All in the name

Secure Income REIT 19 September 2016 Initiation

Secure Income REIT

All in the name

Initiation of coverage

Real estate

19 September 2016

Price

297.5p

Market cap

£536m

€1.20/£

Net debt (£m) as at 30 June 2016 (LTV: 59.5%)

806.5

Shares in issue (m)
(Estimates based on pro forma 227.2m)

180.3

Free float

78%

Code

SIR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.8

5.7

19.0

Rel (local)

13.2

(6.1)

11.0

52-week high/low

298.5p

245p

Business description

Secure Income REIT targets real estate investment providing secure, long-term income and offering protection against inflation for investors. It is differentiated by having no sector investment bias and has plans to grow and diversify the current portfolio of healthcare and leisure assets, on which the rental income is guaranteed by financially strong, listed global businesses.

Next events

Placing close

3 October 2016

2016 final results

9 March 2017

Analysts

Martyn King

+44 (0)20 3077 5745

Julian Roberts

+44 (0)20 3077 5748

Secure Income REIT is a research client of Edison Investment Research Limited

Secure Income REIT (Secure) targets predictable cash flows from a broad range of real estate assets, which offer very long leases (average unexpired lease term more than 23 years) subject to annual fixed or RPI linked rent uplifts, to high-quality tenants providing strong covenants. The external manager has a strong track record, with interests strongly aligned to other shareholders. The prospects for medium-term dividend growth are very strong, while NAV should also grow at unchanged yields. The starting valuation seems modest compared with similar defensive sector peers.

Year
end

Net rental
income (£m)

Adjusted EPRA
EPS* (p)

EPRA NAV
(p)

DPS
(p)

P/EPRA
NAV (x)

Yield
(%)

12/15

99.4

2.6

282.8

N/A

1.05

N/A

12/16e

93.9

10.6

300.3

5.9

0.96

2.0

12/17e

105.3

14.3

320.2

14.3

0.93

4.8

12/18e

106.5

15.4

341.0

15.4

0.97

5.2

Note: *EPRA EPS is adjusted to exclude the impact of the rent smoothing. Estimates assume 46.9m shares issued in placing and completion of Travelodge hotel assets.

Specialist investors in long lease assets

In a tax-efficient REIT structure, Secure is a specialist real estate investor targeting predictable cash flows from long leases and upward-only annual fixed or RPI linked rent increases backed by high-quality tenants. The external manager, Prestbury, brings a strong track record of successfully creating value for investors through previous cycles, sourcing and executing transactions, with management ownership (18%) that is one of the largest in the quoted UK real estate sector. Among a small number of listed specialist investors in long lease income, Secure is differentiated by adopting a sector-neutral position assessing a wider range of long-term rental streams on the merits of the underlying real estate and tenant credit quality.

Strong interims and first accretive acquisition

Since listing, Secure has optimised its balance sheet for its REIT status and broadened its ownership, preparing the ground to deliver additional growth and enhanced shareholder returns through acquisitions. Interim results were predictably strong and Secure announced the agreed acquisition of 55 Travelodge hotels on long (average 27-year) leases with RPI uplifts, for £192.6m, conditional only on the placing of up to £140m of new ordinary shares at a price equivalent to the pro forma NAV per share of 298.6p. The assets are let to Travelodge, the UK’s second largest budget hotel brand, a substantial and growing privately owned business that has recently gone through a substantial investment programme. Completion should lift fully covered distributions by 14%, reduce gearing, extend further the average unexpired lease length and diversify the tenant covenant profile.

Valuation: Secure and growing income

Long leases, upward-only rent increases, and predictable administration and finance costs provide a high degree of medium-term visibility. Consensus expectations of medium-term RPI of c 3% imply 6.5% pa DPS growth to 2022 and, on an unchanged valuation yield, c 11% pa EPRA NAV total return.

Investment summary

Secure Income REIT (Secure) is a specialist long-term income UK REIT. It listed in 2014 with an established portfolio with very long leases subject to annual fixed or RPI-linked uplifts. The portfolio had been previously managed and part-owned by Prestbury since 2007, within in a privately owned investment structure. Having optimised the balance sheet for its new listed REIT status during 2015, Secure broadened its ownership in March of this year by placing 61.4% of the existing shares. It has accompanied its predictably strong interim results with the announcement of an agreed acquisition and share placement, confirming the board’s view that there are opportunities to deliver growth through transactions that should increase shareholder total returns and at the same time diversify Secure’s exposure to various property subsectors, assets and tenant credits. We view the transaction as attractive and well timed, with the historical knowledge and experience of the investment adviser, Prestbury, playing a key role in sourcing and structuring this off-market transaction. Prestbury and the board will themselves add £5.4m to their investment in Secure, taking Prestbury’s holding to more than £104m (at the placing price). We provide a summary of the results and transaction below, and for investors less familiar with Secure we provide an in-depth look at the company in the pages that follow.

Highlights of interim results

There were no changes in the portfolio composition during the first six months of FY16. Passing rent of £78.5m compared with £76.3m at year-end, all with annual fixed or RPI uplifts, secured against major global multi-million pound quoted businesses. The weighted average unexpired lease term was 23.1 years with no breaks.

The portfolio value increased by 2.1% to £1.38bn from the 2015 year-end level, including like-for-like revaluation movements of £19.7m (net of a £12.1m impact from the March Stamp Duty increase), and FX gains on the German assets of £9.3m. The net initial yield of 5.3% was unchanged from year-end and the equivalent yield of 6.3% compared with 6.4%.

Underlying EPRA EPS increased to 5.4p from 2.9p in H215 and a small (0.3p) loss in H115. The increase is significantly driven by last year’s asset sales to lower gearing and refinancing to extend duration and lower interest costs. EPRA NAV per share increased 6.2% to 300.2p.

Gearing continued to fall, with the net loan-to-value ratio at 59.5% compared with 61.0% at 31 December 2015 and 80% at listing in June 2014.

A first quarterly distribution of 2.9375p per share was paid, after the period end, in August. At an annualised 11.75p per share, this represents a fully covered yield on the 30 June 2016 EPRA NAV per share of 3.9%.

Agreed acquisition of 55 long-lease Travelodge hotel assets

Secure has also agreed the acquisition of a portfolio of 55 Travelodge hotels, for £196.2m including property acquisition costs, conditional only on the placing of up to £140m of new ordinary shares at a price equivalent to the pro forma NAV per share of 298.6p. The balance of the consideration is to be financed by a new £60m seven-year, non-recourse secured debt facility for which the lender’s credit approval has been secured, with documentation at an advanced stage of negotiations. The assets to be acquired have a weighted average unexpired lease length of 27 years, are expected to immediately add £13.7m to rental income with future RPI uplifts, and are let to Travelodge Hotels, the UK’s second largest budget hotel brand, a substantial and growing privately owned business that has recently gone through a substantial investment programme. The transaction is expected to be immediately accretive with a 14% uplift to the distributions (from a yield of 3.9% on H116 EPRA NAV to 4.5% on the placing price), it will lower pro forma gearing (net LTV 56% versus 59.5%), and it will extend further the average unexpired lease length and diversify the tenant covenant profile.

