Profit from the Russian recovery

UK investors struggle to understand this Russia-focused property fund, says David C Stevenson. But that just makes it an attractive bet for the brave.

890-Russia-634
St Petersburg property is around 18% of Raven's portfolio

UK investors struggle to understand this property fund, which makes it an attractive bet for the brave.

Although I'm hugely sceptical about Russia politically let's agree not to talk about the activities of their spy agencies I am slightly more optimistic about prospects for the Russian economy. The oil price is much higher than we all expected, debt levels are falling and the poor old Russian consumer has started spending a bit more in the last year or so.

One way into this development is via Raven Russia (LSE: RUS), a London-listed Russian property fund that invests in high-grade logistics warehouses in key Russian cities. Moscow property accounts for 70% of the portfolio, followed by St Petersburg, at 18%. The management of this UK firm is made up of well-respected Russian veterans who know a thing or two about surviving in the local property scene.

An attractive private-equity target

The UK market will never properly value this business, as it can't quite get its head round the obvious policy and execution risk; investors also fret about the high levels of debt. As of 31 December, the business had total debt of $847m on a loan-to-value of 53%, with the average weighted cost running at 7.62% and an average maturity of 4.5 years. No matter how well the fund does, these fears will not subside and the discount currently at around 22% probably won't budge much. That, in turn, makes Raven quite an attractive private-equity target for the right buyer ie, one who understands Russia and all the obvious risks.

In the meantime, Raven sticks to its knitting and produces decent results. Recent full-year numbers (to 31 December 2017) show a 10% increase in net operating income and a 13% increase in net asset value (NAV) to 77 cents, or 55p. If we include the impact of a proposed tender offer, that NAV increases by 17%.

As at 31 December, the portfolio was made up of 1.8m square metres of warehouse (94%) and office space, which generated $145m of net operating income and was valued at $1.57bn. Moscow assets yield between 11.25% and 12.5% (down from 12% to 13% in 2016), and both St Petersburg and regional assets (the remaining 12% of the portfolio) yield 12.5%, down from 13.25% a year ago.

Russia goes mainstream

Most other logistics-park-based funds trade at a substantial premiums to NAV, with underlying property yields probably not running that much over 7% per year. With Raven, net yields are in the low double digits, and the trade here is obvious if Russia becomes more mainstream, those yields will pull back into the single digits, realising more NAV gains. In the meantime, Raven needs to find more local debt to keep rolling out new developments and focus on generating enough cash to pay for its dollar-denominated debt.

The dividend yield comes largely from the frequent tenders to investors the current one is distributing the equivalent of 4p per share, a yield of 9.3%. Most analysts expect that to decline to 3p in the future, a 7% yield. My own preference is for the convertible preference shares, where you get a cash distribution equivalent to a 5.4% yield, and you also get any upside in the equity price if the shares trade (or exit) above 67p a share.

The convertible preference shares can be converted into ordinary shares at any time up to July 2026, currently at a rate of 1.779 ordinary shares per preference share (equivalent to 67.7p per ordinary share at the current price). If we assume another two to three years of 15% to 20% NAV uplifts, we could see a NAV per share of $1 by 2020. That could drag the share price up to around 70p to 80p, which could kick in a share-price uplift for the convertibles.

Recommended

Nine of the best new investment trusts and ETFs
Funds

Nine of the best new investment trusts and ETFs

A lot of appealing investment trusts trusts and exchange-traded funds have emerged now that the market has calmed down. David Stevenson picks nine of …
26 Oct 2020
Is London’s office market a bargain?
Property

Is London’s office market a bargain?

Private-equity groups are swooping on London’s property companies, which are trading on steep discounts to net asset value.
23 Oct 2020
Will Mailbox Reit, a new property fund with a single investment, deliver?
Property

Will Mailbox Reit, a new property fund with a single investment, deliver?

Mailbox Reit, a new real-estate investment trust set to float on a new property exchange, contains just one building. David Stevenson assesses its pro…
20 Oct 2020
Why it pays to take cries of “bubble” with a pinch of salt
Sponsored

Why it pays to take cries of “bubble” with a pinch of salt

Many observers are pointing to a stockmarket “bubble” – especially in US tech stocks. But, says Max King, just because a lot of people are saying it, …
13 Oct 2020

Most Popular

Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020