The prospective 6 per cent dividend yield of Jason Baggaley’s Standard Life Investments Property Income trust more than makes up for the fact it is trading at 6.88 per cent above its NAV, according to analysts at Winterflood.
The trust’s premium is above its three-year average of 5.56 per cent, but represents a significant narrowing on its one-year average of 11.07 per cent. Over the past year, the premium has fallen as low as 2.14 per cent, but has also reached as high as 19.47 per cent.
Innes Urquhart, research analyst at Winterflood, said: “The manager remains relatively positive on prospects for the sector and he has the ability to find attractive investment opportunities, particularly in assets with ‘medium-term’ income security. We believe the fund’s fully covered prospective dividend yield of 6 per cent remains appealing, particularly relative to peers.”
“The fund continues to trade at a premium, although this has contracted over recent months, and we believe that it can be justified by the outlook for the sector and the fund’s historic performance record.”
From its low point in the midst of the financial crisis, UK commercial property has gone on to perform strongly in recent years and has come on to many investors’ radars as future returns, especially for anyone seeking income, have begun to look limited in other parts of the market.
In step with this increased investor interest, all of the eight investment trusts specialising in the AIC’s Property Direct – UK sector are currently trading above NAV. The average premium across the sector stands at 6.65 per cent.
Source: The AIC
The £120.1m Standard Life Investments Property Income trust has outperformed the sector average in total return terms over one, three, five and 10 years. As a point of comparison, it has outperformed the FTSE All Share over the three earlier time frames, but not over the past decade.
Urquhart points out that the trust, like its peers, suffered heavily during the financial crisis, which led to longer-term underperformance against equities. Its net asset value was down 46 per cent in 2008 and fell 63 per cent from peak to trough, in part due to its high gearing as it entered the downturn.
However, performance during the recovery years has been strong. As the graph below shows, it has gained 85.78 per cent over five years against its peer group’s average return of 32.08 per cent and the All Share’s 55.89 per cent.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
Urquhart also notes that since Baggaley took over the trust in 2006, it has outperformed the IPD UK All Property Index in six of the past seven full calendar years. Importantly, it managed to beat the index in the two down years of 2007 and 2008.
However, the analyst says the trust’s income has varied significantly since launch. Its dividend reached 6.76p a year before the crisis, but in November 2008 it became the first of its peer group to rebase its dividend, at 4p a year.
This was subsequently lifted to 4.53p a year, paid as 1.133p per quarter, which was then increased by another 2.5 per cent earlier this year to 1.161p per quarter. At these levels, the quarterly dividend equates to a prospective yield of 6 per cent on the trust’s current share price, which is the highest in the IT Property Direct - UK sector.
Furthermore, the trust’s dividend cover stood at 115 per cent during the six months to 2014 after revenue earnings were boosted by recent acquisitions and lettings, along with a reduction in the cost of debt associated with the refinancing.
Urquhart adds that the trust is one of the more actively managed ones in its peer group and Baggaley has built a track record of adding value through asset management of the portfolio’s holdings.
“The fund has historically been characterised by considerable turnover in the portfolio and the manager has taken advantage of opportunities to realise profits on properties where he believes it is appropriate,” he said.
Activity in 2014 has been quite high. Standard Life Investments Property Income has completed six acquisitions and sold three properties since the start of the year.
This means the portfolio now comprises 33 properties. Its largest exposure is to offices, which make up 47 per cent of holdings, followed by industry at 37 per cent and retail at 16 per cent. Its key overweights are to offices outside of central London and industrial property in the rest of the UK, while it is underweight retail warehouses and rest-of-UK retail.
“The underweight exposure to retail has served the fund well over recent years and reflects the manager’s caution regarding ongoing structural changes that continue to impact the UK high street, the polarisation between prime and secondary retail properties and the lack of rental growth prospects for the sector,” Urquhart said.
“Given the spate of retail administrations and the relative underperformance of retail property, this stance has been of benefit to the fund’s performance.”
Standard Life Investments Property Income has ongoing charges of 1.99 per cent, with no performance fee, and is 32 per cent geared. It is set to convert to a real estate investment trust structure at the start of 2015 after shareholders backed the plan.
Earlier this month, macroeconomic forecasting consultancy Capital Economics said UK commercial property remains in a “sweet spot” as capital and rental growth is expected to continue in the coming years – although not necessarily at the pace seen in the recent past.
“For now the commercial property market’s ‘sweet spot’, with rents rising and yields falling, is probably not over. Total returns should be close to 20 per cent this year and about 10 per cent in 2015,” analysts at the group said.