Diversified portfolio for secure, long-term income

Secure Income REIT (Secure) is a UK real estate investment trust (REIT) that specialises in investing for secure long-term income derived from real estate investments and offering inflation protection. In a tax-efficient REIT structure, it targets predictable cash flows from long leases and regular upward-only rent increases backed by high-quality tenants. Secure is externally managed by Prestbury Investments LLP (Prestbury).

Exhibit 1: EPRA NAV per share

Exhibit 2: Net LTV

Source: Secure Income REIT. Note:*Pro forma for post balance sheet date assets sales and debt refinancing. **Pro forma for Travelodge acquisition and placing.

Source: Secure Income REIT Note:*Pro forma for post balance sheet date assets sales and debt refinancing. **Pro forma for Travelodge acquisition and placing.

Exhibit 1: EPRA NAV per share

Source: Secure Income REIT. Note:*Pro forma for post balance sheet date assets sales and debt refinancing. **Pro forma for Travelodge acquisition and placing.

Exhibit 2: Net LTV

Source: Secure Income REIT Note:*Pro forma for post balance sheet date assets sales and debt refinancing. **Pro forma for Travelodge acquisition and placing.

UK commercial property lease lengths have reduced over a number of years and Secure is not unique in the UK REIT sector in seeking to meet investor demand for secure income streams and attractive returns, but, unlike some of the specialist REITs that similarly focus on long leases (eg primary healthcare properties or logistics properties), Secure adopts a sector-neutral position that management believes provides it with more flexibility to assess a wider range of long-term rental streams on the merits of the underlying real estate and tenant credit quality, and the ability to build a more diversified portfolio across a range of sectors over time.

Secure listed on the AIM market of the London Stock Exchange in June 2014 with an established portfolio of operating healthcare and leisure assets on very long leases, roughly two-thirds of which are subject to fixed annual rent increases, with the remainder indexed to upward-only, uncapped RPI increases. All of the properties are fully let by their nature, with the security that 100% of the rental income is guaranteed by financially strong, global, listed businesses (Ramsay Health Care, RHC; Merlin Entertainments, MERL; Orpea, ORP). We consider this portfolio to be highly attractive in current market conditions and the combination of upward-only rents, predictable administration costs and borrowing costs fixed at least until 2022 underwrite the almost inevitable likelihood of increasing shareholder distributions, even at zero RPI.

Since listing, Secure’s board has been clear in its belief that from the strong existing platform, there are opportunities to build a sizeable portfolio, further diversified by property subsector, assets and tenants, and capable of increasing total shareholder return. The agreed Travelodge hotel acquisition, subject only to the completion of the placing of up to £140m in new shares, is a significant first transaction, adding c 14% to investment property assets and more than 17% to rent roll, and meets all of Secure’s strategic and financial hurdles. We expect further acquisitions in the future, but their shape and timing are not easy to predict. We would identify pubs, healthcare, entertainment and student accommodation as specialist property sectors where there exists a reasonably deep pool of owner operators, with robust operating cash flows, but which may wish to liberate the capital employed for alternative growth projects but who welcome the security of long leases on key operating assets.

In this low interest rate environment, competition for secure longer-term income is understandably strong. Prestbury indicates that the restricted number of specialist UK REITs, combined with Secure’s sector-neutral approach, means that it commonly finds itself in competition for assets with institutions and, to a lesser extent, private investor-backed vehicles. Under these circumstances, Secure’s listed REIT status is likely to create a competitive advantage where the seller needs to manage capital gains tax liabilities on exit. Non-REIT purchasers may be unwilling or unable to take on inherent capital gains tax liabilities, whereas in most scenarios for Secure there would be no effective tax liability. As demonstrated by the Travelodge transaction, we also believe the knowledge and experience of Prestbury is an advantage in sourcing and structuring transactions, preferably less competitively, off-market.

Background

Secure is advised on an exclusive basis by Prestbury, the majority of which is owned by Nick Leslau, Mike Brown, Sandy Gumm, Tim Evans and Ben Walford. The Prestbury team of property and finance professionals is very experienced in the UK real estate market, with a strong track record of successfully creating value for investors through previous cycles. Details of the Prestbury team’s investment track record can be found on page 36 of the presentation dated 8 September 2016 on the company website, www.SecureIncomeREIT.co.uk.

Prestbury is responsible for the day-to-day management of the portfolio and is a significant shareholder in Secure’s share capital, providing very strong alignment of the interests of the advisor and other shareholders. As noted above, Prestbury has pledged to invest an additional £5.3m in the proposed placing (and non-Prestbury board members an additional £0.1m), taking the post-transaction Prestbury holding in Secure to more than £104m (based on the placing price). Although the percentage ownership will decline from c 18% to c 15%, we are very encouraged by the additional investment and we also believe that this will continue to be among the largest management shareholdings in the quoted UK real estate sector.

Prior to listing Secure, Prestbury had an ownership interest in and managed the healthcare and leisure portfolios since their acquisition in 2007 through an investment fund established in 2006 with a 10-year life. Following the change in REIT rules in 2013, which eliminated the conversion charge and allowed closely held companies a three-year grace period within which to become widely held, a stock market listing as a REIT became the preferred “exit option” for investors in the fund. On listing, Secure issued a minimal (c 5%) of new equity, electing to materially extend the maturity profile of the group’s debt before widening the shareholder base. During 2015 the sale of Madame Tussauds in London for £332.4m (net initial yield [NIY] 4.5%) and New Hall Hospital in Salisbury for £49.8m (NIY: 5.3%) reduced gearing and a comprehensive debt refinancing extended the average debt maturity to more than eight years while reducing the average weighted cost of debt from 6.8% to 5.2%. Following the refinancing, with cash flows improved and distributions made possible, in March 2016, 110.7m existing shares (61.4% of the total) were made available in a co-ordinated placing. In addition to complying with the REIT rules, this created a broader shareholder base, better suited to support accretive expansion of the group, and improved liquidity in the shares.

As a REIT, Secure is required to distribute at least 90% of its qualifying profits, although as all of the leases are fully repairing and insuring, are not subject to voids, and have no capex requirement, a full dividend payout ratio is possible. Quarterly distributions began in August 2016 and the policy is to make distributions equal to the higher of this minimum REIT distribution or 1x adjusted EPRA EPS (as defined below) cover. The nature of the portfolio, with upward-only rental uplifts, a fixed cost of debt and predictable administrative expenses, should lead to annually increasing dividends, in line with geared earnings. At the same time, assuming an unchanged valuation yield, rental growth should translate into asset revaluation, excluded from the distributable earnings, reducing gearing/LTV over time.

