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UK Mortgages dividend uncovered until 2020

UK Mortgages dividend uncovered until 2020 – UK Mortgages Limited has announced results for the year from 1 July 2016 to 30 June 2017. The net asset value has fallen from 94.95p to 89.36p as dividends for the year of 6p were paid from revenue of just 0.41p per share with the balance coming from capital.

The chairman says that the process of investment has taken longer than envisaged when the fund was launched. He says that it was always expected that the early dividends would be uncovered to some extent, given the time involved in negotiating and structuring investments, as well as the “back-loaded” nature of returns from the securitisation process. Dividends to date have been paid on the basis that future revenues would not only cover current year dividends, but would also generate a surplus sufficient to repay the capital previously distributed. It is therefore vital that at each
quarterly dividend meeting the Board confirms with the portfolio manager that these assumptions remain valid.

Once the exact terms of the Oat Hill securitisation were known (the securitisation of the £590m book of mortgages that they bought from Capital Home Loans), the Board and manager revisited their cash flow models to consider the profile of expected returns. They say that, whilst it is estimated that the 6p dividend will not be covered by income until 2020 when the Oat Hill securitisation is refinanced and much of its original purchase discount is unwound, the manager’s latest modelling confirms that the original investment case and total return estimates remain valid. In addition, future transactions have the potential to improve returns, not least because any new fund raising can be deal-specific, avoiding the cash drag that hampered UK Mortgages in its first year.

They then go on to say that “Nevertheless, the pace of investment means that full coverage of the dividend will take longer than initially anticipated”. The response to that has been to agree a temporary reduction in the portfolio management fee from 0.75% per annum to 0.6% with effect from the financial year beginning 1 July 2017. The Board will review this arrangement at the end of the 2021 financial year, or sooner should market conditions change.

UKML : UK Mortgages dividend uncovered until 2020

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