Another yield in double figures, another property trust whose divi looks secure
Real Estate Credit Investments yields 10pc and has just reiterated its commitment to pay a ‘stable’ dividend. Its track record suggests it will
APPRECIATION in the share price of Real Estate Credit Investments has, we must admit, been modest since we added the investment trust to our Income Portfolio in late May: the price has crept up by a ha’penny to 120.5p. But there have been some encouraging noises from the fund’s managers since our tip. The portfolio’s net asset value increased, if only slightly, in both May and
June, recovering some of the losses suffered, on paper at least, as a result of the pandemic.
In its annual report, published a month ago, the trust reiterated its commitment to paying a “stable” dividend and said it had done so “consistently” since October 2013.
The asset management firm that runs the fund, Cheyne Capital, said in the annual report: “Looking ahead, the company should seek to capitalise on the myriad of opportunities that the crisis will, and has already begun to, offer. The company has already made large strides towards defending its long-term success and delivery of stable dividends, which leaves it in a comfortable position to start thinking of the next phase in its evolution.”
In what might be a recognition that, while it is nowhere to be seen now, inflation could return as a result of unprecedented walls of cheap money from central banks and spending from governments, the trust emphasised its “robust mitigation against a rising rates environment”.
The first arm of its defence was its high yield: it aims to pay dividends of 7pc-plus of its net asset value, which it described as “offering a significant buffer” to what you can get from “risk-free” government bonds (hardly an exaggeration at a time when such bonds often charge investors for the privilege of owning them). The other arm was a “short weighted average” maturity, which ensures “minimal exposure” to wider falls in bond prices and enables the managers to redeploy the proceeds of maturing bonds and loans “at higher rates quickly”. While the board aims for a yield of 7pc relative to the NAV, the current discount of about 20pc helps to make the yield relative to the share price 10pc.
As we said in connection with the trust we tipped yesterday, AEW UK Reit, whose yield was also just into double figures, that kind of number normally reflects a severe risk of a dividend cut.
But in RECI’s case, as in AEW’s, we believe the market is overstating that risk. RECI’s managers have a record of making astute decisions in a variety of market conditions. We will hold.