Income Investment Trust comments on Covid-19

[77ss]

A special case maybe, but it interesting to note that BCPT's dividends were covered over 2 times by their 'Revenue Reserves'.

I have to take issue with you, how do you get this over 2 times cover from revenue reserves when the Chairman states in yesterday’s release of the Annual Financial Report for 2019 that can be read at …

https://www.investegate.co.uk/bmo-com-pty-tst-ltd--bcpt-/prn/results-for-the-year-ended-31-december-2019--audited-/20200416070000P63B0/

Dividends and Dividend Cover

The Company’s level of dividend cover for the year (excluding capital gains on properties) was 81.8 per cent. This was marginally higher than the 80.2 per cent cover achieved last year.

The over 2 times cover my well be accurate if one includes capital gains on properties, but that is not the amount of cash being held in the trust’s revenue reserve account. 81.8% is only enough to cover the dividend for 10 months.

If one takes the trouble to read the report in its entirety, and particularly the accounts, then one will see …

During 2019 the trust paid out to shareholders dividends totalling £47,962,000
That is £4-million per month

During 2019 the trust received rents totalling £64,380,000
That is £16-million per quarter

At the end of 2019 the trust had £39,249,000 in reserve to cover dividend payouts
That is 10 months cover at £4-million per month

As things presently stand, the problem for the trust is that £16-million of rent due during this current second quarter of the year is expected to be down 25% or maybe more. While the £16-million rent collection prospects for the third quarter of this year don’t look any better. So, I would think until the Board has a clearer idea as to how much of that £32-million rent due for the combined second and third quarters of this year will actually be paid it is prudent to temporary suspend monthly payouts to shareholders. Otherwise, doing nothing could seriously drain the revenue reserves depending on how bad it gets - which is the big unknown.

I wouldn’t be surprised when the Board thinks it safe to restart payouts to shareholders the trust switches from a monthly to a quarterly payout timetable. I also think there is a strong possibility in the short-term that shareholder payouts equalling £4-million per month will be reduced. Exactly by how much is anybody’s guess at this point in time.

I think we are taking about different things, both of us being equally right (or wrong). You are referring to dividend cover as a function of rental income - which is a perfectly sensible way of looking at things. I am referring to dividend cover as a function of the Revenue reserve as given in the accounts. Dividends paid out £47,962,000; Revenue reserve £99,101,000.

What I was really getting at is that the comforting notion that an IT's Revenue reserve enables it to continue paying dividends in tough times may be a delusion. So I found this to be a useful example.

[Render]

AEW UK REIT plc

From this morning's RNS....

"The Company today announces an interim dividend of 2.00 pence per share for the period from 1 January 2020 to 31 March 2020. " which is inline with previous

15% of rents are outstanding at present vs 8% at the same time last year. None of its tenants have filed for Administration.
Gross L-t-V is 27%.

"It remains the Company's intention to continue to pay future dividends in line with its dividend policy, however the outlook remains unclear given the current COVID-19 situation. In determining future dividend payments, regard will be had to the circumstances prevailing at the relevant time, as well as the Company's requirement, as a UK REIT, to distribute at least 90% of its distributable income annually, which will remain a key consideration."

Regards,
Render

[JuanDB]

Perhaps slightly OT as there is no commentary on C19 impact however HFEL (Henderson Far East) have just announced their dividend.

https://www.investegate.co.uk/hendersonfare-incltd--hfel-/rns/dividend-declaration/202004231213596786K/.

This is at the expected value of 5.7p per share but with no additional commentary about current events. The annual increase is due next quarter and will probably more indicative of the trusts intentions for next year.

Cheers,

Juan.

[mike]

Perhaps slightly OT as there is no commentary on C19 impact however HFEL (Henderson Far East) have just announced their dividend.

That is probably explained by the fact that in the last three years, their half-year report has followed within 24 hours of the dividend declaration. So either after hours tonight or at 7:00am tomorrow morning, we should have their considered view.

