Advertisement

Choose carefully when buying real estate investment trusts

Some real estate investment trusts (Reits) are on hefty discounts to net asset value, but not all are bargains, says Max King.

Some real estate investment trusts (Reits) with safe income streams have sailed through the great virus crisis (GVC) almost unscathed – yet their share prices have fallen to significant discounts to historic net asset value (NAV). Among them are BMO Commercial Property Trust (LSE: BCPT) and Secure Income (Aim: SIR)

Advertisement - Article continues below

Launched in 2005, BCPT was one of the first to take advantage of a new tax regime exempting from taxation at the corporate level property companies that paid out at least 90% of their income to investors and thus qualified as Reits. BCPT sought to provide investors with an attractive yield and some potential for capital and income growth from investing in a diverse portfolio. At the end of 2019 it had assets of £1.37bn, financed by £310m of debt and over £1bn of equity. NAV per share was 140p, a fall of 9p on the year ,but the company continued to pay a monthly dividend of 0.5p per share. 

Advertisement
Advertisement - Article continues below

Since its launch, BCPT had used rising capital returns to justify paying dividends that were uncovered by income. But its exposure to retailers left it struggling even before the GVC. In April, it reported another 5% fall in NAV and suspended the dividend, causing the share price to fall to 70p, a 44% discount to NAV. The GVC is clearly affecting the third of the portfolio that is in the retail sector, but retailers’ problems did not start with Covid-19 and will not end with the lockdown. 

Advertisement - Article continues below

The largest asset, the St Christopher’s Place Estate, is affected by falling rents in Oxford Street; this may prove temporary, but the problems with retail parks in Newbury and Solihull seem structural. The St Christopher’s Estate is the jewel in the crown of the portfolio, but Shaftesbury (LSE: SHB), trading at a 32% discount to NAV, offers better-quality exposure to this type of central London property. The rest of the portfolio looks not so much diverse as a bit of a mish-mash, from student accommodation blocks in Winchester (currently unoccupied) to office property in Aberdeen. With the oil boom having turned to bust, this cannot be a good location. In time, the dividend will be reinstated, but at a lower level, limiting the recovery potential of the shares.

The dividend looks secure

Secure Income Trust, the latest vehicle of serial property entrepreneur Nick Leslau, has also suffered in the GVC with the share price, now 314p, falling to a 27% discount to NAV to yield a little over 5%. There is no suggestion that this dividend, never as generous as BCPT’s, won’t continue to be paid, though earnings may suffer this year if temporary rental discounts or holidays are necessary. The assets in the portfolio have been hit hard by the GVC: 41% of the £2.1bn portfolio is in leisure assets, notably Alton Towers theme park, Thorpe Park, the Manchester Arena and Warwick Castle. A further 23% is in budget hotels and 36% in healthcare (private hospitals), so 64% of the portfolio is in lockdown with no revenue to pay the rent.

Unlike at BCPT, NAV per share rose last year, by 8%. The sale of healthcare assets in the summer reduced borrowings so total debt net of uncommitted cash of £234m fell from 43% of assets to 32%. The portfolio, with a rental yield close to 5%, has an average 21 years left on its leases. All properties have guaranteed rental increases, with 67% of rents reviewed annually and 59% of portfolio income-linked to the retail price index. Last year’s like-for-like rental increase was 2%.

There is no reason to think that there will be any lasting damage to Secure Income Trust’s hotels and theme parks, nor that they are losing their appeal. An acquisition of assets at a knock-down price would not be surprising. Secure Income Trust’s discount offers an opportunity to investors seeking income and recovery potential. BCPT, however, looks much less tempting.

Advertisement
Advertisement

Recommended

If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020
Why investment trusts are the best vehicle for your money
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020