Secure Income REIT’s (SIR) FY16 results show income in line with expectations and 14.4% NAV growth per share. SIR has some of the longest leases in the sector, on either fixed or uncapped, upward-only RPI-linked rent reviews. Fixed debt and formulaic advisory costs lead to high predictability and lock in profits to support a rising and dependable dividend. Despite a material valuation gain, portfolio net initial yield was flat year-on-year as yield tightening on existing assets was offset by the acquisition of the Travelodge portfolio in October at a 7% yield. While the market appears to value SIR in line with long-lease peers on an earnings yield basis, the strong likelihood of NAV appreciation driven by rising rents may not be fully recognised. Our forecasts support the manager’s expectation of 11% compounded annual NAV and dividend returns to 2021.
EPRA earnings were closely in line with expectations, which reflected the portfolio’s mix of fixed and RPI-linked rent uplifts. The addition of the Travelodge portfolio during the year kept the blended portfolio net initial yield at 5.3% and was funded in part by a £140m capital increase at pro forma NAV per share which increased NAV considerably in absolute terms. This masked yield contractions in the healthcare and leisure portfolios, which contributed to £85m of valuation gains (with £3.8m from hotels), pushing EPRA NAV per share well beyond our 300.3p forecast to 323.6p. This earned the manager an incentive fee, paid in shares, and contributed to total NAV returns of 16.5% in the year (allowing for the incentive fee).
Robust institutional demand contributed to a contraction in valuation yields in FY16. Yields remain above the level management believes the same assets could be acquired at, and we expect them to fall further (although we do not assume this in our forecasts). The same dynamics make opportunities to expand the portfolio with assets on similarly long, stable leases at good yields scarce, but the acquisition of the Travelodge portfolio with an average unexpired lease term of over 23 years and at a 7% net initial yield demonstrates that it is possible.
Secure income streams and predictable costs enable SIR to pay a dependable and growing dividend, with a current prospective yield of 4.0%. Stable rent growth should also translate into capital growth if valuation yields remain stable, as we assume. The shares trade at a c 5% premium to reported EPRA NAV, close to our FY17e EPRA NAV/share forecast and in line with peers on an earnings yield basis.