The Lemon Fool

Hi All, I happened upon this site which provides details of commercial property yields this morning while while browsing:-

https://www.knightfrank.co.uk/research/ ... -6594.aspx

Opening the August report it seems pretty clear that these people reckon that:-
a) ~8-10% yield is available on retail property
b) more like 5% on foodstores
c) 5-6% on office accommodation
d) and 4-6% on warehouse and industrial sites.

To my mind these figures stack up pretty well with the yields that you can get on REITs which can be viewed summarised here:-

https://www.theaic.co.uk/aic/find-compa ... earch_form

Except of course for NRR with its current 13.25% (!) yield. For some reason NRR is missing from the AIC data as far as I can see, couldnt find it even by searching on the Epic code.

Now I know that NRR have attempted to justify their yield based on their FFO figures plus other sources of income. But if the above is the REAL position in the commercial property sector then somethings got to give surely ?. Logic says that they cant continue to pay a 13% yield when their properties are only likely to yield 8-10%. Of course they only got to such a massive yield as a result of the share price falling through the floor as a result of the Woodford situation. So either the share price will have to correct upwards A LOT or the dividend will likely have to be cut at some point.

I shall continue to watch from the sidelines. I have had several attempts at investing in NRR over the years and never managed to make a plus score so far, GL to all holders.

ATB

Pref

PrefInvestor wrote: Of course they only got to such a massive yield as a result of the share price falling through the floor as a result of the Woodford situation. So either the share price will have to correct upwards A LOT or the dividend will likely have to be cut at some point.

Is there an estimate of how the net asset value compares to the share price? That may give an indication of how much scope for recovery there is in the share price. Their dividend cover is below 100%, so how are they financing the dividends? If there's a lot of borrowing, that may be the explanation and may explain the share price to dividend relationship as similar to a Corporate Bond with junk status, the yield represents a premium for a perceived default risk, in other words a dividend cut.

Alaric wrote:

PrefInvestor wrote: Of course they only got to such a massive yield as a result of the share price falling through the floor as a result of the Woodford situation. So either the share price will have to correct upwards A LOT or the dividend will likely have to be cut at some point.

Is there an estimate of how the net asset value compares to the share price? That may give an indication of how much scope for recovery there is in the share price. Their dividend cover is below 100%, so how are they financing the dividends? If there's a lot of borrowing, that may be the explanation and may explain the share price to dividend relationship as similar to a Corporate Bond with junk status, the yield represents a premium for a perceived default risk, in other words a dividend cut.

Hi Alaric, Well the latest NAV that I can find is dated March 2019 (part of their results) giving a figure of 261p, so at 163p they are trading at ~60-65% of their NAV ATM. For the SP/NAV figures for the smaller REITs see the AIC table in my previous post, you can see there that they all trade somewhat lower than their NAV, some quite a lot lower. But the big retail REITS like INTU and HMSO have traded at much lower NAV multiples of maybe 50% or even 25-33%.

With a bit of googling I located the following figures:
HMSO has a NAV of ~740p and a share price of 227p, ie SP is 30% of NAV and they have an LTV of ~63%.
INTU has a NAV of ~280p and a share price of ~40p ie SP is 14% of NAV !!!

Market sentiment is very heavily against these two ATM IMV.

Question is where does NRR sit on this spectrum ?. They have lots of debt (as all REITs do) LTV is 37% this year, higher than last.

ATB

Pref

Here is my take (for what it's worth).

Net debt of 37% is good because at the moment they have the debt fixed at very attractive rates, much lower than the yield they get from rents.

You say - "Logic says that they cant continue to pay a 13% yield when their properties are only likely to yield 8-10%" but that's not comparing like with like. The 13% yield is based on the very unloved share price whereas the 8% "yield" is based on the asset value of their properties.

According to the accounts the occupancy rate is perfectly OK.

Investors are nervous about the retail environment and obviouslsy expect lots of retailers to continue going out of business and landlords to get hit by much lower demand and therefore lower rents.

Personally I quite like the mix of properties that NRR has and am content to keep receiving the 13% whilst waiting for the market to settle down.

But then maybe one day they'll have all their properties revalued and we'll find out that they're really worth closer to 163 per share rather than the 260p per share currently.

Thanks for this, Laughton, sets out the case for staying with this one very well. My comments are like this {-- a comment --}

Laughton wrote:Here is my take (for what it's worth).{-- Quite a lot because it's a well thought out contribution --}

Net debt of 37% is good because at the moment they have the debt fixed at very attractive rates, much lower than the yield they get from rents.{-- Agreed and a good point --}

You say - "Logic says that they cant continue to pay a 13% yield when their properties are only likely to yield 8-10%" but that's not comparing like with like. The 13% yield is based on the very unloved share price whereas the 8% "yield" is based on the asset value of their properties. {-- again Agreed : it is rare to find a share so unloved when management is putting out quite calm and considered reasonably confident information --}

According to the accounts the occupancy rate is perfectly OK. {-- Agreed - and I like the way the management exudes a quiet confidence --}

Investors are nervous about the retail environment and obviously expect lots of retailers to continue going out of business and landlords to get hit by much lower demand and therefore lower rents.

