UK Commercial Property REIT (UKCM) is a large and liquid, diversified commercial property trust. UKCM’s portfolio is one of the largest in the sector, with total assets of £1.3bn, and the strategy is to generate income and capital return by investing in sectors and properties which are benefitting from structural changes to the economy and society.
The pandemic has accelerated many trends and kick-started others, and the portfolio has been managed cautiously through this period. Helped by being prudently positioned before the crisis hit, manager Will Fulton built up a war chest of £272m of capital to be invested, putting the portfolio in a strong position to be reshaped now the post-pandemic landscape is becoming clearer. Part of this sum is an uninvested gearing facility, and UKCM has low gearing compared to its peer group of just 1.9% net. While this creates resilience in a falling market, it also means there is potential to juice NAV returns in any post-pandemic upswing.
Sadly, Will has been forced to take a temporary break from the trust’s management while he is treated for a medical condition, with his position being filled on an interim basis by Kerri Hunter. Kerri has over 25 years' experience in the property market, 22 years of which have been in fund management and 18 with Aberdeen Standard.
The current portfolio is heavily exposed to the outperforming industrials sector, which has helped NAV returns. As we discuss in the Portfolio section, the manager is increasingly looking to alternatives for new ideas, while also seeing some potential opportunities in specific areas of the retail sector.
The board took a cautious, prudent approach to dividends during the pandemic, and were able to pay a top-up special dividend for the 2020 financial year as well as increasing the payout for 2021 by 40% from its reduced level. It is currently at 70% of its pre-pandemic level, and the trust is yielding 3.2% on an historic basis (see Dividend section).
UKCM trades on a discount of c. 11.8% to NAV, in line with the average generalist trust (see Discount section).
Will’s conservative approach prior to and during the pandemic has put the manager in a strong position to create a very ‘progressive’ portfolio. Entering the crisis with low gearing was to some extent fortuitous, but by maintaining his firepower and agreeing with the board to focus on the long-term rather than aiming to quickly restore the dividend, Will has left the trust with a great opportunity to invest just as the post-pandemic landscape is becoming clearer. We think having a portfolio tilted towards industrials is likely to continue to be beneficial, given the strong structural trends identified by Will and his colleagues. Meanwhile the increasing interest in alternatives and in specific areas of retail could see a very different portfolio in a couple of years than the traditional retail/office/industrial split of a generalist trust.
We think UKCM could appeal to those seeking a core property portfolio to hold for the long term, although we acknowledge that investors will have to be patient in waiting for the dividend to return to pre-pandemic levels, and the yield may not be enough for some in the short term.
|A portfolio tilted to the top-performing and resilient industrial sector
||Commercial property is sensitive to GDP and the UK could pass through a downturn
|Lots of uninvested cash and borrowing facilities on hand
||Yield is low relative to peers
|Scope for dividend growth depending on progress of recovery
||Concentration in industrials is high, creating exposure to any down market