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Edited Transcript of RDC.AX earnings conference call or presentation 16-Feb-21 10:30pm GMT

·18 min read

Half Year 2021 Redcape Hotel Group Pty Ltd Earnings Call Feb 17, 2021 (Thomson StreetEvents) -- Edited Transcript of Redcape Hotel Group Pty Ltd earnings conference call or presentation Tuesday, February 16, 2021 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Daniel John Brady Redcape Hotel Group - CEO & Executive Director * Timothy Fawaz Redcape Hotel Group - CFO ================================================================================ Conference Call Participants ================================================================================ * Edward Day Moelis Australia Securities Pty Ltd, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Redcape Hotel Group Half Year 2021 Results Presentation Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Dan Brady, CEO. Please go ahead. -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you very much. Well, it's -- we're going to be presenting a pack today that highlights really the strength and the resilience of Redcape. Last year, there was obviously in COVID year -- impacted year. We had adversity, and we've been able to produce this great result. You've seen on our opening performance slide out slide that highlights our security holders, customers and people, fantastic improvements in results in staff satisfaction and customer NPS. We put this upfront because we passionately believe that this is our value chain, highly satisfied staff equals highly engaged customers equals a great financial result. And certainly, this year, in this half year result, we've been able to produce all 3 indicators. Our lead indicators continue to improve. And importantly, our -- not only our distributions, but our distributable earnings are all in positive growth and this enables our ability to build and grow the business sustainably. It's an exciting result and through our values of care, collaboration and courage, we've reported a 24% -- 24.6% growth number in distributable earnings, and this is a potent demonstration of our resilience. If we click on now to the financial highlights. And we'll go through this step by step. You'll see from top to tail on this page, there's some fantastic results. Growing statutory NPAT by 45.9% really highlights the strength of the business, delivering $25.4 million as opposed to $17.4 million in the same period last year. Distributable earnings growth of $24.6 million and this is a great result. And I'd like to highlight the $32.9 million as opposed to the $26.4 million on PCP. Our like-for-like revenue growth is a key measure of the underlying health of the business and at a 9.7% growth rate on PCP, this is a great measure and great indicated that the underlying health of the business is in great shape. Operating EBITDA was $40.9 million, up from $38.8 million on PCP. And this is on the back of our very low gearing level of 32.8%, which is beneath our goal range of 35% to 45%. It's worth noting that our interest rate cover has never been as high as 5.7x, which is also very pleasing to see. It's also very pleased throughout the period, and we'll talk more later on it that our independent valuations were delivered with an increase to our per stable security of it to $1.22. This highlights and rounds out a very positive result for the period, and this is a set of results that we can build from. It's the culmination of managing our portfolio and ensuring our value chain of highly engaged staff and customers lead to a terrific financial performance. We then click on to the performance highlights. Throughout the year, as we built into the start of this half year, we had opened coming out of COVID. We knew through that time that we needed to win back our customers. And to that, we look to reengage with both our staff and our customers through that shutdown period. And from there, we started to get back to growth and really get back to our strategy. Turning on distributions was a key part of that strategy. We're an income stock. And to that end, we know that our security holders enjoy the distributions. And to that end, it was really important before getting back to any growth capital or acquisitions or regular strategy that we turn those distributions back on. A strong like-for-like growth in the underlying business. And again, we'll discuss this further in the outlook, but that continues on. The change in portfolio mix and managing the portfolio to growth was the critical components through that period. Through this half year, we've turned on back our strategy in terms of going and executing some acquisitions throughout the period. And as we go into this new year, we'll talk about this more later in our outlook, we turn on growth capital again. This has delivered a very attractive yield based on yesterday's share price of 9.7%. Very pleased with the uplift in the valuations that we achieved throughout the period going in. And obviously, with the COVID period and shutdown. Then getting back and not having independent valuations up until the full year, getting back to our regular rounds of independent valuations is another key part of getting back to strategy, and we're able to do that. The lift in valuations is an even spread between both the earnings -- growth in earnings and also cap rate compression. We stayed vigilant throughout the period around our balance sheet, having refinanced and increased our debt tenor as well as expand our debt facility. And along with the real focus around how we've focused in on our