in St Petersburg. Despite the tightness in the market, rents did not grow as fast as expected during 2020 and this held back valuations. However, Raven indicates that it is now seeing evidence of rents firming at a faster pace and expects this to continue, moving towards RUB4,500 by year-end.
Raven estimates that the cost of constructing a Grade A warehouse has risen by at least 15% in the last 12 months, which may further restrict new development activity unless rents increase further. Costs have been affected by the impact of the weak rouble on imported materials and a reduction in the foreign labour force due to Covid-19 lockdowns and the closing of Russia’s international borders. Many foreign temporary construction workers returned to their homes in the middle of 2020 and are as yet either unwilling or unable to return.
Exhibit 9: Moscow warehouse supply vs demand and vacancy |
Exhibit 10: Moscow prime warehouse rents and yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 11: St Petersburg warehouse supply vs demand and vacancy |
Exhibit 12: St Petersburg prime warehouse rents and yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 9: Moscow warehouse supply vs demand and vacancy |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 11: St Petersburg warehouse supply vs demand and vacancy |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 10: Moscow prime warehouse rents and yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 12: St Petersburg prime warehouse rents and yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
Compared with the wider European market, Russian warehouse rents remain at relatively low levels, while yields are significantly higher. Notwithstanding the relative lack of development of the Russian property investment market, this is a positive indicator for value creation over the medium to longer term. In the near term, against a positive fundamental sector backdrop and compared with international markets and local interest rates, Russian warehouse valuations appear very well underpinned with upside potential.
Exhibit 13: Selected European warehouse rents |
Exhibit 14: Selected European warehouse yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 13: Selected European warehouse rents |
Source: Raven Property Group FY20 results presentation. JLL Research |
Exhibit 14: Selected European warehouse yields |
Source: Raven Property Group FY20 results presentation. JLL Research |
First time EPRA disclosure
Raven has not historically reported supplementary information on an EPRA basis but has now taken the opportunity of recent changes to the EPRA methodology to do so. A key issue was the EPRA NAV adjustment (add-back) for deferred tax provisions in respect of unrealised property gains. In Russia these are payable whether the property is sold (and the gain realised) directly or as part of a corporate vehicle, and conservatively Raven has quoted IFRS net assets (after deducting deferred tax) even as a long-term investor. EPRA NAV has been replaced with three new measures: net reinstatement value (NRV), net tangible assets (NTA) and net disposal value (NDV). The EPRA NRV and NTA values include a deferred tax add-back, even where this may become payable. NRV in particular is aimed at highlighting the value of net assets on a long-term basis, reflecting the investment that would be needed to recreate the company.
EPRA NRV and EPRA NTA were both 49p at end-FY20 (Exhibit 15), well above the diluted IFRS NAV of 40p. EPRA NDV of 42p was much closer to the IFRS value, reflecting the crystallisation of deferred tax liabilities that would occur on sale. We have included EPRA NRV as our main asset value benchmark for Raven.
On an EPRA basis, the FY20 loss was reported as £49.7m compared with £34.7m on an underlying basis and £14.2m on an IFRS basis. Both EPRA and underlying earnings included an adjustment for the £45.7m gain on resignation of the convertible bonds, property and interest rate derivative valuation movements, and both include FX movements in the income statement, adding volatility to the results. However, underlying earnings, as a proxy for cash earnings, makes additional adjustments. These include for depreciation, long-term incentives not paid in cash, and amortisation of the issue premium and issue costs on preference and (historically) convertible preference shares. We will continue to monitor the EPRA earnings disclosure, but for now we consider underlying earnings, adjusted for FX, as the more useful measure.
