Redcape’s gaming pubs slugged by rate hikes as sales on the table

The Grove Hotel in Mackay.

The pub sector is coming under pressure from higher interest rates crimping consumer spending and hitting once impregnable gaming revenues, but the manager of Redcape Hotel Group says that conditions have been resilient as it looks to sell assets.

The pub group, run by the listed MA Financial, is one of the country’s largest, and it froze redemptions at the end of June as forces, including the prospect of harsher gaming laws, loomed. The fund freeze came in the face of economic uncertainty and deteriorating consumer confidence, prompting volatility in venues.

Redcape revealed this month that 6.5 per cent of investors in the $1.44bn fund wanted out, but claimed it had overwhelming support of the remainder of the register. It is now selling off some pubs, despite the relatively quiet market this year in the wake of repeated interest rate rises. The company last week sold The Aspley Hotel in Brisbane’s northern suburbs to a local operator for $10.5m.

It is now putting The Shamrock Hotel and The Grove Hotel in Mackay, Queensland, on the block. The play, via HTL Property and JLL, could see it reap about $50m.

Redcape had a 4.7 per cent like-for-like revenue decline on the June 2022 quarter, which had benefited from spending after lockdowns. The big fall was in gaming, which was down 8.1 per cent, but this bounced back later in the quarter.

Redcape managing director Chris Unger said this continued into July and August as people used pubs as a low-cost form of entertainment, saying that “good numbers” of beers and chicken schnitzels were being sold.

The company said it was “conducting an orderly process to divest selected assets and is in advanced discussions with potential purchasers for several assets”. Mr Unger said sales would give it more “optionality” in a strategy backed by investors.

The pub boss said there had not been much transactional evidence but noted the asset class continued to generate stable earnings, as well as showing the attributes to grow. He is supportive of the Minns government’s harm minimisation policy in the gaming sector.

After the sales, Redcape will keep a Queensland presence, but its 30-plus pubs will be mainly across Sydney’s gaming heartlands. The venues had a “variable” June quarter as they dealt with rising cost of living pressures on households.

Redcape paid out a 2.5c per unit distribution for the June quarter, but underlying earnings for the period were just 1.79c per unit, with some profits from selling Minskys Hotel in Sydney making up the gap.

There was a directors’ portfolio valuation of $1.44bn at a blended portfolio capitalisation rate of 7 per cent. The overall figure was steady on last year, but the cap rate moved up from 6.6 per cent.

Redcape’s pubs are well positioned for a coming wave of immigration and wage growth, as well as for their longer-term value for land banking, which could come into play once the economy moves past the peak in interest rates.