UK Edition
The concept was excellent: an investment trust that would focus on income from the most secure of sources. Unfortunately the execution has been thrown off course by the coronavirus crisis.
Secure Income Reit was tipped here in January 2018, when we highlighted what was, at that time at least, a defensive portfolio of property holdings. The three biggest were, and remain, an estate of Travelodge hotels, some theme parks such as Alton Towers and a number of private hospitals.
We are now in a very different world and, while hospitals are of course still operating, theme parks and hotel chains are empty. The tenants of many of Secure Income’s properties have therefore experienced a collapse in their income.
What is striking is the variation in the tenants’ reaction: all apart from Travelodge have paid the rent due to the Reit.
“Seventy-four per cent of all rents due for the March quarter have been received,” Secure Income told investors on April 23. “The only rents now outstanding are those due from Travelodge.”
The Reit is far from happy with this. A few days earlier it had told the market that discussions with the hotel chain had been taking place for a number of weeks but that, in the absence of proposals concerning rental payments, had “reluctantly initiated actions to recover this debt”.
It did then receive a proposal from Travelodge but said it “was not in keeping with either the nature or the spirit of the proposals made by any of our other tenants, who all engaged with us constructively and at an early stage”. It did not accept the proposal but said it had offered support to Travelodge “which we believe to be proportionate and consistent with the approach accepted by other tenants in our portfolio”.
Travelodge’s overdue rent represents 6.4pc of the Reit’s annual rental income. Another 15.6pc of that income is expected to be deferred. Repayment in full is expected in September next year, to coincide with the tenants’ “maximum liquidity position”. A further 1pc of rents are subject to short-term deferrals.
Despite this, Secure Income Reit has not so far reduced its dividend: it declared a 4.2p quarterly payment, its usual amount, last month. However, it said it would keep dividends under review, “maintaining a balance between retaining funds for opportunities should they arise, appropriate cash reserves given the uncertain duration of the pandemic and the desire of the company’s investors to preserve their dividend income”.
Questor’s view is that a deal with Travelodge will eventually be reached. In normal times it is a profitable business and it has deep-pocketed shareholders in Goldman Sachs, GoldenTree and Avenue Capital, two American asset managers.
Although they may be tough bargainers, they will in the end not want to allow the company they own to renege on its contractual obligations, which would damage Travelodge itself and their own reputations, this column believes.
Hence we expect Secure Income to receive much or all of the rent it is due from Travelodge, although in all likelihood with some delay. Our own dividends should therefore be maintained or perhaps subjected to only minor reductions.
The shares, not surprisingly, are lower than when we tipped them, by 36pc. This time next year we can expect Travelodge, Alton Towers and so on to be back in business, although perhaps they will be viable in the post-Covid era only if their landlords agree to rent reductions.
It is too soon to judge, but either way, especially as the income from the Reit’s hospitals should be secure, we doubt that its income will fall permanently by a third. Accordingly we will hold on to the shares.
Questor says: hold
Ticker: SIR
Share price at close: 227p
Update: Brunner
This global trust, tipped here in April 2017, said yesterday that it was losing its long-standing manager, Lucy Macdonald, because of changes at the management company, Allianz Global Investors. The new management team will be Matthew Tillett, Jeremy Kent and Marcus Morris-Eyton.
Questor is sorry to see Ms Macdonald go but believes that the trust will remain well managed. The board said it expected to use its reserves to maintain this year’s dividend.
Questor says: hold
Ticker: BUT
Share price at close: 762p
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