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Interim Management Statement
REDEFINE INTERNATIONAL P.L.C.
(Registered number 010534V)
LSE share code: RDI
JSE share code: RPL
ISIN: IM00B8V8G91
(“Redefine International” or the “Company” or the “Group”)
INTERIM MANAGEMENT STATEMENT
The Board of Redefine International, the income focused UK Real Estate Investment Trust (“UK-REIT”), today issues the
following Interim Management Statement relating to the period from 1 March 2014 to 17 July 2014.
Greg Clarke, Chairman of Redefine International, commented:
“The period since the interim results has seen a continued recovery in the real estate markets in which the Company operates.
With improving economic conditions, the Company remains optimistic that rental growth is set to return in the sectors and types
of assets that form our core portfolio.”
Highlights for the period include:
Operational
- Acquisition of the Enfield Travelodge for GBP 10.5 million, at an effective 6.4% net initial yield;
- Asset swap of various petrol filling stations improving the overall asset mix and covenant quality;
- Portfolio occupancy remains steady at 97.2% (28 February 2014: 97.2%);
- Strong letting progress across the UK retail portfolio;
- Retail development projects in the UK and Germany progressing well;
- Acquisition by Tsogo Sun of a 25% interest in Redefine BDL Hotel Group Limited.
Corporate
- Inclusion in the FTSE 250 index, supporting a further broadening of the shareholder base;
- GBP 120.0 million of existing debt facilities maturing in FY2016 in the process of being refinanced;
- 72% (GBP 13.8 million) take up of the scrip dividend option;
- Acquisition of the minority interest in the European Manager.
Market overview
Investment activity continues to be supported by active capital markets with recent fundraising activity in both the equity and debt
markets likely to support demand in the short-to-medium term.
While the UK appears to be entering a rising interest rate environment, albeit gradual, Germany looks likely to benefit from low
interest rates for the foreseeable future. This is expected to attract an increasing amount of international capital for real estate
investments as certain investors have been priced out of the UK market for prime assets.
Capital growth over the longer term, particularly in the UK, will need to be rental-driven following the already sharp decline in
investment yields over the past 12 months. Momentum in the UK economic recovery does, however, appear to be feeding through
to improved occupier sentiment in the larger economic centres outside of London.
FTSE 250 Index inclusion
The Company was included in the FTSE 250 index on 15 May 2014 prior to rebalance. This is expected to have a positive impact
on the trading liquidity of the Company’s shares and has already broadened the Company’s shareholder base.
Acquisition of Minority Interest in European Manager
The remaining 10% of the issued share capital in Redefine International Fund Managers Europe Limited (“RIFME”), the manager
of the Company’s European portfolio, was acquired on 14 May 2014. This brought the ownership of RIFME in line with the
Group’s other management companies following the internalisation of the management function by the Company last year. The
purchase was settled by the issue of 444,754 new ordinary shares of 8p each in the Company to the minority shareholder, which
was proportional to the effective price paid for the management internalisation on 3 December 2013.
Acquisitions
Petrol Filling Station portfolio
On 23 April 2014 the Company completed an asset swap in the Malthurst portfolio, whereby eight assets were sold and three were
acquired. The transaction has a number of benefits including extending the average lease term across the portfolio, enhancing the
tenant covenant, increasing the average lot size of the assets and reallocating capital to stronger South East locations.
The three new sites that were acquired are let on long term leases to BP Oil UK Limited with a weighted average lease term of
18.5 years and were acquired at an effective price of GBP 10.35 million reflecting a 5.2% net initial yield. Eight sites were sold at
an effective sales price of GBP 9.3 million reflecting a 6.5% net initial yield with a weighted average lease term of 11.0 years.
Enfield Travelodge
The recently developed Enfield Travelodge was acquired on 23 June 2014 for a purchase price of GBP 10.5 million reflecting a
net initial yield of 5.5%. The 39,000 sq ft hotel was constructed in 2012 and is let to Travelodge for 33.0 years with five yearly
uncapped RPI indexed rent reviews.
The property includes a separate retail unit at ground floor level, which is currently vacant. Significant progress has already been
made on letting the vacant space which is expected to increase the net initial yield to approximately 6.4%. The hotel is close to
both Enfield Town and Southbury rail stations which offer easy access to London’s Liverpool Street and Southgate underground
stations.
Disposals
We are continuing to capitalise on the strong investment market for regional assets, and progressing the Company’s’ strategy of
streamlining the portfolio and focusing resources on fewer, better quality assets. We anticipate being able to make a further
announcement regarding disposals in this regard shortly.
Operations
UK Commercial
Rising confidence in the UK economy is supported by a revival in major office markets outside of London. Occupier take-up is
recovering to pre-recession levels in the UK’s key office markets and the lack of speculative development since 2009 is expected
to produce upward pressure on prime rents beyond the levels recorded in the previous property cycle.
The supply of vacant secondary properties is expected to reduce in regional centres where the values support conversion of
obsolete office stock into residential or student accommodation. This is expected to have a positive impact on vacancy rates as
second hand stock is removed from the market.