Board and management agreement

A highly experienced board of seven, with extensive and relevant experience, is responsible for the overall leadership of the company. A majority of the board is independent of the investment adviser, with Prestbury represented by Mike Brown, Sandy Gumm and Nick Leslau. The Prestbury representatives receive no remuneration from Secure. Martin Moore, the independent non-executive chairman, is a chartered surveyor who served as CEO of M&G Real Estate (previously Prudential Property Investment Managers) for 16 years until 2012. He is an adviser to KKR and is also a non-executive director at Segro, F&C Commercial Property Trust and the M&G Asia Property Fund. The other independent non-executive directors are Leslie Ferrar, Jonathan Lane and Ian Marcus. Biographies for each of the directors are shown on page 19.

The majority of the group’s overheads are borne by the investment adviser and are compensated by way of advisory fees, as set out in an advisory agreement. The advisory agreement runs for eight years from admission in 2014, subject to certain conditions around staff and ownership continuity at Prestbury. The advisory fee is paid in cash and is calculated by reference to EPRA net assets on a sliding scale: 1.25% pa on the first £500m of net assets, plus 1% on net assets between £500m and £1bn, plus 0.75% on net assets above £1bn. There is also a performance fee, which is calculated as the lower of (a) 20% of annual shareholder returns over a 10% hurdle, reset each year to 10% over the previous year’s EPRA NAV, or (b) 20% of the excess shareholder returns over the high watermark (being the EPRA NAV as of the point of any previous performance fee being earned, plus 10%). Performance fees are payable in shares based on the year-end share price. One-third of these shares are locked in for 18 months, another third for 30 months and the rest for 42 months. Following the placing, NAV plus distributions of more than 311.6p per share would need to be exceeded at 31 December 2016 before generating an incentive fee for 2016, which is above our estimates. The independent non-executive directors will review the performance fee arrangements in the middle of 2017 to ensure that it remains an appropriate basis on which to incentivise the investment manager.

Specialist real estate investment proposition

Secure operates in specialist areas of the UK commercial real estate market. The broader UK commercial real estate market has recovered strongly from the post-global financial crisis low in March 2009, of course with regional and sectoral differences. With economic recovery and steadily growing employment, occupier demand has increased, leading to lower vacancy, rental growth and fewer leasing incentives. Meanwhile, investor demand, most obviously in search of income in a low interest rate environment, had reached a new record level in 2015, driving prices higher and yields lower, in some areas of the market like prime central London, to record lows.

The unexpected EU referendum result came as quite a shock to investors, who feared that in its aftermath:

investor demand would wane, particularly among overseas investors, c 45% of all investment demand on average in the years since 2009, and already weakening in the months ahead of the vote. Despite continued low interest rates, yields may rise/prices fall; and

the economy would weaken, and with it occupier demand, denting the prospects for occupancy, rental growth and income.

Subsequent readings on the economy have so far proved more encouraging than some had first feared, while the further cut in interest rates supports the investment proposition, reinforced for overseas investors by the weakness in sterling. It is too early to call the eventual Brexit impact on the broad commercial property market; the jury is still out.

The quoted specialist investors such as Secure or Primary Health Properties (a specialist investor in primary health facilities) have recently been clear beneficiaries of the volatility and uncertainty that has impacted the broader quoted real estate sector, and indeed some unquoted funds. Secure indicates in its interim statement that it has seen no evidence of a weakening in prices in its specialist sectors of the market. Some commentators expect the demand for secure long-term income to continue to drive growth in the investment share of the specialist sectors in the overall market, as has been the case in the US.

In any case, the post-Brexit experience to date underlines the historical volatility of commercial property returns and in that context it is significant that income represents c 78% of total property returns over the long term and has been very much more stable than capital values, which have displayed a high level of volatility.

Exhibit 3: Components of UK real estate returns, rolling five-year total returns

Source: Secure Income REIT, IPD Monthly Index December 2015

Nevertheless, there is evidence that in broad terms, commercial property rents in the UK market have struggled to match inflation. This is particularly true of industrial and office rents, but even retail rents have generally fared better over longer term; the more recent trend has been negative.

Exhibit 4: UK rental values (Index: 1977 =100, CPI adjusted)

Source: Secure Income REIT, Datastream, IPD

A possible contributor to this lack of “pricing power” is the long-term trend to shorter lease lengths, making it harder for landlords to lock in income levels across business cycles but increasing their need to compete for lease renewals.

Exhibit 5: Length of commercial property leases granted in 2015

Source: Secure Income REIT, IPD

Secure’s investment proposition is thus built around the following pillars:

Property income represents by far the larger part of total returns over time.

Long-term leases at effective full occupancy to strong tenants provide considerable security and visibility of income.

Guaranteed annual fixed or RPI linked rent reviews provide a more effective driver of income growth with the added benefit of greater predictability.

Prudent gearing enhances returns to shareholders.

Exhibits 6 and 7 below show the split of passing rent according to the rent review terms, both for the existing portfolio as at 30 June 2016, and pro forma, assuming completion of the acquisition. Assuming RPI of 3%, the weighted average annual rental increase on the pro forma portfolio is 2.88%.

Exhibit 6: Rent review terms by passing rent, post-acquisition (pro forma)

Exhibit 7: Rent review terms by passing rent, existing portfolio

Source: Secure Income REIT data

Source: Secure Income REIT data

Exhibit 6: Rent review terms by passing rent, post-acquisition (pro forma)

Source: Secure Income REIT data

Exhibit 7: Rent review terms by passing rent, existing portfolio

Source: Secure Income REIT data

The enlarged portfolio

Secure’s existing portfolio (prior to acquiring the Travelodge assets) consists of 26 healthcare and leisure assets that were externally valued at 30 June 2016 at c £1.38bn. The healthcare assets comprise 20 freehold private hospitals; a portfolio of 19 located throughout England let to a subsidiary of Ramsay Health Care, a listed Australian healthcare company, and a single property located in central London and let to Groupe Sinoue, a French company specialising in mental health. The six leisure assets, four in the UK and two in Germany, comprise four well known visitor attractions and two hotels. The UK assets are the Alton Towers theme park and adjacent hotel, the Thorpe Park theme park and Warwick Castle. The German assets are Heide Park theme park (the largest in Northern Germany) and an adjacent hotel. The leisure assets are all let to operating subsidiaries of Merlin Entertainments. In each case the lease obligations are guaranteed by the parent companies of the operators, all profitable, global, listed businesses. Subject to completion, the agreed acquisition of the 55 Travelodge hotel assets will increase the existing contracted rental income (as at 30 June 2016) from £78.5m to a pro forma £92.4m at a pro forma portfolio value of £1.57bn. Completion of the hotel asset acquisition is expected before year-end and following a successful completion of the equity placing. We have included the assets from 1 October 2016 in our modelling.

