The SA portion of the portfolio performed well in 1H25. They have done well on rolling out power solutions, and well as spending on maintenance, and that has helped control operating costs and maintain tenant turnover growth and low vacancies. Escalations on leases are, however, coming down with inflation. The concern is they are selling their listed investments to fund capex and maintenance as RES pays out 100% of dips.
Our main concern is the European expansion with LTE. If we look at LTE’s interim results, the French portfolio is valued at 10% less than its purchase price. We calculate the net yield (rent minus property and admin expenses) on the French property cost to be only 5.15%. While the Salera value is marginally up, this is likely due to high indexation in Spain (as we have seen with VKE), while cap rates are increasing. The yield for LTE’s Spanish segment is 5.4% on cost (before finance costs). In our view, the European portfolio is an under-performing investment for RES and dilutes strong SA performance.
The fact that RES trades near its book value given the low yields, as well as the low distribution yield (forward guidance of 475.47 / 6 642 = 7.1%) at 100% payout, indicates the share price is pricing in substantial growth. Given the low inflation and slowing growth in Europe, as well as declining rental escalations and low inflation in SA, we believe the growth needed to justify the current price may not materialise. Consequently, we maintain our sell recommendation.