Looking for opportunities in UK REITs

There are some significant discounts in the UK REITs

I’ve recently read a book by Richard Oldfield - an English deep value investor - it’s called “Simple but not Easy“:

It’s a lovely book summarising all the various ways to invest and not invest. He’s not very keen on “index hugging” because as he rightly says they are subject to some arbitrary change.

In one of the chapters he mentions that there are often mispricings in the market for closed-end investment funds (trusts). Here is what I found:

Using the website of Association of Investment Companies https://www.theaic.co.uk/ I found that there are trusts which trade at more than 60% discount:

The above is looking only at any company with market cap larger than £100m. In a nutshell there are some real estate investment trusts (REITs) in the UK and Europe which trade at a 50+% discount to Net Asset Value.

Let’s look at one of the UK ones in more detail:

UKCM (UK COMMERCIAL PROPERTY REIT LIMITED)

• Discount ~ 50%

• Dividend Yield ~ 6.2%

• Gearing ~ 13%

• Debt Cost ~ 2.8%

• Occupancy ~ 98%

• Rent collection ~ 99%

Their market cap is around £700m. They made £60m in rental income in 2021. This is likely to rise to about £65m. They pay about £7.5m in in finance cost. Most of the debt £200m is fixed until at least 2027 at low rates - 2.7% or so. The rest - about £150m is floating but only partially drawn. Their finance cost should remain low for some time.

What about the other risks such as economy tanking and rent collection collapsing. Well it could happen but at 50% discount, does it really matter? Let’s assume the market cap collapses by another 50% to £350m and dividend plummets to half the current levels - so £20m. If we buy now at £700m it would yield just 3% so not great. Is it likely? Subjectively, let’s assume these probabilities:

I think it’s worth making this investment now.