There is egg on Questor’s face as Regional Reit cuts its divi. What did we miss?
We made the schoolboy error of ignoring what the market was saying when the yield reached 12.6pc. But even now it’s high at almost 8pc
HUMBLE pie is Questor’s dinner today as we hold our hands up to misjudging the inviolability of Regional Reit’s dividend, which was cut by 21pc on Wednesday from 1.9p a share to 1.5p for the second quarter of the year.
We had downplayed, although fortunately for our self-esteem not completely ruled out, the chances of such a cut on
July 31 when we quoted Regional’s fund manager as saying that strong rental collections “continue to underpin our confidence in our robust quarterly dividend payments and we look forward to announcing our second-quarter dividend on Aug 26”. This hadn’t struck us, we wrote, “as the language of someone who is softening investors up for a dividend cut, although the decision is of course the board’s and not his”.
Explaining the cut this week, the board said the trust had “adopted a conservative approach and continues to hold more cash than it would normally, which impacts on current income”. This is because cash deposits earn much less in interest than its property assets do in rent.
It added that it aimed, for the rest of the financial year, to maintain the dividend at the new level of 1.5p a quarter, although in previous years the fourth payment has been larger than the other three. It said it expected the new divi to be fully covered by its income. This column should in hindsight have paid more attention to the market and less to our interpretation of the fund manager’s remarks. At the time we reported his comments the trust yielded 12.6pc, which is far into the territory that normally indicates investor expectations of a dividend cut.
The share price has also risen since then, by about 16pc. This along with the dividend cut takes the yield to 7.9pc – still very high and again normally taken as a sign that investors still think the divi is unsustainable.
We think that, as the new dividend is covered by earnings and as the rental collection has been so strong, the new payment should be maintained and that the yield will be brought down to more normal levels by the other means by which that can happen: a rise in the share price.
The trust remains well managed and we think the composition of its portfolio of regional properties in largely defensive areas of the economy has been validated by its performance during the pandemic. So we will hold.
Update: Triple Point Social Housing
Much less surprising was the announcement, also on Wednesday, of this property fund’s latest quarterly dividend. In keeping with our view that the trust’s rental income, which derives from its portfolio of social housing and is ultimately backed by the Government, is the safest in our Income Portfolio, it declared that it would pay 1.295p a share on or around Sept 25.
This amount is in line with the previous quarter’s and is another step towards the trust’s target of 5.18p a share for the full year, which ends on Dec 31. That 5.18p total would equate to a yield of 4.9pc if the share price stayed at the current 105p.
What is the market telling us when it prices these shares to yield almost 5pc? This is 50 times Bank Rate but also about 17 times the 0.3pc annual return you will get if you lend money to the Government for 10 years by investing in gilts of that duration. Whether you buy the gilts or the trust, your income ultimately comes from, or is backed by, the Government, so can that difference be justified? And we have not even taken into consideration the fact that the trust’s rental income is inflation-linked whereas the 10-year gilt pays a fixed rate of interest.
Of course with the trust you lack the direct guarantee that you will get your money back – a variety of things could go wrong. But at the very least we feel that the vastly better yield provides ample compensation.
We suspect that income-hungry investors will gradually come round to this view and that the share price will gently rise. Hold.