Link between commercial REIT value and the company share value

wmb194

jake_jones99 said:

Coming back to older subjects in a new light, what does everyone think of Supermarket Income Reit nowadays? (https://www.theaic.co.uk/companydata/supermarket-income-reit/performance )
It is trading at roughly 25% discount to NAV and the dividend is now roughly 7%. The NAV seems like it wasn't updated though. According to https://citywire.com/investment-trust-insider/news/supermarket-income-we-think-this-is-the-bottom-after-20-fall/a2413283 seems like some estimated the true SUPR discount is 2%. The managers said the other day they believed the bottom was reached (convenient for them to say). Any thoughts?

@wmb194 @Linton

Rather than just relying on third parties it's always good to have a look at company announcements yourself and no, last week it did issue a new estimate of its NAV: 92p on 31/12/22 (this is stated in the article). Its closing price on Friday was 86.6p so it's currently trading at a discount of 5.9%. 

This might be enough to factor a further fall in commercial property values this year but who knows? It has some good quality tenants renting buildings that aren't likely to go out of fashion and its earnings appear to be holding up but one of the worries around Reits is their debt loads and how rising interest rates will affect them. Having said this its LTV is 40%, which isn't too bad, but obviously if properly prices continue to fall this will rise.

https://www.investegate.co.uk/supermarket-inc-reit--supr-/rns/half-year-report-6-months-ended-31-december-2022/202303300700066965U/#

cwep2

So the NAV is a valuation picked out of thin air to some extent. Value will certainly have dropped, but by how much is the question. 

They released a trading update on 30th March and said they had reduced the value of their portfolio by 13.3% so would expect the NAV to be updated to reflect this. 

At the end of the day, buying this REIT is buying a set of cash flows (rental payments) and so is similar to the value of a bond; the higher interest rates are the lower the current value of those future payments are and a bond price goes down as interest rates go up. For a REIT like this that’s the main driver. For some other REITs you will need to factor rents not getting paid or tenants going bust, consider a REIT that invested in office space, with WFH and companies reducing employees those future cash flows are pretty uncertain. For SUPR, of which 75% of rent is Tesco and Sainsburys, unless they start closing stores you are probably on much safer ground. It’s definitely one of the safer REITs in the UK. 

Key things to look at:
1. How much debt do they have, what is average duration of this debt and at what sort of interest rate is it funded?

2. Are rents linked to inflation at all?
3. What % is empty or what % are behind on rental payments?

IMHO all of these all look OK for SUPR, and you are looking at 7% yield roughly at current levels. It’s probably trading at a discount to NAV but nothing like 25% (prob less than 10%). The current 3p dividend is only 98% funded, so danger it gets cut and yield will be lower, but it’s probably OK, if this does get cut share price will fall a lot. 

But you can get 3.5-4.5% yield risk free, so 7% is only ‘OK’ considering the capital value could fall. Good share if you want a steady income stream, which I guess most REIT investors are looking for. 

jake_jones99

wmb194 said:

jake_jones99 said:

Coming back to older subjects in a new light, what does everyone think of Supermarket Income Reit nowadays? (https://www.theaic.co.uk/companydata/supermarket-income-reit/performance )
It is trading at roughly 25% discount to NAV and the dividend is now roughly 7%. The NAV seems like it wasn't updated though. According to https://citywire.com/investment-trust-insider/news/supermarket-income-we-think-this-is-the-bottom-after-20-fall/a2413283 seems like some estimated the true SUPR discount is 2%. The managers said the other day they believed the bottom was reached (convenient for them to say). Any thoughts?

@wmb194 @Linton

Rather than just relying on third parties it's always good to have a look at company announcements yourself and no, last week it did issue a new estimate of its NAV: 92p on 31/12/22 (this is stated in the article). Its closing price on Friday was 86.6p so it's currently trading at a discount of 5.9%. 

This might be enough to factor a further fall in commercial property values this year but who knows? It has some good quality tenants renting buildings that aren't likely to go out of fashion and its earnings appear to be holding up but one of the worries around Reits is their debt loads and how rising interest rates will affect them. Having said this its LTV is 40%, which isn't too bad, but obviously if properly prices continue to fall this will rise.

https://www.investegate.co.uk/supermarket-inc-reit--supr-/rns/half-year-report-6-months-ended-31-december-2022/202303300700066965U/#

Thank you for sharing that, I saw it in the article but didn't know NTA is used as measure for NAV. On what basis can one say that 40% LTV is not too bad? Looking at the table it looks like it doubled in 6 months due to a drop in value plus a massive increase in borrowing:


Do you have any intuition why they would want to up their borrowings so much right when interest rates are so high? Thanks!

wmb194

jake_jones99 said:

wmb194 said:

jake_jones99 said:

Coming back to older subjects in a new light, what does everyone think of Supermarket Income Reit nowadays? (https://www.theaic.co.uk/companydata/supermarket-income-reit/performance )
It is trading at roughly 25% discount to NAV and the dividend is now roughly 7%. The NAV seems like it wasn't updated though. According to https://citywire.com/investment-trust-insider/news/supermarket-income-we-think-this-is-the-bottom-after-20-fall/a2413283 seems like some estimated the true SUPR discount is 2%. The managers said the other day they believed the bottom was reached (convenient for them to say). Any thoughts?