Exhibit 8: Rental income by tenant/guarantor as at 30 June 2016

Exhibit 9: Pro forma rental income by tenant/guarantor as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

Source: Secure Income REIT data, Edison Investment Research

Exhibit 10: Portfolio gross asset value by sector as at 30 June 2016

Exhibit 11: Pro forma portfolio gross asset value by sector as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

Source: Secure Income REIT data, Edison Investment Research

Exhibit 8: Rental income by tenant/guarantor as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

Exhibit 10: Portfolio gross asset value by sector as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

Exhibit 9: Pro forma rental income by tenant/guarantor as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

Exhibit 11: Pro forma portfolio gross asset value by sector as at 30 June 2016

Source: Secure Income REIT data, Edison Investment Research

The weighted average lease length of the Travelodge hotel assets is 27 years, taking the enlarged portfolio to 23.6 years (existing: 23.1 years) as at 30 June 2016. The hotel assets are expected to produce £13.7m of rental income annually, with upwards only RPI-linked rent reviews on a five-year rolling basis, and at a purchase price of £196.2m including acquisition costs this is a running yield of 7.0% (a net initial yield of c 6.5% compared with existing assets 5.3% at 30 June 2016). As detailed in the valuation section, the transaction promises to be immediately earnings enhancing, and in the exhibits above we show it also enhances the tenant and asset diversification of the portfolio.

In the sections that follow we discuss the components of the portfolio in more detail and also examine the quality of each tenant covenant.

The Travelodge hotel portfolio

The portfolio comprises 55 hotels across England and Scotland with 3,096 rooms with a weighted average unexpired lease term of 27 years, with no lease under 22 years and no break clauses. The passing rent at acquisition is expected to be £13.7m, representing a 7% yield on the £196.2m acquisition price, including costs. 68.6% of the leases by value are on freehold or 999-year leasehold properties. 7% of the portfolio by value has head leases of between 40 and 80 years duration, however we understand that this is reflected in the apportioned price on purchase with a net initial yield of c 10% for these properties. The portfolio’s staggered five-yearly rent reviews are upwards-only and RPI-linked. As a result of the timing of reviews it is expected that the portfolio will yield 7.3% on the purchase value by October 2017.

Exhibit 12: Portfolio tenure by asset value

Exhibit 13: Portfolio siting by type of location

Source: Secure Income REIT data

Source: Secure Income REIT data

Exhibit 12: Portfolio tenure by asset value

Source: Secure Income REIT data

Exhibit 13: Portfolio siting by type of location

Source: Secure Income REIT data

The tenant is Travelodge Hotels, the UK’s second largest budget hotelier (behind Premier Inn, owned by Whitbread), with a well-recognised brand and c 18 million customers. This is a substantial, privately owned business that has received significant investment and operates in a relatively defensive market.

The UK hotel market has grown revenues per available room (RevPAR) at a compound annual rate of 2.7% over the past decade (including the 2007-09 recession period) and international comparisons suggest room for the value branded sector, in which Travelodge operates, to grow further; in the UK the value branded sector of the hotel market accounts for 19% of all UK hotel supply, lower than France (24%) and the US (33%).

Travelodge was the first value brand to launch in the UK more than 30 years ago, but after the financial crisis the business struggled with a heavy burden of debt taken on as part of earlier expansion. It was acquired by the current owners, a consortium consisting of Goldman Sachs, GoldenTree Asset Management and Avenue Capital Group, in 2012. Travelodge management also owns a 10.4% stake. Since then, it has seen strong growth and has undertaken considerable investment. 2015 revenues of £560m were up from £497m in 2014 and EBITDA increased to £105m from £66m. 2015 also saw the completion of a £100m modernisation programme, which included the refurbishment of 35,000 out of 39,000 rooms, and importantly, all of the hotels in the portfolio to be acquired. Substantial investments were also made in yield management systems, online platforms, and marketing. The group recently refinanced its existing debt by issuing £390m of seven-year bonds and was given a credit rating of B3 by Moody’s and B- by S&P. Travelodge RevPAR has grown by 11.7% pa, like-for-like, since the change of ownership in 2012 and continues to grow, as shown in Exhibit 15. Over the same period, growth in the overall UK hotel market was 4.2%

Exhibit 14: Travelodge revenue and EBITDA* (£m)

Exhibit 15: Travelodge revenue per available room (£)

Source: Travelodge. Note: *EBITDA before rent smoothing.

Source: Travelodge

Exhibit 14: Travelodge revenue and EBITDA* (£m)

Source: Travelodge. Note: *EBITDA before rent smoothing.

Exhibit 15: Travelodge revenue per available room (£)

Source: Travelodge

The healthcare portfolio

The 19 private hospital portfolio was valued at £809.6m at 30 June 2016 with a passing rent of £45.6m. It is let to Ramsay Health Care UK, a subsidiary of Ramsay Health Care, an Australian company listed on the ASX with a market capitalisation of c A$15.8bn (c £9bn). Ramsay Health Care is guarantor to the leases. It is a very substantial business with growing earnings and a growing stock-market capitalisation. It is one of the top five hospital operators globally. The UK assets leased from Secure are a significant part of its UK business, which is a core part of the group.

The UK hospitals leased from Secure represent 61% of Ramsay UK’s 31 UK hospital locations. The UK is the Ramsay group’s third-largest geographical segment after Australia and France, generating A$782m in revenue and $75.6m in EBIT (c £420m and £40.5m respectively) in 2015, from total group revenues and EBIT in 2015 of A$7.4bn and A$804m (£3.94bn and £430m). The UK leases are fully repairing and insuring with a current term to expiry of 21 years with no breaks. Rents increase by a fixed 2.75% pa in May of each year although in 2017 for the first time (and at 5 year intervals thereafter) Secure has the option for an open market rent catch up. It is too early to determine whether it would be advantageous for Secure to trigger this option.

The hospitals are well spread across the country where Ramsay UK treats self-insured patients and an increasing number referred by the NHS; admissions of the latter showing double-digit growth in 2015. Underpinned by demographic trends of an increasing and ageing population living longer with medical conditions requiring treatment, conditions appear favourable to continued growth. With the NHS underpinning a growing share of its UK revenue and insurance companies paying most of the rest, its income sources are also reliable. Ramsay has performed well both in terms of revenue and EBIT, with 18% and 18.7% CAGR since 2007 respectively.

Exhibit 16: Ramsay Health Care EBIT and revenue

Exhibit 17: % of population over 65 years old

Source: Bloomberg

Source: World Bank

Exhibit 16: Ramsay Health Care EBIT and revenue

Source: Bloomberg

Exhibit 17: % of population over 65 years old

Source: World Bank

The other healthcare asset is Central London’s only private a psychiatric hospital on Lisson Grove in Marylebone, let to Groupe Sinoue, which is 45% owned by Orpea SA, a French healthcare company listed in Paris. Its value at 30 June 2016 was £40m with a passing rent of £1.9m. Rents increase by a fixed 3.0% pa in May of each year. Orpea SA is guarantor for the lease.

