RDI REIT breaches LTV Aviva covenant – Following on from a trading update on February 28, 2019, where it was announced that RDI REIT (RDI) had breached a covenant in relation to its debt facility with Aviva (click here to read more on this story, including a QD comment), it has been announced today that that all net operating cashflows after interest costs of approximately £6.5m (on an annualised basis) from four RDI shopping centres were being retained within the loan facility as a result of the general deterioration in values for UK shopping centres and the resultant increase in the lender’s loan to value (LTV) ratio on this particular facility.
UK retail headwinds
The shopping centres in question are Grand Arcade, Wigan; Weston Favell, Northampton; Birchwood, Warrington and Byron Place, Seaham. They account for about 12% of RDI’s portfolio by market value. The outstanding principal balance of the debt facility is £144.7m, at a fixed rate of 5.5% per annum.
Due to the ongoing uncertainty around UK shopping centre valuations, as well as concerns over certain key retailers, Aviva has undertaken a further valuation of the four assets and found that that its LTV is now at 89.4%, breaching an 85% covenant. Aviva has valued the properties at £152.5m, reflecting a net initial yield of 9.7%. Aviva notes that occupancy (94.5%) and net income across the four centres have remained broadly stable since 31 August 2018. Under the terms of the facility agreement RDI has until 23 April 2019 to repair the covenant breach which would require a cash payment of approximately £9.4m.
Could a sale be on the cards?
RDI says it will carefully consider the options available to it with respect to long term shareholder value and will remain disciplined in any further capital allocation to the retail sector. The company adds that a disposal of the four centres would reduce exposure to UK retail to approximately 20% of the portfolio by value (31 August 2018: 29%) as well as reducing the Group’s LTV to 44.0% (31 August 2018: 47.3% pro-forma) and the group’s average cost of debt to approximately 3.0% (31 August 2018: 3.4%).
[QD comment: Valuing these centres on a 9.7% yield seemed quite harsh to us at first sight. We had a look at occupancy within the centres and each of them has vacant units/units occupied by charity shops. Debenhams, one of the anchor tenants in Wigan, is rumoured to be about to enter administration. Maybe this valuation reflects the risk that rents will have to fall in these centres.]
RDI: RDI REIT breaches LTV Aviva covenant