In Finance by Clyde Mooney

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This week the listed Redcape Hotel Group (ASX: RDC) announced its full-year distributable earnings for FY19, with returns and opportunities mirroring upside in the broader hotel industry.

RDC’s earnings were in line with its PDS guidance, largely driven by portfolio expansion and enhancement. Total revenue increased 17.4pc, EBITDA 21.3pc against the prior corresponding period.

Six venues were acquired over this period, and a valuations uplift of $14.6m brings the total portfolio value to $1.08bn. $21.6m was invested in growth capex, including major refurbishments at the Leumeah, Eastwood and Cabramatta Hotels.

A strategy of portfolio optimisation, through recycling capital into higher-growth opportunities, brought divestment of the Belrose Hotel in August 2018.

Like For Like revenue grew 3.3pc on FY18, and distributable earnings for FY19 amounted to $46.5m, with distributions of 8.75c per security, equating to a 7.85pc yield. FY20 projected earnings are expected to see greater than 9.0c paid per security.

Earlier this month RDC secured a new $503m senior debt facility, replacing existing arrangements set to expire late 2020, and now count the four major banks as creditors on “more favourable terms”, providing “greater flexibility to support its growth ambitions”.

This sets gearing at 38.0pc, at the lower end of its target range (35-45pc), and is slated to improve all-in interest costs by ~100 bps.

RDC’s net asset value stands at $1.14 per stapled security, described by market analyst Edward Day as “a compelling investment” at a ~4.4% discount to NAV, offering circa 8.0pc return.

The Group’s results announcement cited “downward pressure on gaming margin”. CEO Dan Brady clarified this was much the result of catering to cyclical customer preferences, giving rise to a period of increased jackpots – prompted by gaming room analytics showing a trend toward linked jackpot machines. 

In the short term this has impacted margins, but the increased payouts have maintained customer loyalty and with the trend now swinging away from jackpots and back toward RTP, the margins are improving again. Beyond advanced analytics, the practice speaks to the Group’s methods of customer approach.

“It’s about us understanding what customers want, rather than dictating what customers will get,” offered Brady.

RDC expects to marginally decrease the percentage of revenue out of gaming from current levels to the upper 50pc range, but this is expected to come about not through reduced gaming revenue, rather by growing the other portions of the pie.

“We will over time diversify our income, so you’ll see a lower amount of gaming income coming through as a proportion of earnings, over time. This will be in relation to things like investment in the brewery and other vertical integration, as well as full refurbs of our pubs.”

Redcape is an independent listed scheme managed by Moelis Australia Hotel Management P/L (MAHM), of which principals including Brady and Moelis Group are owners. A short year since listing and series of one-off costs prompted MAHM to waive its management fees for the year, demonstrating clear alignment with the interests of shareholders and significant praise by investors.

The results note RDC’s 32 venues, of which 31 are freehold going concerns, and their provision of refurbishment growth opportunities – plus flexibility to consider alternative use developments and “unlock latent land value”.

This can be seen in considerations on two of its multiple western Sydney pubs located on or near train lines, such as the Cabramatta Hotel, looking at a mixed-use development with 234 residential units, and the Revesby Pacific, contemplating a 144-bed aged care facility.

Brady spoke of potential joint ventures and options to carve off land on large sites, clarifying that Redcape does not consider itself a developer and “won’t be taking on development risk”.

“Our portfolio is difficult to replicate, comprising of strategically located, high-quality assets, many of which are on sites we own and are underutilised, providing an opportunity to unlock value through alternate land use,” he notes.

“It’s those sorts of value opportunities, which are not reflected in our valuations today, that we can be exploring.

“It really goes to the thesis of who we are; yes, we are an operating business, but also a property business, and we can utilise it because we own both the business and the property.”