Over in my Financial Times column, I’ve been writing about my hunt for value in the investment trust space, focusing on familiar names such as private equity investment trusts and alternative asset fund. Today brings news on two of those ‘familiar’ names – the first is the Ground Rent Income fund, the other the PE fund Electra.
Last week the Ground Rents Income fund (GRIO) issued an NAV update (for 30 September) of 130.2p, a reduction of 3.8% from 31 March. This was in line with the Board’s estimate following all the scandal about terrible ground rents. GRIO does have exposure to residential ground rents but very little to the more obscene varieties being peddled by the home builders. The main impact seems to have been on the secondary market where the valuer notes that “until the Government decides on a course of action there is now valuation uncertainty for some ground rent types”. The fund’s managers also note that there is an active market for RPI-linked ground rents, but there is a material change in the perceived investment quality of investments with “aggressive review patterns, leasehold houses and those with ground rents which are high in comparison to the property’s capital value. Some investors have either reduced their bids for these assets or withdrawn from buying them altogether.”
My hunch is that we will see reform – rightly so – but not the outright abolition of ground rents as some have suggested. My core argument here is that if the state did go down the full-scale abolition route it would run into the wrath of the UKs leading aristocrats, many of whom benefit from huge investment portfolios stacked full of ground rents. More to the point the bad apples in the North West building scene shouldn’t be allowed to obscure the fact that many use ground rents for perfectly sensible, mutually agreeable (to leasee and leaser) reasons.
I’m all for radical action on Britain’s housing but if I was a policymaker I’d be focusing my attention on getting more social housing built, not usurping long-established contracts across the board. But in the absence of any news on the proposed policies there’s always the chance that the legislative changes might be radical, in which case we should apply a sensible discount to the fund’s NAV and underlying holdings. That accounts for the 10% fall in the share price and the current 10% discount. The fund is now yielding a tiny bit under 3.4%. Overall, I think the balance of risks is decent and this would make a great long term investment. Still a buy for me.
Over at Electra, we’ve now got back news of the Phase II strategic review. According to a JPM note this doesn’t contain any great surprises, with current market conditions not supporting any new investment and “that as a result most of the excess cash is being returned, with a £350m payment, or 914pps. This is to be paid on 1/12/17 and represents 45% of NAV. “
What remains unclear is whether any funds will be allocated to Bramson’s new £700m AIM quoted investment vehicle, Sherborne C. Crucially the funds latest NAV – based on 31/3/17 valuations – is 2028.33ps which JPM thinks implies uplifts on a number of rump assets. According to JPM “if we take the dividend off both this and the share price it implies an ongoing discount of 22% at the current price of 1785p (@8.30am). Given that retained cash will still be 29% of the ex-dividend NAV, this implies an ongoing discount on the remaining portfolio of ~31%.” That remaining portfolio largely consists of TGI Fridays (33% of pro forma ex dividend NAV), Photobox (23%) and Hotter Shoes (9%). “
One side note on those valuations – they have been held at their 31/3/17 valuations and are to be revalued at 30/9/17 when the results are announced in December, so there could be even more upside.
Obviously, there’s a very clear issue lurking around the chosen cash distribution route – the proposed dividend of 914pps (£350m) is to be paid on 1/12/17 to those on the register on 3/11/17. This takes the amount returned since the resumption of dividends in 2015 to £1.9bn (£49.50 per share). Now in truth dividends aren’t actually ideal – they are very tax inefficient for may private investors outside of a tax wrapper – and I got the impression that the poor old private investor in Electra was completely ignored on this redistribution issue…but the die is cast, sadly.
Nevertheless that 31% discount to the remaining portfolio strikes me as a very decent bet. Again, I’d stick with my view this a buy.