The boom in ‘alternative income’ continues apace with four high-yielding property and debt funds raising nearly £500 million and a fifth unveiling plans to attract a further £100 million.
PRS ‘significantly oversubscribed’
Half of this total will go to PRS Reit (PRS), the new government backed real estate investment trust which last week hit its £250 million target but had to scale back investors’ applications after its share offer was ‘significantly oversubscribed’ by institutional and private investors.
The government’s Home and Communities Agency was a cornerstone investor in the flotation, putting in £25 million for a 9.99% stake. PRS is the UK’s first Reit focused on the private rental sector. It aims to alleviate the shortage of affordable, quality homes for young people struggling to get on the property ladder.
After costs the trust’s investment adviser Sigma Capital Group will have £245 million to assemble a portfolio of newly-built rental properties in the south of England outside London. It has identified a pipeline of 2,535 homes worth £375 million with around £72 million completed or under construction.
Investor demand was spurred on by the sense of strategic opportunity combined with the company’s target to generate a 6% dividend yield as part of an annual total return of at least 10%. Trading in the shares will start on the London Stock Exchange tomorrow.
Graham Barnett, chief executive of Sigma Capital, said: ‘We are tremendously excited about prospects for The PRS Reit. There is an acute shortage of new rental homes across England and Sigma’s success in the private rented sector clearly demonstrates the unmet need for a high quality, professionally managed family homes in the English regions.’
Meanwhile, Sequoia Economic Infrastructure (SEQI), one of only two listed infrastructure debt funds, also continues to draw in investors. Its latest share issue raised £160 million, £35 million more than it planned when announcing the open offer and placing of new shares at 105.5p earlier this month. It also said the issue had been ‘very significantly oversubscribed’.
The new shares, which will start trading tomorrow, will lift the fund’s market value to around £825 million. SEQI has grown quickly since raising £150 million at its flotation in March 2015, with investors liking the fact that half of the portfolio is invested in floating rate or inflation linked debt, whose coupons will rise as interest rates and the cost of living advance.
At 112p, up a penny today, the shares trade at an 8.8% premium over their estimated net asset value per share of 102p, according to Morningstar. The portfolio is valued monthly and at 28 April stood at 101.07p. It aims to pay a total of 6p in quarterly dividends each year and annual NAV growth on top of that of 1-2%. In the past 12 months the portfolio has exceeded its target with a 10.7% total return. The shares yield 5.4%.
Income investors also snapped up the chance to buy shares in CatCo Reinsurance Opportunities (CAT). A tap share issue priced at 2% premium above its NAV at 30 April was designed to capitalise on ‘mid-year opportunities’ spotted by the manager Markel CatCo. It drew in $45.9 million (£35.7 million) which increases the fund’s market value to about $510 million (£362 million), according to the company’s broker Numis Securities.
You don’t get much more ‘alternative’ than this London-listed company which invests in reinsurance contracts through a Bermuda-based ‘master fund’. It effectively uses investors’ capital to provide a back-up to the reinsurers that take on the big, catastrophe risks that everyday insurers don’t want to handle. Although there is a risk of a hurricane or earthquake wiping out 10% of the fund’s assets, in return CatCo receives a steady stream of premiums enabling it to target a dividend of 5% over dollar Libor, the US inter-banking lending rate.
At $1.30, down 0.8% today, the shares stand at a 3% premium above their estimated net asset value (NAV), according to Morningstar, an improvement on last October when the stock traded at a 7% discount to NAV. They yield 5.5% and have delivered an annual 9.6% return since launch in December 2010, according to Numis.
Another brick in the wall
Direct lending funds have got in the action too. Hadrians’s Wall Secured Investments (HWSL), an investor in secured loans to UK small and medium-sized businesses, failed to hit the magic £100 million level at its flotation last June, but has done so now with a £45.2 million issue of C-share or ‘conversion’ shares. These will merge with the company’s existing ordinary shares in the next six to nine months when the money has been invested.
The fund, managed by Hadrian’s Wall Capital, is backed by Old Mutual Global Investors which took a 25% stake at launch. It has said it is on track to deliver its target 6% dividend rate. The shares, down a penny to 107p today, stand on a 9.3% premium to their estimated NAV per share of 97.9p, according to Morningstar, and yield 5.6%.
Sweet debt income
Honeycomb (HONY) will hope to do even better after announcing plans to raise up to £105 million with a placing of 10 million new shares. These have been priced at £10.50, a 5.8% discount to their closing price last Wednesday but some way above the Morningstar estimated NAV per share of 994.5p. The shares, up 15p to £11.30 today, stand at a 12% premium to NAV.
Heavily backed by Mark Barnett at Invesco Perpetual, Honeycomb has previously raised £200 million since launching in December 2015. The trust invests in UK consumer and business loans sourced through brokers such as Freedom Finance and Green Deal Finance. It is managed by Pollen Street Capital, which last week announced plans to merge with MW Eaglewood, the manager of P2P Global Investments (P2P), the biggest direct lending fund which struggled after raising too much money in 2015.
That’s a mishap that none of these fund raisers will want to repeat, notwithstanding the satisfaction of giving yield-hungry investors the dividends they want.