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Schroder Reit lifts dividend cover with 10% earnings leap

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Schroder Reit lifts dividend cover with 10% earnings leap

Schroder Real Estate Investment Trust (SREI), the cheapest UK commercial property fund listed on the London Stock Exchange, has strengthened its 4% dividend yield with a solid set of half-year results.

In the six months to 30 September the fund's net asset value (NAV) grew 2.5% to £340.6 million or 65.7p per share.

Underlying EPRA earnings, a standard property industry performance measure, grew 10.3% to £7.5 million with net revenue of 1.4p per share exceeding the 1.2p per share paid in two quarterly dividends during the period.

Although the payouts are flat on last year, this lifts cover for the dividend to 117% from 106% a year ago and raises the prospect for dividend increases in future, the company said.

The rise in dividend cover puts SREI in second place in a group of 10 real estate investment trusts, according to data from Numis Securities, its joint corporate broker (see table).

It ranks just behind Ediston Property (EPIC), which has dividend cover of 118% and a yield of 4.9%, and just ahead of 4%-yielding Picton Property Income (PCTN), winner of a UK Property Performance Award at last week's Citywire Investment Trust Awards.  F&C Commercial Property (FCPT) has the lowest cover in the group of 81%, one of five funds whose dividends are uncovered by earnings (ie, less than 100%). 

At yesterday's close of 61.5p, SREI shares stood on a 6.8% discount below Numis' estimated NAV per share of 66p. (The trust updates its valuations every three months.) This is the widest discount in the Association of Investment Companies UK Property Direct sector, whose 13 trusts stand on an average premium of 1.4% above NAV.

Dividend cover of UK property trusts

  Annual dividend target (pps) Dividend yield % Dividend cover (% covered by earnings)
AEW UK Reit  8.00 7.9% 94%
Custodian Reit  6.45 5.5% 97%
Ediston Property  5.50 4.9% 118%
F&C Commercial Property 6.00 4.2% 81%
F&C UK Real Estate 5.00 4.7% 94%
Picton Property Income  3.40 4.0% 116%
Schroder Real Estate  2.48 4.0% 107%
Standard Life Inv Property Inc  4.76 5.2% 114%
Tritax Big Box Reit  6.40 4.3% 100%
UK Commercial Property  3.68 4.2% 95%

Source: Numis Securities.
Table was corrected on 13/11/17 to show AEW UK Reit's dividend at 94% not 75% as previously stated.  

Polarised property market

With dividends included, SREI produced a total return of 4.5% from net assets, behind the MSCI (formerly IPD) UK property index return of 4.9%. Its underlying property returns before costs came in at 5.2%, ahead of the benchmark, with big uplifts in valuation achieved in its three biggest holdings, including the Arndale shopping centre in Leeds (main picture).

Duncan Owen, global head of Schroder Real Estate Investment Management who runs the trust with Nick Montgomery, said he was confident the outperformance would continue in to its full-year results.

‘In the previous full year to 31 March we hit [a return of] 5.3% against the peer group average of 2-3% and everyone said it was good but the cynicism set in and people said we couldn’t keep it up,’ he said.

However, Owen said he has managed to retain the momentum as the trust holds no property in the City of London or Docklands, areas under a Brexit cloud as uncertainty over the UK's divorce talks with the EU.

Instead the fund is invested in what Owen described as ‘winning cities’ such as Manchester, Leeds and Milton Keynes, which are ‘high growth urban locations’ where there is huge demand for industrial properties from e-commerce retailers that need warehouses to hold stock and make ‘last-mile deliveries’ from.

The fund's industrial properties returned 9.1% over the six months but Owen said this was not indicative of all UK property as the market was ‘polarised’.

‘The market is like a man lying down with his head in the fire and his feet in the freezer – in the middle he’s OK but at either end there is a hugely different experience,’ he said.

‘People are on the cautious side because of Brexit, weak growth, subdued take up and the retail sector has structural problems but on the other side you have massive capital flows and demand, some from overseas investors…low debt, low rates and weak sterling.’

Owen said industrials are ‘coming at the top’ of the beneficiaries while ‘retail is at the bottom’ with six-month growtj of 3.3%

‘Retailers need fewer stores because people get stuff delivered at home. We invest in urban logistics – we have lots of these and we had them in winning cities and regions where there is growth and jobs,’ he said.

Aviva ‘late’


The difficulties in the market may impact on the new Aviva Investors Reit, which plans to invest in core property such as offices and alternative property like hospitals, university halls, and hotels.

Owen (pictured) said alternatives were a good addition to a portfolio but the valuations are high. ‘We love them but they are too expensive,’ he said.

‘We own the Arndale shopping centre in Leeds – there were two office blocks above it. We got consent to convert it into hotels and leased it for 20 years to Premier Inn. That’s an alternative but we make the value out of it by creating [the alternative asset] not buying it,’ he said.

The Reit also sold an acre of carpark in Wembley to student accommodation company Unite for £7.5 million after gaining permission for halls of residence to be built on the site.

‘People want income but coming in at this time in the cycle is madness,’ he said. ‘I’m fascinated to see how Aviva get on,’ he added.

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