Secure Income Reit offers certainty

No investment is bombproof, and the company’s rental income is only as good as the ability of its tenants to pay. On this point, there is little to worry about. Following the recent acquisitions, around 43 per cent of the portfolio comprises healthcare assets of 20 freehold private hospitals, 19 of which are located in England and let to a subsidiary of Ramsey Health Care, the Australian healthcare company. The lease length is an impressive 18.9 years with no breaks.

Other assets include a leisure portfolio totalling just over a third of the assets comprising two hotels as well as Alton Towers and Thorpe Park, two of the three leading theme parks in the UK, and leased to Merlin Entertainments. The average lease term is 24 years, with uncapped annual rent reviews every June.

Also on the books are 131 Travelodge hotels let to Travelodge Group. The average unexpired lease term here is 23.9 years with no break clauses. There is also a portfolio of 18 high street pubs generating £2m in passing rent per year, with the next rent review due in February 2020. The recent deal also saw Secure Income buy the Manchester Arena, which includes the UK’s largest indoor arena, and The Brewery in London’s Chiswell Street.

A common theme running through these assets is the quality of the rental stream. Nearly half the rental income is subject to fixed uplifts averaging 2.8 per cent (nearly all of which are re-rated annually). A further quarter has annual rent increases linked to RPI inflation with no upward cap, while another quarter has upward only RPI linked reviews every three or five years, nearly all of which are also uncapped. Add to this the fact that the average lease term is 21.4 years, with tenants responsible for repairs and insurance, and running costs are very low. The portfolio as a whole is currently valued at a net initial yield of 5.2 per cent, and rental growth on average is around 3 per cent a year.

There was a three-month time lag between the March placing and completing the recent deals. This lag meant half-year EPS and dividend per share numbers were down on a year ago. However, earnings are expected to recover in the second half as the new assets make a rental contribution, and the final dividend is expected to be around 8p a share, which would mean a higher annual payout despite the increased share capital.   

The portfolio now comprises 177 properties – more than double the amount at the end of 2017. The biggest challenge to further expansion remains the ability to identify and acquire new assets that offer shareholder value. This has become increasingly difficult through a combination of limited supply and ever-growing competition. However, Secure Income is not dependent on securing fresh assets in order to generate an attractive risk-adjusted return; it already has the ability and the assets to achieve that. The recent deal pushed net debt close to £1bn and the net loan-to-value ratio has jumped from 35.4 per cent at the half-year end to 44.4 per cent, although this is already down from almost 50 per cent at the end of 2017 and is likely to fall further after a full-year valuation uplift.