Exhibit 15: Key EPRA disclosures
2019 |
2020 |
|
Earnings |
||
Underlying earnings (£m) |
43.2 |
(34.7) |
Underlying EPS (p) |
7.67 |
(6.86) |
EPRA earnings (£m) |
24.0 |
(49.7) |
EPRA EPS (p) |
4.3 |
(9.8) |
EPRA cost ratio (including vacancy costs) |
24.8% |
22.1% |
EPRA cost ratio (excluding vacancy costs) |
22.7% |
20.5% |
EPRA cost ratio (excluding share-based payments) |
20.3% |
21.0% |
Balance sheet |
||
IFRS net assets (£m) |
365.8 |
233.7 |
Diluted IFRS net asset value (NAV) per share (p) |
75 |
40 |
EPRA net reinstatement value (NRV) per share (p) |
83 |
49 |
EPRA net tangible assets (NTA) per share (p) |
83 |
49 |
EPRA net disposal value (NDV) per share (p) |
71 |
42 |
Portfolio |
||
EPRA net initial yield (NIY) |
9.4% |
9.4% |
EPRA topped up net initial yield |
9.5% |
9.6% |
EPRA vacancy rate |
11.0% |
7.2% |
Source: Raven Property Group
Forecast and financials
Our forecasts are based on the current £/RUB rate
Our forecasts are based on FX rates at around current levels as shown in Exhibit 1. Although the rouble is only slightly weaker versus sterling compared with end-FY20, we estimate that a continuation of the current rates would represent a c 10% reduction in the average FY21 level compared with FY20, reflecting rouble weakness in H220.
At the level of the rouble-based subsidiaries, the slight strengthening of the rouble versus the euro since the end-FY20 level suggests a positive translation of euro-denominated debt (reported in the income statement) in FY21 (c £10m versus a negative c £53m in FY20). However, at current rates we forecast this to be more than offset at the group level by the negative impact on the sterling presentation of the rouble earnings. We also forecast a negative translation impact on NAV (c £21m versus c £147m in FY20), taken within other comprehensive income, in respect of the reduction in the sterling-equivalent value of the rouble net assets.
Net rental and related income
For the core property investment business, our forecasts allow for a continued run-off of the remaining US dollar-denominated warehouse rents offset by indexation of rouble-denominated rents and improving occupancy. For warehouse occupancy, we assume a further improvement to c 96% from 94% at end FY20 and for this level to be maintained during FY22. We expect little change in the office portfolio and in rouble terms, we expect total net property rental income to be broadly flat (c RUB10bn) over FY21/22. At our assumed FX rates, there is a downward trend in the sterling presentation due to rouble weakness.
There is a similar FX effect on our forecasts for RosLogistics, masking the slight improvement in net rental and related income (c 2%) we forecast for FY21 (increasing to 5% growth in FY22).
Exhibit 16: Net rental and related income
(£m) |
FY20 |
FY21e |
FY22e |
Property investment gross revenues |
140.5 |
124.2 |
126.1 |
Property investment net operating income |
107.7 |
95.5 |
97.0 |
RosLogistics gross revenues |
13.3 |
12.0 |
12.6 |
RosLogistics net operating income |
5.3 |
4.8 |
5.1 |
Group total |
|||
Gross revenues |
153.8 |
136.2 |
138.7 |
Net rental and related income |
113.1 |
100.3 |
102.0 |
Source: Raven Property Group data, Edison Investment Research forecasts
Group underlying earnings forecast
The changes to our underlying earnings forecasts are significantly driven by FX and, as noted above, we have not at this stage incorporated the proposed Invesco share repurchase via a newly formed JV. Our revised forecast for underlying profit before tax and FX gains/(losses) is £20.5m, down from £24.9m previously.