Scroll back down here over a few pages to see https://www.investegate.co.uk/Index.aspx?searchtype=3&words=hfel&pno=1

[DavidM13]

Alliance Trust

https://www.theaic.co.uk/financial-advi ... 3A29/H2711

We will, should it be necessary to do so, use these reserves to supplement this year’s and future dividend payments. Even though we anticipate that our income will drop this year, we intend to continue our record of annual dividend growth into a 54th year.

[Dod101]

Alliance Trust

https://www.theaic.co.uk/financial-advi ... 3A29/H2711

We will, should it be necessary to do so, use these reserves to supplement this year’s and future dividend payments. Even though we anticipate that our income will drop this year, we intend to continue our record of annual dividend growth into a 54th year.

Good. Thank you. That is an unequivocal statement and will presumably encourage other dividend heroes to do the same. It was of course a virtual AGM

Dod

[mike]

Henderson Far East (HFEL) have now issued their half-year report (my re-paragraphing for emphasis)

Your Board knows very well the expectations of our shareholders and their priorities. Dividends are of paramount importance and this will guide us through these difficult times. The report from [fund managers] Mike Kerley and Sat Duhra sets out the strategy.

We have been adding to our revenue reserve every year since we moved to Jersey in 2007. This is revenue we have not paid out to shareholders but held back to smooth out dividends in extraordinary times. These are extraordinary times and your Board is ready to draw on these reserves to help meet our dividend objectives if necessary.

https://www.investegate.co.uk/hendersonfare-incltd--hfel-/rns/half-year-report/202004231619527055K/

I do like the confidence exuding with the "if necessary" statement

[JuanDB]

Thanks Mike.

Reading through the report I’m not sure I can quite reconcile the statement around positioning away from banks with the sectoral break down showing financials increased from 16% to 21% over the same period. I’m guessing the increase in financials pre-dates the Covid-19 breakout as the value is taken as of 29/2, and the latest figures will show financials on a lower weighting.

Cheers,

Juan.

[OllyDrod]

Good article from Gavin Lumsden on Citywire on this:

https://citywire.co.uk/investment-trust ... -news-list

- OllyDrod

[mike]

Henderson International Income have issued their half-year report, and comment as follows

It is worth noting that, since the period end, some of the companies held in the portfolio have been asked to delay or moderate their dividends until the impact of the current pandemic is clearer. We continue to recognise the importance of dividend income to our shareholders, and if need be we intend to utilise the Company's revenue reserves in the event of any temporary shortfall between the Company's distributions and portfolio income.

It was another Henderson IT, HFEL, that only a few days ago used "if necessary" with regards to drawing on the revenue reserve, and here we get "if need be". This optimism must be catching !

Immediately following the above comment was

The board continues to monitor the level of dividend paid out to shareholders and currently aims to maintain the same level of dividend for the remaining six months of this financial year.

Including the dividend declared in the HY results, we have had 2 x 1.5p, so another two of the same will give us 6.0p for their FY ending August 2020 (2019 - 5.7p), a very creditable 5.3% rise if their objective is achieved.

Dividend of 1.5p declared, ex-div 7 May, paid 29 May

https://www.investegate.co.uk/henderson-int-income--hint-/rns/half-year-report/202004291640463810L/

[forrado]

Not encouraging signals coming from North American Income Trust (NAIT).

https://www.theaic.co.uk/aic/news/citywire-news/north-american-income-gets-defensive-as-it-eyes-divi-cuts

“North American Income gets defensive as it eyes divi cuts"
"Aberdeen Standard’s Ralph Bassett and Francis Radano reposition the 4%-yielding equity income trust faced with the growing risk of dividend cuts in the US.”

Think about it, and it shouldn’t come as a surprise that a US focused income trust should feel under pressure. US companies never have viewed the level of dividends they pay shareholders to the same degree investors here in the UK have come to expect. In a downturn, US companies are more willing to ignore the dividend needs of their shareholders in order to shore up balance sheets.

[baldchap]

I am not so sure US companies are more willing to cut dividends. They may not pay a lot compared to UK stocks, but they put a lot of store in 'dividend heroes' and the like.
These companies will make all efforts to avoid a cut.

