UK Edition
It has been a roller-coaster ride for investors in Secure Income Reit over the past two years.
The trust, which owns property assets with long leases that offer inflation-linked rent rises, ran into difficulties in 2020 after two of its biggest tenants, Travelodge and Merlin, owner of Alton Towers and Thorpe Park, were hit by the lockdowns.
In June 2020, after months of its hotels sitting empty, Travelodge entered into a “company voluntary arrangement”, which enabled the business to stay afloat after new terms were agreed with creditors.
This agreement saw Secure Income reduce the rent due across Travelodge’s 123-hotel portfolio by £23.2m between April 2020 and the end of December 2021.
The good news is that Travelodge appears to be back on its feet now and since the start of the year rents have reverted to levels agreed in the original contract.
Rent rises from inflation-linked reviews that should have taken place between 2020 and 2021 are now due as well.
For Merlin, the situation was less dire during the pandemic: Secure Income agreed to defer collection of £17.7m of rents due between June and September 2020 – and they were paid in September of last year.
As you might expect, there were repercussions for Secure Income’s dividend, which was cut by 3.7pc to 15.7p per share in 2020 and by a further 3.2pc to 15.2p per share in 2021.
Fortunately, this difficult chapter appears to have come to an end and things are looking much brighter for the portfolio and its tenants, now that economies have reopened and large swathes of the population are vaccinated.
Today, Secure Income finds itself in a favourable position as a beneficiary of rising inflation. This is because 58pc of its leases include rent reviews linked to the retail prices index (RPI) or consumer prices index (CPI).
In Secure Income’s results for the year to the end of December 2021 it reported a 9.3pc increase in the value of its portfolio, while rent reviews across 77pc of the portfolio resulted in like-for-like rental growth of 3.1pc.
During this period the trust also made a cash payment of £33.5m to Merlin to extend its leases by 35 years (from 20.5 years to 55.5 years).
This has been viewed as a wise move because the valuation uplift that results from the lease extensions more than offsets the cash payment.
In light of these positive developments, the board intends to raise the dividend by 15pc to 18.2p for the 2022 financial year.
This is in large part down to rents returning to pre-Covid trajectories and expectation of rising inflation, which translates to higher rents.
Of course, the trust’s attractive prospects in an inflationary environment have not gone unnoticed by investors: over the past year the shares have risen by 26pc and it has moved to a 3.2pc premium. It yields 3.5pc. Hold.
Questor says: hold
Ticker: SIR
Share price at close: 437.5p
Update: Supermarket Income Reit
It has been a similar story for Supermarket Income, another of Questor’s long lease Reit picks, whose shares have risen by 17pc over the past year. The fund yields an attractive 4.7pc and currently trades at a 10.6pc premium.
The Reit owns stores operated by the likes of Tesco, Sainsbury’s and Morrisons and has had a much smoother ride during the pandemic, with no cuts to its dividend.
This appears to be down to the management team’s focus on supermarkets which also operate as distribution centres for online deliveries. They are beneficiaries of the working from home shift, as well as the growth of online grocery shopping.
Again, inflation protection is on offer, with 85pc of the trust’s rental income inflation-linked.
Launched in 2017, Supermarket Income currently has a relatively young portfolio, but Mike Pinggera, of Sanlam Investments, says investors stand to benefit from high inflation coming through at this early stage.
“You get the compounding effect of a higher income in the early part of the asset’s life, which is a good thing because it accumulates over time,” he says.
There is, of course, much to be said for a reliable, inflation-linked income stream at a time when markets face great uncertainty and inflation stands at a 30-year high.
This is why Secure Income and Supermarket Income look very attractive today.
However, there is one sticking point: the trusts’ premiums of 3.2pc and 10.6pc respectively, which pose a challenge for bargain hunters.
With this in mind, Questor rates both trusts as a strong hold for now, but they could be worth buying on any future weakness.
Questor says: hold
Ticker: SUPR
Share price at close: 125p
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