Exhibit 17: Summary of underlying earnings and forecast changes
New estimates |
Last published* |
|||
£/RUB102 average/102 spot |
£/RUB98 average/98 spot |
|||
£m unless stated otherwise |
FY21e |
FY22e |
FY21e |
|
Gross revenue |
136.2 |
138.7 |
145.8 |
|
Property operating expenditure & cost of sales |
(35.9) |
(36.7) |
(39.4) |
|
Net rental & related income |
100.3 |
102.0 |
106.4 |
|
Administrative expenses |
(19.8) |
(20.0) |
(19.9) |
|
Share-based payments and other long-term incentives |
(1.0) |
(1.0) |
(1.0) |
|
Share of profit of joint ventures |
0.0 |
0.0 |
0.0 |
|
Underlying operating profit before FX gains/(losses) |
79.5 |
81.0 |
85.5 |
|
Net finance expense |
(59.0) |
(59.0) |
(60.6) |
|
FX gains/(losses) |
10.0 |
0.0 |
0.0 |
|
Underlying profit before tax |
30.5 |
22.0 |
24.9 |
|
Tax |
(7.6) |
(7.9) |
(10.9) |
|
Effective tax rate |
25.0% |
35.8% |
43.9% |
|
Underlying profit after tax |
22.9 |
14.1 |
14.0 |
|
Underlying profit before tax, excluding FX |
12.9 |
14.1 |
14.0 |
|
Basic underlying eps (p) |
4.1 |
2.5 |
2.7 |
|
Fully diluted underlying EPS (p) |
4.1 |
2.5 |
2.7 |
|
Distribution per share (p) |
2.50 |
2.50 |
2.25 |
|
Fully diluted NAV per share (p) |
41 |
44 |
45 |
|
EPRA NRV per share (p) |
41 |
44 |
45 |
Source: Edison Investment Research forecasts. Note: *10 September 2020.
Our IFRS earnings forecasts are shown in Exhibit 19 at the back of this report and also include a relatively small amount of depreciation, unrealised valuation movements in respect of properties and derivative instruments (we assume none prospectively), and long-term incentive payments that are settled in shares (none assumed prospectively).
Our forecasts indicate a continuing healthy cash position and a stable LTV in respect of the secured debt despite the further negative FX impact on the sterling presentation of portfolio values and NAV. We expect continuing distributions per share at the rate of 2.5p pa.
Forecasts significantly geared to higher property values and higher £/RUB
Although we have not assumed any change in the rouble value of the portfolio, as we note on page 13 there are several supportive positive factors that point towards potential valuation increases. The structure of Raven’s balance sheet, with assets funded primarily by secured debt and fixed-charge preference shares, provides the ordinary shares with significant gearing to asset value. We estimate that a 1% increase/(decrease) in the value of the portfolio (at constant FX) is equivalent to a c 4% increase/(decrease) in NAV per share after allowing for deferred tax.
Exhibit 18: Asset gearing
£m |
FY20 |
FY21e |
FY21e |
Investment properties & properties under construction |
1,117 |
1,104 |
1,109 |
Other assets |
112 |
105 |
98 |
Preference shares |
(252) |
(252) |
(252) |
Secured debt |
(627) |
(621) |
(621) |
Other liabilities |
(116) |
(119) |
(121) |
Ordinary shareholders' equity |
234 |
217 |
213 |
Equity/assets |
19% |
18% |
18% |
Source: Raven Property Group, Edison Investment Research forecasts
Valuation
Investors in the ordinary shares are fully exposed to share distributions and NAV movements, and would benefit from any narrowing of the wide discount to NAV.
Despite sometimes volatile economic and market conditions, Raven has consistently made distributions to ordinary shareholders. These are made through share repurchases effected by way of tender offers, providing shareholders with a choice of receiving cash (in return for shares tendered) or retaining their shareholding and benefiting from increased ownership share in the company. Since listing, it has repurchased and cancelled more than 300m ordinary shares. COVID-19 uncertainty delayed the FY19 final distribution (2.25p) until September 2020, resulting in just one distribution in respect of FY20 (1.25p declared with the final results) but the company indicates that it will return to biannual distribution in FY21.
Distributions to ordinary shareholders |
Raven Property Group |
Our forecast 2.5p distribution for FY21 represents a yield that is approaching 9%, while the shares are trading at a more than 40% discount to EPRA NRV per share.
At a price of 113p, the yield on the cumulative non-redeemable preference shares is a little more than 10% based on the fixed yield of 12% on the nominal value of 100p. The preference shares have the added security of ranking ahead of the ordinary shares for distributions, but do not provide the upside exposure to underlying income, property valuations and a recovery in the rouble versus sterling.
