Strong results with improving outlook

Raven Russia 12 March 2018 Update
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Raven Russia

Strong results with improving outlook

FY17 results

Real estate

 

12 March 2018

Price

43.10p

Market cap

£285m

US$1.3550/£, RUB60/$

Net debt ($m) at 31 December 2017

996

Shares in issue

660.6m

Free float

90%

Code

RUS

Primary exchange

LSE

Secondary exchange

TISEA

Share price performance

%

1m

3m

12m

Abs

(11.1)

(7.3)

(15.5)

Rel (local)

(13.2)

(5.7)

(15.7)

52-week high/low

55.0p

43.1p

Business description

Raven Russia (RUS) invests mainly in Class A warehouses in Russia let to large Russian and international companies. It also owns three office buildings in St Petersburg, a third-party logistics company in Russia (RosLogistics) and a residential development company in the UK (Raven Mount).

Next events

AGM

Expected May 2018

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Raven Russia is a research client of Edison Investment Research Limited

The Russian economy returned to growth in 2017 and the FX market was relatively calm, creating the conditions for a significant improvement in the warehouse market supply-demand balance, with rents stabilising. Against this backdrop, Raven produced strong headline earnings, including land sale gains, and a solid underlying performance, including a first benefit from 2017 accretive acquisitions. Although not reflected in our forecast, further acquisitions are likely, funded by existing cash resources, with the potential to more than offset rent reversion to market levels and return the company to growth.

Year end

NOI* ($m)

PAT** ($m)

EPS** (c)

DPS (p)

Adj NAV***/ share (p)

Yield (%)

P/adj NAV (x)

12/16

151.7

47.1

6.81

2.5

52

5.8

0.83

12/17

166.7

56.8

7.41

4.0

60

9.3

0.72

12/18e

154.6

32.6

4.92

3.0

62

7.0

0.70

12/19e

150.1

29.9

4.78

3.0

64

7.0

0.68

Note: *NOI is net operating income. **PAT and EPS (fully diluted) are underlying, excluding valuation movements, depreciation, share-based payments and exceptional items. ***NAV is underlying and fully diluted, excluding goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares. EPS and NAV assume convertible preference share conversion.

Positive earnings and distribution

Profit after tax of $56.8m (2016: $47.1m), on the company’s underlying basis, positively surprised. A lower FX gain was more than offset by realised gains on non-core legacy UK land holdings, adding c $20m. Excluding this, underlying earnings were broadly as we had expected, with warehouse occupancy at a similar level (81% vs 80%) and much of the negative rent reversion (to lower, rouble-denominated market rents) offset by a part-year $10m contribution from acquisitions. RosLogistics continues to show good growth. The investment portfolio saw positive revaluation of $38.2m with a benefit to NAV per share (80c fully diluted or c 60p at year end). Raven will make a 3p final distribution (4p for the year vs 2.5p) by way of a tender offer buyback, the increase reflecting management confidence in the outlook as well as the land sale gains.

Significant acquisition upside, not in forecast

The cash balance remains strong ($266.7m at end-2017) providing resources for further accretive acquisitions; we estimate c $300m in asset purchases on a geared basis which, at an 11% yield, has the potential to lift our forecast 2019 earnings and cash flow by 35% on an annualised basis.

Valuation: Ord shares offer yield and capital potential

Raven investors have three share classes (in addition to warrants) from which to choose. The preference (RUSP) and convertible preference (RUSC) shares yield 8.2% and 5.4%, respectively. The 2017 yield on the ordinary shares is more than 9%, and 7.0% in 2018 assuming a lower distribution excluding realisation gains. The ordinary shares will benefit fully from any NAV growth or narrowing of the 30% discount to FY18e NAV/share.