Personally I quite {-- I REALLY like --} like the mix of properties that NRR has and am content to keep receiving the 13% whilst waiting for the market to settle down. {-- and so am I --}

But then maybe one day they'll have all their properties revalued and we'll find out that they're really worth closer to 163 per share rather than the 260p per share currently.{-- I doubt it --}

Yes I could have bought in at a lower price but then I can never buy at the bottom - and I will probably sell before the top sometime in the future. But that's the nature of investing.

It would be interesting to see "What your investment personality is?" so please take the test at viewtopic.php?f=8&t=19258 : mine was "The independent rider" - maybe yours is too

Hi Loughton, A few points from me (in italics) in respect of your inputs:-

Net debt of 37% is good because at the moment they have the debt fixed at very attractive rates, much lower than the yield they get from rents.

Ahhh so more debt is good ?. INTU has an LTV of 58%, better still then !

You say - "Logic says that they cant continue to pay a 13% yield when their properties are only likely to yield 8-10%" but that's not comparing like with like. The 13% yield is based on the very unloved share price whereas the 8% "yield" is based on the asset value of their properties.

Agreed on the 13%, but their rental income surely ie their FFO (not the asset value of their properties) is what funds the dividends, that’s why I think the knight frank report is relevant. If their properties are only yielding 8-10% then they can’t go on paying out 13% forever, somthings got to give.

According to the accounts the occupancy rate is perfectly OK.

Yes, pretty much the same as INTUs actually. It’s rental income that matters…..

Investors are nervous about the retail environment and obviously expect lots of retailers to continue going out of business and landlords to get hit by much lower demand and therefore lower rents.

Indeed !

Personally I quite like the mix of properties that NRR has and am content to keep receiving the 13% whilst waiting for the market to settle down.

Well INTU used to have a pretty tasty dividend too when it was trading at just over 100p. Roughly 14%, until one day it didn’t. And many who invested in NRR at 200p+ will be sitting on losses of 30% plus right now so 13% is precious little compensation, and you’ll have to wait a year for that. Well done to anyone who bought in the 140s though, ATM anyway. Right now I think that NRR is benefitting a lot from the Green King buyout, but the effect is starting to fade. Be interesting to see what happens from here.

But then maybe one day they'll have all their properties revalued and we'll find out that they're really worth closer to 163 per share rather than the 260p per share currently.

Well a no deal brexit might just do that, who knows. Certainly has most of the housebuilders and financials on the run.

TBH though Loughton I have no idea how it’s going to play out, but I can’t see a 13% yield being sustainable and it will either have to be cut or the share price needs to rise substantially. I am no longer invested here so it really doesn’t matter to me, I have only really responded to play devils advocate to your positive view. I hope it works out well for you.

By the way BBB my investor type is “vigilant planner”.

ATB

Pref

PrefInvestor wrote:By the way BBB my investor type is “vigilant planner”

Seems most people here are : think it depends on whether you chose ~ Pizza or Pasta and how certain you were that it would be the same choice in 12 months time. I can't stand pasta and nor can the dog; I don't particularly like pizza either, however the dog does and so I was sure that next year it would like the same. Now if they had give a choice between a roast or a curry - I might have been a VP too

PrefInvestor wrote:
You say - "Logic says that they cant continue to pay a 13% yield when their properties are only likely to yield 8-10%" but that's not comparing like with like. The 13% yield is based on the very unloved share price whereas the 8% "yield" is based on the asset value of their properties.

Agreed on the 13%, but their rental income surely ie their FFO (not the asset value of their properties) is what funds the dividends, that’s why I think the knight frank report is relevant. If their properties are only yielding 8-10% then they can’t go on paying out 13% forever, somthings got to give.

Pref

I honestly don't get this...
The 13% is a reflection of the depressed share price. If NRR were paying out, let's say, 500,000GBP in dividends when the yield was 6%, that monetary amount has not changed even if the SP decreases and yield ups to 13%.
Or is there something that I'm missing?

torata

PrefInvestor (and everyone else), I've been invested here since 2013 so started buying at a lot higher than 200p. That should tell everyone that it would be a mistake to take too much notice of what I have to say.

However I still think this is a well run outfit with a good spread of properties (not like INTU) with a sensible amount of debt (again, not like INTU) and sensible ideas for generating additional income from their assets.

torata - bear in mind my first para above but no, I don't think you are missing something. They pay out the same dividend but the price of the share to be entitled to that dividend has halved.

