Investment Trust Dividends
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If your search for Today’s Quest most of the answers can be found there.
The Saba Saga dominates the Tip Sheet with The Telegraph strongly defending the track records of two of the US activist’s targets— Herald (HRI) and The European Smaller Companies Trust (ESCT). As The Telegraph points out, HRI is a great success story that has turned £1000 at launch in 1994 to £24,200 today, while, ESCT has beaten its benchmark in 12 of the last 13 years.
By Frank Buhagiar
No prizes for guessing the above Telegraph article focuses on one of the seven funds currently being targeted by Saba Capital. Herald Investment Trust (HRI) launched in 1994, £65m was raised to plough into global small-cap technology and communications stocks. A further £30m was subsequently raised in 1996. Fast forward to today and HRI has grown its assets to around £1.2bn and that’s despite returning hundreds of millions to investors via share buybacks on the way. The share price performance is equally impressive: a £1,000 investment at launch would now be worth £24,200 or £26,000 had warrants that came with the original share issue been exercised. As Questor points out “That is a long way ahead of the return that you would have achieved tracking the UK small-cap market or even a US small-cap technology index.”
And yet, despite producing the goods for long-term investors, HRI is one of the seven investment trusts in which Saba Capital has accumulated a large stake in (20%) and is one of those named by the US activist in its 18 December 2024 announcement calling for general meetings to be held and wholesale changes to the Board to be made. Saba’s plan appears to be to replace the current directors with its own nominees, become the investment manager and change the mandate to one that targets other UK-listed trusts, “As a minimum, it seems to want to force these companies to give it a cash exit at NAV, which is likely to make it a fast buck”.
Notwithstanding the loss of a much-needed and respected investor in the UK technology sector— UK stocks account for 35% of the portfolio—Questor believes the Saba attack needs to be seen off by shareholders because “taking a longer-term view, the performance gap between small cap and large cap tech seems overstretched. The existing investment approach could deliver attractive returns in the coming years and prove far more lucrative than Saba’s self-serving agenda. Shareholders in Herald and the other Saba targets need to ensure that their voice is heard, and this US corporate raider is sent off with its tail between its legs.” Strong stuff and with good reason.
Questor – Europe is in a mess – here’s how to take advantage
HRI, not the only member of the Saba Seven to get a favourable write-up from Questor. So too, The European Smaller Companies Trust (ESCT). Like HRI, ESCT invests in small-cap stocks and like HRI, it has done a good job of it too. Since July 2011 when Janus Henderson’s Ollie Beckett took over as manager, the portfolio has returned +263%, easily beating the +176% generated by the MSCI Europe ex UK Smaller Companies index. In all, the fund has beaten its benchmark in 12 of the last 13 years and over the past decade is the second-best performing European-focused investment trust.
That stellar record, testimony to the manager’s approach that is centred around identifying mispriced stocks from a pool of around 2,000 companies with sub-€7bn (£5.8bn) market caps at the time of investment. It’s an approach that is style agnostic, namely there is no ‘growth’ or ‘value’ focus which in practice means it has a higher exposure to ‘value’ stocks than its more growth-oriented peers.
But, as Questor points out, that strong track record is under threat following Saba’s stake building— Saba says it owns 29.1% of the fund—particularly if the activist investor gets its own way at the upcoming general meeting. As with HRI and the other five funds, Saba is looking to appoint its own directors “then through them impose its will on minority investors. To achieve this, it needs the support of over 50% of those voting.” Bearing in mind the fund’s track record “Questor would be surprised if the shareholders that have stuck by the European Smaller Companies Trust through the lean times would wish to lose the prospect of a recovery in its fortunes.” The stakes are therefore high and nothing can be taken for granted. That’s why “it is important that shareholders vote, as Saba is likely relying on a low turnout to boost its chances of winning.” Shareholders, you have been warned.
Some buyers for Property Trusts.
For those Trusts that don’t have a Premium to Discount figure, u need to compare the NTAV to the CAPITAL amount.
Remember as the share price rises the yield falls.
NextEnergy Solar Fund – Well covered, growing, double-digit yield
Despite having many attractive features, NextEnergy Solar Fund (NESF) has seen its share price derate significantly during the last two years (driven largely by macroeconomic headwinds, such as the impact of higher interest rates on income-producing assets, which has affected the whole renewable energy sector and has been a factor again very recently). A hefty and, in our view irrational, discount has opened up, bringing with it significant yield expansion – NESF now has the second-highest yield in the FTSE 350 – despite its dividend being 1.3x cash-covered during FY2024, with a coverage target of 1.1x – 1.3x for FY2025 on a higher target dividend.