Well positioned for warehouse market recovery

Raven Russia (Raven), listed on the main market of the London Stock Exchange (LSE). It was founded in 2005, with the intention of building a portfolio of modern, Grade A Russian warehouse assets through acquisition and development. The company has been self-managed since 2008 and has built a substantial portfolio which, at 31 December 2017, comprised c 1.8m sqm of predominantly logistics warehouse property (of which c 72% is in the Moscow region). At end-2017 the portfolio was 81% let, to mainly large Russian or international companies. International comparisons show Russia to have a relatively low density of warehouse space, a positive indicator for long-term growth. In the near term, the Russian recession through 2015-16 coincided with a cyclical pick-up in new building, causing vacancies to increase and rents to fall, with the market converting almost completely to rouble-denominated lease terms in contrast to longer-term US dollar-denominated leases that Raven has historically targeted. However, with economic recovery taking hold, the US$/rouble rate relatively stable, oil prices improving, and inflation and interest rates declining, warehouse market conditions are improving.

New Grade A development completions in the Moscow region in 2017 were the lowest since 2006 (source: JLL), and well below improving levels of take-up, with vacancy across the market reducing. Market rents have stabilised. Raven has a strongly liquid balance sheet, ending 2017 with a cash balance of $266.7m, which supports a continuing acquisition strategy (four properties acquired in 2017) aimed at high-quality, attractively yielding assets to support income through the transition from maturing, dollar leases. Acquisitions are not included in our base forecasts, but a sensitivity analysis is provided on page 7.

In addition to the core investment property division, group subsidiaries include Raven Mount, a UK residential development company, and RosLogistics, a third-party logistics business in Russia.

Raven warrants (RUSW) and preference shares (RUSP) are traded on the LSE in addition to the ordinary shares (RUS), while convertible preference shares (RUSC) trade on the official list of the International Stock Exchange Authority Limited (TISEA).

Full year results positively surprise

The full year results were a positive surprise, with strong growth in net operating income, statutory and underlying earnings, NAV per share, and an increased distribution. We had not anticipated the disposal gains on the legacy UK land bank, and stripping this out of underlying earnings leaves them pretty much where we had expected. Market conditions are improving, and this is reflected in a gain on revaluation of investment properties (not in our forecast) and contributing to NAV growth. With management sounding increasingly confident about the outlook, in addition to the land sale gain, the increase in distributions was also not in our forecast.

Exhibit 1: Raven's FY17 results

$m unless otherwise stated

2017

2016

Change in

Underlying earnings

Capital & other

Total reported

Underlying earnings

Capital & other

Total reported

underlying 2017 v 2016

Property investment net operating income

133.3

133.3

140.6

140.6

-5%

RosLogistics net operating income

12.4

12.4

9.8

9.8

26%

Raven Mount net operating income

21.1

21.1

1.3

1.3

n.m.

Total net operating income

166.7

0.0

166.7

151.7

0.0

151.7

10%

Administrative & other expenses

(27.0)

(6.1)

(33.1)

(27.4)

(7.0)

(34.4)

-1%

Foreign currency gain/(loss)

9.2

9.2

18.1

18.1

Share of JV profits

2.1

2.1

1.8

1.8

Operating profit before property gains/(losses)

151.1

(6.1)

144.9

144.2

(7.0)

137.2

5%

Gains/(losses) on properties

0.0

38.2

38.2

0.0

(39.5)

(39.5)

Operating profit

151.1

32.0

183.1

144.2

(46.6)

97.7

Net finance expense

(78.1)

(14.4)

(92.4)

(81.9)

6.5

(75.4)

-5%

Profit before tax

73.0

17.7

90.6

62.3

(40.1)

22.2

17%

Tax

(16.2)

(16.8)

(33.0)

(15.2)

0.7

(14.5)

Underlying profit after tax

56.8

0.9

57.7

47.1

(39.4)

7.7

21%

Add back convertible preference share dividend

12.6

4.6

Fully diluted underlying earnings

69.4

51.7

34%

Average number of shares

663.5

657.5

Average fully diluted no. shares assuming pref. conversion

936.4

759.6

Underlying EPS - basic ($c)

8.56

7.17

19%

Underlying EPS - fully diluted ($c)

7.41

6.81

9%

Source: Raven Russia

Key financial highlights

Net operating income grew 10%. The investment portfolio NOI was 5% lower, reflecting the continuing reversion to market rent levels that are below the currently contracted average, and almost completely denominated in roubles, partly offset by a c $10m part-year contribution from properties acquired. The logistics subsidiary, RosLogistics, continues to show strong growth, while the UK development subsidiary, Raven Mount, produced a pleasant surprise, taking advantage of planning consents to realise a substantial c $20m gain on the sale of most of its non-core, legacy land bank.