Orpea is a major European healthcare provider specialising in nursing homes, post-acute and psychiatric care. It is listed on Euronext with a €4.8bn market capitalisation. Its financial performance has been strong, with revenue and EBIT growing at compound annual rates of 20.3% and 20.5% respectively since 2007, and over 23% each since 2002.

The leisure portfolio

The leisure portfolio was valued at £528.1m at 30 June 2016 with a passing rent of £31.2m. The assets are all let directly to Merlin Entertainments or guaranteed by Merlin. Merlin, the world’s second largest visitor attractions company, is a constituent of the FTSE100 with a market capitalisation of c £4.8bn.

The UK assets (Alton Towers Park and Hotel, Thorpe Park, and Warwick Castle), with a passing rent of £25.4m, are subject to upwards only uncapped RPI-linked rent reviews every June. The lease runs for 35 years from 5 July 2007 with the option for Merlin to renew for two further terms of 35 years at expiry. The German assets (Heide Park attractions and hotel), are let to Heide Park Soltau and Tussauds Heide-Metropole respectively and are guaranteed by Merlin, with a passing rent of £5.5m. The leases run until 2042 with options to extend for two further terms of the same length. The rent on the German assets is subject to a fixed annual uplift of 3.34.

The UK assets are among the country’s best-known tourist attractions, Alton Towers and Thorpe Park are the second and third most-visited theme parks in the UK with combined admissions of 3.775m people in 2015; Heide Park had 1.525m visitors (source: The Themed Entertainment Association). Worldwide, Merlin’s assets attracted 62.9m visitors in 2015 generating £1,278m in revenue, 2.3% above the 2014 figure of £1,249m.

Merlin runs 114 tourist attractions in 23 countries around the world including the Madame Tussauds, Legoland and Sea Life brands. It is the third-largest attraction operator by revenue in the world after Disney and Universal Studios and second by number of visitors. The top ten attraction operators have attracted over 420 million visits in 2015, 9.8% higher than 2014 and a number which has increased at a 5.1% CAGR since 2007. Merlin has a strong track record of growth and profitability and is highly diversified within its sector.

Exhibit 18: MRL underlying operating profit and revenue

Exhibit 19: Merlin visitor numbers

Source: Company reports. Note: Underlying operating profit is the nearest available statistic to EBIT, which we have used for RHC and ORP, going back to 2007.

Source: The Themed Entertainment Association

Exhibit 18: MRL underlying operating profit and revenue

Source: Company reports. Note: Underlying operating profit is the nearest available statistic to EBIT, which we have used for RHC and ORP, going back to 2007.

Exhibit 19: Merlin visitor numbers

Source: The Themed Entertainment Association

Financials and valuation

Given the annual fixed or RPI linked rent review profile, long leases and a lack of vacancy, costs that are substantially driven by a predictable and formulaic management fee structure, and debt costs that are fixed at least until October 2022, medium-term forecasting for Secure requires relatively little judgement. With few assumptions (future RPI, the valuation yield and non-advisory fee costs), dividend growth and total return can be reasonably forecast for several years. Prior to the acquisition of the hotel assets, the distribution formula described above indicated a cash dividend distribution potential equivalent to 3.9% of the H116 EPRA NAV per share or an annualised 11.75p. Following completion of the placing and acquisition, the same formula indicates headroom for the distribution to increase to an annualised 13.3p per share, with the first enhanced payment in Q117. By following the current market expectations for future RPI (c 3% pa) management illustrates the potential for 6.5% pa compound annual growth in dividends (2016-2022). Our own analysis supports this illustration. Further, by assuming an unchanged valuation yield, such that rent growth can be expected to translate into revaluation gains and NAV uplift, management has illustrated, again supported by our analysis, the potential for an annual compound EPRA NAV total return (the change in EPRA NAV plus dividends paid) of 10.9% pa, based on the base case assumptions discussions outlined below.

Forecasting details

Our analysis similarly assumes that asset values follow rent increases with no structural shift in valuation yields; we assume that there is no change in the rate of exchange between sterling and the euro, although the impacts are modest; we assume no change in the rate of tax payable on the German business that remains subject to corporate taxation; and we have similarly relied on the consensus for future changes in RPI to drive the 42% of the pro forma rents that are RPI-linked. We have applied similar indexation to the small amount of non-management fee costs (corporate costs, other administration costs, c 15% of total costs) that are not formulaic investment advisory fees, and therefore potentially “variable”. The investment management fee structure is detailed on page 5, and this covers the majority of the group’s overheads. All overheads, including the fees, are subject to VAT, which Secure cannot fully recover currently due to the fact that VAT is not chargeable or recoverable on its healthcare assets. Disallowable VAT currently averages at c 60% but should reduce to c 50% following the Travelodge acquisition. Corporate costs include directors’ fees and other costs of being listed. Other administration expenses include items such as audit fees and tax compliance costs. The cost ratio (recurring administrative expenses/gross profit) was a sector competitive 13.2% in 2015 and 9.3% in H116.

Exhibit 20: Cost structure analysis

H116

H115

FY15

Investment Adviser's fee

3.6

3.3

6.9

Other administrative expenses

0.3

0.4

0.5

Corporate costs

0.3

0.3

0.8

Recurring costs

4.2

4.0

8.2

Costs of secondary placing

2.1

Investment feasibility costs

1.4

Total administrative expenses

7.7

4.0

8.2

Source: Secure Income REIT data

Under an agreement entered into prior to listing, until 10 July of this year the cash required to satisfy the advisory fees was subsidised by pre-listing shareholders. During H116, Secure received a final cash contribution covering £2.8m of the £3.6m investment advisory fees.

There is a difference between EPRA earnings, which primarily adjust reported earnings for non-cash revaluation movements, and “adjusted EPRA earnings” which further adjusts for “rent smoothing” and other non-recurring costs. In H116 there was a £2.1m adjustment relating to the costs of the secondary placing, and a £1.4m adjustment for acquisition feasibility costs incurred in relation to Travelodge.

