Infrastructure

The small size of Downing Renewables & Infrastructure (DORE) has held the trust back and lost it its place on the Winterflood buy list.

The £140m trust has been replaced by sector behemoth 3i Infrastructure (3IN), which has a huge £2.9bn market cap and invests in ‘core-plus infrastructure assets’ across four ‘megatrends’: energy transition, digitalisation, renewing essential infrastructure, and demographic change.

The discount has widened substantially in the past year, from 8% at the start of 2024 to a current level of 17%, despite a pick-up in private deals.

Bird said the track record was ‘excellent’, despite the rising cost of capital, with the NAV increasing 85% over five years, versus 37% for the S&P Global Infrastructure index. Although, remarkably, the shares have only managed a 28% rise, giving rise to the discount.

She said managers Scott Moseley, Bernardo Sottomayor, and Rob Collins have ‘proven their ability to exploit value-accretive capex opportunities’.

Since 2016, the fund has achieved a 37% average uplift on the realisation of its assets, and this trend continued in 2024, with it receiving a binding offer for its 33% stake in renewable energy operator Valorem at a 15% uplift to the last valuation.

‘The fund’s track record of disposing assets at a premium… leads us to question the sustainability of the fund’s discount, particularly given the robustness of earnings growth within the portfolio, and the abundance of dry powder in private markets,’ said Bird.

Property

A ‘considerable rerating’ for Schroder Real Estate (SREI) saw it rotated off the buy list and replaced by Custodian Property Income (CREI), which is trading at a wider discount.

Shares in the portfolio are currently sitting at a 23.2% discount to NAV, making it more attractive to Bird than the Schroder trust, which is at a discount of 18.9%.

Custodian is now the largest diversified UK commercial property trust in the market with a market cap of £321m following a spate of corporate activity last year.

‘This, combined with the focus on smaller lot sizes, means the portfolio is well diversified, reducing asset- and tenant-specific risk,’ said Bird.

Targeting smaller properties also provides a ‘yield advantage’ given the assets are off the radar of most peers.

‘This supports Custodian’s attractive prospective dividend yield of at least 8.2%, which is fully covered by earnings, and the fund has increased its annual dividend each year since 2021, following a cut in response to the Covid pandemic,’ said Bird.

It has delivered a NAV increase of 16.6%, or 3.1% annualised, in total return terms over the five years to the end of September, outperforming the 1.2% annual return from the MSCI UK Property index. Bird believes the outperformance will continue given its asset management skills and sales at a premium to book value.

Supermarket Income (SUPR) was also added to the list as a ‘buy’ given its specialist exposure and ‘supportive fundamentals’.

The £823m trust buys up ‘omnichannel’ stores – which are used not just as grocery stores but also fulfilment hubs for online orders – meaning it ‘benefits from the structural trend of e-commerce growth’.

‘These supportive fundamentals ensure affordability of rents for the fund’s tenants, as well as driving market rental growth, particularly for omnichannel stores,’ said Bird.

The trust enjoys a 100% rent collection rate and a fully covered dividend, which has been increased every year since launch in 2017, helped by the fact that 80% of the rental contracts are inflation-linked.

‘Supermarket’s current discount of 24%… offers significant value relative to history,’ said Bird.

‘We think that there is scope for a rerating, given the stabilising underlying valuations, supported by a more benign interest rate environment, with the fund’s relatively large size… making it a likely beneficiary of an improvement in sentiment towards property as an asset class.’