BOE increased inflation forecasts on Thu - CPI now expected to peak at 3.7% this year, and not return to 2% target until 2028.
At the margin, that must help the dividend coverage forecasts for the next couple of years. |
Tring adds 175k to rent roll of 7.7M (FY24) plus c1/3rd of portfolio getting a 2.5% RPI rise is c7.9m rent roll currently (I asked AIRE for an update they said it will be released in HY report!). Op costs are 1.2m and finance costs of 1.3m which leaves the 5m divi covered. A replacement loan is going to be 5.75-6% based on latest 5yr swap and 1.5% margin. They do have a bit of spare cash so lets assume they reduce loan to 40m that adds 0.8-0.9m to interest bill. So current divi will be 0.6-0.7m uncovered which will reduce over time. As I said early they have 50% of the portfolio on 5yr reviews so depending when they fall (not detailed on each asset in AR's) coverage could be far closer as even though most are on 4% annual caps that could easily add c15% to existing passing rents. Of course AIRE will have this knowledge so thats why they increased the divi despite the imminent refi.
BoDs here really need to reduce the cost of the inv mgr all it needs is a debt collection agency. |
Indeed. The arguments regarding non-full dividend coverage have generally proven to be false. In fact, given that the rate rises since the lows of 2020-2 have been so rapid, and we are seeing dividend projections at around 0.95x coverage suggests the leverages are just about tolerable.
As said, there is no way on earth you cut a dividend when coverage is temporarily short by around 10%. Rent rises now coming through support the thesis that non-coverage is temporary.
The exceptions to this are when it could hardly be clearer as in the case of RGL and HOME etc. - these were situations where the deficit was large and permanent.
The argument about credit concentration is unarguable. That is the larger risk here. |
The thing about AIRE is that, because their rent increases are baked into the leases, their forward income is pretty predictable. I'm sure the company has a much more detailed forward projection of net income than we have and therefore will have a good handle on how dividend coverage will pan out in the next few years. If they didn't think they could handle it, why would they increase it? The impact of raising a dividend then cutting it on the share price would be worse than just holding it. Since 2020 the dividend and coverage has been (excluding the 2023 0.345p relating a historic legal case)
2020: 5.0p (99%)
2021: 5.14p (98.6%)
2022: 5.5p (101.3%)
2023: 5.7p (106.4%)
2024: 5.9p (101.5%)
2025F: 6.2p |
A dose of stemis-plaining doesn't alter what are straightforward sums. The finance cost is about to jump as loan interest roughly doubles at a stroke. Pretty simple, the distributable income drops by around 0.4p per quarter. The fact that it has been squeezing up in the meantime is irrelevant.
So yield is about to get approx 25% haircut. Is that priced in?
A cash transaction at roughly 10% discount to NAV might save the day for those of you holding on but there has been no hint of that and time is fast running out. |
Excellent analysis, thanks.
Apart from the refi the other concern of course is a tenant defaulting. This is a concentrated portfolio.
Am I right that there is a waste to energy plant that is paying its rent but not operating? |
Let me explain how it works.
Dividend cost at 6.2p/share is £4.99m.
According to q2 statement - net profit after interest was ~£1.4m or annualised £5.5m. Interest on £41m is ~£1.3m so profit before interest = ~£6.8m.
Assume interest cost rises to 6% so that's £2.46m.
Assume profit before interest rises by 3% per year, so:-
2025/6
Profit before interest = £7.0m
Interest = £2.1m
Dividend cover = 98%
2026/7
Profit before interest = £7.21m
Interest = £2.46m
Dividend cover = 95%
2027/6
Profit before interest = £7.426m
Interest = £2.46m
Dividend cover = 100%
The cost of the uncovered element of the dividend over the period is £330k or 0.4p a share. Now maybe they are expecting more than 3% (the current period didn't reflect the full benefit of the Tring acquisition, for example) and they are likely to generate over coverage of dividend in the current year. Either way I think the idea that they are going to have to cut the dividend or haven't planned for the refinancing is unlikely. |
Because of its size it has the chance of an RTO or similar |
That loan is a burning platform here and I knew that when I bought in a few years back expecting rates to have dropped back but they haven't. Im sure they will get it refid but going to be c6% vs 3.19% today so finance costs will be doubled. Rent increases accrued over last couple of years aren't going to cover that so divi looks vulnerable here. Haven't got time now to check but they do have some properties that are on 5yr reviews which if they are due near term may help close the gap.