staff, satisfaction, our customer -- net customer scores, we've been able to really lay down the platform for an excellent result and also building into the new year. With that, we'll now move on to Tim Fawaz, who can go through the income statement. -------------------------------------------------------------------------------- Timothy Fawaz, Redcape Hotel Group - CFO [3] -------------------------------------------------------------------------------- Thank you, Dan. I might turn our attention now to Page 8. As Dan mentioned, we're pleased today to report a very strong profit result, underpinned by strong underlying trading performance, lower interest expenses and the revaluation of our venues, which reflects the impact of both earnings growth and cap rate compression. The key features of our trading results today include strong top line revenue growth of 7.1%, underpinned by exceptionally high like-for-like growth of 9.7%. And as Dan mentioned previously, that's a real demonstration of the underlying strength of the business. It also includes the impact of the divestment of 2 large venues versus the acquisition of 2 smaller yet high-growth venues with considerable future upside. Our strong revenue growth reflects strength in gaming and off premise, offset by weaker on-premise revenue. Our operating costs continue to be well managed, up 0.5% versus the prior period. Key call-outs in terms of costs includes the benefit of job keeper of $4.1 million, which we've outlined previously, and additional COVID-related costs of $120,000 per week or $3.1 million for the half. Our like-for-like operating EBITDA as a result of the above, was higher than the prior period. It's important to note that our overall operating EBITDA reflects the net impact of our divestment and acquisition program, which reflects a net negative. This delta will narrow in future periods as current and future acquisition programs contribute positively to the overall reported result. Moving on to our distributable earnings results, which we've listed on Page 9, we're equally pleased to report an increase of 24.6% versus the prior period. And this reflects strong operating performance, as we outlined in the prior slide, lower cash interest expenses down around 40%, which reflects a decline in our cash rate, plus improved pricing delivered as a result of the newly negotiated facility from September '19. Maintenance CapEx of $2.2 million, which is anticipated to land slightly below $6 million this year before resetting to a range of $6 million to $7 million in future years. The first half payout ratio was 64.1%, and Dan will talk more in the outlook section around how we see this ratio for the full year. Pleasingly, operating cash flow was $52.3 million, which after one-off adjustments, normalizes to $38.4 million, which is comfortably above distributable earnings and distributions. Distributions for the half were $0.0366 per security or $0.0183 per security per quarter, which is consistent with our expectations in the second half. Dan will discuss future distribution further in the outlook section. As outlined in the prior slide, operating EBITDA was above the prior period despite the divestment of St. George and Royal Hotel Granville. We'll now turn to the page -- balance sheet, which is on Page 10. In terms of the key features of our balance sheet, gearing, as Dan mentioned previously, was 32.8% or 40.1% post settlement of our 4 recently announced acquisitions. Net debt landed below $360 million, almost $29 million less than what we reported June '20. All in interest cost was circa 2.3%. We locked in our newly expanded debt facility of up to $600 million, which we announced in December, which delivered a revised tenor of 4.1 years, which compares to the 3.2 years that we reported in June '20. Our undrawn facility is $185 million at December, which post our recently announced 4 acquisitions, will leave us with firepower of $70 million to $80 million for future earnings accretive acquisitions. Dan has already mentioned a very strong interest rate coverage of 5.73x and that's our strongest reported results today. Moving to our asset position. We're pleased to report a $72 million lift in directors' valuations. It's important to note that directors' valuations include both the property and business values and include the impact of the 12 independent valuations, which broadly lifted in equal measure due to improved earnings and cap rate compression since their last valuation in August '18. Our director NAV now stands at $1.22, and our statutory NAV, which now reflects the impact of effectively the recording of costs plus depreciation except for land, which we fair value each half, has now improved and stands at $1.13 versus $1.09 at June. And this reflects an incremental lift in land of $21.8 million. I'll now hand you back to Dan, who will take you through the strategy and the outlook. -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Tim. On to a strategy now and outlook. Our strategy remains largely unchanged. There is a small sweet when it comes to capital. And I'll talk you through this slide and go through -- talking through our payout ratio and retained earnings. This is about our platform. And after the disruption of COVID-19 getting back to distributions. Prior to COVID-19, we were hedged to $0.093 per security guidance, and that was deteriorated through shutdown. So we've been really pleased to turn distributions back on. It gets us back to our strategic plan, and I'll talk to our growth drivers here. Our operations are all about people. We're investing in our people, ensuring