Fund Profile

Ediston Property Investment Company 27 May 2022

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Ediston Property Investment Company. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
EPIC offers exposure to the relatively high-yielding retail warehouse sub-sector…
Overview

Ediston Property Investment Company (EPIC) invests in retail warehouse properties, a sub-sector of the market which has performed well in the aftermath of the pandemic and the managers believe will be a crucial part of mixed online/bricks & mortar retail offerings in the future. After a strategic review in 2021, the manager, Calum Bruce of Ediston, has sold all but one non-retail warehouse asset to focus the portfolio exclusively on what he believes is a value opportunity. Calum is looking to reinvest the c. £60m of cash and gearing available into new retail warehouse assets. The strategy is to look for active asset management opportunities, where the manager can add value to a property and boost the income and capital value.

One of the benefits of investing in a sector that has been out of favour is the higher income available. EPIC pays a 5p Dividend, which amounts to a yield of 6.5% on the share price at the time of writing. Unlike most REITs or investment trusts, EPIC pays in monthly instalments, which may be advantageous to those living off the income on their investments.

Commercial property suffered during the initial impact of the pandemic, but has delivered positive returns over the past year. Retail warehouses have performed especially strongly. Anecdotally, we report an increasing number of managers looking to the sub-sector, perhaps validating EPIC’s longstanding focus here (before the change of strategy, retail warehouses already made up around 70% of the portfolio).

Despite recent strong performance, in the increased risk aversion that has followed the war in Ukraine, high inflation and fears of a UK recession EPIC’s Discount has widened to 19.9%.

Analyst's View

Ediston has long taken a contrarian view towards retail warehouses, which it sees as a crucial part of retailers’ offerings as online sales grow and as relative winners in the retail property sector. Recent developments are showing some support for this thesis: the sub-sector performed well operationally through the pandemic and has performed strongly in the aftermath as an increasing number of managers view it as attractive. Retail warehouses can offer exposure to some of the same themes and tenants as industrials but on higher yields, as the industrial sector has been strongly in favour in recent years and has yield compression.

Income is the main reason many investors look to property, and EPIC stands out in this regard. The monthly dividend is a rare opportunity, and the payout is high relative to the commercial property peer group and to the alternative sectors (see Dividend). Typically commercial property offers decent inflation protection, with upwards only rent reviews offering opportunities for income to rise as nominal sales do, and sensitivity to nominal GDP supporting the sector. However, if inflation contributes to a recession, property is likely to face headwinds. In our view the current 19.9% discount is more than enough compensation for this risk and could represent an attractive entry point into a high-yielding trust with a thesis that may be playing out.

Bull

  • Relatively high-yielding sector and wide discount could provide long-term growth potential
  • Recent portfolio valuations and income performance strong, possibly indicating change of momentum
  • High dividend yield with board expecting to be able to increase the dividend further

Bear

  • Concentrated, quite binary strategy that does not offer much diversification by property type
  • The cost of living increase could impact discretionary spend in the retail sector
  • High gearing will magnify any valuation falls (or increases)
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