Exhibit 19: Financial summary
Period ending 31 December. (£m) |
2017 |
2018 |
2019 |
2020 |
2021e |
2022e |
INCOME STATEMENT |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
Gross revenue |
177.0 |
162.6 |
175.4 |
153.8 |
136.2 |
138.7 |
Property operating expenditure & cost of sales |
(47.3) |
(44.4) |
(48.9) |
(40.7) |
(35.9) |
(36.7) |
Net rental and related income |
129.7 |
118.3 |
126.5 |
113.1 |
100.3 |
102.0 |
Administrative expenses |
(22.1) |
(25.2) |
(25.4) |
(24.7) |
(21.3) |
(21.5) |
Share based payments and other long term incentives |
(3.5) |
(2.9) |
(5.5) |
(1.2) |
(1.0) |
(1.0) |
FX gains/(losses) |
6.1 |
(2.5) |
27.5 |
(53.7) |
10.0 |
0.0 |
Share of profit of joint ventures |
1.6 |
1.6 |
1.3 |
(0.1) |
0.0 |
0.0 |
Operating profit/(loss) before realised/unrealised property gains (EBIT) |
111.8 |
89.4 |
124.3 |
33.4 |
88.0 |
79.5 |
Realised/unrealised gains on investment property |
28.2 |
(121.0) |
48.3 |
(5.6) |
0.0 |
0.0 |
Operating profit |
140.1 |
(31.6) |
172.6 |
27.8 |
88.0 |
79.5 |
Net finance expense |
(71.7) |
(83.3) |
(107.6) |
(72.6) |
(62.4) |
(62.4) |
Gain on cancellation of Convertible Preference shares |
45.7 |
|||||
Profit before tax |
68.3 |
(114.9) |
65.1 |
1.0 |
25.6 |
17.1 |
Tax |
(25.2) |
(5.8) |
(19.0) |
(15.1) |
(7.6) |
(7.9) |
Profit after tax |
43.1 |
(120.7) |
46.0 |
(14.2) |
18.0 |
9.2 |
Company underlying profit after tax |
43.4 |
20.0 |
43.2 |
(34.7) |
22.9 |
14.1 |
Company underlying profit after tax, excluding FX |
37.2 |
22.5 |
15.8 |
19.0 |
12.9 |
14.1 |
Basic IFRS EPS (p) |
6.50 |
(18.81) |
8.16 |
(2.80) |
3.24 |
1.63 |
Fully diluted IFRS EPS (p) |
6.27 |
(18.81) |
7.50 |
(2.80) |
3.24 |
1.63 |
Basic company underlying EPS (p) |
6.54 |
3.12 |
7.67 |
(6.86) |
4.13 |
2.51 |
Fully diluted company underlying EPS (p) |
5.68 |
3.08 |
6.35 |
(6.86) |
4.13 |
2.51 |
Distributions per ordinary share (p) |
4.00 |
3.00 |
3.50 |
1.25 |
2.50 |
2.50 |
Period end number of shares exc own held (m) |
655.4 |
612.5 |
480.8 |
576.7 |
525.9 |
483.0 |
Average number of shares (m) - basic |
663.5 |
641.6 |
563.9 |
506.3 |
554.2 |
562.7 |
Average number of shares (m) - fully diluted |
936.4 |
649.4 |
876.7 |
506.3 |
554.2 |
562.7 |
BALANCE SHEET |
||||||
Investment property |
1,159.2 |
1,175.4 |
1,337.7 |
1,089.8 |
1,077.5 |
1,082.5 |
Other non-current assets |
74.7 |
102.6 |
70.5 |
54.8 |
54.8 |
54.8 |
Total non-current assets |
1,233.9 |
1,278.0 |
1,408.2 |
1,144.5 |
1,132.3 |
1,137.3 |
Cash & equivalents |
197.1 |
73.5 |
68.1 |
53.1 |
43.2 |
35.3 |
Other current assets |
59.0 |
44.4 |
42.0 |
31.5 |
33.5 |
34.7 |
Total current assets |
256.2 |
117.8 |
110.1 |
84.6 |
76.8 |
69.9 |
Interest bearing loans & borrowings |
(78.9) |
(75.6) |
(60.2) |
(29.6) |