we understand our lead indicators and what drives them and what they value. This is what we focus on in operations, and it really starts our value chain. Our customers, our digital platform, the customer management program has been very much centered around the retention of customers. Coming out of COVID-19, we took a humble position by saying we needed to win back all of our customers. We needed to treat the situation though we didn't have any customers, and we needed to be in the mindset of winning them back. We've done that, and we've done that well. Retention will be part of our strategy, as always, and a marked difference to years gone by, however, we're now very much in customer acquisition mode. Within that program, we're working on how we can build out long-term customer advocacy. We want to explore the customer-centric centricity of our business and match that for a win-win relationship with our customers. From a property standpoint, we've turned back on growth capital in the form of refurbishments and have the capacity in our balance sheet to make further acquisitions. So certainly from a capital standpoint, we know we've got well demonstrated returns that go backwards and delivering IRRs of 20%. And with that we will get back to a full program in 2022. We also take a future view on our existing assets with the lens of -- with the future lens, hence, why we made divestments last year. This is a strategic thinking in relation to capital, which does mark a slightly different mindset. We understand that the structure of our business with a strong property portfolio, but we're also in the operating business. And for the betterment of security holders, we can deploy our capital effectively and accretively, holding some capital in reserve and sensibly. Hence, the reason why we are seeing that 75% payout ratio in our outlook. We're in a position to retain some of our earnings, even maintain a strong and attractive yield. This is a change we've made following extensive consultation in understanding the drivers of their business. We know that we can deploy capital that results in accretive growth. This is why we're moving to a lower payout ratio than we have in the past. This strategy builds confidence. And on that basis -- and on the basis of a resilient business with stability, we've got the ability to meet different challenges. If we move to the outlook page. We're in a position that we can provide guidance to the market, we're pleased to be talking about delivering distributable earnings of $0.097 per security for the full year. Distributable earnings of $0.097 per security includes job keeper of $0.07 per security. Quarter 1 outperformance was $0.05 per security post opening and seasonality. The payout ratio for the full year will be around 75%. This is really highlighting the underlying businesses in fantastic health. The key focus for the full year will be onboarding the recently acquired hotels, growing market share through our customer platform, understanding the customer values and driving better experiences. Our balance sheet gives us a platform for growth and we can be very proactive in optimizing our portfolio, turning on our growth CapEx program and asset optimization program is fully in our sites. It's been a privilege to present a wonderful set of results and show the evidence of how our resilient business is still performing greatly still in the face of a disruptive hospitality sector. Thanks very much. And we're now happy to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question is from Ed Day with Moelis. -------------------------------------------------------------------------------- Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just a couple of questions from me. Firstly, just on the valuations. Could you just talk through the valuation schedule and how this gets determined? And then just within the valuations, perhaps just talk to the transaction, marketplace and roughly what we've seen in terms of cap rate compression? -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [3] -------------------------------------------------------------------------------- Sure. So the valuation schedule is -- we're required to do 1/3 of our portfolio. That was a pretty straightforward choice for us. We picked the most long-dated valuations. So as over the next 12 to 18 months, we expect that all of our pubs will be revalued as we'll do some more in the next 6 months, and we'll do some more in the following 6 months after that. So there was not much science to that outside of just getting the valves fresh. From a transaction standpoint, in the marketplace, I think the question might be, obviously, it's still an active market. We were very active. We got really moving in the -- we could see where the business was turning and trading, and we thought it would be opportunistic in the market. We were not the only ones, however, there were a lot of other well-established players making acquisitions in that period. And just in recent times on this side of Christmas, on this side of the half, there's been further acquisitions. And I would also probably consider those to have further compression in the cap rate in those transactions. -------------------------------------------------------------------------------- Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Just wondering if you can sort of quantify the compression that came through the valuations? -------------------------------------------------------------------------------- Timothy Fawaz, Redcape Hotel Group - CFO [5] -------------------------------------------------------------------------------- Ed, as