Exhibit 21: EPRA earnings and adjusted EPRA earnings

£m

H116

H115

2015

Rental income & property outgoings

45.0

52.9

46.6

Net finance costs

(24.5)

(42.4)

 

Administrative expenses & corporate costs

(7.7)

(4.0)

 

Tax

0.0

(0.3)

 

EPRA earnings

12.8

6.2

17.7

Rent smoothing

(6.6)

(6.8)

(13.0)

Costs of placing

2.1

0.0

0.0

Investment feasibility costs

1.4

0.0

0.0

Adjusted EPRA earnings

9.7

(0.6)

4.7

EPRA EPS (p)

3.4

7.1

9.8

Adjusted EPRA EPS (p)

(0.3)

5.4

2.6

Source: Secure Income REIT data, Edison Investment Research

IFRS accounting requires that where future lease income, including uplifts, is known with certainty (as is the case with Secure’s fixed rent uplift leases), it must be reported on a straight line basis; the average periodic “known” rent over the whole lease term is reported as income in each period. To avoid overstating the value of the portfolio, the positive rent smoothing adjustment (the difference between actual cash rent received and the smoothed rent reported) is offset against any property revaluation gains, thus being taken back out of net income through the revaluation line. The balance sheet recognises it as a receivable asset, which grows during the first half of the lease term and shrinks back to zero by the end. Secure helpfully publishes details of future smoothing adjustments, although the German assets will generate modest changes in the schedule from one period to another according to the £/€ exchange rate. German rents represent c 7% of the pro forma group passing rent and c £2.1m of the expected FY16 smoothing adjustment of £12.6m. The key point is that the fully repairing and insuring nature of the lease structures, and no capex requirement means that cash flow and future dividend paying capacity effectively tracks adjusted EPRA earnings. Our forecasts assume a 100% pay-out of adjusted EPRA earnings in line with management’s guidance.

We have assumed completion of both the placing (to raise £140m gross) and the acquisition in our forecasts, published for the first time. We have also included the £60m new seven-year non-recourse debt facility that is at an advanced stage of negotiation, at an assumed fixed cost of 2.75% pa. This is below the average fixed cost of the existing debt facilities of 5.2%. Management has indicated that the earnings accretion from the transaction feeds through to a 14% uplift in the expected dividend which, under the policy described above, is equivalent to a similar increase in annualised adjusted EPRA EPS. Management expects the dividend yield on EPRA NAV to represent 4.5% of NAV post the transaction compared with 3.9% before, and this is supported by our analysis.

We have assumed RPI of 2% for FY16 and, in line with the current UK RPI interest rate swap curve (source: Thomson Reuters), we have assumed 2.8% in 2017 and 2.9% in 2018. Within the predictable earnings framework outlined above it remains interesting to flex our central assumptions for alternative changes in RPI, which we do so in the Valuation section that follows.

As noted above, Secure came to market in 2014 with relatively high gearing (net LTV of 69.7% at 31 December 2014), although we would not describe this as excessive given the secure nature of its income. When run as a private fund prior to listing there was no expectation of dividend payments, allowing higher gearing and faster amortisation of debt. The net LTV had declined to 59.5% by 30 June 2016 and will decline further, to a pro forma 56%, when the equity placing and acquisition of the hotel portfolio has completed. We have allowed for ongoing debt amortisation of £4m pa which sees the substantial cash position (£89.6m at 30 June 2016) decline modestly and net LTV hit c 50% in 2020.

Distribution and total return illustrations

Exhibit 22 below illustrates the potential growth in annual distributions to September 2022 according to a range of assumptions for RPI, and based on the general assumptions outlined above. As our model is based on annual forecasts, we have shown management data from its recent presentation so as to avoid confusion. We note that our own distribution and EPRA NAV estimates are very similar to management’s illustration, being based on similar assumptions. The current RPI swap curve indicates an average 3.1% pa RPI increase over the period (to October 2016, the date of the first debt maturity), generating a potential compound annual growth in distributions of 6.5% pa. Even at zero RPI increase, the 58% of rents that are subject to fixed annual uplifts, combined with operational and financial gearing, are capable of generating a potential 4.3% under this scenario. Higher RPI growth should generate higher income and distribution potential; if RPI were to be 1% pa higher over the period, the potential annual growth rate increases to 7.0% pa.

Exhibit 22: Illustrative compound annual growth in distributions per share

Source: Secure Income REIT data, Edison Investment Research

Working with the assumption of a constant valuation yield (a pro forma 5.4% on the enlarged portfolio at 30 June 2016) it is possible to similarly illustrate how rent growth may translate into asset and NAV growth, and therefore to illustrate the potential NAV total return.

Exhibit 23: Illustration of base case NAV total return on constant valuation yield (periods ending 30 September*)

Source: Secure Income REIT data. Note: *2016 is 30 June 2016 reported EPRA NAV adjusted for placing and acquisition.

Using the consensus RPI expectation detailed above, and leaving the valuation yield unchanged, suggests a potential IRR of c 11% pa on the growth of the current pro forma NAV to the potential September 2022 NAV with dividends added back. In simple terms, the compound annual growth rate from the current EPRA NAV of 298.6p to the illustrative 527.9p (including cumulative distributions) in September 2022 is 10% pa.

Combining possible outcomes for RPI with alternative valuation yield assumptions (both higher or lower), provides the range of potential IRRs shown in Exhibit 24.

Exhibit 24: IRR sensitivity to RPI and portfolio yield (to September 2022)

+1%

RPI curve

-1%

0 RPI

-50bp

14.4%

13.8%

13.0%

11.4%

-25bp

12.9%

12.3%

11.5%

9.9%

5.4%

11.5%

10.9%

10.1%

8.4%

+25bp

10.2%

9.5%

8.7%

7.0%

+50bp

8.9%

8.2%

7.4%

5.6%

Source: Secure Income REIT data. Note: IRR is based on EPRA NAV development with dividends added back.

At a 297.5p share price, Secure is prospectively yielding c 4.8% (Edison FY17e DPS of 14.3p) and is trading just below pro forma EPRA NAV per share. These ratios position the group around the peer group median on both measures. Closer comparators, other specialist REITs whose portfolios have similarly long leases, are all on noticeably higher P/NAV ratios (Exhibit 25). For example, the three primary healthcare REITs/investment companies (Assura, Primary Health Properties, MedicX Fund) are all in the top five ranked by P/NAV, reflecting the long, secure income streams from their portfolios, largely underpinned by the NHS (either directly as tenant or indirectly through rent reimbursement to the GP tenants). Secure has the longest WAULT in the group with strong visibility of medium-term rental income growth. Open market rent increases for primary healthcare assets are currently quite modest, but should increase as NHS investment leads to more development projects upon which to base rent reviews. Secure’s rents are less directly underpinned by government than is the case for many primary care assets (although a significant share of Ramsay UK’s revenues are generated from the provision of treatment to NHS patients), but as we discuss above, we believe the quality of the tenant covenants are very strong and quite sufficient to support an increased valuation.

Exhibit 25: Secure Income REIT prospective yield versus REIT sector peers

Source: Bloomberg, Edison Investment Research. Note: Companies for which forecasts are available. Data as at 7 September 2016.

Any prospective P/NAV revaluation would have the potential to additionally gear up the illustrative NAV total return potential discussed above. What we consider to be the closest peers to Secure (the healthcare REITs/investment companies and Tritax Big Box, shown in grey in the charts) trade at an average c P/B of 1.2x, at the same rating Secure’s share price total return over the period to 2022 could increase from the base case to c 14% pa.

