With so many REIT’s having de-rated heavily, sifting out the companies that were swept along in the coronavirus slump and left with unmerited discounts is fraught with danger.
We have seen industrial and logistics specialists bounce back strongly due to a lockdown acceleration in the sector’s fundamentals, namely ecommerce penetration rates.
However, more generalist companies that hold a diverse portfolio of property assets are still languishing on heavy discounts, some of which may be unjustified.
One that has caught our eye was AEW UK REIT (AEWU). It is a relatively small fund, with a portfolio worth £107m, but pays one of the biggest dividends in the sector at 8p a year, which is equivalent to a yield of 11%.
It is trading on a discount to net asset value of 20% yet has almost half of its assets in the industrial sector and just 12% in retail.
The covid-19 pandemic has highlighted the importance of conservative debt levels and AEWU’s loan to portfolio value is 25%.
This follows the £18.8m sale of its largest asset, a 35-acre car storage facility in Corby, last month at a 23% premium to book value.
The sale was a bit of a blueprint to AEWU’s investment philosophy. It likes to buy shorter-income properties in prime locations that have strong supply-demand dynamics. The shorter income gives it lots of options to increase the value of the property through asset management initiatives.
This could mean renewing the lease for yield compression (as it has done in recent weeks with a 15-year renewal to the Secretary of State for Communities and Local Government at its Solihull office, 30% above the previous rent), redeveloping all or part of the site, or crystallising value by gaining planning consent for an alternative use and selling to a developer.
With the Corby asset, which it bought in 2018 for £12.4m with three-and-a-half years left on the lease, it progressed down all three routes and ended up selling to an owner-occupier that has plans to redevelop the site.
By buying shorter income, it does not pay the premium price that comes with long income. The trials and tribulations of Travelodge in recent months shows just how unsecure long income can be.
The company has said it is looking at investment opportunities that meet its criteria across the real estate sectors, but its immediate focus is on cash preservation.
It collected 84% of rents billed in March, which is at the higher end of its peers, and it expects a similar level for June. Whether AEWU will continue to pay an 8p annualised dividend on these collection levels remains to be seen.
But when the dust settles, the company’s expertise in enhancing the value of assets should once again appeal to investors and it is hard to see how a 20% discount will persist.