[monabri]

NAIT

'A fourth interim dividend of 4.3p, which will take the total for dividends for the year to 9.5p, an increase of 11.8% from last year, will be payable on 5 June 2020, to shareholders on the register on 11 May 2020. '

https://www.londonstockexchange.com/exc ... 14669.html

The linked article indicates

https://www.theaic.co.uk/aic/news/cityw ... -divi-cuts

"The trust has revenue reserves of 8.28p per share, covering 90% of the dividend, which will provide some backup once companies start to prune their payouts.


Increases of ~12% will doubtless be off the table!

[DavidM13]

https://www.theaic.co.uk/financial-advi ... 3A06/7175L


Polar Capital Global Financials Trust Plc

The Company has built up distributable reserves over past years which may be utilised to support dividend payments to shareholders at times when the underlying portfolio delivers lower than expected income returns.

[richfool]

Not encouraging signals coming from North American Income Trust (NAIT).

https://www.theaic.co.uk/aic/news/citywire-news/north-american-income-gets-defensive-as-it-eyes-divi-cuts

“North American Income gets defensive as it eyes divi cuts"
"Aberdeen Standard’s Ralph Bassett and Francis Radano reposition the 4%-yielding equity income trust faced with the growing risk of dividend cuts in the US.”

Think about it, and it shouldn’t come as a surprise that a US focused income trust should feel under pressure. US companies never have viewed the level of dividends they pay shareholders to the same degree investors here in the UK have come to expect. In a downturn, US companies are more willing to ignore the dividend needs of their shareholders in order to shore up balance sheets.

I read that to mean that they were moving towards better quality holdings in the portfolio, in an effort to preserve/maintain ongoing income, and I bought some NAIT with that in mind (and to increase my US exposure).

‘We have been raising cash selectively and reinvesting into new positions in more high-quality companies with sales visibility,’ they said.

‘We have initiated several positions in what we feel are best-in-class companies that had been on our watchlist due to their relatively attractive valuations.’

They said the changes means ‘we have further upgraded the overall quality of the trust’s portfolio’.

[77ss]

https://www.theaic.co.uk/financial-advisers/companydata/0P0000YYTN/announcements/2020-05-04/07%3A00%3A06/7175L


Polar Capital Global Financials Trust Plc

The Company has built up distributable reserves over past years which may be utilised to support dividend payments to shareholders at times when the underlying portfolio delivers lower than expected income returns.

Read on:

This is a unique feature of the Investment Trust structure which the Board expects will enable it to maintain the dividend for the current financial year at an equivalent level to last year. This approach will give the fund manager time to assess the structure and longer-term income capability of the portfolio in a post COVID environment and to determine the appropriate longer-term distribution level.

Sounds to me like a held dividend this year and a warning shot about the future.

[Dod101]

Don't forget that the 85% distribution rule puts a floor under the dividend.

Dod

[nmdhqbc]

Don't forget that the 85% distribution rule puts a floor under the dividend.

Not sure what this means. Are you saying they have to distribute 85% of their underlying income? If so I'm not sure how that helps in current circumstances. Dividends are being cut so the underlying income will probably be going down. So the issue could only be that they want to distribute more than 100% of underlying income but are not sure if it is sustainable. The floor would surely only come into effect in the good years where dividends are rising.

[richfool]

Don't forget that the 85% distribution rule puts a floor under the dividend.

Not sure what this means. Are you saying they have to distribute 85% of their underlying income? If so I'm not sure how that helps in current circumstances. Dividends are being cut so the underlying income will probably be going down. So the issue could only be that they want to distribute more than 100% of underlying income but are not sure if it is sustainable. The floor would surely only come into effect in the good years where dividends are rising.

It means whether they want to or not, they can't hold back more than 15%. They have to distribute at least 85%.

[swill453]

It means whether they want to or not, they can't hold back more than 15%. They have to distribute at least 85%.

I don't think "holding back" is going to be the issue. 85%, or even 100%, of a much reduced income might not be enough.

Scott.