A yield of 11pc and no prospect of a div­i­dend cut? This trust looks too cheap

AEW UK Reit seeks out hid­den value in for­got­ten cor­ners of the prop­erty mar­ket – with great suc­cess so far

The Daily Telegraph - Business - - Business - RICHARD EVANS

SOME­TIMES things that “don’t look good in the brochure” make bet­ter in­vest­ments. That ex­pres­sion, heard by Questor from a fund man­ager this week, is one way to ex­plain the suc­cess of a prop­erty trust that steers clear of the big show­case build­ings found, for ex­am­ple, in the City of London. In­stead it spe­cialises in lower-pro­file real es­tate that at­tracts less com­pe­ti­tion among buy­ers when put up for sale. The less it has to pay for its as­sets, the higher the yields the trust makes from them – and hence the more it can pay its own share­hold­ers.

Add the in­come-en­hanc­ing ef­fect of a dis­count that now stands at about 22pc and you have a yield of 11pc – the kind of fig­ure you al­most never see un­less the mar­ket ex­pects an im­mi­nent div­i­dend cut. But AEW UK Reit’s div­i­dend looks safe, ac­cord­ing to one port­fo­lio man­ager who has put some of his clients’ money into it.

“There is no rea­son for the trust to cut its div­i­dend at this stage,” said Richard Par­fect, who holds AEW in his Seneca Di­ver­si­fied In­come fund. “It is slightly un­cov­ered by earn­ings but there are dis­tributable re­serves and the trust has paid its tar­get of 8p a year since in­cep­tion.”

The fact that the div­i­dend cur­rently ex­ceeds earn­ings is partly be­cause the trust has re­cently sold as­sets and has yet to re­de­ploy the cash into new prop­er­ties. But such sales are a key part of its strat­egy and it has a record of en­hanc­ing value by re­cy­cling its cap­i­tal into as­sets that it can im­prove and sell in their turn.

“The man­agers’ ap­proach is sim­ple: buy well, man­age the as­set well, sell well,” said Mr Par­fect. He gave some ex­am­ples of prop­er­ties that had gone through this process suc­cess­fully.

“They had an early suc­cess with a re­tail park in Belfast,” he said. “They locked in a high yield, then re­ceived £1m from tenants to break the lease, in­vested that money in the park and then sold it for a healthy profit. In 2018 they bought a prop­erty in Corby,

Northants, for about £12.5m and a yield of 10pc from a short lease. In line with their nor­mal ap­proach the man­agers, Alex Short and Laura Elkin, had pre­pared a plan B and a plan C but in the end they sold it about two months ago for al­most £19m.”

He added: “I don’t see why they can’t carry on with this ap­proach. They con­cen­trate on smaller prop­er­ties that don’t at­tract much com­pe­ti­tion from buy­ers – they are al­most push­ing on an open door.”

As­set sales have helped to re­duce debt and the trust’s gear­ing, af­ter its cash is taken into ac­count, is cur­rently low at 13.7pc.

Just 13pc of the trust’s money is in re­tail as­sets, while 52pc is in in­dus­trial prop­erty, 27pc in of­fices and 8pc in other types such as cin­e­mas and petrol sta­tions. “But this trust is not about pick­ing win­ning sec­tors and more about spe­cific as­sets,” Mr Par­fect said.

In an up­date last week it said 84pc of rents for the third quar­ter had been col­lected or were ex­pected on monthly pay­ment plans, while a fur­ther 6pc was ex­pected un­der agreed longer-term pay­ment plans.

One to buy for its un­der-the-radar ap­peal, strong man­age­ment, wide dis­count and gen­er­ous yield.

Questor says: buy

Ticker: AEWU

Share price at close: 73p

Up­date: Doric Nim­rod Air Three

This fund, which owns air­craft leased to the Emi­rates air­line, re­cently an­nounced another div­i­dend in line with its nor­mal sched­ule.

Mr Par­fect, whose fund has a stake in this trust too, said Emi­rates was “over the worst” of the coro­n­avirus pan­demic and the trust’s ex­pected div­i­dends alone should ex­ceed the cur­rent share price. The cur­rent yield is 25.4p. Hold.

In­vest­ment trust news

Per­pet­ual In­come & Growth is to be ab­sorbed into Mur­ray In­come, sub­ject to share­hold­ers’ ap­proval.

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