That said may have to take a haircut here and recycle elsewhere as unless a buyer comes along i fear they will languish down here and then decline if divi cut. |
I do not, they have been very careful with the wording. |
You don't think the board took account of the refinancing when it decided to increase the dividend? |
Yes. I reckon by 1.5-2.0p |
Therefore with an increased interest payment the dividend will fall ? |
The amount a REIT must pay as a PID is determined by reference to its tax exempt property profits as determined by the REIT regulations. |
But what happens when they have to refinance the loan ? |
"The Company continues to pay a fully covered dividend in line with the 2025 annual dividend target of 6.2pps†. The dividend cover for the quarter was 110.3%. The annual dividend target of 6.2pps is an increase of 5.1% over the previous year's dividend of 5.9pps. The target is subject to the continued collection of rent from the Group's portfolio as it falls due.
At 31 December 2024, the Group's unaudited NAV was £66.0 million, 81.9pps, representing a 0.8% increase over the previous quarter. When combined with the 1.55pps dividend paid in the quarter, this produces an unaudited NAV total return for the quarter of 2.7%. |
Took them a long time to reinvest. I agree 6.5% is no bargain but you have to look at the sitting tenant since 1976, inflation linked (capped of course) rent reviews and the tenure. a very stable bet I would say |
6.5% NIY bit low imv but guess it will be a stable asset looking at the lessor |
Quite right nickrl this is a trap, luring punters in on a rising dividend which they know will have to be cut. My guess is the cost of borrowing, which needs to be refinanced within the next six months or AIRE becomes a questionable going concern, will double up from the current 3.2% average. AIRE are a small player under pressure and unlikely to be able to agree terms better than base + 2%.
So net income available for distribution is likely to fall by around 30%. Very naughty of AIRE to be rising distributions by about 5% in the meantime.
So naughty in fact it adds to suspicion that they are lined up to sell out in the next 12 months, to a buyer attracted by a high yielding and performing portfolio. This time next year AIRE will be sold for cash at a 10% discount to NAV, subsumed by an O or other well funded real estate giant where the yields are less spectacular. |
Good to see annualised NRI continuing to increase modestly each qtr which does support the slight rise in divi forecast. However, the elephant in the room is with less than a year to go on refi thety are going to be faced with quite a step up on finance charges from current 3.2% to 5-5.5% currently or worse after adverse reaction from gilts yesterday. I would have rather they held back on any divi increase until that refi was boxed off as cutting the divi now ill have an adverse reaction to share price As a result i will hold and not top up further here until I know whats happened on refi. |
Great to hold for the dividend and the capital gain is nice too. |
ASLI had a good finish to the week - moving up to 62.5p. Still good value.
As I've posted elsewhere, take a look at CLI.
Sp has been hammered due to their chosen sector of Offices. However, look under the bonnet and the 60% NAV discount and the 8.5% yield on a well-covered dividend, does seem more than a little harsh.
Berenbergs now upgrading and looking for a 25% recovery to 114p. I'm looking for much more; especially if the 60% controlling family decide to diversify their trusts and sell out to PE. An immediate 75%-100% profit! |
I'm sure many of you guys will have IHR. It would have been tempting six months ago but like CREI has also gained 10p since. Still looks good value, it might have further to go, worth watching. Care homes have more sectoral operator risk than leading supermarkets though, so for now I will focus on SUPR. |
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