Expenses were well controlled. Including bonuses and long-term incentives, administrative and other expenses were slightly lower year-on-year on both a reported and underlying basis. Bonuses and incentives were lower (c $4.5m versus c $9.1m), offset by a $2m impairment of the remaining Raven Mount goodwill, post the land sale, and underlying inflation, especially on rouble-denominated costs. The adjustment from reported to underlying expenses includes the goodwill impairment, depreciation and the share-based element of bonuses and incentives.

Net interest expense benefited from lower borrowing costs and rouble deposits. Underlying net financial expense declined as a result of increased interest income from higher cash balances, mostly rouble-denominated, as well as a lower cost of borrowing. The latter mainly reflects a higher share of lower-rate convertible preference share debt in the mix. The difference between the underlying and reported net interest expense was amortisation of the redemption premium on preference shares, amortisation of loan arrangement fees and fair value movements on derivative instruments.

Underlying profit after tax increased 21% and underlying EPS by 19%. On a fully diluted basis, and assuming full conversion of the convertible preference shares, the increase in earnings was 34%, but the EPS increased by a smaller 9% as a result of the higher number of potential shares resulting from the second issue of convertible preference shares in July 2017.

NAV benefited from a $38.2m net profit on revaluation of the investment portfolio, which reflects a c 50bp tightening of the external (JLL) yield assumption and no material change in the portfolio expected rental value (ERV), both mirroring market developments. Fully diluted NAV per share increased to 80c, or c 60p at the current US$/£ exchange rate, from 71c. The positive $9.2m FX result reported in the P&L account reflects the positive impact of increased rouble cash balances as the currency strengthened. Other comprehensive income (and net assets) saw a $24.7m loss that primarily results from the US dollar translation of the preference share liabilities, denominated in sterling.

The year-end cash balance increased to $266.7m compared with $198.6m a year earlier. A second issue of convertible preference shares raised £102m ($126m) in July while investing more than $170m (rising to a maximum $209m including deferred consideration) in the acquisition of four new properties during the year.

The fall in Russian interest rates may offer the opportunity to better balance rents with rouble debt. Long-term US dollar rents historically created a hedge to US dollar borrowings, but the move to rouble rents has opened an increased FX mismatch. Raven continued to restructure its existing US dollar secured bank debt in 2017, pushing out the average maturity and reducing annual amortisation, but the fall in Russian interest is opening an opportunity to shift borrowings towards roubles, reduce the FX risk and manage interest costs. In anticipation, management is in dialogue with its banking partners about a possible transition.

A final distribution of 3.0p per ordinary share takes the total for the year to 4.0p (2016: 2.5p). The increase reflects the positive result for the year and management’s increasing confidence about the future prospects. As usual, the distribution is to be made by way of a tender offer buyback of 1 in 17 shares at 52p.

Key operational developments

Economic conditions in Russia improved during the year. GDP grew 1.5% (2016: -0.2%), the US$/rouble rate relatively stable in a range of 56-60, oil prices increased, inflation fell (2.2% in January 2018), and interest rates have followed, falling from 10% at the beginning of 2017 to 7.5% following the latest 25bp cut in February 2018. With the improving economy, occupier demand for logistics warehouse space increased while development completions slowed.

Exhibit 2: Rouble versus US$

Exhibit 3: Brent crude oil price in US$

Source: Bloomberg, 8 March 2018

Source: Bloomberg, 8 March 2018

Exhibit 2: Rouble versus US$

Source: Bloomberg, 8 March 2018

Exhibit 3: Brent crude oil price in US$

Source: Bloomberg, 8 March 2018

Demand-supply conditions in the warehouse market have also improved. Grade A development completions in the Moscow region declined to c 530,000 sqm in 2017, roughly half the prior year level. With take-up running at c 1.2m sqm, JLL estimates end-2017 market occupancy at 8.3% compared with 9.5% at end-2016. JLL also says that prime rents for new deals have stabilised at c RUB4,000 per sqm.

