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 BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU 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
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 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
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
Research Tree provides access to ongoing research coverage, media content and regulatory news on Residential Secure Income.
We currently have 18 research reports from 5
Companies: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
With a new CEO, Amanda Blanc, Aviva’s shareholders could dream of a possible change in the group’s strategy, with a more focused insurance business. The new Chief has an opportunity to take painful decisions in a year where no one will require a high operating performance.
Companies: Aviva Plc
The Native Antigen Company (“NAC”) has been acquired by LGC for up to £18.0m – with the ongoing COVID pandemic highlighting the value of knowledge and execution in the infectious diseases space. Mercia invested in NAC via both its balance sheet and 3rd party funds. The exit represents a strong return for both sources of capital, validating complete connected capital to optimise value creation. For the balance sheet stake, the £5.2m proceeds represent a £2.5m gain on realisation (c.1.5% of our FY21e NAVps). Final Results will be announced next week, when we will review our forecasts. The shares are currently trading at a 45% discount to NAV (which is 20% cash). Today’s exit demonstrates justification for a much narrower discount, if not a premium, to conservative carrying values.
Companies: Mercia Technologies
Trading Well in Tough Market
Companies: Palace Capital
With the sale of The Native Antigen Company (NAC) for up to £18m in cash, Mercia expects to realise £5.2m (1.2p per share) for its 29.4% stake. This exit delivers another significant milestone in management’s strategy to achieve an evergreen funding model. Management has confirmed that the group is profitable on a day-to-day basis following the acquisition of the NVM VCT management contracts (NVM) in December 2019. NVM, together with additional allocations from the British Business Bank (BBB), has lifted AUM to c £800m. Management’s three-year strategy targets a sustainable, evergreen balance sheet with AUM of £1bn in FY22, with future investment commitments met through existing cash resources and realisations without the need for further recourse to the markets. Despite real progress, Mercia trades at 0.69x its September 2019 NAV, with the fee-earning funds business as further upside, not captured in an NAV-based calculation. FY20 results are due on 14 July 2020.
HgCapital Trust’s (HGT) 12-month NAV TR to end-March 2020 was a solid 13.8% despite the COVID-19 market downturn in March 2020 (ytd NAV performance since end-December 2019 was a 6.2% decline). The coverage ratio reached a historically low level (13% vs three-year average of 53%) after HGT notably increased its investment activity and commitments in Q120. However, a significant part of these new commitments will not be drawn in the near term. The board continues to review its future funding arrangements and may also opt out of a new investment without penalty across all funds. HGT’s portfolio focus is on the resilient software and technology sector and the manager expects a limited direct earnings impact on its portfolio from the COVID-19 pandemic.
Companies: Hgcapital Trust
Accelerating activity in to FY21
Companies: Manolete Partners
Hot on the heels of the Architas acquisition – announced 1st July, Liontrust has issued in line final results (£38.1m adj. PBT vs £38.3m consensus, 24p second interim dividend). An accompanying trading update also confirms that AuM bounced back in Q1 as markets recovered and net inflows were sustained at a record £971m for the quarter. The Architas acquisition – once completed later this year – stands to drive Liontrust through the £25bn AuM mark and bolster the existing multi-asset product offering and wider appeal to the current client base. As joint corporate broker, we have withdrawn forecasts pending the approval of the acquisition at the forthcoming general meeting.
Companies: Liontrust Asset Management
Beijing’s forced implementation of the Hong Kong security law threatens the region’s financial hub status. This is a potential game-changer for HSBC but it does not seem to come as a surprise for the group as confirmed by the acceleration of its investments in China or its efforts to secure a leading position on the RMB.
Ground Rents Income Fund (GRIO) has today released its interim results for the period ending 31 March 2020. The fully diluted NAV is 110.1p down marginally from previous NAV of 111.3p as at 30 September 2019 year-end. This valuation included a material valuation uncertainty clause as a result of the COVID-19 pandemic, which has subsequently been removed since the period end for long dated ground rent valuations given the defensive nature of the income streams and continued market/transactional activity. The latest valuation represented a decrease on a like for like basis of £0.36 million or -0.3%. Two Interim dividends were paid during the six-month period ending 31 March totalling 1.98p, and a further dividend of 0.99p has been declared today (ex 16 July / payable 10 August). Dividend cover excluding the non-recurring litigation costs on Beetham Tower was 90%. Assuming a full year dividend of c4p this puts the shares on a flat yield of 4.9% and a discount of 26%.
Companies: Ground Rents Income Fund
Burford has announced its results for 2019. As previously indicated, these were lower than in the previous year. Revenue fell 17% from $430m in 2018 to $357m. Profit after tax, on Burford’s basis, declined 31% from $329m to $226m. As announced earlier, there will be no final dividend so only the interim dividend of ¢4.17 was paid for FY19. Unusually, Burford has also released a trading update for early 2020 alongside its main figures. Court results and arbitral awards have been obtained that would generate some healthy profits. Most notable is $200m in income ($300m in cash receipts) regarding which further legal review is unlikely.
Companies: Burford Capital
Gfinity plc* (GFIN.L, 1.625p/£14.0m) | Blackbird plc* (BIRD.L, 16.5p/£55.4m) | Tern plc* (TERN.L, 11.5p/£31.1m) | The Panoply Holdings (TPX.L, 72.5p/£39.9m)
Companies: GFIN BIRD TERN TPX
ICGT, the 39-year listed private equity (PE) investor, has delivered a total NAV return of 178% over 10 years (comparable FTSE All Share return 61%). Since Intermediate Capital became the manager in 2016, ICGT has earned mid-teen p.a. underlying returns every year. This has been achieved by leveraging the attractive PE market with incremental manager synergies. It has a concentrated portfolio of “high-conviction” investments (19% p.a. average returns over five years, 42% of portfolio, defensive growth focus) and a diversified third-party PE funds book. ICGT manages over-commitment tightly. The 33% discount to NAV is above peers.
Companies: ICG Enterprise Trust
Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
Companies: Numis Corporation
PetroTal (PTAL LN/TAL CN)C; Target price £0.45: 1Q20 results/Bretaña expected to restart in July – 1Q20 financials are in line with expectations and 1Q20 production had been reported previously. At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19. Most importantly. PetroTal continues to expect the Bretaña field to be re-opened this month. The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port. This is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. We anticipate that the imminent reopening of the field with be an important catalyst to the share price.
i3 Energy (I3E LN): Reveals takeover target in Canada | Maha Energy (MAHA-A SS): Production update | Aker BB (AKERBP NO): 2Q20 update in Norway | Energy (RRE LN): Recommended offer by Viaro Energy | Spirit Energy: Dry hole in Norway | Enwell Energy (ENW LN): Ukraine update | JKX Oil & Gas (JKX LN): 2Q20 update in Ukraine and Russia | Pharos Energy (PHAR LN): Operating update in Egypt and Vietnam | Sound Energy (SOU LN)C: Terms of Moroccan licence renegotiated | Tethys Oil (TETY SS): June production in Oman | Victoria Oil & Gas (VOG LN): Gas sales contract with ENEO in Cameroon terminated
EVENTS TO WATCH NEXT WEEK
14/07/2020: Aker BP (AKERBP NO) – 2Q20 results
15/07/2020: Premier Oil (PMO LN) – 1H20 update
13-17/07/2020: GeoPark (GPRK US) – 2Q20 update
Companies: I3E MAHAA JKX PHAR EQNR AKERBP ENI HUR PTAL REP RRE SOU TPL VOG OMV