Real estate investment trust plans to appeal to income investors by hiking its dividend 20% and raising its yield to 5.8% after paying £28 million early repayment penalty to refinance its debts.
Schroder Real Estate (SREI ) plans to hike its dividend by 20% after paying a £28 million early repayment penalty to refinance its debts.
The £287 million investment trust, which invests in the UK’s ‘winning cities’, has doubled the average length of its £129.6 million fixed rate loan with Canada Life from 8.5 years to 16.5 years, with half of the debt maturing in 13 years and half in 20 years.
The transaction requires the real estate investment trust (Reit) to pay the lender a break-out fee of around £28 million which analysts said would knock an 8% hole in its net asset value.
The trust will pay the penalty with cash accumulated from recent property sales and says the cost is worth it as it will nearly halve its annual interest rate bill to 2.3% from 4.4%.
The £2.8 million this saves each year will be ploughed into the quarterly dividend, increasing the annual pay-out to around £16.2 million. This is equivalent to 3.12p per share or 20% more than the current run-rate of 2.6p, said analysts.
Duncan Owen, global head of Schroder Real Estate, said: ‘The transaction increases net operating income post all costs and debt reduction, and leads to a material increase in the dividend, thereby increasing shareholder’s returns. In addition, it reduces risk with long-term and low-cost debt,’ he said.
Sam Murphy of Numis Securities said the dividend rise could eventually draw in more investors and help re-rate the shares, which yesterday stood at a wide 22% discount below NAV. However, Brexit uncertainty over the UK commercial property sector meant it was unlikely to be a quick fix.
‘Against a backdrop of strong investor demand for higher-yielding assets, we believe the 20% increase in dividend will make Schroder Real Estate IT a more attractive proposition to new investors, as the fund had been one of the lowest-yielding in the peer group,’ said Murphy in reference to the dozen Reits the broker follows.
SREI shares dropped 1.8p or 3.3% putting the trust on a prospective yield of over 5.8%. This puts it on a par with the likes of rival Reits such as Custodian (CREI ), Warehouse (WHR ) and BMO Real Estate Investments (BREI ), and ahead of the 5.2% average yield in the broader Association of Investment Companies' (AIC) UK Commercial Property sector.
Completion of the refinancing and further property disposals next month will leave SREI with around £80 million of cash and a relatively low proportion of debt with net loan to value (LTV) of around 24%. It believes this will give it the firepower to exploit any Brexit-related slump in commercial property.
‘The company is well positioned; it has long-term debt with a conservative LTV and the capacity to take advantage of lower pricing in the real estate markets, with available cash and undrawn revolving debt facilities,’ Owen stated.
Investors will hope the gambit works. The low rating on the shares means shareholders have seen a total return of 21.7% in the past five years, less than half of the AIC sector average.
Schroder Reit's move echoes similar refinancings by the Brunner (BUT ) and Merchants (MRCH ), two equity investment trusts managed by Allianz Global Investors that had laboured under expensive, long-term debts.
In addition, there has been a wave of refinancings by investment trusts looking to lock in long-term loans on historically low rates of interest in order to gear up shareholder returns.