Four properties were acquired during the year, taking the total gross lettable (GLA) area to 1.822m sq ft. In April 2017 Raven acquired three separate properties in St Petersburg, adding 87,000 sqm of Grade A warehousing and 33,000 sqm of offices. The consideration was RUB4.9bn (c $86m) at an initial 16% yield. The properties were 98% let to 68 tenants. In November 2017 Raven completed the acquisition of Logopark Sever, a 195,000 sqm Grade A warehouse complex to the north of Moscow. The initial consideration was RUB5.1bn (c $88.5m), with deferred consideration that takes this up to a maximum RUB7.1bn (c $122.7m) depending on leasing progress from the 73% occupancy at acquisition. The maximum consideration represents a yield of 11.4% and a reversionary yield of 12.5%. Further acquisitions are expected.

Warehouse occupancy remained stable on a like-for-like basis. Including a small benefit from acquisitions it was 81% at end-2017 compared with 80% in December 2016. The small headline improvement came in H2, with mid-year occupancy at 79%, which suggests an improved like-for-like performance during H2. The office portfolio (less than 3% of total GLA), is practically fully occupied. Vacancy in Raven’s portfolio is higher than for the general market, especially in Moscow (72% of GLA, with 78% occupancy) as leases have expired and new lettings have failed to keep pace. Some speculative developers are continuing to let space at levels that Raven feels are below the real market and likely to destroy value for shareholders if entered into at this time, as the market stabilises. The market in St. Petersburg is somewhat tighter.

Active asset management of the portfolio continues and can be seen by significant leasing activity. 198,100 sqm of existing leases were renegotiated and extended during the year, while 179,600 sqm of space was vacated at maturity or terminated early, offset by 187,100 sqm of new leases agreed. Of the 1,815k sqm of space (1,766k sqm of warehouse space and 49k sqm of office space), 342,900 sqm was vacant at year end. Exhibit 4 provides the updated maturity profile. In addition to the 170,000 sqm of lease maturities in the current year, there are 78,300 sqm of lease breaks (and 79,000 sqm in 2019). Good progress has been made in the year to date, with 53,000 sqm of renewals and 21,000 sqm of new lettings completed. In addition, letters of intent on 38,000 sqm of vacant space and 8,400 sqm of extensions have been signed.

Exhibit 4: Portfolio maturities

(‘000 square metres)

2017

2018

2019

2020

2021-27

Total

Maturity profile (1 January 2017)

215

165

252

179

392

1203

Impact of acquisitions

44

31

21

19

147

262

Subtotal

259

196

273

198

539

1,465

Lease extensions

(97)

(79)

(22)

0

0

(198)

Vacated/terminated

(162)

(14)

(4)

0

0

(180)

Remaining lease maturity (31 December 2017)

0

103

247

198

539

1,087

Maturity profile of 2017 extensions

0

51

0

78

69

198

New leases

0

15

17

32

123

187

Maturity profile as at 31 December 2017

0

169

264

308

731

1,472

Source: Raven Russia

The market transition to rouble-denominated rents continues, with the share of US dollar-denominated rents reducing to 31% of the total, measured by warehouse GLA at end-2017 (2016: 50%), with an average term to maturity of three years. Much of this is leases on high-specification, temperature controlled space, with an average rent level of $143 per sqm. 45% (2016: 21%) represented rouble-denominated rents (with an average annual indexation of 6.8%) with an average rent of RUB5,200 per sqm (c $87) and a weighted average lease length of 3.6 years. A further 2% of leases are subject to rent increase caps, with euro-denominated rents (3%) and vacant space account for the balance (20%) accounting for the balance of GLA.

Exhibit 5: Currency exposure by warehouse space

Source: Raven Russia

With both the warehouse and office markets in which Raven operates now being effectively rouble only, the remaining long-term US dollar contracts should therefore be expected to unwind over the next three years. New lease terms, in roubles, are shorter and generally contain lease break clauses (c three years on average or five years with a three-year break option, compared with an average c five years previously for dollar leases). They do have the advantage of having annual indexation linked to Russian CPI. At current market rent levels, this unwinding of long-term dollar contracts will be a negative drag on revenue, for which acquisitions are providing an off-set. Average rents for new lettings in roubles during 2017 were RUB3,870 per sqm (c $65) while lease renewals benefit from tenants wanting to avoid the frictional cost of moving and averaged RUB5,250 (c $87.5) for rouble leases.