NESF has been making progress with its capital recycling programme (see page 7), with the proceeds used to reduce debt and fund share repurchases that, at current discount levels, are very NAV-accretive. The final phase for 100MW of assets could prove transformational.
NESF aims to provide its shareholders with attractive risk-adjusted returns, principally in the form of regular dividends, by investing in a diversified portfolio of primarily UK-based solar energy infrastructure and complementary energy storage assets. Since IPO, NESF has paid £370m of ordinary dividends – roughly its market cap – highlighting its strength as a total return play.
| Year ended | Share price TR (%) | NAV total return (%) | Earnings per share1 (pence) | Dividend per share (pence) | Cash dividend cover (x) |
|---|---|---|---|---|---|
| 31/03/2021 | 4.9 | 7.2 | 6.32 | 7.05 | 1.1 |
| 31/03/2022 | 11.4 | 23.1 | 17.34 | 7.16 | 1.2 |
| 31/03/2023 | 8.2 | 7.2 | 7.55 | 7.52 | 1.4 |
| 31/03/2024 | (25.1) | (1.4) | (1.42) | 8.35 | 1.3 |
| 31/03/2025 | 8.4322 | 1.1-1.33 |
Source: Morningstar, Marten & Co.
Note 1) Fully diluted.
2) Target dividend for FY2025.
3) Forecast cash coverage of target dividend as per the company’s announcement on 15 May 2024.
NESF has invested $50m in NextPower III ESG – a private solar infrastructure fund that owns international solar assets – that targets gross IRR between 13 and 15% on its investments. This is significantly above the level that UK solar funds are offering.
Shortly after we last published, NESF announced that its first two international solar co-investments, in which it invested alongside NextPower III ESG, had been energised. The assets are a 210MW solar project in Portugal (Santarém) and a 50MW solar asset in Cadiz, Spain (Agenor). NESF directly owns 13.6% of Santarém, 24.5% of Agenor, and 6.21% of NPIII ESG. Both assets have long-term PPAs with Statkraft (Santarém’s PPA is the largest in Portugal’s history).
NESF’s manger highlights that the investment in NextPower III ESG gave NESF instant international diversification (the fund owns development-stage and operational assets in OECD countries), removing the need for NESF to have its own teams on the ground around the world. NextPower III ESG now has 102 operating assets, and the co-investment opportunities that NESF is able to access have the additional benefits of no management fee and no carry. This is a differentiating factor for NESF versus its peers.
Camilla 50MW standalone battery project online
Since we last published, NESF has brought Camilla, its first standalone battery project, online. This is also the first project from its JV with Eelpower (the JV is 70% owned by NESF and 30% by EelPower). The 50-MW lithium-ion BESS asset, located in Edinburgh, is a one-hour battery, but has been pre-augmented for two hours so any upgrade to this should be plug-and-play. BESS assets have a very different revenue stack to solar, and this asset is very complimentary to NESF’s existing portfolio (BESS asset revenues are much volatile but can be much higher than those from solar, which is very stable). With its investment in NextPower III, NESF has exposure to 1.8GW of batteries. NESF’s manager highlights that it is the only renewable generator that has a utility scale battery online at present and that this is approaching its one-year operating anniversary in March 2025.
Two out of five assets sold at a premium, adding 1.84pps to the NAV.
NESF has sold three of the five assets – Hatherden (November 2023), Whitecross (June 2024) and Staughton (November 2024) – earmarked for its capital recycling programme. These were all at premiums to their carrying values in the NAV, adding 2.76p cumulatively to the NAV. The three sales have raised £72.5m, of which £38.8m has been deployed to pay down NESF’s RCFs, with c £4m used to repurchase shares (see page 7). However, NESF plans to look at alternative uses for the proceeds (for example, NAV-accretive investments) as the discount narrows.
Prior to the sale of all of these assets, NESF had added considerable value to both through its initiatives. For example, at Hatherden, approval for co-locating battery storage on the site was achieved, while an AR4 contract was secured for Whitecross. It adds that the latter had a very small snag list, so was very easy to sell.
NESF’s manager marketed the five assets as a portfolio but received more interest for the assets individually.
NESF’s manager says that it is taking its time with the disposal of the remaining two assets, which will be sold together in phase IV (the final phase), and exclusive negotiations are continuing with third-party bidders. It adds that it is seeing many pricing points in the market that are proving NESF’s NAV and there are superior valuations in the secondary market, versus the listed space, which in its view is being over-cautious.