Hi All, Well I’m going to say no more on this, I’m not invested here so am only following it from a general interest point of view. I continue to believe that paying a 13% dividend isn’t sustainable and holders will either benefit from either a significant upward re-rating of the share price OR suffer a dividend cut. But I’m always prepared to be wrong, I wish all holders the best of luck with their investment.

ATB

Pref

PrefInvestor wrote:Hi All, Well I’m going to say no more on this, I’m not invested here so am only following it from a general interest point of view. I continue to believe that paying a 13% dividend isn’t sustainable and holders will either benefit from either a significant upward re-rating of the share price OR suffer a dividend cut. But I’m always prepared to be wrong, I wish all holders the best of luck with their investment.

ATB

Pref

Normally you'd be right - but this is a REIT, not a share, and as such the dividend is forced to be high because of the requirement to pay out 90% of the usual income. So as NRR's share price is so depressed, that's the only thing making the div so high. Now whether the properties can continue to attract that income is another matter, but for a REIT, I think we need to be careful we don't view it with the same criteria as we use for equities.

PrefInvestor. You are obviously right - the share price will have to increase or the dividend will have to be cut.

Obviously I'm hoping for the former.

Laughton wrote:PrefInvestor. You are obviously right - the share price will have to increase or the dividend will have to be cut.

Obviously I'm hoping for the former.

gbjbaanb wrote:Normally you'd be right - but this is a REIT, not a share, and as such the dividend is forced to be high because of the requirement to pay out 90% of the usual income.

Data on the Company appears to indicate that the dividend isn't covered by earnings. That would seem to suggest that the dividend could be cut if the Directors so decided.

Alaric wrote:

gbjbaanb wrote:Normally you'd be right - but this is a REIT, not a share, and as such the dividend is forced to be high because of the requirement to pay out 90% of the usual income.

Data on the Company appears to indicate that the dividend isn't covered by earnings. That would seem to suggest that the dividend could be cut if the Directors so decided.

As it's a REIT, and has been explained before, if they "decide" to do this they might first have to "decide" to no longer be a REIT.

dealtn wrote:As it's a REIT, and has been explained before, if they "decide" to do this they might first have to "decide" to no longer be a REIT.

As they appear to be paying out more in dividends than they are earning, why cannot they cut back to the minimum they are required to pay to maintain REIT status?

I can't arrive at a figure for "exempt net property rental income", but that's not the same as "earnings", or FFO, or UFFO. I would hope though that they were paying 90-100% of that as PID, and were that not to be the case then agree it should be adjusted to that level.

Cutting to <90%, even if that meant it was uncovered on an "earnings" basis, isn't an option without giving up REIT status.

£65m paid out in dividends, the May report says total revenue was £127m, "net property income" was £89m

They still lost 12p per share though, but it looks like the vast majority of that was down to re-rating their asset valuations (-£88m). I'm not sure why that would appear on the income statement, something about "fair value adjustments". Seems a bit wierd asset values would appear on income statement to me, but looking at their income v expenses, they are profitable otherwise.

Alaric wrote:

dealtn wrote:As it's a REIT, and has been explained before, if they "decide" to do this they might first have to "decide" to no longer be a REIT.

As they appear to be paying out more in dividends than they are earning, why cannot they cut back to the minimum they are required to pay to maintain REIT status?

Regarding the REIT 90% payout requirement. As I understand it the mandatory requirement on a REIT is to payout 90% of its property related income ONLY (ie its Funds From Operations). REITs dont have to payout 90% of their profits on any other activities, but these cannot be greater than 25% of their total activities.

As we know that the NRR dividend is NOT fully covered by FFO (I think the figure in their May 19 report was 84% ?) then the REIT 90% requirement surely means that they could cut their dividend to 90% of 84% of 21.6p (=16.33p ?) and still retain their REIT status. Now they clearly dont want to do that and plan to deliver the dividend cover through their other activities, I believe.

SP been going great guns in the last few sessions though. GLA holders !.

ATB

Pref

Laughton wrote:...However I still think this is a well run outfit with a good spread of properties (not like INTU) with a sensible amount of debt (again, not like INTU) and sensible ideas for generating additional income from their assets.

NRR is my largest holding and I remain relatively relaxed as I, like you Laughton, think this is a very professional and experienced REIT. They recycle capital sharing examples in their reports, have new income streams and as far as I am concerned a plan.

(My other thoughts are further up this thread)

Obviously this is a lot riskier than say SIR which I also hold but I think the risk/reward ratio looks good on a medium term view. Who knows maybe there is a 'Greene King' suprise revaluation by the market one day given the pub component.