Acquisitions and occupancy have the potential to offset dollar lease unwind

We would expect a continuation of the market recovery to improve occupancy and support market rents, while further acquisitions are also likely. Raven made two accretive acquisitions (four properties) in 2017, expects to complete more in 2018 and has the balance sheet to finance them. Together, these have the potential to offset the further drag on revenues from the unwinding of long-term dollar lease contracts. We estimate that dollar rents contributed c 50% of total NOI in 2017 and with a three-year maturity, the unwind into rouble contracts at current rents would see half of this erode. Our forecasts allow for this and include an occupancy improvement (by 4% in each of 2018 and 2019), to reflect the improved market supply-demand balance, but no acquisitions, as we have no way to know when they may happen and on what terms. We can however illustrate the potential impact and we present a sensitivity analysis below.

The 2017 underlying result was very much in line with our forecast, with the exception of the unexpected land sale gain at Raven Mount (Exhibit 5).

For 2018, our forecast is reduced although the extent of the reduction is exaggerated by our reluctance to include the likely acquisitive activity. We have reduced our NOI expectation by 3% which primarily reflects a lower assumed rent level on new and extended leases. On average, these are now forecast at $70 per sqm versus $75 per sqm previously, reflecting current market levels. We nevertheless expect warehouse NOI to increase in 2018 with the full year impact of the 2017 acquisitions adding at least $14m. The other factor suppressing our revised 2018 forecast is higher net finance charges, resulting from the additional debt taken on in H217 as part of the company’s refinancing operations. The reality is that the debt has boosted cash levels, and the cash is likely to find a home in accretive acquisitions, the subject of the sensitivity analysis. For 2019, we expect much of the same, with the further increase in occupancy only partly off-setting the dollar lease unwind, in the absence of forecast acquisitions.

Exhibit 6: Underlying earnings performance versus estimate and revisions

$m unless otherwise stated

Actual

New forecast

Previous forecast

2017 actual vs forecast

Change in 2018 forecast

2017

2018

2019

2017

2018

NOI

166.7

154.6

150.1

145.3

158.6

15%

-3%

Administrative expenses

(25.3)

(25.9)

(26.0)

(25.6)

(26.0)

-1%

0%

Share based payments & long-term incentives

(1.6)

0.0

0.0

(0.8)

0.0

FX gains/(losses)

9.2

0.0

0.0

4.9

0.0

Share of profit of JV

2.1

1.0

1.0

0.8

1.0

Operating profit

151.1

129.7

125.1

124.5

133.6

21%

-3%

Net finance expense

(78.1)

(86.2)

(85.2)

(78.2)

(80.9)

0%

7%

Underlying profit before tax

73.0

43.5

39.9

46.3

52.7

58%

-17%

Tax

(16.2)

(10.9)

(10.0)

(14.3)

(13.2)

Underlying profit after tax

56.8

32.6

29.9

32.0

39.5

78%

-17%

Add back preference share dividend

12.6

16.3

16.3

12.6

16.3

Fully diluted underlying earnings

69.4

48.8

46.1

44.6

55.8

56%

-12%

Average number of shares (m)

663.5

636.0

609.4

665.8

654.8

Average fully diluted no. shares assuming pref. conversion (m)

936.4

991.8

965.2

949.0

1,015.1

Underlying EPS - basic ($c)

8.56

5.12

4.91

4.81

6.03

78%

-15%

Underlying EPS - fully diluted ($c)

7.41

4.92

4.78

4.69

5.50

58%

-10%

Source: Raven Russia, Edison Investment Research. Note: Compared with IFRS, underlying earnings exclude valuation movements, depreciation, amortisation of debt issuance costs, amortisation of preference share redemption premium, share-based payments and exceptional items.

Significant upside to base case from acquisitions

Raven is continuing to seek high quality income producing acquisitions and expects distressed sellers or mature funds exiting the market to provide further opportunities over the coming months, despite improving market conditions and the falling cost of local funding.

