What astounds me is not that inflation has reared its ugly head, all the ingredients were in place to create an inflation shock nine months ago as I noted at the time (‘Lock into an inflation-protected high yield, 7 May 2021). Booming commodity and energy prices, labour market shortages, rising supply chain costs, higher food prices and a post lockdown boom which delivered 6.9 per cent projected UK GDP growth in 2021, are just some of the inflationary factors at work.
No, what is truly astonishing is the failure of the UK monetary authorities to make a pre-emptive strike to take some of the heat out of the economy to dampen demand. When the governor of the Bank of England pleas with workers not to demand high wage settlements, you know that the interest rate setters are woefully behind the curve. It’s not rocket science. Freed of lockdown restrictions, it was only reasonable to expect the velocity of money, a key driver of inflation, to pick up as cashed-up consumers started to spend again, a point I made last May.
I also suggested that one way to play higher inflation expectations is to invest in hard assets, noting the attractions of high-yielding property.
AEK UK REIT’s high growth worth backing
- Net asset value (NAV) total return (TR) of 5.6 per cent in last quarter
- 3.49 per cent like-for-like quarterly valuation increase
- 98 per cent of rents collected since onset of pandemic
AEW UK REIT (AEWU:115p) is the top-performing UK commercial property REIT over the past three years, posting a net asset value (NAV) total return (TR) of 46.5 per cent. Since inception, it has delivered annualised NAV TR of 11 per cent, well ahead of peers, while a quarterly 2p share dividend underpins a hefty dividend yield of 6.9 per cent.
A reliable income stream is derived from a portfolio of 35 properties that is overweight industrial property (51 per cent of £225mn portfolio value) and retail warehousing (14.6 per cent), both segments being beneficiaries of the online shopping boom. They are also proving attractive to investors as highlighted by respective 5.2 and 6.7 per cent portfolio valuation gains in the final quarter of 2021.
It’s not the only factor at work as AEW’s shrewd asset manager is driving rental growth and adding value through active asset management by deliberately targeting assets with low passing rents, shorter leases and refurbishment potential.
Furthermore, £46mn-worth of disposals in the past two years have realised more than 30 per cent above book value (and 70 per cent above cost), with the funds recycled into high-yielding investment opportunities that offer significant growth potential. For example, AEW acquired the well-located Central Six Retail Park in Coventry for £16.4m on a net initial yield of 11 per cent last autumn. The low acquisition cost of £110 per sq ft looks a steal given the strong tenant mix (TK Maxx, Next, Boots, Sports Direct and Burger King), and high rent collection rates. Six months earlier, AEW purchased a full-let retail park in Shrewsbury on a 8.7 per cent net initial yield. The £88 per sq ft acquisition cost is well underpinned by low passing rents of £8 per sq ft, suggesting upside to both capital and rental income.
Analysts have taken note of the smart capital recycling and potential for further valuation uplifts on AEW’s industrial and retail warehousing, pencilling in a NAV total return of 25.1 per cent in the 12 months to March 2022, 14.4 per cent in 2022/23 and 11.2 per cent the year after. This means that NAV per share of 114p at the end of 2021 could hit 130p by March 2024, and shareholders will also bank nine quarterly dividends of 2p a share in the meantime.
AEW’s strong NAV growth profile and rock-solid high income stream are key reasons why I suggested buying the shares, at 110p (Alpha Research: ‘A high-yielding capital growth property play’, 19 November 2021). I maintain my 12-month target price of 128p. Buy.
Indexed linked for rental and valuation uplifts
- 100 per cent of current quarter rents expected to be collected
- On track to deliver 5.5p a share dividend by September 2022
- 4.6 per cent like for like portfolio valuation increase year on year
- £5m acquisition of Volvo showroom in Slough on 5 per cent net initial yield and 15 years unexpired lease term
Alternative Income Reit's (AIRE:79p) portfolio of 18 commercial freehold and long leasehold properties in non-traditional sectors provides not only a secure income stream from a high-quality tenant mix, but 93 per cent of rents are subject to inflation-linked reviews.
Effectively, this means that if the UK inflation rate stays stubbornly high then investors are protected by the rent increases baked into rent reviews from a portfolio that includes care homes, hotels, serviced apartments, student housing, nurseries, car showrooms, petrol stations, and small power stations. Over half of the portfolio's contracted rent is due to be reviewed during the year to June 2022. There are eight indexed annual reviews (expected increases averaging 2 to 3.5 per cent), two indexed three and five yearly reviews (expected increases averaging 19 to 20 per cent) and one lease expiry.
These bond-like income streams – weighted average unexpired lease term of 18.2 years to break – are proving attractive to investors looking to lock into the 5.71 per cent net initial yield (NIY) on the £108m portfolio. NIY compressed by 0.13 percentage points in the last quarter of 2021, which helped drive a 1.7 per cent like-for-like valuation gain and lifted NAV to £72.75m (90.4p a share). The portfolio is modestly geared and the yield easily covers the fixed interest of 3.19 per cent on AIRE’s £41m secured loan with Canada Life (expiry in October 2025). Moreover, the positive outlook for rents is good news for the dividend. The board is maintaining guidance of a 5.5p a share annual payout that will be fully covered by September.
The shares have delivered a 25 per cent total return since I first suggested buying ('Alpha Research: A deep value, high-yielding property play’, 25 October 2019), and I see scope for share price parity with NAV. Trading on a 13 per cent discount to NAV and offering a 7 per cent prospective dividend yield, the potential for AIRE to deliver strong capital and income growth is being underrated. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].
Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 postage and packaging
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