Exhibit 26: Secure Income REIT share price/NAV per share versus REIT sector peers

Source: Bloomberg. Note: Data as at 7 September 2016.

Share placing details

The agreed £196.2m acquisition of the Travelodge hotel assets is subject to the placing of up to 46.9m new shares to raise gross proceeds of up to £140m (137.5m net of issuance cost) by way of part-funding. The new shares represent 26.0% of the current issued share capital and are being offered at 298.6p, equivalent to the pro forma EPRA NAV per share (and compared with the 30 June 2016 reported EPRA NAV per share of 300.2p.

Exhibit 27: Pro forma financial profile

(£m unless otherwise stated)

H116*

Equity placing

Debt financing

Portfolio purchase

Pro forma

Investment property

1,378.5

192.6**

1,571.1

Travelodge transaction costs

(1.4)

1.4

-

Gross debt

(909.3)

(60.0)

(969.3)

Prepaid finance fees

13.2

1.3

14.5

Cash

89.6

137.5

58.7

(196.2)

89.6

Rent deposit

1.7

1.7

Other

(29.1)

(29.1)

EPRA NAV

541.5

137.5

0

(0.5)

678.5

Number of shares

180,344,240

46,851,976

227,196,216

EPRA NAV per share (p)

300.2

298.6

Source: Secure Income REIT data. Note: *Data as reported for 30 June 2016. **Net of £1.9m purchase costs and £1.7m funding of superior landlord rent deposits.

Prestbury will invest c £5.3m in the placing resulting in a post-acquisition shareholding of more than £104m at the placing price. Non-Prestbury members of the board will also invest c £0.1m. This further commitment to the company will maintain Prestbury’s position as one of the largest management shareholdings within the UK quoted real estate sector. The expected timetable of the main events is as follows:

Placing opened: 8 September 2016

Latest time and date for the receipt of commitments: 1pm on 4 October 2016

Results of placing announced: 4 October 2016

Admission and commencement of dealings: 6 October 2016

If for some reason the transaction to acquire the hotel portfolio should not proceed, the vendor is due a payment of £3.0m while management suggests that additional costs of c £1.0m would likely be incurred.

Sensitivities

Secure is insulated to some extent against short-term movements in the wider property market by the length and structure of its leases, the financial strength of it tenants and guarantors of the leases and the sectors it operates in, healthcare in particular. As noted above, movements in RPI affect the level of rental income on 42% of the rents of the enlarged portfolio and therefore potential distributions. In the current low inflation environment, the 58% of rents that are subject to annual fixed uplifts are a distinct advantage. The annual RPI linked uplifts are uncapped, providing protection should inflation accelerate noticeably, while in the case of the Ramsay assets (£45.6m of the total £53.1m of passing rents with fixed uplifts) the leases contain the periodic landlord option to elect for a market rental value. Other risks include:

Tenant risk: In each case the leases on the individual assets of the existing portfolio are guaranteed by the parent companies of the operators, providing an additional layer of protection should any individual asset or tenant perform badly. The parent companies of each of the existing assets are all financially strong, global, listed businesses with diverse and well-established operations. The assets leased from Secure are key operating assets to these businesses but do not dominate their outlook. Travelodge is currently a smaller and less diverse business than the existing tenants/guarantors, but, as we explain above, is well invested and growing profitably; its strong market positioning within the UK budget hotel sector should create competitor interest in its established footprint of hotels should the Travelodge business perform badly. Overall, we consider tenant risk to be low.

Property valuations: EPRA NAV is highly dependent on property valuation yields. Valuations are in turn based on likely future rental income, which in Secure’s case is highly predictable. This should mean that the value of Secure’s portfolio is relatively stable. Moreover, the majority of property returns have historically come from income rather than asset value. Given that Secure intends to hold its assets for the long term, and given that its tenants are unlikely to want to relocate, the valuation risk on Secure’s portfolio should be low.

Funding: Secure’s bank debt is fixed with the first maturity in October 2022, providing good visibility. The company is well within its borrowing covenants and has grace periods and cure rights on key covenants including the ability to inject secured cash into borrowing structures to avoid defaults.

Portfolio additions: There is strong competition for long lease duration assets backed by good tenant covenants; however, Prestbury has shown an ability to source these. Notwithstanding the competition for assets we consider future acquisitions to be likely, although difficult to predict in terms of timing and nature. We note that the board and manager are targeting dividend and total shareholder return enhancing acquisitions.

Exchange rates: Around 6% of Secure’s rental income on the enlarged portfolio is generated by the German assets and denominated in euros, substantially matched with euro-denominated debt. Pro forma EPRA NAV exposure to the euro is 3.1%.

Exhibit 28: Financial summary

Year end 31 December

£000s

2015

2016e

2017e

2018e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

Rental income

86,468

81,194

94,135

96,863

Rent smoothing adjustment

13,011

12,700

11,200

9,700

Non-recoverable property costs

(33)

(29)

(33)

(33)

Net rental income

 

 

99,446

93,864

105,302

106,530

Administrative expenses

(8,138)

(11,062)

(10,549)

(11,088)

EBITDA

 

 

91,308

82,803

94,753

95,442

Gain on disposal of investment properties

23,962

0

0

0

Change in fair value of investment properties

70,435

8,964

34,055

37,544

Operating profit before financing costs

 

 

185,705

91,767

128,807

132,985

Finance income

61

109

80

80

Finance expense

(146,613)

(49,316)

(50,807)

(50,594)

Profit Before Tax

 

 

39,153

42,560

78,081

82,471

Tax

(2,382)

(606)

(305)

(315)

Profit After Tax (FRS 3)

 

 

36,771

41,954

77,776

82,156

EPRA adjustments:

Cost of early termination of interest rate swaps

60,625

0

0

0

Other early debt repayment costs

13,666

0

0

0

Net gain/(loss) on revaluation

(70,435)

(8,964)

(34,055)

(37,544)

Gain on disposal of investment properties

(23,962)

0

0

0

German deferred tax on investment property revaluation

1,023

0

0

0

EPRA basic earnings

 

 

17,688

32,989

43,721

44,612

Rent smoothing adjustment

(13,011)

(12,699)

(11,200)

(9,700)

Adjusted EPRA earnings

 

 

4,677

20,290

32,521

34,912

Period end number of shares (m)

180.3

227.2

227.2

227.2

Average Number of Shares Outstanding (m)

180.3

191.2

227.2

227.2

Fully diluted average number of shares outstanding (m)

180.3

191.2

227.2

227.2

EPS - fully diluted (p)

 

 

20.4

21.9

34.2

36.2

Adjusted EPRA EPS (p)

 

 

2.6

10.6

14.3

15.4

Dividend per share (p)

