• 97.2 per cent of rents collected since start of pandemic.
• Portfolio valuation edges up in latest quarter.
• Inflation-linked leases provides inflation hedge.
Booming commodity prices, a post lockdown UK economic boom – Bank of England now expects 7.25 per cent UK GDP growth in 2021 – and unprecedented quantitative easing programmes are set to unleash major inflationary pressures.
Oil prices have doubled since the autumn, which has fuelled sharp rises in pump prices for motorists and transport operators at a time when more of us will be increasing road usage post lockdown. Higher logistic costs will ultimately have an impact on the price of other goods, especially food prices which are already riding a seven-year high. Anyone looking to lock into electricity and gas fixed price tariffs this summer will have noticed that energy companies are pushing through double-digit price increases year on year.
Add to that a population ready to spend and party as lockdown shackles are released, and it’s only reasonable to expect the velocity of money, a key driver of inflation, to pick up in the coming months. In turn, this will feed through to wage demands as many employers start to recruit again.
One way to play higher inflation expectations is to invest in hard assets. Cheap money is not the sole reason why residential property is proving popular as an asset class. Commercial property has its attractions, too, especially for companies with high rent collection rates on inflation-linked leases.
Alternative Income Reit's (AIRE:71p) portfolio of 19 commercial freehold and long leasehold properties in non-traditional sectors offers just that. Around 87 per cent of AIRE’s rental income is subject to inflation-linked reviews, and its tenants are of a high quality, too.
Since the start of the pandemic the company has collected 97.2 per cent of rents due and has agreements in place for the balance deferred. For the current quarter, the company has already collected 87.9 per cent of rent, with a further 10.3 per cent scheduled to be paid by the end of next month. Only 1.8 per cent of rents are subject to concessions.
The £108.7m portfolio edged up in value in the latest three-month period, a valuation based on an attractive net initial yield of 5.94 per cent. AIRE’s bond-like income streams – weighted average unexpired lease term of 18.3 years to break – are likely to remain attractive to investors across a portfolio which includes care homes, hotels and serviced apartments, student housing, nurseries, car showrooms and petrol stations, and small power stations. The fact that disposals have been at premiums to book value is evidence enough.
European Public Real Estate Association (EPRA) net asset value (NAV) per share also edged up to 85.1p and that’s after the board paid out half-year dividends of 2.25p a share from cash earnings per share (EPS) of 3.2p. The third-quarter dividend of 1.25p (ex-dividend: 13 May) is comfortably covered 1.25 times by EPRA EPS of 1.56p. The payout is safe as the £108m portfolio is modestly leveraged and AIRE has ample headroom under its £41m loan with Canada Life (fixed interest of 3.19 per cent to expiry in October 2025).
AIRE’s share price has risen 12 per cent well since I suggested buying when I covered the half-year results (‘Running bull market winners’, 24 February 2021), and the 15.5 per cent share price discount to EPRA NAV should continue to narrow to my 80p target. The current discount is still double that for companies in Liberum Capital’s UK Commercial property space, and AIRE’s 7 per cent dividend yield compares favourably with the 4.7 per cent average for its peers. Arguably AIRE's shares shouldn’t be trading on a discount at all given that inflation-linked rent reviews are set to drive up the company's rent roll and property valuations. Buy.
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