Many property, debt and infrastructure trusts are disappointing income investors

Since the onset of the Covid-19 pandemic, dividend investors have had a rough old time of it. Quoted company after quoted company has cut or cancelled the shareholder reward.

Against this backdrop the investment trust sector has acted as a partial safe haven. 

Income seekers have long been attracted to investment trusts. Their ability to keep some dividend income aside during good times has helped them to maintain proud, long-established dividend records during bad times.

However, Winterflood has been diligently tracking investment company updates and notes that over the past month, a number of trusts have disappointed investors with dividend reductions, suspensions and cancellations.

These have come about overwhelmingly because of the cash flow drought and uncertainty engendered by the pandemic.

In this article we will explore the reasons behind the individual dividend cuts as well as revealing income-focused trusts which are currently trading at a discount to net asset value.

WHICH TRUSTS HAVE BEEN CUTTING?

‘So far, the Property and Debt subsectors have been heavily impacted but equity and infrastructure funds have not been immune,’ says Winterflood. ‘Troy Income & Growth (TIGT) gave guidance that its dividend will almost certainly be reduced in its next financial year, while GCP Infrastructure (GCP) and HICL Infrastructure (HICL) have both reduced their dividend guidance for next year.’

Winterflood also warned it expects to see more funds across a range of asset classes to reconsider their dividend policies as the year progresses.

MORE EXAMPLES OF DIVIDEND CHANGES

As the table of disappointers illustrates, a sprinkling of property and debt-focused trusts have been forced to reassess their payouts due to the pandemic; this will have irked income investors who originally bought these products for the high yields previously on offer.

For instance, Alternative Income REIT (AIRE) slashed its quarterly dividend by 40% to 0.825p, citing the exceptional circumstances affecting global economies and markets and the group’s rental collection levels.

However the REIT, which owns a portfolio of UK commercial property assets let on long leases, still expects to continue paying ‘an attractive’ quarterly dividend even if a prolonged economic downturn results in some potential impairment from the company’s previously announced aggregate dividend target of 5.5p per share for the year ending 30 June 2020.

Sector peer BMO Commercial Property Trust (BCPT) has suspended future dividends until conditions improve, Ediston Property (EPIC) reduced its monthly dividend by 30% to 0.3333p and Empiric Student Property (ESP) has suspended future distributions until market conditions stabilise.

BMO Real Estate Investments (BREI) cut its quarterly dividend by 50% and said it would reduce the level of future quarterly dividend payments in order to protect its cash reserves and the long term value of the fund, Covid-19 having impacted on its rental receipts.

Within the debt and leasing patch, Fair Oaks Income (FAIR) has suspended dividends in light of prevailing uncertainty, having traded on a historical yield of 12.1% in late February, while Marble Point Loan Financing (MPLF), on a 10.9% historic yield as recently as February, has also suspended payouts with its revenue expected to decline.

WHAT ABOUT INFRASTRUCTURE?

Investors have long-prized infrastructure for its secure, government-backed cash flows, inflation-protected portfolios and reliable dividends. However on 20 May, HICL Infrastructure reduced its full year 2021 dividend target from 8.45p to 8.25p and removed its 2022 dividend target of 8.65p with guidance to be revisited once economic recovery becomes clearer.

HICL’s demand-led assets, which include toll roads in France and the US, have been among the hardest hit from the coronavirus crisis and ensuing lockdown-driven disruption to activity levels.

On 29 May, GCP Infrastructure reduced its full year 2021 dividend target from 7.6p to 7p. Since 2012, this fund has paid a stable 7.6p per year dividend, one backed largely by UK public sector cash flows, while also generating modest growth in net asset value (NAV).

Nevertheless, the dividend has been rebased following a reassessment of the objectives and risk tolerances of a trust now facing macro changes including a decline in power and gas prices that has accelerated since COVID-19 lockdown measures depressed demand.

‘While this shows the sector is not invincible in terms of its dividends and dividend growth, in our view, it remains in a stronger position than other sectors,’ stressed Winterflood.

INCOME TRUSTS ON SALE

Within the Global Equity Income sector, Henderson International Income (HINT) and Murray International (MYI) have seen average premiums over the last 12 months of 0.5% and 2% respectively give way to discounts of 3.8% and 2.7% according to Winterflood data. These modest de-ratings reflect concerns over the outlook for global growth and dividends.

Elsewhere, UK Equity Income stalwart Temple Bar (TMPL) trades on a deep 14.3% discount to NAV, one that has widened out materially from a 4.1% average, as compiled by Winterflood. Beside the fact that its value, contrarian style remains largely out-of-favour, concerns over future dividends and uncertainty pertaining to the trust’s management arrangements also weigh on sentiment.

In May 2020, Temple Bar announced a first interim dividend of 11p for calendar 2019, although in a blow to income investors, the board also cautioned that ‘shareholders should not assume from this that that the total dividend for the year as a whole will be similarly maintained’.

Another interesting situation is Troy Income & Growth. Co-managers Francis Brooke and Hugo Ure were already transitioning this portfolio away from higher yield but low growth investments and towards lower yielding yet higher growth stocks before the pandemic struck.

This evolution would have required the fund’s reserves to support this year’s dividends regardless of the environment.

First and second interim dividends, announced with the half-year results (11 May), were in line with expectations, although Troy Income & Growth warned that the outlook for dividends in general was particularly unclear and this included the visibility and certainty of the trust’s future dividends.

As the table shows, other UK Equity Income trusts that have seen their discounts widen out markedly include the likes of Lowland (LWI), Merchants (MRCH), Murray Income (MUT), Perpetual Income And Growth (PLI) and Value & Income (VIN).

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