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As peer valuations soar, Secure Income weighs its future

Some bullish words from the property group’s investment adviser, ahead of results on 9 September
August 31, 2021
  • Market doubts remain, despite sharp improvement in rental income
  • Stifel forecasts NTA of 453p per share by December 2022

Secure Income Reit (SIR) will be wound up if its share price fails to catch up to the value of its assets, the property group’s investment manager has pledged.

Mike Brown, chief executive of Prestbury Investment Partners and long-time business associate of property tycoon Nick Leslau, said in an interview with Investors’ Chronicle that the Aim-traded firm’s current market price failed to reflect the “greater potential to rebound than our peer group”.

Shares across the real estate investment trust (Reit) sector have recovered strongly in the past year, as investors have rushed to put capital into reliable cash-generators and property firms that, like Secure Income, benefit from annual rental uplifts and therefore offer a hedge against inflation.

In several cases – such as NHS landlord Primary Health Properties (PHP) and student accommodation provider Unite Group (UTG) – management teams have been rewarded with share prices trading at 40 per cent-plus premiums to tangible assets.

For Secure Income, its own rebound started from a sharp discount. Although the stock has climbed 44 per cent over the past year to 400p, and now trades at a 5 per cent premium to last December’s EPRA net tangible asset (NTA) value per share, it remains well below the 472p all-time high recorded just prior to the onset of the pandemic.

Despite a rise in annualised passing rents, NTA per share dipped 12 per cent in 2020 as Covid-19 disruption hit valuations hard. While the group’s portfolio is split across more than 160 properties, it leans toward the leisure and travel sectors and is dominated by four tenants: private hospital group Ramsay Healthcare, publican Stonegate, theme park operator Merlin Entertainments and budget hotel chain Travelodge.

This meant chunky rent concessions and mid-lockdown questions over tenant solvency. But since the reopening of the economy, rent collections have climbed to 98.7 per cent. A quarterly dividend of 3.95p will be paid on 3 September, six days before interim results and 8.2 per cent head of June’s payout.

The stock is rated a ‘buy’ by all four City analysts who cover it, but the jury is out on the pace of the recovery. Panmure Gordon’s Miranda Cockburn expects net asset value (NAV) to rise to 389p by December and 404p per share 12 months later. Analysts at Stifel are more bullish and forecast a rise in NAV to 453p a share by the end of 2022.

“This cannot possibly last,” said Brown, speaking about the pessimism towards the value of the portfolio compared with peers. “But if this carries on, we’ll liquidate the business. We’d rather sell all the assets and take our own money out of it and do our own thing.” At last count, Brown, Leslau and their fellow directors owned 12.4 per cent of the group’s shares, which Secure Income says is the largest holding by value among UK Reits.

Brown clarified that now would be the wrong time to sell out, despite observing that across the commercial property market, “there is more cash looking for product than there are deals”. Although he remains bullish, some of the investment manager’s actions – including keeping some £200m of cash on hand – reflect a wait-and-see approach to rental income.

Longer term, the group is confident its portfolio of long leases is well-placed to navigate and even benefit from social and economic megatrends.

Brown says that “trying to avoid the incursion of the internet undermining the business” was a key starting point when Secure Income was launched in 2007. “The healthcare and experiential sectors are very defensive in that regard, although what we’ve found from last year’s 100-year event is they aren’t very pandemic-proof,” he acknowledged.