(29.6) |
(29.6) |
Other current liabilities |
(79.5) |
(66.2) |
(51.7) |
(39.2) |
(41.9) |
(43.4) |
Total current liabilities |
(158.3) |
(141.8) |
(111.9) |
(68.8) |
(71.5) |
(73.0) |
Interest bearing loans & borrowings |
(547.4) |
(567.9) |
(623.2) |
(597.8) |
(591.7) |
(591.7) |
Preference shares |
(108.3) |
(109.3) |
(110.3) |
(251.5) |
(251.9) |
(252.3) |
Convertible preference shares |
(198.9) |
(206.1) |
(217.5) |
0.0 |
0.0 |
0.0 |
Other non-current liabilities |
(85.4) |
(75.2) |
(89.6) |
(77.3) |
(77.3) |
(77.3) |
Total non-current liabilities |
(939.9) |
(958.4) |
(1,040.6) |
(926.6) |
(920.9) |
(921.3) |
Net assets (and shareholders' equity) |
391.8 |
295.6 |
365.8 |
233.7 |
216.6 |
212.9 |
Adjust for: |
||||||
Fair value adjustment in respect of interest rate derivatives |
N/A |
N/A |
(2.6) |
(2.5) |
(2.5) |
(2.5) |
Deferred tax in respect of investment properties |
N/A |
N/A |
64.6 |
56.5 |
56.5 |
56.5 |
EPRA net reinstatement value (NRV) |
N/A |
N/A |
427.8 |
287.7 |
270.6 |
266.9 |
IFRS NAV per share (p) |
60 |
48 |
76 |
41 |
41 |
44 |
Fully diluted IFRS NAV per share (p) |
59 |
48 |
75 |
40 |
41 |
44 |
EPRA net reinstatement value (NRV) per share |
N/A |
N/A |
83 |
49 |
51 |
55 |
CASH FLOW |
||||||
Net cash generated from operating activity |
98.0 |
96.1 |
93.1 |
77.6 |
72.6 |
73.4 |
Property investment |
(161.3) |
(86.5) |
(24.0) |
(14.3) |
(5.0) |
(5.0) |
Other investing activity |
7.3 |
14.3 |
7.8 |
4.3 |
(0.5) |
(0.7) |
Net cash generated from investing activity |
(154.0) |
(72.2) |
(16.2) |
(9.9) |
(5.5) |
(5.7) |
Bank borrowing costs paid |
(49.5) |
(50.0) |
(54.7) |
(43.1) |
(37.1) |
(37.0) |
Preference/convertible preference share dividends paid |
(21.0) |
(24.0) |
(23.8) |
(24.6) |
(25.8) |
(25.8) |
Net own shares (acquired)/disposed |
(11.3) |
(28.3) |
(53.3) |
(9.2) |
(14.1) |
(12.9) |
Debt drawn/(repaid) |
78.8 |
(20.8) |
50.9 |
8.9 |
0.0 |
0.0 |
Other financing activity |
97.5 |
(16.7) |
0.8 |
(2.2) |
0.0 |
0.0 |
Cash flow from financing activity |
94.5 |
(139.8) |
(80.1) |
(70.1) |
(77.0) |
(75.7) |
Change in cash |
38.5 |
(115.9) |
(3.2) |
(2.3) |
(9.9) |
(8.0) |
Opening cash |
160.6 |
197.1 |
73.5 |
68.1 |
53.1 |
43.2 |
FX/other |
(2.0) |
(7.7) |
(2.1) |
(12.7) |
0.0 |
0.0 |
Closing cash |
197.1 |
73.5 |
68.1 |
53.1 |
43.2 |
35.3 |
Secured bank debt |
(626) |
(643) |
(683) |
(627) |
(621) |
(621) |
Preference shares & Convertible Preference shares |
(307) |
(315) |
(328) |
(252) |
(252) |
(252) |
Net (debt)/cash, including Pref. & Conv. Pref. |
(736.2) |
(885.4) |
(943.0) |
(825.8) |
(830.0) |
(838.4) |
LTV on secured debt |
52.6% |
53.3% |
50.1% |
56.1% |
56.3% |
56.0% |
Source: Raven Property Group historical data, Edison Investment Research forecasts
|
|