Renewed confidence in the Thames Valley, the M4 corridor and certain other regional centres has also led to increased
development activity and refurbishment of office buildings into modern Grade A space.
Investment demand for secondary regional assets remains strong, particularly for portfolios and larger lot sizes which are
attracting a broad range of investors including opportunity funds.
Leasing and asset management
Two new leases totalling over 78,000 sq ft were agreed during the quarter. The new leases will produce a total gross rent of GBP
632,949 p.a. compared with an ERV of GBP 628,309 p.a.
Occupancy by area stands at 97.8% (28 February 2014: 98.4%).
Manton Lane, Bedford
Terms for a new 10 year lease over 76,180 sq ft have been agreed with the Highways Agency for a rent of GBP 600,000 p.a.,
which is 0.9% ahead of ERV, with no rent free period or tenant incentive.
The remainder of the space at The Observatory, Chatham (2,092 sq ft) was let on a new 10 year lease with a tenant break in year
five to the Chatham Maritime Trust for a rent of GBP 15.75 per sq ft. The property is now fully let.
A fixed uplift rent review was settled at Atherton, Wigan. The rent increased to GBP 214,241 p.a. from a base rent of GBP
180,000 p.a., representing a 19% uplift.
UK Retail
The UK retail market is showing signs of stabilisation with a decrease in tenant failures and available space. Dominant retail
centres are attracting occupiers and, while material rental growth is not yet evident apart from in the best locations, there are
grounds for cautious optimism. Notwithstanding this, weaker locations suffering from oversupply and/or structural problems show
little sign of recovery.
Leasing and asset management
Progress on lettings across the portfolio is encouraging, with the majority of vacant space under offer or in solicitors’ hands.
A total of 11 new leases over 11,618 sq ft were exchanged and/or completed during the quarter, compared to 32,844 sq ft subject
to tenant breaks or lease expiries. The new leases will produce total gross rent of GBP 294,190 p.a. compared with an ERV of
GBP 271,990 p.a.
Occupancy by area is 95.2% (28 February 2014: 95.4%) and a number of lettings at advanced stages of negotiation are anticipated
to exchange shortly.
Weston Favell, Northampton
Plans for the rebranding and refurbishment of the centre are well advanced. The project will be undertaken on a phased basis with
the initial phase to refresh the branding, enhance the external façade and upgrade the lower mall expected to commence during the
first calendar quarter in 2015.
Grand Arcade, Wigan
Letting progress is encouraging with the only one vacant unit, totalling approximately 7,000 sq ft, at advanced stages of
negotiation.
St George’s, Harrow
The final phase of the refurbishment at St George’s, Harrow is underway with the installation of a new double height entrance.
Ongoing improvements are being made to enhance commercialisation opportunities in the centre through the introduction of
modern mobile retail units which can be let on long-term leases. Further opportunities have been identified to create additional
restaurant space on the second floor which has already generated interest from a national operator.
All of the existing 6,969 sq ft of vacant space is currently under offer at an estimated combined rent of GBP 211,500 p.a. and a
further GBP 71,000 is under offer in relation to kiosks and commercialisation units.
Birchwood, Warrington
Following the extension of the centre, 7,977 sq ft of retail space remains vacant but leasing activity is progressing well with 1,917
sq ft is in solicitors’ hands at a rent of GBP 42,500 p.a. The remaining 6,060 sq ft is at an advanced stage of negotiation.
The new dedicated car park at Birchwood is nearing completion and opportunities to create additional retail space and a drive-
through fast food operation are being progressed.
Hotels
The outlook remains positive for hotels throughout the UK backed by improved economic prospects in Europe and North
America, a pick-up in corporate travel, improved conditions for rate negotiations and a strong tourism market. RevPAR growth in
London is expected to reach 3.8% in 2014 driven almost entirely by higher average room rates. The market is expected to be at
least as strong in 2015 with forecast RevPAR growth of 5.2%.
Robust trading conditions in the Company’s hotel portfolio are translating into EBITDA figures ahead of management budgets
which bodes well for future rent reviews.
The additional 48 room extension at Southwark Holiday Inn Express was completed on 1 June 2014. Trading performance has
remained steady since the opening of the additional rooms with overall occupancies and RevPars in line with figures before the
extension which reflects well on the underlying demand for limited service hotels in London.
Redefine BDL Hotel Group Limited (“RBDL”)
As previously announced, Tsogo Sun Holdings Limited (“Tsogo Sun”) invested GBP 8.1 million to acquire a 25% interest in
RBDL with effect from 1 May 2014. The Company’s interest was reduced to 25.3% as a result of this new investment.
Tsogo Sun is South Africa’s largest hotel and casino operator. The acquisition is of strategic importance for both parties,
providing RBDL with additional cash resources to develop and update its business in the UK and Europe whilst allowing Tsogo
Sun access to additional management expertise, exposure to new markets and the potential for opportunities to deploy capital in
attractive investments in the European market in the future.
