- Net asset value (NAV) falls slightly to £65.7mn (81.6p)
- 9.2 per cent prospective dividend yield
- 21 per cent discount to NAV
Alternative Income Reit’s (AIRE:64.4p) interim results were flagged up in a second-quarter trading update, so there were no major surprises.
In the second half of 2023, the upward yield movement seen across the wider UK real estate sector clipped £1.9mn off the fair valuation of the group’s portfolio of 19 commercial long-leasehold and freehold properties. The portfolio includes care homes, hotels, student housing, nurseries, car showrooms and petrol stations. The net initial yield (NIY) used to value the portfolio increased from 6.58 per cent to 6.94 per cent, hence the 1.9 per cent like-for-like fall in the portfolio valuation to £103.3mn, which is based on annualised gross passing rent of £7.7mn.
It was still a resilient performance, and one underpinned by a secure, index-linked income stream (95.8 per cent of the portfolio), which boosted contracted rents by 2.9 per cent in the six-month period. Around 19 per cent of group income is subject to rent reviews in the current half-year, creating a useful tailwind for rental uplifts with the UK inflation rate double the Bank of England’s target rate of 2 per cent.
Catalysts for investment upside
It’s worth noting that the group sold one property (a hotel in Glasgow) in the trading period for 7.9 per cent above book value, highlighting that transaction values in the real world (rather than conservative surveyor estimates) can exceed carrying valuations in the accounts.
It’s also worth paying attention to the insightful 2024 property outlook of property consultancy CBRE. In particular, the firm expects a narrowing of the abnormally wide gap between property yields and government bonds, a hangover from post-crisis quantitative easing. CBRE also expects a shift in focus towards maximising rental income, as investors prioritise capital preservation and secure income rather than the pursuit of capital growth.
This is positive for the portfolio of Alternative Income Reit, which has a weighted average unexpired lease term of 16.6 years to first break, 100 per cent rent collection and occupancy rates, and benefits from more than a third of rental income being reviewed annually. The incremental income earned from rent reviews underpins a progressive dividend policy, which enabled the board to declare interim dividends of 2.85p, up 3.6 per cent year on year, and guide shareholders to expect a fully covered annual dividend of 5.9p. On this basis, the shares offer a 9.2 per cent prospective dividend yield.
Importantly, the portfolio is modestly geared. The only debt is a fully utilised £41mn loan facility with Canada Life, which has a fixed interest rate of 3.19 per cent and matures in October 2025. Even if the company refinances at a higher interest rate when the loan matures, the additional rental income from rent reviews this year and next should offset the higher interest charge. The dividend looks safe as highlighted by a bumper interest cover ratio of 571 per cent.
Investors have warmed to the investment case since I last highlighted the undervaluation as the holding has subsequently delivered an 18.8 per cent total return (‘Double your money with this high-yielding Reit’, 20 October 2023). Moreover, with well-respected sector commentators expecting a narrowing of the yield gap between government bonds and property yields, and a shift in investors’ focus towards income-producing assets, the investment risk is skewed to the upside for both Alternative Income Reit’s portfolio and its share price. Buy.
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