You can understand why a property fund may want to get out of offices – currently largely empty across the country – but choosing to invest in the retail sector instead may raise some eyebrows.
This is what the Ediston Property Investment Company has been doing and, to judge by its recent decision to raise its dividend, it is making a decent fist of the transition.
The trust’s chairman set out its plans in the annual report published on Monday. He said the outcome of its strategy review was that “for the foreseeable future, given its attractive investment potential, the [trust] should concentrate on the retail warehouse sector”. It would therefore sell its offices and recycle the proceeds into retail warehouse assets, typically found on retail parks. “This process is well underway,” he said, and those assets accounted for 74.1pc of the portfolio by Sept 30.
“The investment manager has always made a strong case for the retail warehouse sector,” the chairman added. “It has proved to have been the most resilient retail sub-sector during the pandemic, with favourable rent collection figures and an active tenant market. Following the sell-down across all retail markets, the investment manager considers the retail warehouse sub-sector to have been oversold.
“Yields look attractive when compared to other property sub-sectors, often with income secured on high-quality tenants. The anticipated recovery in consumer spending is likely to favour many of the retailers that trade from retail warehouses. The format also works well alongside online retailing, supporting retailers’ “omnichannel” strategies.”
He said this revision to the trust’s strategy should support its objective of providing investors with an attractive level of income and the potential for capital and income growth.
When we last wrote about Ediston, in May 2019, we advised readers, “with some reluctance”, to sell their shares in the trust, partly on the basis that things were bound to get tougher in bricks-and-mortar retail no matter how well managed this fund might be.
We feel able to return to a positive stance now in the belief that retail parks at least are through the worst of the turmoil, that Ediston’s portfolio is particularly well positioned for the future evolution of shopping habits and that its policy of actively aiming to keep its rents reasonable should protect them as retailers seek to use overcapacity in the sector as a whole as a means to negotiate lower rents.
Its decision to concentrate on retail parks looks wise: the real pain in retail is being felt on the high street and in shopping centres.
It is encouraging that even during the recent lockdowns almost three quarters of its tenant retailers were able to remain open for business in some form. Some were essential and therefore allowed to operate normally, while others offered click-and-collect, appointment-only or delivery services.
This was reflected in the trust’s rent collection figures: despite some insolvencies among its tenants it has received 98.4pc of the rent due for the year to the end of September, compared with 89.3pc last time. The trust’s contracted rental income at the end of the year was £20.8m, a 3pc increase compared with 2020’s £20.2m.
It was this resilience in its rental income that allowed Ediston to increase its dividend, paid monthly, to an annual equivalent of 5p earlier this year. At the current share price of 80p the yield is 6.3pc.
As this column has repeated ad nauseam, that kind of yield is too high from a business that is increasing its dividend rather than cutting it or looking likely to do so. Any move to a more realistic figure entails, of course, a rise in the share price.
Another sign that the shares trade at an undemanding price is the discount to net asset value, which stands at 10.7pc.
Investec, the bank, recently reiterated its bullish stance on the trust. It spoke of “encouraging” final results, “solid” total returns and “robust income collection from a resilient portfolio”. When we sold in 2019 the shares stood at 104.25p; now, almost 25pc lower, they are worth owning again.
Questor says: buy
Share price at close: 80p
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