@wmb194 @Linton

Rather than just relying on third parties it's always good to have a look at company announcements yourself and no, last week it did issue a new estimate of its NAV: 92p on 31/12/22 (this is stated in the article). Its closing price on Friday was 86.6p so it's currently trading at a discount of 5.9%. 

This might be enough to factor a further fall in commercial property values this year but who knows? It has some good quality tenants renting buildings that aren't likely to go out of fashion and its earnings appear to be holding up but one of the worries around Reits is their debt loads and how rising interest rates will affect them. Having said this its LTV is 40%, which isn't too bad, but obviously if properly prices continue to fall this will rise.

https://www.investegate.co.uk/supermarket-inc-reit--supr-/rns/half-year-report-6-months-ended-31-december-2022/202303300700066965U/#

Thank you for sharing that, I saw it in the article but didn't know NTA is used as measure for NAV. On what basis can one say that 40% LTV is not too bad? Looking at the table it looks like it doubled in 6 months due to a drop in value plus a massive increase in borrowing:


Do you have any intuition why they would want to up their borrowings so much right when interest rates are so high? Thanks!

It looks like the mechanical effect of its NAV reducing i.e. it started from a good position. There's also a leveraged transaction with Sainsbury's that's unwinding this year but I haven't gone into the weeds with that one. IIRC other Reits are more like 60%. You need to read through its recent reports to see what it says on this e.g., how rising rates will affect it and what its loan covenants are.

With Reits we're at one of the classic investing junctures: do you catch the falling knife because you think the price has factored in the future and the company can remain solvent or do you wait for a more obvious economic turnaround?

jake_jones99

wmb194 said:

jake_jones99 said:

wmb194 said:

jake_jones99 said:

Coming back to older subjects in a new light, what does everyone think of Supermarket Income Reit nowadays? (https://www.theaic.co.uk/companydata/supermarket-income-reit/performance )
It is trading at roughly 25% discount to NAV and the dividend is now roughly 7%. The NAV seems like it wasn't updated though. According to https://citywire.com/investment-trust-insider/news/supermarket-income-we-think-this-is-the-bottom-after-20-fall/a2413283 seems like some estimated the true SUPR discount is 2%. The managers said the other day they believed the bottom was reached (convenient for them to say). Any thoughts?

@wmb194 @Linton

Rather than just relying on third parties it's always good to have a look at company announcements yourself and no, last week it did issue a new estimate of its NAV: 92p on 31/12/22 (this is stated in the article). Its closing price on Friday was 86.6p so it's currently trading at a discount of 5.9%. 

This might be enough to factor a further fall in commercial property values this year but who knows? It has some good quality tenants renting buildings that aren't likely to go out of fashion and its earnings appear to be holding up but one of the worries around Reits is their debt loads and how rising interest rates will affect them. Having said this its LTV is 40%, which isn't too bad, but obviously if properly prices continue to fall this will rise.

https://www.investegate.co.uk/supermarket-inc-reit--supr-/rns/half-year-report-6-months-ended-31-december-2022/202303300700066965U/#

Thank you for sharing that, I saw it in the article but didn't know NTA is used as measure for NAV. On what basis can one say that 40% LTV is not too bad? Looking at the table it looks like it doubled in 6 months due to a drop in value plus a massive increase in borrowing:


Do you have any intuition why they would want to up their borrowings so much right when interest rates are so high? Thanks!

It looks like the mechanical effect of its NAV reducing i.e. it started from a good position. There's also a leveraged transaction with Sainsbury's that's unwinding this year but I haven't gone into the weeds with that one. IIRC other Reits are more like 60%. You need to read through its recent reports to see what it says on this e.g., how rising rates will affect it and what its loan covenants are.

With Reits we're at one of the classic investing junctures: do you catch the falling knife because you think the price has factored in the future and the company can remain solvent or do you wait for a more obvious economic turnaround?

I think it's worth dipping your toes at this level, but in the right Reit.

