Secure Income REIT (Secure) targets predictable cash flows from a broad range of real estate assets, which offer very long leases (average unexpired lease term more than 23 years) subject to annual fixed or RPI linked rent uplifts, to high-quality tenants providing strong covenants. The external manager has a strong track record, with interests strongly aligned to other shareholders. The prospects for medium-term dividend growth are very strong, while NAV should also grow at unchanged yields. The starting valuation seems modest compared with similar defensive sector peers.
In a tax-efficient REIT structure, Secure is a specialist real estate investor targeting predictable cash flows from long leases and upward-only annual fixed or RPI linked rent increases backed by high-quality tenants. The external manager, Prestbury, brings a strong track record of successfully creating value for investors through previous cycles, sourcing and executing transactions, with management ownership (18%) that is one of the largest in the quoted UK real estate sector. Among a small number of listed specialist investors in long lease income, Secure is differentiated by adopting a sector-neutral position assessing a wider range of long-term rental streams on the merits of the underlying real estate and tenant credit quality.
Since listing, Secure has optimised its balance sheet for its REIT status and broadened its ownership, preparing the ground to deliver additional growth and enhanced shareholder returns through acquisitions. Interim results were predictably strong and Secure announced the agreed acquisition of 55 Travelodge hotels on long (average 27-year) leases with RPI uplifts, for £192.6m, conditional only on the placing of up to £140m of new ordinary shares at a price equivalent to the pro forma NAV per share of 298.6p. The assets are let to Travelodge, the UK’s second largest budget hotel brand, a substantial and growing privately owned business that has recently gone through a substantial investment programme. Completion should lift fully covered distributions by 14%, reduce gearing, extend further the average unexpired lease length and diversify the tenant covenant profile.
Long leases, upward-only rent increases, and predictable administration and finance costs provide a high degree of medium-term visibility. Consensus expectations of medium-term RPI of c 3% imply 6.5% pa DPS growth to 2022 and, on an unchanged valuation yield, c 11% pa EPRA NAV total return.