Ediston Property Investment Company (EPIC) takes a contrarian approach to investing in commercial property with a view to generating a high yield and capital growth through asset-management initiatives. EPIC has increasingly focussed on the retail-warehouse sub-sector as a cheaper way to play digitalisation and the shift of retailing patterns to include more online sales.
EPIC is managed by Ediston’s Calum Bruce. The manager’s thesis is that retail warehouses will be relative winners from the growth of online retailing and an important part of vendors’ omnichannel sales strategies (see Portfolio). Besides serving physical customers, retail warehouses can act as click-and-collect stations and last-mile distribution hubs.
The value of the portfolio increased significantly over the past two quarters. June’s NAV registered a like-for-like increase of 2.7%, driven by strong performance from the key retail-warehouse position (see Performance). Calum reports strong operational performance from tenants and increasing demand for new space, indicating that the market may be coming round to the manager’s basic thesis. These results follow a tough period during the pandemic, when retail property sold off indiscriminately as lockdowns were imposed. The board and manager’s confidence in their basic thesis is shown by their intention to increase the weighting to retail warehouses in the near future from the current 70%, although maintaining the flexibility to go into other sectors as opportunities arise.
EPIC has recently reversed some of its pandemic dividend cut and yields a prospective 6.8%, with dividends at c. 83% of their pre-pandemic level. The yield is boosted by the 15.8% Discount, wider than the 12.6% sector median, and by high levels of Gearing at 62% on a net asset value basis.
EPIC’s high yield is an obvious attraction. The question for investors is the valuation of the portfolio. If this can be maintained or grown, we think EPIC is a powerful proposition; however a high yield would be slim compensation for a declining NAV. The recent valuation uplifts are a positive sign in our opinion, as are the manager’s reports of increasing interest from potential tenants.
EPIC employs a contrarian strategy. The manager makes the case for retail warehouses to be the survivors of the shift towards online retailing. This is plausible, although it will take months and years to truly be confirmed. In the meantime, the current discount of 15.8% seems to offer a considerable cushion – particularly given the healthy state of the income account. Even during the lockdowns, EPIC maintained a payout of 67% of its pre-pandemic level. A recent increase has taken it back to 83%, with the board commenting that it expects to be able to increase the dividend further after the year-end. In the short term, we think that evidence of stability in the portfolio valuation and growth potential in the dividend should support the share-price rating. In the long term, the wide discount is an interesting entry point for those keen to take the risks of a contrarian investment strategy on the long-term prospects of retail warehouses.
|Out-of-favour sector and wide discount could provide long-term growth potential||Concentrated, quite binary strategy that does not offer much diversification by property type|
|Recent portfolio valuations and income performance strong, possibly indicating change of momentum||Consolidation in the retail sector could see some tenants get into difficulty|
|Well-covered high yield with board expecting to be able to increase the dividend further||High gearing will magnify any valuation falls (or increases)|