Real Estate Investors at a discount

Midlands-focused property investment company Real Estate Investors (LON: RLE) has secured deals to sell property and land at prices in excess of their book valuations. This will help to free up cash for reinvestment and there rent collections are strong enough to pay a dividend that could provide a yield of around 10%.

Chief executive Paul Bassi says that there is already a significant increase in interest in offices outside of city and town centres. People are less keen to travel to city centres and prefer to work nearer to home. These types of properties are a specialisation of Real Estate Investors.

Occupancy levels are already 93%. Managements’ local knowledge means that it can identify property investments with potential to improve overall returns. These are investments that are not necessarily what other investors are looking for, but they can be highly lucrative.

Disposals

Investors are interested in properties that provide a solid income and supermarkets are an example of this.

The main disposal is an Aldi supermarket in Edgbaston for £5.35m. The gain on book value is £1.3m. That should be completed next September.

Vacant offices in West Bromwich have been sold for £625,000 (completion expected in January) and £1.15m will be received for land – a further £350,000 could be paid on planning permission.

The other disposal is in Leicester. It was previously announced but it will complete next month.  The sale price is £2.6m.

Nearly £10m will be generated from the sales, but most will flow in next year. Even so, loan-to-value is expected to be 43% this year.

More disposals will be announced before the end of the year, although it is not clear whether the cash will flow in this year.

Dividend

As it is a REIT, Real Estate Investors has to pay out most of its earnings in dividends. This means that the dividend will continue to be paid, even though the high yield suggests that there could be a danger of a slump in the payment.

The reason behind the delay in completion of the sale of the Aldi supermarket is that this means that rental income will continue while the management seeks an alternative use for the funds. There should be £300,000 or rental income until completion. Putting the cash in the bank would reduce income.

Although at least 90% of rents have been collected in each quarter – with the likes of Boots being the tenants not paying up yet – earnings and cash flow will decline. The dividend is expected to fall from 3.8p a share to 3.5p a share.

Quarterly dividends have been 0.5p a share and the fourth quarterly dividend will be more substantial. Even if the dividend is not as high as forecast, the yield will still be high.

The expected dividend is being paid at a time when conditions have been far from ideal. A steadier trading period next year should enable a return to dividend growth.

NAV discount

The NAV is forecast to decline from 67.4p a share to 62.1p a share. There could be a further decline next year

Share buy backs have helped the share price to recover. The share price is nearly 30% higher than the low at the beginning of October. At 35p, the forecast discount to NAV is 44%. Even if there is a further NAV decline in 2021, the discount will still be around 40%. The expected yield is 10%.

The Midlands is a strong market thanks to the investment in the forthcoming Commonwealth Games in Birmingham and rail line HS2. Add to that, managements’ experience of the region and Real Estate Investors is in a relatively good position compared with other property investors. That makes the NAV discount appear too harsh.