Questor: a yield of 11pc and no prospect of a dividend cut? This trust looks too cheap

Questor investment trust bargain: AEW UK Reit seeks out hidden value in forgotten corners of the property market – with great success so far

Richard Evans 30 July 2020 • 6:00am

Property in Bank Hey Street, Blackpool, that belongs to AEW UK Reit — This property in Bank Hey Street, Blackpool, belongs to AEW UK Reit

Sometimes things that “don’t look good in the brochure” make better investments. That expression, heard by Questor from a fund manager this week, is one way to explain the success of a property trust that steers clear of the big showcase buildings found, for example, in the City of London.

Instead it specialises in lower-profile real estate that attracts less competition among buyers when put up for sale. The less it has to pay for its assets, the higher the yields the trust makes from them – and hence the more it can pay its own shareholders.

Add the income-enhancing effect of a discount that now stands at about 22pc and you have a yield of 11pc – the kind of figure you almost never see unless the market expects an imminent dividend cut. But AEW UK Reit’s dividend looks safe, according to one portfolio manager who has put some of his clients’ money into it.

“There is no reason for the trust to cut its dividend at this stage,” said Richard Parfect, who holds AEW in his Seneca Diversified Income fund. “It is slightly uncovered by earnings but there are distributable reserves and the trust has paid its target of 8p a year since inception.”

The fact that the dividend currently exceeds earnings is partly because the trust has recently sold assets and has yet to redeploy the cash into new properties. But such sales are a key part of its strategy and it has a record of enhancing value by recycling its capital into assets that it can improve and sell in their turn.

“The managers’ approach is simple: buy well, manage the asset well, sell well,” said Mr Parfect. He gave some examples of properties that had gone through this process successfully.

“They had an early success with a retail park in Belfast,” he said. “They locked in a high yield, then received £1m from tenants to break the lease, invested that money in the park and then sold it for a healthy profit.

"In 2018 they bought a property in Corby, Northants, for about £12.5m and a yield of 10pc from a short lease. In line with their normal approach the managers, Alex Short and Laura Elkin, had prepared a plan B and a plan C but in the end they sold it about two months ago for almost £19m.”

He added: “I don’t see why they can’t carry on with this approach. They concentrate on smaller properties that don’t attract much competition from buyers – they are almost pushing on an open door.”

Asset sales have helped to reduce debt and the trust’s gearing, after its cash is taken into account, is currently low at 13.7pc.

Just 13pc of the trust’s money is in retail assets, while 52pc is in industrial property, 27pc in offices and 8pc in other types such as cinemas and petrol stations. “But this trust is not about picking winning sectors and more about specific assets,” Mr Parfect said.

In an update last week it said 84pc of rents for the third quarter had been collected or were expected on monthly payment plans, while a further 6pc was expected under agreed longer-term payment plans.

One to buy for its under-the-radar appeal, strong management, wide discount and generous yield.

Questor says: buy

Ticker: AEWU

Share price at close: 73p

Update: Doric Nimrod Air Three

This fund, which owns aircraft leased to the Emirates airline, recently announced another dividend in line with its normal schedule. Mr Parfect, whose fund has a stake in this trust too, said Emirates was “over the worst” of the pandemic and the trust’s expected dividends alone should exceed the current share price. The current yield is 25.4pc.

Questor says: hold

Ticker: DNA3

Share price at close: 32.5p