Octopus Renewables Infrastructure 20 September 2023

Octopus Renewables Infrastructure Trust (ORIT) has a carefully thought-out approach to diversification. First, it invests across several different proven technologies, which include offshore and onshore wind, solar, together with energy storage systems. Next, it invests across several different geographies, which means it is not only diversified by physical location but also by jurisdiction. Finally, it also invests at different stages of an asset’s life, from development through to operational.

ORIT is an impact fund with the core objective of accelerating the transition to net zero through its investments. It monitors this through its framework of ‘performance’, ‘planet’ and ‘people’ and also conforms to the Sustainable Financial Disclosures Regulation Article 9.

ORIT pays dividends quarterly, with the target dividend for the FYE 31/12/2023 set at 5.79p per share, a 10.5% increase on the previous year. ORIT has a progressive Dividend policy and although not explicitly linked to inflation, the 10.5% increase is equivalent to the corresponding CPI inflation figure for 2022. Dividends are fully covered by operational cashflows.

ORIT was geared at 44% LTV or 79% gross to net at its last balance sheet data as of 31/12/2022. Much of the gearing is secured against specific assets in the relevant currency and with a range of maturities between 2032 and 2042, with the vast majority fixed at very low interest rates. We discuss this in more detail in the Gearing section. The discount rate used in the valuation of ORIT’s assets is currently 7.5%, an increase from 6.8% for the year ending 31/12/2021, which is a recognition that interest rates have risen.

ORIT currently trades at a Discount of c. 17%, which is in line with the average for the renewable energy infrastructure peer group.

ORIT is an impact fund in the true sense, and therefore may well appeal to investors who place importance on ESG factors in their decision-making. And as we’ve argued before, what could be more core to an industrial society than where its energy comes from?

As we discuss in the Portfolio section, valuations for renewables infrastructure are sensitive to interest rates and the stock market has applied a discount to the NAVs of ORIT and its peer group. ORIT can invest in construction and development assets, which means that even when trading on a discount, and thus unable to raise new equity, it can continue to grow the portfolio, using excess cash generated from its operational projects or the proceeds of potential asset sales to fund new developments.

ORIT’s dividend is fully covered and the dividend yield is 6.6%, which is a significant premium to UK and European government bond yields, and has a large element of inflation linkage built in on top. It’s natural for a period of adjustment after such a large move up in bond yields, so we don’t view ORIT’s discount as inexplicable, but with valuations already adjusting to the higher rate environment and very strong long-term demand for renewables assets, we think it is likely that the discount will be eliminated in time, and therefore there is a good long-term opportunity at the current share price.