Plotting a selection of the largest REIT total returns over five and 10 years, we see that RDF is the second-worst performing REIT of the group in both instances. As we have suggested, a diversified model for REITs is inefficient, and we see this with GRT having essentially the same return over both periods as RDF. We feel it is the business model and believe RDF and GRT will continue to underperform the other large, more specialised REITs.
RDF has said it wants to reduce the complexity of its various JV structures. While we see this as a good long-term move, it will mean earnings and value destruction in the short and medium term.
RDF’s SA REIT LTV is 42.3% with a see-through LTV of 47.9%. RDF had its ICR covenant temporarily reduced to 1.75x, as it will likely breach 2x in FY25. Some 61.3% of property income (rent less property expenses) goes to covering finance costs. As we expect finance costs to increase further in FY25, we would expect sustainable DIPs to come under pressure. RDF in FY24 is, in our view, distributing more that its sustainable cash generated, which has led to a DRIP being offered. RDF does not appear to be funding distributions from debt and equity raises currently. With the unwinding of the highly leveraged JVs, there is a potential risk for LTV to increase further, and further equity may be required, either through cutting DIPs or DRIPs, or via bookbuilds. If RDF does try to protect yield this could lead to distributing financing raised, or discounted asset sales.
RDF has been ‘recycling’ SA property at relatively high yields into relatively low-yielding property, reducing GLA by 10% from FY20, while distributable income yield (distributable income/NAV) has declined steadily from 7.3% to 6.4%. Yields on the JVs and associates are below the cost of funding, with earnings negative in FY24, and we calculate the dividend yield at 3%.
We expect sustainable distributable earnings to be 13% below FY24 distributable earnings, but 4% lower than our FY23 and FY24 calculations of sustainable distributable earnings.