It's not quite that simple, though, because rental income is only as secure as the tenants that pay it. If leases are not renewed or the tenant goes bust, the secure revenue stream suddenly doesn't look so secure. Establishing long leases with prime quality tenants is the ideal goal.
Secure Income (SIR), then, is aptly named. Created as a long-term real-estate investment trust (Reit), and floated on London's Alternative Investment Market (Aim) last week, the business model is designed to provide inflation-protected income from a quality portfolio of properties valued at £1.46bn, and on which it owns the freehold. These include Madame Tussauds, Alton Towers, Thorpe Park, Warwick Castle, as well as 21 private hospitals. Nearly all the rental income is generated from two global businesses, Merlin Entertainments and Ramsay Health Care, and is currently running at £92.4m a year. All the leases have annual rental uplifts, and the weighted average unexpired lease term of the portfolio is 25 years. That's a big plus point because it's significantly more than the UK market average of around six years and provides huge earnings visibility.
The enormous gap between the £1.46bn portfolio valuation and the company's £293m market capitalisation is explained by the fact that since 2007 the portfolio has been held in separate sub-groups under common ownership by Prestbury 1 LP, a private investment business managed by its general partner, which is wholly owned by Prestbury. The Prestbury Group will retain a 26 per cent stake in Secure Income, with Sir Tom Hunter's West Coast Capital, and a subsidiary of Lloyds Banking, each holding a 26.7 per cent stake. There are also three other private investors each holding a 6.7 per cent interest. So there aren't really many shares in the free float. But on joining Aim, the company also issued 8.6m shares through a £15m placing at 174p a share. Not surprisingly, the share price climbed to 230p in a matter of days - that's a whopping 34 per cent premium to adjusted book value.
Board members include veteran player Mike Brown as a non-executive director, who is chief executive of Prestbury Investments and also a non-executive director of opportunity fund Max Property, set up by Prestbury Group chairman and chief executive Nick Leslau, who is also a board member. Secure Income will be externally managed by Prestbury Investments LLP.
The obvious question here is why float the entity at all? Mike Brown explains that admission to Aim enables it to exploit the tax-efficient structure within a Reit but to do that, the shares have to be traded on a stock exchange. It also opens the way for going back to the market to raise fresh funds at a later date to finance additional acquisitions, and it is at this point that new investors will have a chance to make a more significant investment than through the new shares issued at the time of the flotation. So, in the short term, it will be the existing pre-float shareholders receiving the returns, and they are unlikely to sell their stakes, given the longer-term potential for growth. And a further downside is that there doesn't seem to be much prospect of a material dividend payout until after December 2016. But one thing is pretty clear. With UK institutions looking for a more visible and longer-term investment return, Secure Income should have little trouble raising fresh finance when it wants to.
For those looking for a more immediate return, the world of real-estate mezzanine finance provides an interesting alternative. ICG-Longbow (LBOW) was floated in February 2013 on London's main market and has constructed a portfolio of good quality, defensive, senior debt investments secured by first ranking fixed charges, predominantly against UK commercial property investments. The target is to provide a dividend yield of around 6 per cent on the flotation price of 100p and paid quarterly. The company was 85 per cent invested in the first year and is now fully invested. And earlier this month it launched a £400m senior debt programme that will invest in senior loans secured on UK commercial property with a maximum loan-to-value rate of 65 per cent.
