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Questor: this well-managed trust has just raised its dividend. So why are we selling?
Questor investment trust bargain: Ediston Property has coped well so far with the troubles in retail but we can only see the task getting harder
At a time when many investors are running away from anything to do with retail as fast as they can, it is a brave step to move decisively in the opposite direction.
Yet this is what one property investment trust has done.
We tipped Ediston Property in May 2017 and six months later it announced that it intended to buy four retail parks for £144m, which would increase the total value of its portfolio to about £318m.
As a result, the trust’s exposure to retail parks increased from 55pc of the portfolio to 74pc, although it has since eased slightly to 72pc. It currently has 24pc of its assets in office space and 3pc in leisure facilities such as bingo halls.
We said in our original tip that the trust was well run. In particular, it believes in actively managing its assets, rather than simply acquiring them and collecting the rent. To this end, it employs more managers relative to its size than some rivals.
It’s also true that it chooses its retail assets with care.
“From an investment perspective, it is important to remember that not all retail warehousing is equal,” the trust said in its annual report for 2018. “Those parks that are well located, have the right planning consents and are let off affordable rents will see better tenant demand and their capital values will be more resilient, especially if the income can be improved through active asset management.
“We believe our retail warehouse portfolio has many of these positive characteristics.”
Ediston Property has also dealt neatly with tenants that have struggled in today’s tough retail market. When Toys R Us went bust, B&M, the discount chain, took over its store on the trust’s Kingston Retail Park in Hull, moving from a smaller shop on the same site, which Ediston was then able to put back on the market.
It said that, despite the tough market for retailers, only two units totalling about 29,000 sq ft were returned to it in the last financial year, of which about 5,000 sq ft remained vacant at the end of the year. “In income terms, this represents just 0.4pc of the [trust’s] contracted rent,” it said.
- Read Questor’s rules of investment before you follow our tips
Despite this evidence that Ediston is currently coping well with retail’s difficulties, we have two concerns: one of substance, one of perception.
The first is that the outlook for bricks and mortar retailers is certain to get tougher. Some will fail and those that survive will try to negotiate lower rents eventually in the knowledge that alternative tenants are thin on the ground. Capital values will come under pressure as a result.
The other problem is that investors will remain sceptical of retail property, which will hit the shares of quoted companies with exposure, such as Ediston. This has already happened – the trust traded at a premium of 1.3pc when we first tipped it but is now at a discount of 7.1pc – and Questor can only see the perception worsening, not improving.
The modest capital loss of about 5.5p per share or 5pc since our tip is more than offset by the dividends received, which were 5.75p in 2018. The company announced an increase in the interim dividend to 2.88p yesterday, when it said it was “well placed to show considerable levels of resilience to any headwinds”.
None the less, in view of the increasingly tough environment for retailers, we must with some reluctance advise readers to sell.
Questor says: sell
Ticker: EPIC
Share price at close: 104.25p
Investment trust news
Templeton Emerging Markets, rated a hold by Questor, is to offer investors the chance to sell shares at close to NAV in a “tender” offer in 2024 if it underperforms its benchmark index.
Lord Rothschild is to step down as chairman of RIT Capital Partners in September. James Leigh-Pemberton will become non-executive chairman.
Terry Smith is to hand management of Fundsmith Emerging Equities Trust to Michael O’Brien, with Sandip Patodia as his assistant. The annual fee will fall from 1.25pc to 1pc of net asset value.
Shares in RDL Realisation, the former Ranger Direct Lending, have been suspended pending publication, expected next Tuesday, of audited accounts for 2018. The trust is being wound up.
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