Secure Income REIT, the newly-incorporated property company managed by Prestbury Investments, reported an eye-watering 50% increase in net asset value (NAV) over seven months to the end of 2014, amplified by the high balance sheet leveraging amid a rising market.
The property portfolio, comprises 28 predominantly UK leisure assets including Madame Tussauds in London and Alton Towers as well as 21 private hospitals in the UK, which rose in value by 11.6% over the full nine months since the REIT’s IPO.
The portfolio revaluation saw a £168.0m rise to £1.625bn. Based on the group’s £1.13bn total net debt this reflects 69.7% of gearing on a traditional loan-to-value (LTV) basis, a 10 percentage point fall over the nine-month period from 80%.
Gearing expressed as net debt to equity, rather than portfolio value, stands at 233%, which amplified the 11.6% portfolio revaluation over seven months at the geared NAV level to 259p per share.
Mike Prew, analyst at Jefferies said: “Although underlying growth was good the balance sheet grew mostly through financing which is fine in a bull market but seems excessive if asset inflation is set to moderate as interest rates rise in the US.”
Of course, gearing varies widely in structure and covenants and cannot all be equally compared.
Nick Leslau, co-founder of Prestbury Investment Holdings which advises Secure Income REIT, replied: “Gearing is a term liberally applied to encompass all debt. Whilst our gearing is higher than most so too is the duration and quality of our income at 25+ years and underwritten by two outstanding covenants.
“Compare for example gearing at 69% secured against a development site in the middle of Bradford with no income and a similar debt level against our very long leased secure assets with no LTV covenants and fixed annual and RPI uplifts for 25 years. They are chalk and cheese and in making comparisons of gearing a clear distinction needs to be made.
“Our ambition is, in due course, to reduce gearing as we have by 10% in just the last seven months alone.”
In the maiden preliminary results published this morning, Martin Moore, chairman of Secure Income REIT, wrote that the company is considering an early refinancing to capitalise on favourable lending terms driven by historic low interest rates.
CoStar News understands that Morgan Stanley and Eastdil Secured have been engaged to explore a potential refinancing of Secure Income REIT’s healthcare and leisure assets.
Secure Income REIT’s group’s total net debt is comprised of:
- £609.4m secured against the healthcare portfolio, including 20 of the 21 assets guaranteed by Ramsay Healthcare Limited, valued at £813.0m at the end of last year, reflecting a 75.0% LTV;
- £534.5m secured against the leisure portfolio, guaranteed by Merlin Entertainments Plc, the world’s second largest operator of visitor attractions, valued at £812.4m at the end of last year, reflecting a 65.8% LTV. The leisure debt is comprised of two loans: a £497.2m sterling facility and a €66.1m euro facility.
The principal lender across the healthcare and leisure portfolio is Lloyds Bank.
Moore said: “It makes sense for us to investigate whether an early refinancing of the portfolio would be in shareholders’ best interests.
“This would present an opportunity to lock into lower interest rates for a longer period, but at the cost of breaking our interest rate swaps which otherwise expire in 2017 when the associated debt matures.”
The refinancing has a number of possible permutations at this stage. One of the variables is thought to be the impending sale of Madame Tussauds, which the REIT brought to market in February seeking offers in excess of £300m.
“If Madame Tussauds is sold this will significantly reduce our levels of net borrowings, as this property has a value in excess of £300m and represents 19% of our property portfolio,” wrote Moore.
The potential refinancing, therefore, excludes this asset.
Moore concluded: “The world currently lacks an adequate supply of investments able to generate a safe and secure income stream at reasonable levels.
“The resultant search for yield is driving up the prices of those remaining assets that share such characteristics and this is likely to continue whilst most countries around the world maintain low interest rates and quantitative easing suppresses bond yields.
“Of course there is always the possibility that events steer markets off course, but the early months of 2015 have seen a further continuation of this trend, which augurs well for the company.”