you know, we don't disclose that information, but we certainly looked at this very hard, and we certainly took on board the independent valuations. I can't say any more than that. -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [6] -------------------------------------------------------------------------------- And I guess the point being in the presentation, though, is that the lift in the NAV is very much even balance between that cap rate compression and also earnings growth. The pubs themselves are performing very, very well. -------------------------------------------------------------------------------- Timothy Fawaz, Redcape Hotel Group - CFO [7] -------------------------------------------------------------------------------- And certainly, Ed, just on a further note, as Dan mentioned, the 12 independent valuations we undertook for our longest stated assets. It was a pool that hadn't been revalued since August '18. And obviously, use that information to then determine directives and also how you think about the earnings position as well. -------------------------------------------------------------------------------- Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- And then just on guidance. Obviously, the guidance implies a softer second half from a distributable earnings perspective. Could you just talk about perhaps what your expectations are in terms of like-for-like revenue or at the EBITDA line? -------------------------------------------------------------------------------- Timothy Fawaz, Redcape Hotel Group - CFO [9] -------------------------------------------------------------------------------- It -- I would -- as you know, when we've reported our first and second quarter result, and Dan touched on it in the outlook, Pete. He talked around some of the characteristics in the first half JobKeeper, which was at 0.7%. And equally, that strong result in Q1, which was 0.5%. The way I think about this is I just step back and look at how we performed in the second quarter. And if I multiply that by 2, I sort of get a number of about $33.6 million. I then compare that to what we're looking for in that outlook of 9.7%. And to me, that makes a lot of sense. So we're using the sort of the run rate we've seen as our numbers normalize from effectively the second quarter. And that does work on the basis that we continue to report positive like-for-like growth. Certainly, it won't be 9.7%, but it will continue to be very positive. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) The next question is from [Jason Pachynski] of (inaudible). -------------------------------------------------------------------------------- Unidentified Analyst, [11] -------------------------------------------------------------------------------- You mentioned you're turning back to an asset optimization program. Will this be focused on improving recent acquisitions or existing locations? Are you just able to provide some more color on this. -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [12] -------------------------------------------------------------------------------- We'll look to probably deploy a surface somewhere between $7.5 million to $7 million in growth capital between now and the end of the financial year in our full year. And next year, we'll get back to -- I think we've always spoken about that sort of $22 million to $25 million in growth capital. We'll do that. And the program is set for that for next year. That will be both existing and acquired venues. One of the things that we did do throughout last year, whilst we did turn the capital tap off from a construction and tool belt perspective, we didn't stop getting D.A. approvals and planning approvals. And so we've got quite a good option set to undertake both in the near-term now and also in the following year. -------------------------------------------------------------------------------- Unidentified Analyst, [13] -------------------------------------------------------------------------------- I guess as well, can you comment in broad terms how you're seeing the overall market pubs for sale? Have you see any distressed opportunities out there? Or are you seeing sort of high-value kind of opportunities? -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [14] -------------------------------------------------------------------------------- There's not many distressed opportunities, if any, in quality assets. I mean, if we're talking hospitality assets, sure, there's going to be distressed leaseholds those sorts of things. But any A class property backed asset is actually becoming more valuable due to the fact that it's really demonstrated its resilience through a major disruption. And certainly, from my standpoint, having been in these presentations for many year talking about a resilient business. And without really a point of evidence, now there is a point of evidence. I think that's just feeding to the fact that these assets have become more valuable. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand the call back to Mr. Brady for any closing remarks. -------------------------------------------------------------------------------- Daniel John Brady, Redcape Hotel Group - CEO & Executive Director [16] -------------------------------------------------------------------------------- Thanks very much, everyone, for joining. We appreciate your interest and your time. And we look forward to maybe seeing some of you face to face and certainly soon and talk to you soon. Thanks very much. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.