Against a very challenging operating environment, we consider Raven’s H115 performance to have been robust, and ahead of that implied by our full-year estimates. Net operating income was down 3% on H114 and underlying EPS and NAV by 3% each. The focus continues to be on collecting rents and maintaining occupancy, with no current development projects to fund. The cash balance is strong with no near-term funding needs. We believe Raven is strongly positioned to weather the likely challenges and take opportunities when recovery comes.
Since the economic crisis in Russia erupted, management has turned its focus to renegotiating near-term maturing leases to defend occupancy and cash receipts. H1 has seen considerable progress in pushing out the profile of remaing maturities. Vacancy has increased, taking occupancy from 94% at year end to 89% at midyear but the group remains solidly cash-positive. The period-end cash balance was $220.9m and it has since increased to c $247m (as at 27 August). The majority of current debt has been extended since June, with no remaining significant maturities before 2017. A reduced interim distribution of 1p per share has been proposed; this is well covered but management wants to maintain financing flexibility and be able to take advantage of an eventual market recovery.
H1 leasing progress leads us to slightly increase our forecasts for FY15 and FY16. However, conditions remain very challenging and forecasting uncertainty is high. We explain the assumptions behind our NOI forecasts in detail, and we continue to look for NOI declines as leases progressively roll-over to new lower rent levels. Meanwhile, we allow for an assumed lag in re-letting and higher vacancy. Management is planning on the basis that low oil prices and the rouble is the “new normal”, and we have attempted to estimate on the same basis.
While the 33% discount to NAV provides support to the shares, we expect they will be driven more by long-term cash flow and yield. NAV movements may well remain volatile, exacerbated by a relatively undeveloped Russian investment market. The ordinary shares offer a c 7% prospective yield and at 126p, the preference shares yield nearly 10% on a fixed coupon.