As at end September 2024, NESF had £333.3m of debt of which £156.4m was long-term debt at fixed rates. It also had £198.4m of long-term preference shares. Total gearing was 48.2% of GAV including the preference shares (the limit is 50%) and 29.1% excluding them. The weighted average cost of debt was 4.9% including the preference shares. As noted on page 3, the bulk of the proceeds of the capital recycling programme have been used to reduce NESF’s floating rate debt and, while this is the more expensive of NESF’s debt sources, the financing provided by the RCFs is still very competitive at SONIA + 1.2%–1.5%, reflecting NESF’s scale and creditworthiness. Both RCFs were refinanced in March and April this year on existing terms or better.
The preference shares remain an attractive source of finance in the current environment. While they have an indefinite life, they can be redeemed at par or converted to equity in 2036 and there could be significant upside from this (the managers describe it as a great form of non-amortising debt). NESF has been amortising long-term debt across the remaining life of its subsidiaries.
NESF is an Article 9 fund
As a reminder, NESF is an Article 9 fund under EU SFDR and Taxonomy. During the year ended 31 March 2024, its renewable generation had avoided the production of 279.3 ktCO2e. As we have previously highlighted, if the UK is to meet its net zero targets, much more needs to be done and NESF is keen to play its part in this. Its manager, NextEnergy Capital is the largest specialist solar manager, managing c$4.4bn of solar assets across its key OECD target markets, and aims to be at the forefront of developments in the space. Ross Grier (chief operating officer and head of UK investments at NextEnergy Capital) sits on the UK government’s Solar Taskforce, which was established to drive forward the actions needed to meet the government’s ambition to achieve clean power by 2030. published its third standalone sustainability and ESG report
In June 2024, NESF published its third standalone sustainability and ESG report. NESF is keen to highlight its commitment to biodiversity and 81% of its portfolio assets have enhanced biodiversity measures. New habitat provisions comprise 27 bat boxes, 35 beehives, 78 bird boxes, 131 bug hotels, 32 hibernacula, 35 kestrel boxes, six owl boxes and 1,246 shrubs planted. NESF also provided community funding of £106k and donated £339k to the NextEnergy Foundation in cash and solar modules during the last financial year.
NESF published its first nature strategy report in November 2024. Key elements set out in the report include: an SBTN-aligned commitment to prevent the material loss of natural ecosystems in direct operations and supply chains; a responsible land use target including nature implementation plans and dual land use regimes; a nature restoration target to restore natural ecosystems in the regions where NESF operates that need support; and updated nature-related risk management procedures for supply chain transparency and sustainability.
The end-September NAV was 97.8p – down from 101.3p as at the end of June, 107.3p at end March 2024 and 107.7p as at end December 2023. The main negative drivers between end-June and end-September were lower than budgeted generation due to lower-than-expected irradiation (-2.1p) and changes in power prices forecasts (-3.0p), with changes in short-term inflation costing an additional 0.1p. On the positive side, time value, the sale of Whitecross, share buybacks and the revaluation of NextPower III added 7.7p, 0.6p, 0.2p and 0.1p respectively.
The main negative drivers of the reduction between end-March and end-June were lower than budgeted for generation due to lower-than-expected irradiation (-1.7p) and changes in power prices forecasts (-1.2p), although changes in short-term inflation added 0.4p and the revaluation of NextPower III added 0.1p.
The main negative drivers of the reduction between end-December and end-March were changes in power prices forecasts (-2.7p – mainly due to lower commodity prices – particularly gas, which sets the marginal price of electricity – which was down c.30-40%, influenced by above-average gas storage levels, milder weather across winter 2023/24 and sustained reductions in demand) and lower than budgeted for generation (-1.7p). Furthermore, although changes in short-term inflation added 0.3p, the revaluation of new assets added 1.6p and the revaluation of NextPower III added 0.7p.
Weighted average discount rate is 8.0%.
NESF did not make any changes to its discount rate assumptions for the quarters ended either 31 March 2024, 30 June 2024 or 30 September 2024. On 21 November 2024, NESF said that, for the quarter ended 30 September 2024, it had:
NESF made the same statements for the previous two quarters, but, for the end-March valuation it also said that it had introduced new discount rate assumptions for its new 50MW operating energy storage asset, Camilla, which were in line with energy storage investment company peers. This increased NESF’s weighted average discount rate at 31 March 2024 slightly to 8.1% (31 December 2023: 8.0%), and it has remained at the level for the end-June and end-September valuations.