As noted above, the cash position was $266.7m at end 2017, although we would not expect management to commit all of the available cash resources to investment and assume that it will continue to prudently hold c $100m. Allowing for this, our revised analysis suggests that Raven has capacity to invest c $120m by the end of 2019, most likely in initially ungeared acquisitions, which are then geared to recycle equity into further projects. Assuming a 60% LTV again, this implies potential cash-generating asset additions of more than $300m (end-2017 investment portfolio: $1.6bn). This is a similar figure to our previous estimate, although we have moved to a 2019 basis (from 2018) and no longer assume re-gearing of the 2017 acquisitions following the debt raised in H217. By the end of 2019, any deferred consideration for the Sever acquisition will have been paid and has no impact on the calculation.

Exhibit 7: Potential for further asset investment

($000s unless stated)

2019

Forecast cash and equivalents

220,477

Cash retention assumed

100,000

Cash available for investment

120,477

Assumed LTV (%)

60

Potential geared asset investment

301,191

($000s unless stated)

Forecast cash and equivalents

Cash retention assumed

Cash available for investment

Assumed LTV (%)

Potential geared asset investment

2019

220,477

100,000

120,477

60

301,191

Source: Edison Investment Research

The additional potential upside to our base case forecasts remains substantial as we show below. JLL estimates prime yields in the Moscow warehouse market at 11-12.5% (Moscow Warehouse Market Indicators, 2017), with St Petersburg c 100bp above this. In Exhibit 8, we illustrate the potential uplift to NOI and underlying earnings from investing the $301m estimated in Exhibit 7, at a range of property yields between 10-12%. We assume no significant acquisition costs or additional administrative costs and have applied a 7.8% interest cost to additional borrowings, similar to the existing average cost of secured US dollar debt – although management hopes to be able to lower this, especially with local borrowing costs falling.

Exhibit 8: Potential accretion from asset acquisitions

Forecast earnings ($000s unless stated)

2019e

Underlying earnings - basic

29,890

Underlying earnings (fully diluted basis)

46,147

Total net operating income after interest

29,366

Add back convertible preference dividend

16,257

Total net operating income after interest (adj. for conv. pref. div.)

45,623

Potential acquisition impact (full year basis)

2019e

Potential asset investment

301,191

301,191

301,191

Assumed net initial yield

10%

11%

12%

Additional NOI

30,119

33,131

36,143

Interest income adjustment

-19,276

-19,276

-19,276

Net earnings uplift

10,843

13,855

16,867

Tax

25%

25%

25%

Net earnings uplift

8,132

10,391

12,650

Adjusted earnings

Underlying earnings - basic

38,023

40,281

42,540

Underlying earnings (fully diluted basis)

54,279

56,538

58,797

Total net operating income after interest

37,499

39,757

42,016

Total net operating income after interest (adj. for conv. pref. div.)

53,755

56,014

58,273

Potential accretion to base case forecast

 

 

 

Underlying earnings - basic

27%

35%

42%

Underlying earnings (fully diluted basis)

18%

23%

27%

Total net operating income after interest

28%

35%

43%

Total net operating income after interest (adj. for conv. pref. div.)

18%

23%

28%

Source: Edison Investment Research

On this basis, full deployment of resources in the way described (at an 11% net initial yield) has the potential, on an annualised basis, to increase NOI by $33m and lift underlying earnings and net operating income after interest costs by an additional 35%, compared with our FY19 base case forecast. On a fully diluted basis (allowing for preference share conversion) the increases, from a higher base, is 23%. In both cases, the percentages are the same in per-share terms.

We are now more confident that market conditions will continue to improve (as management anticipates, and partly reflected in our forecasts, which include improving occupancy but no uplift in market rents), acquired NOI has the potential to offset the un-wind of long-term dollar contracts and generate earnings growth. Alternatively, assuming no improvement in market rents or occupancy, acquired NOI would materially offset an eventual reversion to marke- level NOI of $35-40m pa, albeit spread over a number of years.

