UK Commercial Property REIT (UKCM) is the largest generalist commercial property trust in its AIC sector with net assets of over £1.1bn. Manager Will Fulton, of Aberdeen Standard Investments, aims to buy assets which are benefitting from structural social and economic themes which should support capital values and income growth. This has led to a progressively high allocation to the industrials sector, helpful during the pandemic, as it benefits from the shift of retailing online. It has also led to an increasing allocation to areas of the alternatives sector which Will thinks are benefitting from secular growth trends, including student accommodation and supermarkets.
As discussed in performance, the portfolio has been relatively resilient during the crisis thanks to the industrials weighting and to prudent levels of gearing when the pandemic broke out. However, the dividend was cut in half in April 2020 as a response to the lockdowns and their unknown impact. In fact, the rent collection has outperformed these feared worst-case scenarios, and so potentially there is scope for a raised final dividend payment this year - which could lift the annualised yield on the current share price to 2.1% or above.
UKCM trades on a discount of c. 17% to NAV. While during the earlier period of the crisis it was narrower than its generalist peers on average, this is now in line with the peer group tracked by JPM Cazenove.
UKCM has the lowest net gearing of the generalist UK commercial property trusts at just 6.4%. Will has a total of £218m of cash and undrawn credit facilities to put to work to boost income, in what he hopes will be a year of recovery.
We think UKCM is an excellent core property portfolio to hold for the long term, although we acknowledge the yield is unexciting in the short term. Will’s approach to identifying secular themes and positioning the portfolio accordingly really paid off in 2020, even if via a black swan event. With capital values in retail and offices likely to be under pressure in a weak economic environment, the focus on alternatives also looks well-timed with attractive yields of over 5%, although the income generated from the student properties will not come online until the 2022/2023 academic year.
In the short term it may take an increase in the dividend to close the discount, or at least the market seeing a clear path to that, given that most property investors are probably seeking a yield rather than share price appreciation. As we discuss in the dividend section, we think the outlook on this front is good. A deployment of the substantial cash and borrowing facilities on hand in the coming months would be one potential source of dividend growth. In the immediate term, with the current quarterly dividend more than covered by the rental income being collected, this means that a top-up payment to the dividend in April is a distinct possibility.
|A portfolio tilted to the top-performing and resilient industrial sector
||Commercial property is sensitive to GDP and the UK is passing through a downturn
|Lots of uninvested cash and borrowing facilities on hand
||Unpredictable outlook for alternatives sub-sectors in the short term
|Scope for dividend reinstatement depending on progress of recovery
||Yield is low relative to peers