NESF uses a weighted average of the prices from three power forecasters in arriving at its own power price assumption. However, the manager believes that there is considerable upside that is not factored into these, for the following reasons:
The manager says the situation is actually quite exciting and not as doom-and-gloom as the predictions suggest.
Source: NextEnergy Solar Fund. Note: 1) For financial years ended 31 March. 2) Cash dividend cover is pre scrip dividends.
NESF has 10 years history of paying a growing cash-covered dividend. For the year ended 31 March 2024, NESF paid a total dividend of 8.35p per share, which is a yield of 13.1% on its share price of 63.9p as at 15 January 2025. This is the second-highest yield in the FTSE 350 Index (the highest, Ithaca Energy, is artificially inflated and uncovered, as it is honouring a pre-IPO commitment to distribute US$400m of dividends for FY 2023).
NESF has about 150m retail investors on its share register (around 26% of the total) and its board is acutely aware of the importance of income to these investors. NESF’s board sets a target for the year (usually announced in November as part of the interim accounts) which considers five-year forecasts of revenues and costs and allows for a sensible progression of the dividend over time that is both covered and sustainable. The target for the year 31 March 2025 is 8.43p per share, with forecast coverage of 1.1x-1.3x. The first and second quarterly interim dividends of 2.1p per share were paid on 30 September 2024 and 31 December 2024 respectively. Dividend cover for the first half was 1.5x.
The impact of the shifting sentiment on UK interest rates on NESF’s discount remains an obvious feature of Figure 2. Recent figures have shown inflation, while much reduced over the last couple of years, to be more stubborn than was expected even in the middle of last year. This has, at the margin, extended the higher interest rates for longer narrative, which has weighed on the discounts of all of the renewable energy funds, NESF included – leaving them all close to or at long-term discount highs.
As is illustrated in Figure 2, NESF’s discount remains very wide relative to its own history, offering significant narrowing potential, when interest rates retreat (something we started to see when inflation fell previously) and share repurchases continue. We also see potential for NAV growth through NESF’s capital recycling initiative. However, we still think that one of NESF’s key attractions is the size of its yield, which is covered and supported by its attractive terms on its preference shares debt. We also see potential upside from the resolution of the cost disclosure issues that have plagued the sector, which should hopefully stem selling by professional investors.
Source: Morningstar, Marten & Co
Source: NextEnergy Solar Fund, Marten & Co
NESF has been very active, repurchasing a modest amount of shares most days.
On 18 June 2024, NESF announced that it was launching a £20m share buyback programme designed to help narrow the discount to NAV. As is illustrated in Figure 3, since the programme’s launch, NESF has been very active in repurchasing its own shares, buying back 10.9m shares, equivalent to 1.8% of its issued share capital. These purchases are strongly NAV-accretive, given the prevailing discount. All of the repurchased shares are held in treasury.
Board completely refreshed as 10-year anniversary passed.
Since we last published, Caroline Chan has been appointed as chair of the management engagement committee and Jo Peacegood has been appointed as chair of the audit committee, following the retirement of Patrick Firth (who had served his full nine-year tenure). The chairwoman, Helen Mahy, was previously the chair of TRIG and Paul Le Page is ex-Bluefield. Both joined the board in 2023.
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Octopus Renewables Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Overview Analyst’s
ORIT’s broadly diversified renewables portfolio is significantly undervalued…
Overview
Octopus Renewables Infrastructure (ORIT) has the capacity to generate over 1400GWh , the equivalent of powering c. 360,000 homes , from its diverse portfolio of solar and onshore and offshore wind assets. The trust is managed by an experienced team with skills across the whole value chain from development, construction, operations, and finance. While 95% of ORIT’s portfolio is operational, about a quarter of that originates from development and construction projects led by the Octopus Energy Generation (OEGEN) team. ORIT’s assets are located in the UK, Ireland, France, Finland, and Germany.
ORIT currently yields c. 8.8% factoring its c. 34% discount. From the first year of full investment in 2021 ORIT’s dividend has been fully covered and risen in line with UK CPI inflation and is on target to repeat this in the financial year ending 31/12/2024. Over the next two years, 85% of ORIT’s cash flows are already fixed and over ten years, 50% of the income is inflation-linked.