I just looked at other Reits and 

UK Commercial Property REIT (https://www.investegate.co.uk/uk-commercial-property-reit-lt/prn/annual-results/20230403070000P73C0/#)
    LTV: 22% in Dec 2022 (16% in Dec 2021)
    NAV (Dec 2021->Dec 2022): -18.1% 
    Dividend yield: 8.3% (dividends did drop in 2014 and 2020, but company runs since 2008)
    Discount to Dec 2022 NAV: 26.7% (roughly the same as in Dec 2021)

Regional REIT (49% LTV)

Supermarket Income REIT (https://www.investegate.co.uk/supermarket-inc-reit/rns/half-year-report-6-months-ended-31-december-2022/202303300700066965U/# )
    LTV: 40% in Dec 2022 (19% in June 2022)
    NAV (June 2022->Dec 2022): -20% (same for NTA)
    Dividend yield: 6.9% (dividends have been steadily increasing since 2017)
    Discount to Dec 2022 NTA: 5.86%
    Discount to Dec 2022 NAV: 9.79%

So at least UK Commercial Property REIT has a much lower LTV and actually looks better from other points of view too. I am wondering how much this in itself counts or maybe there's just a short term abnormality. I will keep looking into it.

tichtich

Hi. I'm a late-comer to this thread. I've had SUPR and some other commercial REITs on my watch list for a while, but haven't bitten yet. However I did recently go overweight on RESI, a residential REIT that seems incredibly discounted. (If any one can see a good reason for it to be so discounted please let me know. I suspect it's just contagion from other UK residential REITs which have got into trouble recently, but which have very different business models from RESI.)

I wasn't aware of UKCM, so thanks for bringing it to my attention. I'll add it to my watchlist, though I'm not in a great hurry to add to my portfolio at the moment, given the state of the economy and markets.

Given the likelihood of high inflation in the future (in my opinion), I'm concerned that REITs with long leases should be able to increase their rents on existing leases in line with inflation (or close to it). Sub-inflation increases compounded over a long remaining lease could be very costly. SUPR claims to have 80% inflation-linked rents, 18% open market reviews and only 2% fixed. That sounds very good. But in my experience so-called "inflation-linked" rents, are usually capped, at say 3% or 4%. Unfortunately, the SUPR presentation that I'm looking at doesn't mention whether there are any caps. (In case of high inflation, I would prefer open market reviews to inflation-linked with low caps.) The other side of the equation is debt, where high inflation can mean debt being inflated away. If I understand correctly, SUPR has 100% of its debt fixed or hedged at 2.9% interest, which is great, though maturities are not very long (mostly 2025 to 2029). I'm a bit concerned about having to refinance at higher rates when those loans mature, but I expect real (inflation-adjusted) interest rates to remain low, so hopefully that won't be too bad.

UKCM looks quite attractive. I'm not sure about the yield of 8.3% given above. Based on today's price (about 50p), I calculate a last 12 months yield of 10.6% (if you include the special dividend) or 6.75% (if you don't).LTV of 20% seems surprisingly low for a REIT, which is good. But unlike SUPR it only has 68% of debt at fixed rate, and the current average rate is 3.68%. On rent reviews, I could only find this: "At 31st December 2022, 28% of portfolio rent is subject to a form of index-linked rent reviews or fixed increases, which provide an estimated blended annualised increase of 3.3% per annum." I guess that means that the remainder are open market reviews, but I wish it was clearer. (Some individual properties are mentioned as having open market reviews.)

jake_jones99

The yield of 8.3% given above is from dividendmax and I assume they compute some average between the case with and without special dividend. Thanks for pointing it out. Still need to work out what the special dividend is and what's the likelihood it will still be paid. 

Regarding RESI, on "theaic.co.uk" website the gearing is set at 82%, I assume that's a typo, as I can't see anything near those figures in their final results, right? Would you mind to elaborate a bit more on what you mean by other REITs having different business models from RESI? Thanks!

tichtich

I use Dividendmax too, and I sometimes have difficulty reconciling the yield figure with the actual dividend payments that they list below. The special dividend I mentioned was the one from Aug 2022. I wouldn't bet on there being another one in the next year. As far as I recall, the report or presentation I was looking at mentioned the last one, but didn't say anything about any future specials.

As I recall, RESI has an LTV (loan-to-value) just below 50%. Based on that, gearing of 82% isn't surprising. (If anything I would have expected it to be about 100%, but I don't know exactly how it's calculated.) I don't think the high gearing is too risky here, because RESI's cash flows are mostly very stable and predictable, as I see it. If a buy-to-let landlord has an 80% mortgage, that's 400% gearing (debt is 4 times equity). RESI is like a landlord with a 50% mortgage.

Regarding residential REITs with different business models, please read this:

https://www.investorschronicle.co.uk/news/2022/08/22/the-controversial-reit-model-delivering-homes-for-the-vulnerable/

More recent news about Home REIT:

https://www.landlordzone.co.uk/news/landlords-troubles-just-go-from-one-crisis-the-next/

On RESI's website there's a link to a recording of the Annual Report 2022 Webinar, which is well worth watching if you're thinking of investing. In the Q&A at the end, someone asks how RESI differs from those other residential REITs that are in trouble.

jake_jones99

tichtich said:

I use Dividendmax too, and I sometimes have difficulty reconciling the yield figure with the actual dividend payments that they list below. The special dividend I mentioned was the one from Aug 2022. I wouldn't bet on there being another one in the next year. As far as I recall, the report or presentation I was looking at mentioned the last one, but didn't say anything about any future specials.