Valuation

An investment in Raven can be made via ordinary shares, preference shares, convertible preference shares and warrants. The ordinary shares receive variable distributions and would benefit fully from any growth in NAV or discount narrowing (c 27% currently). The 4p distribution declared for 2017 represents a yield of 9.3% on the ordinary shares. We believe this partly reflects the non-recurring gains at Raven Mount and we assume a lower distribution for 2018 and 2019 of 3p per share in each year, a yield of 7.0%. Our assumed distribution is relatively high compared with forecast earnings, more so in 2019, but as noted above, a full deployment of cash resources on cash-generative acquisitions has the potential to substantially lift earnings and cash flow above the forecast levels.

The convertible preference shares (RUSC) rank ahead of other share classes in terms of dividend payments and receive a cumulative 6.5% preferential dividend on the subscription amount of 100p, a yield of 5.4% on the current price of 120.5p. The convertible preference shares can be converted into ordinary shares at any time up to July 2026, currently at a rate of 1.779 (equivalent to 67.7p per ordinary share at the current price). The (non-convertible) preference shares (RUSP) earn a cumulative 12% dividend on the fixed issue amount per share of 100p, ranking ahead of the ordinary shares. At a current price of 147.0p, the yield is 8.2%.

The growth in NAV per share in 2017 was supported by investment portfolio valuation gains, reflecting the stabilisation of the market and falling interest rates. If the market continues to improve, as we expect, we believe there is room for valuation yields to decline further over the medium to long term, but would not anticipate a material near-term shift. The investment market in Russia is relatively thin compared with the size of the economy, making valuation movements less predictable.

Diluted IFRS NAV per ordinary share at end-2017 was 80c and on an adjusted basis (adjusted for goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares) and fully diluted (including cumulative preference shares), at 78c. At an exchange rate of $1.3550/£, this represents 60p for a discount of c 27%.

 

Exhibit 9: Financial summary

Year end December

2014

2015

2016

2017

2018e

2019e

PROFIT & LOSS

Gross revenue

257,596

219,704

195,294

228,082

209,630

204,114

Property operating expenditure & cost of sales

(65,288)

(45,581)

(43,553)

(61,354)

(55,045)

(54,013)

Net rental and related income

192,308

174,123

151,741

166,728

154,585

150,100

Administrative expenses

(34,630)

(30,494)

(25,344)

(28,547)

(27,008)

(27,108)

Share based payments and other long-term incentives

(2,354)

(3,594)

(9,077)

(4,546)

(4,700)

(4,700)

FX gains/(losses)

(15,471)

1,223

18,079

9,229

0

0

Share of profit of joint ventures

955

2,518

1,780

2,074

1,000

1,000

Operating profit/(loss) before realised/unrealised property gains (EBIT)

140,808

143,776

137,179

144,938

123,877

119,292

Realised/unrealised gains on investment property

(145,404)

(256,548)

(39,517)

38,152

0

0

Operating profit

(4,596)

(112,772)

97,662

183,090

123,877

119,292

Net finance expense

(93,448)

(92,284)

(75,416)

(92,444)

(100,758)

(99,771)

Charge on preference share conversion

0

0

0

0

0

0

Profit before tax

(98,044)

(205,056)

22,246

90,646

23,119

19,522

Tax

9,855

12,697

(14,527)

(32,961)

(10,863)

(9,963)

Profit after tax

(88,189)

(192,359)

7,719

57,685

12,256

9,558

Company underlying earnings

66,652

54,559

47,122

56,808

32,588

29,890

Reported EPS - fully diluted (c)

(11.83)

(27.99)

1.16

8.55

1.88

1.52

Company underlying EPS - fully diluted (c)

8.94

7.94

6.81

7.41

4.92

4.78

Distributions per ordinary share (p)

6.00

2.00

2.50

4.00

3.00

3.00

Period end number of shares exc own held (m)