0.00

5.88

14.3

15.4

BALANCE SHEET

Fixed Assets

 

 

1,349,547

1,576,691

1,621,946

1,669,189

Investment properties

1,349,547

1,576,691

1,621,946

1,669,189

Deferred tax asset

0

0

0

0

Current Assets

 

 

81,725

88,915

84,915

80,915

Trade and other receivables

114

67

67

67

Cash and equivalents

81,611

88,848

84,848

80,848

Current Liabilities

 

 

(32,862)

(33,102)

(33,102)

(33,102)

Trade and other payables

(29,293)

(30,576)

(30,576)

(30,576)

Taxation

(862)

(57)

(57)

(57)

Bank and loan borrowings - current

(2,707)

(2,469)

(2,469)

(2,469)

Derivative financial instruments

0

0

0

0

Long-Term Liabilities

 

 

(893,999)

(957,251)

(953,251)

(949,251)

Borrowings

(888,312)

(950,322)

(946,322)

(942,322)

Derivative financial instruments

0

0

0

0

Deferred tax

(5,687)

(6,929)

(6,929)

(6,929)

Net Assets

 

 

504,411

675,253

720,507

767,751

Deferred tax

5,687

6,929

6,929

6,929

EPRA net assets

 

 

510,098

682,182

727,436

774,680

IFRS NAV per share (p)

279.7

297.2

317.1

337.9

EPRA NAV per share (p)

282.8

300.3

320.2

341.0

LTV

61.0%

55.7%

54.0%

52.3%

CASH FLOW

Operating Cash Flow

 

 

70,131

72,635

83,553

85,742

Net interest paid

(86,743)

(49,674)

(50,727)

(50,514)

Tax

(316)

(995)

(305)

(315)

Purchase of investment property

0

(196,200)

0

0

Sale of investment property

379,316

0

0

0

Net proceeds from issue of shares

5,033

140,288

0

0

Equity dividends paid

0

(13,348)

(32,521)

(34,912)

Costs of early termination of interest rate derivatives

(60,289)

0

0

0

Other

2,004

(7,243)

0

0

Net Cash Flow

309,136

(54,537)

0

0

Opening net (debt)/cash

 

 

(1,118,544)

(809,408)

(863,945)

(863,945)

Closing net (debt)/cash

 

 

(809,408)

(863,945)

(863,945)

(863,945)

Source: Secure Income REIT data, Edison Investment Research

Contact details

Revenue by geography

Cavendish House
18 Cavendish Square
London
W1G 0PJ
020 7647 7647
www.secureincomereit.co.uk

Contact details

Cavendish House
18 Cavendish Square
London
W1G 0PJ
020 7647 7647
www.secureincomereit.co.uk

Revenue by geography

The board

Independent non-executive chairman: Martin Moore

Non-executive director: Mike Brown (Prestbury)

Mr Moore is a chartered surveyor who was CEO of M&G Real Estate from 1996 to 2012, retiring as chairman in 2013. He is a senior adviser to KKR, and an independent non-executive director of Segro, F&C Commercial Property Trust and the M&G Asia Property Fund. He is a past president and a board member of the British Property Federation, a past chairman of the Investment Property Forum and was a commissioner of the Crown Estate for eight years to 2011.

Mr Brown is CEO of Prestbury Investments LLP, investment adviser to the group. He is a chartered surveyor and joined Prestbury in 2009, at the time of the flotation of Max Property Group, a limited life opportunity fund that was sold to Blackstone in August 2014. Previously, he was deputy chief executive of Helical Bar with responsibility for investment and trading activities from 1998 to 2009, and a director of Threadneedle Property Fund Managers from 1992-1998. Mr Brown is also chairman of the Property Advisory Committee to Weybourne Partners.

Non-executive director: Leslie Ferrar

Non-executive director: Sandy Gumm (Prestbury)

Ms Ferrar is non-executive chairman of The Risk Advisory Group, a non-executive director of Penna Consulting Plc, a non-executive member of the HMRC Risk and Audit Committee and a member of the Audit Committee for the Sovereign Grant. She is a qualified chartered accountant, having trained at KPMG where she was appointed partner in 1988, a position she held for 17 years. During that time she led the firm’s international expatriate practice and was a member of the international board that ran the global tax practice.

Ms Gumm is an Australian-qualified chartered accountant and chief operating officer of Prestbury Investments LLP, investment adviser to the group. She trained at KPMG and worked there for nine years in Sydney and London before becoming group financial controller of Burford Holdings in 1995. She was appointed finance director of Prestbury Group 1997 and became its chief operating officer in 2007.

Non-executive director: Jonathan Lane

Non-executive director: Nick Leslau (Prestbury)

Mr Lane is a senior adviser to Morgan Stanley and chairman of EMEA Real Estate Investment Banking (REIB). He joined Morgan Stanley in 1999 where he served as managing director and co-head of REIB. Jonathan is a non-executive director of Grosvenor Europe and Grosvenor Liverpool Limited and is on the Advisory Board of Resolution Property Advisors. He is a member of the Policy Committee of the British Property Federation, a member of the Bank of England’s Commercial Property Forum and was formerly a member of the UK Government’s Property Unit Advisory Panel. He was previously a non-executive director of Songbird Estates Plc between 2008 and 2015.

Mr Leslau is a chartered surveyor who has been chairman and chief executive of Prestbury Investment Holdings since it commenced business in 2000 and chairman of Prestbury Investments LLP since its establishment in 2006. He was chief executive of Burford Holdings for approximately 10 years to 1997 and group chairman and chief executive of Prestbury Group from 2008. He has sat on several boards of listed and private companies including, most recently, Max Property Group. Mr Leslau is a member of the Bank of England Property Forum.

Non-executive director: Ian Marcus

Mr Marcus, FRICS, is a former chairman of the Bank of England’s Commercial Property Forum, a member of the Real Estate Advisory Board of the Department of Land Economy at the University of Cambridge, a senior adviser to Eastdil Secured and Wells Fargo Securities, chairman of The Prince’s Regeneration Trust and a member of Redevco’s Advisory Board. He is also a non-executive director of The Crown Estate and Town Centre Securities. Formerly managing director and chairman of the European Real Estate Investment Banking division of Credit Suisse, he is a past president of the British Property Federation and a past chairman of the Investment Property Forum.

Principal shareholders

(%)

Artemis Investment Management

19.5

PIHL Property

12.5

Invesco

11.0

West Coast Capital Investments

7.1

Investec Wealth & Investment

6.9

Mr Dominic Silvester

5.9

Prestbury Incentives

5.4

Old Mutual

5.3

Companies named in this report

Assura (AGR), Primary Health Properties (PHP), MedicX Fund (MXF), Tritax Big Box REIT (BBOX), Merlin Entertainments (MERL), Orpea (ORP), Ramsay Health Care RHC)


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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Secure Income REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Secure Income REIT and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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