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

The Daily Telegraph - Business - - Business - RICHARD EVANS

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.

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