Last year’s mantra was something for everyone, from duration income streams with inflation-linked dividend growth all the way down to deep recovery hopes in retail. The sector had a very good year, rising by a tad under 30% against the FTSE 100 up by 14%. The best performing shares were in the self-storage and logistics sectors, followed from a very low base by retail landlords. Something indeed for everyone. Nothing changes on the 1st of January, but it tends to focus the mind and the thought process, and this year it was a very simple and basic one, namely, ‘buy the discounts’.
There aren’t many to choose from, because in the long era of ultracheap money, a whole wave of ‘new REITs’ offering exposure to a variety of property sectors have floated on the market and gone on to raise fresh equity to grow businesses, with many having market capitalisations over £1bn now. That they can raise equity is a function of two things. First, they offered a high level of “So far this year, and it’s mid-February as I type,
“So far this year, and it’s mid-February as I type, ‘income’ REITs have not performed very well”
‘income’ REITs have not performed very well “dividend yield in a yield starved world by conservatively leveraging assets let to high-grade covenants who have committed to long-term inflation-linked leases. As such, these companies are rated more for their income growth and security than their inherent capital growth prospects, but a consequence is that they trade at premia to NAV, meaning equity raised is non-dilutive to the net worth of the business.
Common sense might dictate that as inflation rises, or rockets, then the nature of these leases will make the shares even more attractive, but perversely it may be the case that investors actually want a higher dividend yield in inflationary times. So far this year, and it’s mid-Februarys I type, ‘income’ REITs have not performed very well, although LXI REIT, which specialises in a sector agnostic way in long-leased Praises, successfully doubled the size of its recent fund raise to £250m. The jury is out, I think, on some of these companies for the moment, as the era of cheap money passes.
Discounts to NAV prevail primarily for a handful of ‘old REITs’ orthose with a high retail pastureland this is where I’m focused this year, most obviously on Landsec. Reasons? Many offer dividend yields comparable or greater than the ‘new REITs’, albeit only by rebasing pay-outs downward due to income being lost over the past two years for obvious reasons. Moreover, some are forecast to grow those dividends at a faster rate than ‘new REITs’. Second, capital values are likely to increase modestly in both London office sand, I think, even in retail by the end of this year. Large discounts at time of rising earnings, dividends and net asset values doesn’t indicate much downside to me. Third, there is capital around at the moment for UK real estate. Last year, five companies were bid for with nothing in common and it wasn’t the type of assets they owned, rather it was the fact that they all traded at discounts to NAV when the bid was announced. Buying shares in companies in anticipation of abide is a fool’s game, but buying cheap relative shares for recovery is eminently sensible.