As I recall, RESI has an LTV (loan-to-value) just below 50%. Based on that, gearing of 82% isn't surprising. (If anything I would have expected it to be about 100%, but I don't know exactly how it's calculated.) I don't think the high gearing is too risky here, because RESI's cash flows are mostly very stable and predictable, as I see it. If a buy-to-let landlord has an 80% mortgage, that's 400% gearing (debt is 4 times equity). RESI is like a landlord with a 50% mortgage.

Regarding residential REITs with different business models, please read this:

https://www.investorschronicle.co.uk/news/2022/08/22/the-controversial-reit-model-delivering-homes-for-the-vulnerable/

More recent news about Home REIT:

https://www.landlordzone.co.uk/news/landlords-troubles-just-go-from-one-crisis-the-next/

On RESI's website there's a link to a recording of the Annual Report 2022 Webinar, which is well worth watching if you're thinking of investing. In the Q&A at the end, someone asks how RESI differs from those other residential REITs that are in trouble.

Looks interesting. So I guess with REITs one of the main question to ask is why be confident the tenant will keep paying. With SUPR for example, the tenants are big supermarkets that are likely to perform well in bad economic situations. With RESI, the tenants are either pensioners (whose incomes are stable), local authorities (which are stable too) and tenants with a percentage stake in the house (via shared ownership). With the latter is the main idea that having a stake in the house they are more trustworthy and unlikely to vanish?

tichtich

jake_jones99 said:

tichtich said:

I use Dividendmax too, and I sometimes have difficulty reconciling the yield figure with the actual dividend payments that they list below. The special dividend I mentioned was the one from Aug 2022. I wouldn't bet on there being another one in the next year. As far as I recall, the report or presentation I was looking at mentioned the last one, but didn't say anything about any future specials.

As I recall, RESI has an LTV (loan-to-value) just below 50%. Based on that, gearing of 82% isn't surprising. (If anything I would have expected it to be about 100%, but I don't know exactly how it's calculated.) I don't think the high gearing is too risky here, because RESI's cash flows are mostly very stable and predictable, as I see it. If a buy-to-let landlord has an 80% mortgage, that's 400% gearing (debt is 4 times equity). RESI is like a landlord with a 50% mortgage.

Regarding residential REITs with different business models, please read this:

https://www.investorschronicle.co.uk/news/2022/08/22/the-controversial-reit-model-delivering-homes-for-the-vulnerable/

More recent news about Home REIT:

https://www.landlordzone.co.uk/news/landlords-troubles-just-go-from-one-crisis-the-next/

On RESI's website there's a link to a recording of the Annual Report 2022 Webinar, which is well worth watching if you're thinking of investing. In the Q&A at the end, someone asks how RESI differs from those other residential REITs that are in trouble.

Looks interesting. So I guess with REITs one of the main question to ask is why be confident the tenant will keep paying. With SUPR for example, the tenants are big supermarkets that are likely to perform well in bad economic situations. With RESI, the tenants are either pensioners (whose incomes are stable), local authorities (which are stable too) and tenants with a percentage stake in the house (via shared ownership). With the latter is the main idea that having a stake in the house they are more trustworthy and unlikely to vanish?

I would say it's not just about how long the tenant will stay, but also about how difficult it will be to replace them when they leave, and can they be replaced at the same rent. I think SUPR has long leases, and supermarkets probably have a strong incentive to renew,  but if a supermarket does decide to leave at the end of a lease, it might be difficult to replace them if the location is no longer attractive for some reason, or the other supermarkets already have shops in the area. 

Given the extreme shortage of affordable accommodation in this country, it seems unlikely RESI would have much difficulty filling vacancies. But I suppose there's a question about whether they can maintain their rents. According to the leases, the rents on retirement properties rise by RPI capped at 6%, and the rents on shared ownership properties rise by RPI + 0.5%. I guess that could get ahead of market rents, and they might have to reduce the rent a bit to attract replacements (or perhaps even to keep existing tenants), but I don't think that would be by much.

Given that the dividend is barely covered by profits, I doubt that it will keep up with inflation this year. I'm not betting on the current high yield being fully maintained in real terms over the long term. I'd be very happy with a long term real yield on today's price of 6%, which seems manageable, barring some big surprise that I haven't foreseen!

I haven't thought much about the local authority housing, but that's only 7% of the total. 

Please bear in mind that I'm absolutely not an expert, and don't rely on anything I say!