Europe
Against the background of a sluggish European economy, Germany continues to be relatively robust with GDP growth of 0.8% in
the first quarter of 2014. Last month the ECB cut its base rate to 0.15%, which is expected to further stimulate growth in the
German economy.
Investors are showing renewed interest in discount stores, supermarkets and retail parks, which accounted for approximately 51%
of retail investment in 2013. Consequently net initial yields have hardened, particularly for core retail and office assets.
Leasing and asset management
A total of three new leases over 160 sq m (1,722 sq ft) were exchanged and/or completed during the quarter, with two lease
terminations of 136 sq m (1,464 sq ft) to support the planned asset management activity being undertaken at Ingolstadt. The new
leases equate to a total gross rent of EUR 71,280 p.a. against an ERV of EUR 75,000 p.a. Overall occupancy increased to 99.4%
(28 February 2014: 98.0%) excluding approximately 1,600 sq m held vacant for redevelopment purposes.
City Arkaden, Ingolstadt
As referred to above, good progress has been made on plans to reconfigure this centre in order to create the modern, larger format
retail space required by many retailers. As part of the planning activity, a number of existing leases have been terminated or not
renewed on expiry in order to enable redevelopment plans to progress.
Schloss Centre, Berlin
This centre is now fully occupied following the take-up of the last vacant unit. Vodafone has agreed to take 75 sq m (807 sq ft) on
a ten year term for EUR 36,000 p.a. The lease will be subject to uplifts equivalent to 80% of CPI every two years.
Bahnhoff Altona, Hamburg
Asset management plans to expand the current retail space by up to 50,500 sq ft are progressing, which is expected to attract
significant footfall and add value to the existing scheme. Layouts and planning proposals are being co-ordinated with potential
tenants, who have shown strong interest in the scheme. The process of obtaining vacant possession of a limited number of units
has commenced in order to ensure development plans can progress in due course.
Cromwell
The AUD:GBP exchange rate has strengthened by approximately 2.3% since 28 February 2014 while the share price on 14 July
2014 was AUD 1.00 (28 February 2014: 99.5 AUD cents ). Cromwell has delivered on earning expectations and distributions for
FY2014 totalling 7.625 AUD cents per security which equates to a 7.7% yield on the current security price. The Company
remains opportunistic with respect to its investment in Cromwell but retains the option of recycling capital if the right opportunity
arises.
Debt facilities
Debt capital markets remain competitive which is expected to support near term refinancing and investment activities. Significant
progress has been made in extending or refinancing existing facilities to take advantage of the current interest rate environment
and competitive lending market.
Credit approved terms have been received to refinance and extend the existing GBP 84.5 million bank loan against the enlarged
hotel portfolio for a further six years. A new GBP 96.0 million facility has been agreed at a margin of 2.275%. Existing hedging
until November 2015 will be retained and a 3.0% interest rate cap is proposed to be taken out for the remainder of the loan term.
Lloyds Bank has agreed that an existing two year extension option be exercised to extend the GBP 35.4 million Zeta facility for a
further two years to May 2017.
Following these extensions, the weighted average maturity of the Group’s debt facilities will increase to 8.4 years.
Dividend
On 5 June 2014, the interim dividend of 1.50 pence per share was paid to all shareholders recorded on the register on 23 May
2014.
There was a 72% take-up of the of the scrip dividend alternative for which 25,323,941 ordinary shares of 8p each in the Company
were issued equal to approximately 2% of the issued share capital. The scrip dividend shares were issued at an effective price of
53.45 pence per share which is a premium of 40% to the last reported net asset value per share.
Outlook
Improving economic and occupier fundamentals are encouraging and, while UK interest rates are likely to rise, absolute levels are
expected to remain well below long run averages in the short-to-medium term. Germany appears likely to benefit from historically
low Eurozone interest rates for an extended period, which is likely to attract further equity investment into the German real estate
market.
The investment market looks set to remain competitive given these conditions and caution will need to be exercised in certain
markets that have already experienced significant yield compression. However, this will provide further opportunities to recycle
capital out of low growth assets into investments expected to benefit from ongoing occupier demand, supported by improving
economic fundamentals.
The Company remains focused on improving the quality of its portfolio to underpin long-term income returns and extending its
debt facilities to provide certainty around future interest costs.
The Company expects earnings for the current financial year to be in line with management expectations.
For further information:
Redefine International P.L.C.
Michael Watters, Stephen Oakenfull Tel: +44 (0) 20 7811 0100
FTI Consulting
UK Public Relations Adviser
Stephanie Highett, Dido Laurimore Tel: +44 (0) 20 3727 1000
FTI Consulting
UK Public Relations Adviser
Max Gebhardt Tel: + 27 (0) 11 214 2402
JSE Sponsor
Java Capital Tel: + 27 (0) 11 283 0042
Redefine International is a UK-REIT with a primary listing on the London Stock Exchange and a secondary listing on the
Johannesburg Stock Exchange.
18 July 2014
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