Redcape buys, and sells, again

16 December, 2019 by Andy Young

The Redcape Hotel Group has released details of its operating performance so far in FY20, and also detailed one new hotel acquisition as well as the sale of one of its assets.

Redcape has exchanged contracts to divest the Royal Hotel, Granville for $51m, excluding transaction costs – the sale price represents a 6.25 per cent premium to book value.

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Additionally Redcape has exchanged contracts to acquire the Kings Head Tavern, South Hurtsville for a total purchase price of $27m, excluding acquisition costs. Redcape described the Kings Head Tavern as a “quality Freehold Going Concern assets”. Adding that “management believe that it will benefit from significant capital investment and operational improvements realised through the capability of the manager”.

Redcape CEO Dan Brady said: “These transactions are consistent with Redcape’s strategy of portfolio optimisation and demonstrates our continued focus on acquiring venues where we can increase value by enhancing their operations and applying our refurbishment capability. The net sale proceeds will reduce borrowings, strengthen our balance sheet and provide the Group with significant debt capacity to pursue other growth opportunities.”

The completion of both transactions remain conditional to customary condition precedents including a financing condition with settlement anticipated to occur before March 2020. The deals come after other recent portfolio activity for Redcape, including the sale of the St George Hotel in Belmore for $47.1m and the acquisition of the Eden Brewhouse in Redbank Plains for $11.5m.

Both deals were brokered by JLL Hotels and Hospitality group’s John Musca in a record-breaking year for the group.

Speaking about the Royal Hotel, which is located opposite Granville train station and includes 30 EGMs, public and sports bars, Musca said: “In a rapidly consolidating asset class, this sizable transaction is another example of the value afforded to the very best assets across the densely populated Sydney metropolitan area.”

The Kings Head Tavern includes 27 gaming machines, restaurant, public and lounge bars, drive-through bottle shop and beer garden.

The property also occupies a 1334 sqm corner position on King Georges Road, and also offers future multi-level mixed-use development potential.

“After years of unsolicited buyer approaches, the long-time owners sought JLL’s assistance to facilitate the sale,” Musca said.

The deal was a record 15th hotel asset transaction in metropolitan Sydney for JLL Hotels, with an average NSW deal size of $27.1m.

In regards to off-market sales, Musca said: “More than ever the increasing sophistication of the market and capital sources, has seen a move towards truly national or global agency platforms to deliver divestment solutions, particularly off-market.”

Redcape also issued an update on its operating performance, year to date in FY20m, which it said “has been strong”.

In a statement to the ASX, Redcape said: “As a result of the strong performance of the underlying business Redcape is pleased to reaffirm its Distributable Earnings guidance for FY20 despite the net impact of recent transactions and the lowering of gearing to close to the bottom end of Management’s target range of 35-45 per cent.

“On a pro forma basis, the completed transactions will reduce Redcape’s gearing by 2.4 per cent to 35.6 per cent. This provides Redcape with funding capacity of approximately $60-70m for pursuing additional acquisition or refurbishment opportunities that are accretive to Distributable Earnings.”

Brady added: “Reaffirming our FY20 guidance, which takes into account recent acquisitions and divestments and the consequential reduction in gearing, demonstrates that operational performance has been strong and we believe general market conditions remain favourable.

“We are pleased with our progress in actively optimising the opportunities within our portfolio in the first half of FY20 and anticipate further activity will occur in the second half.”

Given the expected reduction in gearing Redcape has determined to suspend its Distribution Reinvestment Plan with immediate effect.