Commercial property investors have experienced a wildly volatile few months and the outlook is still extremely uncertain too, thanks to the government response to the coronavirus outbreak. Many investment companies have cut or cancelled their dividends; and the pace and scope of the lockdown lifting will affect how quickly and to what extent their rental income recovers. As a result, they sit on wide discounts to NAV. On the other hand, other areas of the property market have seen limited or no effect. Some of these alternative sectors have seen their share prices fall and rise dramatically, close to their pre-crisis valuations.
Companies: BREI RESI THRL BBOX SHED
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP EBOX ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA CCRGF NRR
Residential Secure Income (RESI) is a real estate investment trust (REIT) that invests in the social housing sector, aiming to generate an RPI-linked 5% dividend yield and 8% total returns per annum. RESI takes a cautious approach to selecting assets, which requires the ability to raise debt equivalent to investment grade against each proposal. RESI has a target gearing level of 50% of GAV. Investments have so far been focused on the retirement homes sub-sector and shared ownership sector, with other investments made in local authority housing. Importantly, it is worth noting that RESI has no exposure to the specialist supported-housing sub-sector, which has been the focus of regulatory attention thanks to the weak balance sheets of some housing associations (HAs) in this sub-sector. RESI is now close to being fully-invested, having invested £300m of a targeted £340m, split 50/50 between debt and equity. Deployment was initially slower than expected, but recent deals in the shared ownership sector have brought RESI close to fully invested and created a more diversified portfolio. RESI pays quarterly dividends and has declared aggregate dividends of 5p for 2019, in line with its target, which the managers aim to increase broadly in line with inflation and represents a yield of 5.5%. The dividend is not yet covered by rental income from the portfolio (although it is covered from total earnings). However, the manager projects full rental cover to be achieved by the end of 2020 as the shared ownership portfolio becomes income producing. The shares currently trade on a discount of 12.5%. While this is wide in absolute terms, it is tighter than RESI’s social housing peers, which have seen their discounts move out markedly following the Regulator of Social Housing announcing it was investigating the business models in the specialist supported housing sector they invest in (and RESI does not). RESI is managed by a team at RESI Capital Management Limited, a subsidiary of TradeRisks, which has been a specialist treasury adviser and debt arranger to the social housing and broader social infrastructure sector for 18 years.
Companies: Residential Secure Income Plc
Hipgnosis Songs – Proposed fundraising | Merian Chrysalis – Portfolio update and placing price | Residential Secure Income – Statement on regulator's report
Companies: SOND MERI RESI
GRI – Grainger – TfL PRS Build to Rent partnership | RESI – Residential Secure Income – Shared ownership acquisition | SONG – Hipgnosis Songs – Portfolio update
Companies: GRI RESI SOND
BGLF* - Blackstone / GSO Loan Financing - December 2018 NAV | CIFU - Carador Income - December 2018 NAV and dividend | RESI - Residential Secure Income - Partnership agreement | AGR - Assura - Trading update to 31 December 2018
Companies: BGLF RESI AGR CIFU
Residential Secure Income (ReSI) is a REIT that, when fully invested, aims to generate an RPI-linked 5% dividend yield and capital growth from investments in the social housing sector. The trust takes a cautious approach which means it only invests in a project when it knows it can raise investment grade debt against the assets. This and the collapse of a few expected deals shortly after launch in July 2017 mean that the trust is not yet fully invested – it is at £240m in gross assets which will rise to around £330m when the listing proceeds are fully invested and geared. This slow pace of investment has caused the trust to slip onto a discount relative to NAV and peers. The trust can invest in various residential housing sub-sectors, but concentrates on retirement housing, shared ownership housing, as well as leasing housing to local authorities for the vulnerable. The management team at TradeRisks, led by Ben Fry, view these types of assets as the more secure sources of income in the sector. Although the trust is not yet fully invested, it currently offers a prospective yield of 5.4% should current forecasts be met. The unleveraged yield on the underlying portfolio is 5%, in line with the long-term target. Dividends are paid quarterly. The trust is managed by a team at TradeRisks, which has raised debt and advised clients in the social housing sector for 17 years. The investment trust allows that team to plug a gap – that of equity - in social housing financing which they have watched develop as government grants have reduced.
Residential Secure Income – Finals to 30 September 2018 | HICL Infrastructure – Preferred bidder
Companies: Residential Secure Income Plc HICL Infrastructure Company
EBOX – Tritax EuroBox – Acquisition | INPP – International Public Partnerships – Further investment | RESI – Residential Secure Income – Acquisition and debt facility | SLI - Standard Life Property Income – Investment transactions
Companies: International Public Partnerships Residential Secure Income Plc
Augmentum Fintech – New investment | GCP Asset Backed Income - C share fundraising and prospectus | Foresight Solar – C share fundraising and prospectus | HgCapital Trust – Half year report to 30 June 2018 and investment in BrightPay | Residential Secure Income – Portfolio Acquisition
Companies: AUGM GABI FSFL RESI HGT
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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
Cenkos Securities plc has terminated coverage of Record Plc. Our previous recommendation (BUY) and forecasts can no longer be relied upon.
Please contact Cenkos for further information.
What’s new: Today’s trading update reveals 17% rise in assets under management (AuM), double digit revenue growth, and an increasing operating margin as the business scales. The outlook is positive. Highlights are:
12.6% rise in 1H Group Revenues to £11.0m (1H last year: £9.7m);
21.9% rise in 1H adj operating profit to £5.0m (1H last year: £4.1m);
17.4% rise over 6 months in AUM to £7.8bn on 30 September 2020,
n.b. From 31 March 2020 the WMA balanced index rose 11.6% to 4510;
- Market movements added 12.5% to AUM (i.e. Tatton outperformed WMA);
- 1H net inflows of £328.1bn were 4.9% of opening AUM (i.e. c 10% annualised net inflows);
3.0% rise in Paradigm Mortgage Services member firms to 1,591
2.5% rise in Paradigm Consulting member firms
Interims will be announced on Wednesday, 18 November 2020
Companies: Tatton Asset Management Plc
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
Agronomics has announced it has conditionally raised £10.0m gross from an equity issue at a price of 6.0p, which represents a 6.8% premium to the most recently reported NAV per share of 5.62p. Assuming the company's post-raise cash balance is £8.15m, after repaying a £1.9m bridging facility, we estimate the new NAV per share to be c5.7p. We see significant potential in the cultivated meat sector and believe Agronomics is well positioned to support this developing sector and generate strong returns from these investments. We see upside in Agronomics' portfolio and have today initiated coverage with a Buy recommendation.
Companies: Agronomics Limited
The most pleasing aspect of Tatton’s trading update for the six months ending 30 Sep 2020 (H1 2021) was how robust its fundamental offering to clients (financial advisers) has proven to be in highly uncertain market conditions. It continued to attract strong net inflows into its asset management business while also growing its base of IFA consulting and mortgage services clients. The prospect of beating our previous FY21 forecasts looks promising. Longerterm growth prospects also look strong. We do, however, remain wary of the potential impact of further large market dips. For now, we maintain our fundamental valuation of 300p per share but see room for significant upside on that mark if Tatton continues to deliver.
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL
John Laing Group (JLG) has announced the sale of its Australian wind farm assets for A$285m (£157m), a valuation described as a ‘small uplift’ to book value. This news is significant for two reasons: 1) it provides some reassurance that the book value of JLG’s renewable assets is now relatively conservative; and 2) accounting for about a third of its renewable portfolio, the disposal represents material progress on JLG’s strategy to exit this market. We make no change to our numbers ahead of the company’s Q3 trading statement expected next week.
Companies: John Laing Group Plc