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Secure Income REIT is a reopening play and inflation hedge all in one
Are you looking for investments to play a reopening of the economy while also hedging any accompanying inflation? You should buy Secure Income REIT (SIR:AIM).
Managed by a team of veteran investors and on the stock market for nearly seven years during which it consistently traded at a premium to net asset value until the pandemic hit, the trust suffered as the crisis unfolded to surrender its valuation advantage.
While the shares have subsequently recovered some ground, they still trade at a sizeable discount to NAV of 11% when most other property vehicles similarly focused on long-leased, inflation-linked income trade at a premium. Secure Income REIT also offers a generous yield of 4.5% having continued to pay dividends through the coronavirus crisis thanks to a strong balance sheet.
The reason it has slipped behind the pack is a material exposure to the hotel and leisure sectors. It owns 123 Travelodge sites, where it faced a company voluntary arrangement in 2020 which hit its rental income. Another key tenant, theme park operator Merlin Entertainments, has seen its sites close due to Covid.
The REIT’s other main assets are a portfolio of private hospitals operated by Australian firm Ramsay Health Care, and it also owns some pubs and the Warwick Castle attraction.
The good news on its Merlin and Travelodge holdings is they are primed to benefit from a reopening of the economy. Mike Brown, the CEO of Secure Income’s investment adviser Prestbury Investment Partners, says budget hotels tend to do well in the early stages of a recovery.
Travelodge is frequented by white collar workers, including those in the construction sector which continues to be very active, though it also caters for blue collar industries like sales which might take longer to recover.
Numis comments: ‘The shares remain the most obvious vaccine, Covid recovery play in our coverage space.’
It adds: ‘It is hard to argue with management’s historically strong return track record and summary of their business model which comprises £1.95 billion gross property assets, £1.2 billion net assets, £192 million uncommitted and unfettered cash, structurally protected non-recourse debt, and very long leases on key operating assets in defensive sectors and which are difficult to replicate.’
The main risks include a deterioration in the situation with the pandemic which means restrictions are in place for longer and/or further interruptions to rental income.
The management team are aligned with investors owning more than 12% of the shares and should a discount on the shares persist then they have indicated all options for addressing it would be considered including liquidating the assets and returning cash to shareholders.