Over the last year, ORIT has selectively disposed of assets with a value of £161m, at prices on average higher than the carrying value, providing additional confidence around the valuation of the assets and hence the NAV. One of the disposals also validates ORIT’s development and construction capabilities, having been taken through all the stages through to operational, before disposal above book value. The management team of more than 150 professionals have experience, going back to 2011, in development and construction projects in addition to operating and financial experience. While 95% of ORIT’s assets are operational, relatively small amounts of capital allocated to development can create significant value, and with strong dividend cover and selective disposals, ORIT does not need to resort to raising new equity in order to acquire new assets.
Analyst’s View
While ORIT’s discount of c. 34%, which is close to its peer group average, suggests that investor sentiment to this asset class remains weak, the trust has sailed through the period characterised by higher inflation and interest rates with the dividend increasing in line with CPI even at its highest point. One could regard this as a successful stress test for the portfolio, as we can imagine some investors may have been sceptical that inflation links would hold when inflation ran into double-digits, but hold they did, and the result flowed through to the dividend.
As the ORIT team notes, in a more difficult environment for raising capital, and with higher borrowing costs, ORIT’s ability to deliver on development and construction projects, with the potential to generate higher returns while utilising less capital, comes into its own.
ORIT’s discount to net asset value, c. 34%, means that in effect the market is saying that the discount rate implied by the portfolio valuation is c. 10%, rather than the 7.0% it actually is, with the abovementioned disposals providing real-world evidence of that latter figure. In our view, the unwinding of the discount over time is very likely to give investors, at this point a return, higher than ORIT’s target returns, and with a large part of this return generated through dividends, investors don’t need to rely on the discount closing in the short-term to achieve this.
When the Nobel Prize-winning scientist Albert Einstein was asked to identify the most powerful force in the universe, he is said to have replied: “compound interest”. It’s no joke to say that the mathematical phenomenon of compounding – or the ability for gains to grow on gains and income to arise from income – provides a powerful tool for anyone seeking to accumulate wealth. However, you will need time to make it work.
Should I buy 29,761 shares in this FTSE 250 dividend REIT for £1,000 a year in passive income?
Story by Stephen Wright
High bond yields make this a good time to consider buying dividend shares and there are a few on my list at the moment.
One is Assura (LSE:AGR), the FTSE 250 real estate investment trust (REIT) with a lot of features that could make it a reliable source of passive income for investors.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
The equation
Over the last 12 months, Assura shares have fallen by around 23% and the share price has hit 36.26p as a result. With the firm set to distribute 3.36p per share this year, the implied dividend yield‘s 9.26%.
That means the amount someone would need to invest in order to generate £1,000 a year in dividends is £11,025. That’s £10,791 for 29,761 shares, plus £234 in stamp duty.
A falling share price and a high yield can be a sign investors are concerned about the firm’s ability to keep paying dividends. But if they’re wrong, this could be a great passive income opportunity.
A 9.26% yield is eye-catching with government bonds offering above 5%. So I think it’s well worth looking at the stock to see whether the returns actually might be more durable than the market realises.
The business
Assura owns and leases a portfolio of 608 GP surgeries and healthcare properties, the vast majority located in the UK. As a result, the firm gets almost all of its rental income from the NHS.
From a passive income perspective, this could be a very good thing. An organisation backed by the UK government is unlikely to run out of money, making the risk of rent defaults relatively low.
It does however, mean the risk of a change in government policy is quite significant. But for the time being, things seem to be moving in the right direction in terms of UK healthcare policy.
Growth typically comes from developing and expanding existing properties rather than acquiring new ones. But the company did acquire a portfolio of hospitals last year at a cost of £500m.
Risks and rewards
As is often the case with REITs, the biggest risks with Assura come from its balance sheet. It has a lot of debt and the average time to expiry is less than five years.
REITs have limited options when it comes to managing their debts. Being required to return 90% of their taxable income to shareholders means they can’t use it to repay outstanding loans.
But Assura’s making moves to bring down its debt levels by selling off some of the properties in its portfolio. However, this obviously means less in the way of rental income.
A company with reliable rental income should be able to manage a higher debt load than one with more volatile tenants. But I think this is the biggest risk for investors to pay attention to.
Should I buy ?
I currently own shares in Primary Health Properties in my portfolio, which is a very similar business. Adding Assura could help maintain a similar income stream while reducing company-specific risks.
On that basis, buying 29,761 shares to look for a £1,000 a year second income doesn’t seem like a bad idea. It’s definitely one I’m considering for my Stocks and Shares ISA.
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