Three real-estate investment trusts built on solid foundations

With interest rates set to remain at rock bottom, investors will come to prize reliable income streams, particularly those backed by physical assets, says professional investor Chris Clothier of the Capital Gearing Trust. Here. He picks three of his favourite Reits to buy now.

A consequence of the Covid-19 pandemic is that interest rates are going to be much lower for much longer. In the US the Federal Reserve has cut interest rates below 0.25%. The Fed Fund Futures market (where investors can speculate on the path of future interest rates) predicts that rates will turn negative before rising.

This is hardly surprising. The Taylor rule serves as a rule of thumb for central bankers: it takes unemployment and inflation as its inputs and spits out a target interest rate. Today it recommends an interest rate of minus 5%. It will be a long time before the US sees any interest-rate rises. The outlook is not very different here in the UK.

All this means that investors will be even more starved for income in the next few years and will come to prize reliable income streams highly, particularly those that are backed by either physical assets or government promises. Fortunately there are a number of investments in the property sector that meet these criteria: real estate investment trusts (Reits). Some of them are available at knockdown prices.

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The backbone of online retailing

Tritax Big Box Reit (LSE: BBOX) invests in so-called mega-sheds: the large logistics warehouses that are the backbone of online retailing. The sheds themselves make up a fraction of the overall cost of distribution centres because inside they are kitted out with sophisticated “pick & pack” robotics. To protect this investment, tenants are happy to sign up for long leases, often rising with inflation.

The firm has signed a deal to pre-let 2.3 million square feet in Dartford to “a world- leading online retailer”, widely tipped to be Amazon. When completed this should add a few pence to the net asset value (NAV)per share. Rent collection has been strong – reflecting the thriving tenants – and the shares offer a covered 4.4% dividend yield. They trade around NAV.

Secure Income Reit (Aim: SIR) is managed by Nick Leslau and owns a portfolio of long-lease property assets. There are three parts to the portfolio: leisure, private hospitals and budget hotels. The shares have had a bruising year thanks partly to a spat between Travelodge and its landlords, which has just been resolved.

The leisure portfolio, which includes theme parks such as Alton Towers and Legoland, could also be a cause for concern. But Leslau says the tenants – which include the Lego family and Blackstone – are in it for the long haul and have deep pockets, while these irreplaceable assets are their crown jewels.

Healthy hospital holdings

The private hospitals look rock-solid and at present their rents are being paid by the government, which has commandeered all UK private hospitals to help fight the Covid-19 pandemic.

The shares trade at a 40% discount to historic NAV, which provides an ample cushion against any fall in the value of the leisure and budget hotel portfolio, and pay a dividend yield of 6.3%.

Finally, Residential Secure Income Reit (LSE: RESI) is a specialist residential-property investor. It owns a portfolio of retirement flats and shared-ownership properties. Both income streams look very secure and should rise slightly faster than inflation. It trades on a 15% discount to net assets and yields 5.5%.

Chris Clothier

Chris Clothier is co-manager of the Capital Gearing Trust.