688.5

644.1

661.5

655.4

623.9

599.1

Average number of shares (m) - basic

715.0

666.8

657.5

663.5

636.0

609.4

Average number of shares (m) - fully diluted

745.5

687.2

667.7

675.1

653.4

626.8

BALANCE SHEET

Investment property

1,593,684

1,333,987

1,300,643

1,568,126

1,571,126

1,574,126

Other non-current assets

151,840

96,735

92,097

100,844

100,845

100,845

Total non-current assets

1,745,524

1,430,722

1,392,740

1,668,970

1,671,971

1,674,971

Cash & equivalents

171,383

202,291

198,621

266,666

248,299

220,477

Other current assets

54,444

51,878

53,798

79,815

58,981

58,981

Total current assets

225,827

254,169

252,419

346,481

307,280

279,458

Total assets

1,971,351

1,684,891

1,645,159

2,015,451

1,979,251

1,954,429

Interest bearing loans & borrowings

55,252

104,724

40,787

106,697

50,000

50,000

Other current liabilities

86,215

55,481

66,351

107,392

91,278

83,223

Total current liabilities

141,467

160,205

107,138

214,089

141,278

133,223

Interest bearing loans & borrowings

837,429

814,021

699,038

740,485

767,182

737,182

Preference shares

164,300

156,556

131,703

146,458

146,460

146,460

Convertible preference shares

0

0

119,859

269,031

283,031

297,031

Other non-current liabilities

130,866

89,066

87,195

115,629

115,629

115,629

Total non-current liabilities

1,132,595

1,059,643

1,037,795

1,271,603

1,312,302

1,296,302

Total liabilities

1,274,062

1,219,848

1,144,933

1,485,692

1,453,580

1,429,525

Net assets (and shareholders' equity)

697,289

465,043

500,226

529,759

525,670

524,904

NAV adjustments

Goodwill

(7,806)

(5,134)

(6,187)

(4,712)

(4,525)

(4,525)

Deferred tax on revaluation gains

55,250

0

0

0

0

0

Cumulative FX loss on preference shares

13,955

4,956

(20,362)

(7,854)

(13,606)

(13,606)

Fair value of derivatives

(5,322)

(5,159)

(5,041)

(8,172)

(3,941)

(3,941)

Adjusted NAV

753,366

459,706

468,636

509,021

503,598

502,832

Fully diluted NAV per share (c)

110

72

71

78

81

84

Adjusted fully diluted NAV (c)

106

70

68

78

81

84

Fully diluted NAV per share (p)

85

55

55

60

62

64

Adjusted fully diluted NAV (p)

81

54

52

60

62

64

CASH FLOW

Net cash generated from operating activity

168,794

136,151

118,012

125,485

123,546

107,082

Payments for investment property under construction

(105,582)

(20,028)

(9,163)

(122,274)

(3,000)

(3,000)

Acquisition of subsidiary undertakings, net of cash acquired

(12,873)

0

0

(82,519)

0

0

Other investing activity

19,561

32,895

8,171

5,060

12,120

10,707

Net cash generated from investing activity

(98,894)

12,867

(992)

(199,733)

9,120

7,707

Bank borrowing costs paid

(70,979)

(69,465)

(66,808)

(64,171)

(66,154)

(63,754)

Ordinary dividends paid in cash

0

0

0

0

0

0

Preference/convertible preference share dividends paid

(18,225)

(17,156)

(19,437)

(27,875)

(33,832)

(33,832)

Net own shares (acquired)/disposed

(68,928)

(41,906)

6,624

(14,337)

(21,048)

(15,025)

Issue of preference/convertible preference shares

0

0

128,327

126,402

0

0

Debt drawn/(repaid)

89,447

23,157

(164,493)

107,764

(30,000)

(30,000)

Other investing activity

(3,086)

(4,930)

(4,972)

(485)

0

0

Cash flow from financing activity

(71,771)

(110,300)

(120,759)

127,298

(151,034)

(142,611)

Change in cash

(1,871)

38,718

(3,739)

53,050

(18,368)

(27,822)

Opening cash

201,324

171,383

202,291

198,621

266,668

248,300

FX/other

(28,073)

(7,812)

69

14,997

0

0

Closing cash

171,383

202,291

198,621

266,668

248,300

220,478

Debt

(1,056,981)

(1,075,301)

(991,387)

(1,262,671)

(1,246,673)

(1,230,673)

Net (debt)/cash

(885,598)

(873,010)

(792,766)

(996,003)

(998,373)

(1,010,195)

Source: Raven Russia, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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