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).

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.

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.

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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.

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.