Alexander-bisop49 days ago

Other

LONG

An idea in the spirit of Max's workshop today

The current PE ratio of the S+P is around 39 which puts it at the second highest after the 2000 tech bubble indicating it is extremely expensive. Dividend yields are at record lows. Price/book values are high. The UK has one of the cheaper markets globally and has been rather unloved during Brexit. The price to book value and PE ratios are all still rather low , especially compared to the US. Yields are at multi year highs. The gap between gilts and yield from property is at a record high in the UK. Historically low interest rates are positive for REITs. The vaccination program is ahead of most countries and lockdown should mostly end by the summer so rent collection should improve. Custodian REIT,(CREI) has experienced, conservative management and the gearing is quite low at approx 28%. You can buy currently at about a 6% discount to NAV and PE around 13. Cheaper things compared to NAV are available but the market usually prefers to pay more for REITs with better management. The average price before covid for CREI was about 1.1 x NAV. The most recent valuations were from December 2020, right in the middle of the covid during a time of poor rental collection so they are quite conservative. CREI has been dragged down by exposure to high street retail, the ‘retail apocalypse’ but this is only about 10-12% of the total properties. The management has been selling these properties and plans on reducing that figure to closer to zero which could be a catalyst to improve sentiment . There has been a golden cross, the price has formed a saucer bottom after the covid crash, POLR north. Buying at around 0.905, the bottom of this latest range , SL around 0.79, TP around 1.13. The RR ratio should be around 2 to 1 and the dividend yield should be around 7-7.5% in the meantime ,assuming the rent collections look OK for 2021. In a recent interview Richard Shepherd-Cross, the managing director stated a 5-6% yield is safe with reduced rental collections from covid . Risks: more covid variants, high beta to a stock market crash starting in the US, political problems in the UK around Scottish independence/brexit, slower economic growth in the UK post brexit as stated by the LSE and others, cyclical slowdown in the UK commercial real estate market, rising interest rates. Even after disposing of the high street properties the market may still value CREI low because of the exposure to the retail/warehouse sector after covid due to the pervasive belief in online shopping growth, stay at home working and the ‘retail apocalypse’ . I'm at around 3.5%/portfolio and would like to increase to about 5% if the price drops to around 90 pence and cable drops to around 1.355, so benefiting from sterling as an additional tail wind. Any comments/suggestions/questions welcome

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