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Real estate revival bumps along stony Covid path

31 July 2020

Trading updates from Supermarket, Regional, Ediston and Picton real estate investment trusts hold out promise of slow recovery in commercial property.

The revival of the real estate investment trust (Reit) sector continues, with Supermarket Income (SUPR ) snapping up Tesco stores and others seeing rising rent collection as tenants recover from the Covid-19 lockdown.

The £519m SUPR Reit has been a darling of the property trust world during the Covid-19 pandemic as lockdown restrictions forced the closure of restaurants and other leisure facilities, forcing people to cook and therefore grocery shop more. It currently trades at a premium of 18% and yields 5.3%. 

It raised £140m earlier this year in an oversubscribed share issue and has ploughed £61m of the cash into a Tesco supermarket in Newmarket, Suffolk, purchasing the property from the Standard Life Pooled Pension Property fund. 

The acquisition, which represents a 4.6% yield for the portfolio, comprises a supermarket, a 12-pump petrol station, 654 car parking spaces and distribution docks to fulfil online deliveries, a key part of SUPR’s investment strategy. 

Ben Green, director of fund manager Atrato Capital, said the purchase was a ‘great addition to our growing portfolio of omnichannel stores’.

‘The property has attractive lease terms, strong fundamentals, and is a key online grocery fulfilment hub for Tesco supporting both home delivery and click and collect’. 

SUPR has also arranged a revolving credit facility of £60m with US bank Wells Fargo at a cost of 2.1%, which Green said was ‘competitively priced’ and its seven-year term provided ‘room to grow’.

Rent progress

Regional Reit (RGL ), an investor in offices and industrial estates outside the M25 London orbital road, has continued its slow and steady progress through the Covid-19 crisis, with 91.4% of second quarter rents collected.

The £293m trust managed to resist cutting its dividend but has still seen its share price plummet 37% this year. It currently trades at a discount of 33.4% and yields 12%, a high level that indicates investors expect a cut in the payout. 

In its latest rent update, it said second quarter rent collection has increased to 91.4% from 78.5%, and the trust expected to collect ‘the vast majority of the balance of outstanding second quarter rent in due course as usual’. 

Stephen Inglis, chief executive of fund manager London & Scottish Property, said ‘the strong rental collection to date is a testament to the collaborative relationship we have with the majority of our tenants and the quality of our management platform’ and the second quarter dividend will be paid at the end of August.

Inglis said the fund had worked with tenants to ensure a ‘safe return to work’.

Declining values

An update from Ediston Property Income’s (EPIC ) reveals the hit to net asset value (NAV) it has taken from its bias towards the retail sector.

The £113m trust, which invests in retail parks, reported its NAV fell 6.2% in the three months to 30 June and a ‘material uncertainty’ clause is still attached to the assets. 

EPIC has collected 79% of rents for the second quarter, including 100% owed from office tenants, and said that third quarter rent collection is on track to hit 88%. 

Since the easing of lockdown, 96% of the company’s let retail warehouse portfolio is open and trading and two pre-let development projects have progressed, delivering £232,500 of new income a year. 

The Reit also confirmed three lease renewals securing £392,130 of income a year although its vacancy rate has ticked up slightly to 6% from 5.7% quarter-on-quarter. 

The trust is still paying a dividend, albeit at a reduced level of 4% to reflect the reduced rent collection. Its shares trade on a very wide discount of 41%.

In its NAV update, the trust said the challenges for real estate were ‘evolving from the practicalities of working with measures to prevent the spread of the virus to managing the implications for the sector of a severe economic downturn’. 

Although the portfolio has been ‘relatively resilient’, EPIC said it recognised the potential for ‘further tenant failures and additional declines in value’.

Trust chairman William Hill said the board had been ‘encouraged’ by its rent collection but ‘is under no illusion that the road ahead remains bumpy’. 

‘The board remains focused on the company’s income, its NAV, and efforts to improve the rating of the company’s shares in this liquidity shy market,’ he said. 

Tough quarter

Picton Property Income (PCTN ), which also cut its dividend after the global sell off, has faced ‘a particularly challenging quarter’, according to manager Michael Morris. 

The £367m trust, whose shares stand 26.4% below net asset value, saw its NAV decline 0.6% in the three months to 30 June, adding to the 1% decline in the previous quarter. 

Although 85% of June rents had been collected or are expected to be received under monthly payment plans, the trust expected it to increase to 90% under longer term payment plans. However, only 86% of March rents had been collected, a level Morris expected to increase to 95%.

The NAV valuation includes a £1.3m provision against outstanding rents.

Trust chairman Nick Thompson said the portfolio has performed well with an ‘encouraging’ rent collection level and said the dividend remains under review.

Morris said the quarter had been ‘particularly challenging’ but ‘despite this, we have pursued a number of asset management transactions that have mitigated its impact and in addition we have refinanced our revolving credit facility’. 

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