The commercial property trust with a 7% yield and a 19% discount

Real Estate Investment Trusts (REITs) with retail exposure were one of the areas worst-hit by the pandemic, but with the lockdown coming to an end there are some bargains to be had. 

The £273m Ediston Property (LON:EPIC) trust was particularly badly affected on account of the fact that the majority of its regional portfolio consists of retail warehouses and offices. At the end of December these accounted for 60% and 27% respectively of its assets.

EPIC aims to pay an attractive level of income with the potential for capital and income growth. Before the onset of the pandemic it paid annual dividends of 5.75 pence per share, but reduced this to four pence in April of last year on account of the uncertainty. 

The board has recently announced that from April onwards the rate will be increased back up to five pence with the first of the higher monthly payments being made in May. Based on the current share price of 70 pence this gives the company an attractive prospective yield of just over seven percent. 

Enticing discount 

There are not many yields of this magnitude available in the market, which suggests a degree of scepticism from investors and also explains the 19% discount to NAV. If the company is successfully able to maintain the monthly distributions at the new level there should be plenty of room for the shares to be re-rated.  

The board has said that the dividend will be well-covered and sustainable, based on net income projections, assuming there is no dramatic deterioration in the trading conditions. In making their calculations they have taken into account the improving outlook for income and rent collection and if this continues there could be further dividend increases in due course.

A lot of EPIC’s retail exposure is classed as essential and was allowed to stay open, which enabled the company to finish last year with dividend cover − at the lower level of four pence per share − of 139% on a cash basis. If the tenants who pay their rent monthly continue to do so, it is projected that the company will collect 94% of the total rent due for the first quarter. 

Buy rating 

Ediston invests in buildings with lot sizes ranging from £10m to £50m and a net yield over the holding period of more than 6.5%. They look for properties that offer opportunities to add value where they can transform them into institutional-grade assets. 

Investec has recently upgraded EPIC to a buy rating as it offers the potential for an attractive sustainable income stream that may be accompanied by some capital growth if the economy improves. They say that having a high proportion of essential tenants, a defensive convenience-led bias and affordable rents, leaves the company well-positioned.

EPIC will publish its 31 March NAV later this month and will provide a full trading update at the same time. The shares pay an attractive monthly income of seven percent and offer considerable value if you think the worst of the pandemic is behind us.