Foresight Solar Fund Ltd earlier this week said it remained focused on delivering income and capital growth for shareholders amid expectations of falling UK interest rates.
The company told investors that it has maintained a consistent dividend since listing and is currently offering a yield of approximately 10%. Chief executive Toby Virno said, “We’ve never missed a payment,” and indicated that lower interest rates may support the share price due to the historical correlation between bond yields and valuation.
The company welcomed the economic outlook, suggesting that increased activity may lead to higher electricity demand, which would be favourable for operators of generation assets.
Foresight Solar Fund’s Toby Virno joined us in the studio to talks us through it.
Proactive: I'm joined by Foresight Solar Fund’s Toby Virno. Toby, very good to speak with you. The Bank of England's Monetary Policy Committee meeting is in a couple of weeks at the beginning of May. The market is expecting it to announce lower interest rates. Is that likely to be positive news for Foresight Solar?
Toby Virno: Likewise, Stephen, good morning and thank you for having me. Our expectation aligns with that of the market in that we too anticipate there will be further rate cuts this year. And we welcome this as it's being supportive of businesses at this time. In general, lower interest rates will promote economic growth. And from an operational perspective, a more active economy should lead to higher electricity demand as the country produces and sells more products and services, which for an operator of generation assets is a good thing.
In terms of the impact on share price, Foresight Solar has historically shown to be strongly correlated to UK government bonds. And simply put, this means that our share price goes up as interest rates go down, and vice versa. So if interest rates are now coming down, that should be good news to the share price.
That's just one factor though, and we're not simply at the mercy of the bond markets. We've not stood still in light of the challenging macroeconomic environment. What we've done is to take a series of measures to prove our valuations, generate cash, and return capital to our shareholders. All of this is to try and narrow the discount to net asset value to which shares currently trade.
Proactive: Toby, have you adjusted your strategy since the expectation is that interest rates will fall, even if not to the record low levels seen a few years ago?
Toby Virno: I think the final part of your question is really the key point here. Whilst we expect that there will be further falls in interest rates, we don't expect that they'll return to the historic low levels of the last decade any time soon.
When Foresight Solar first listed in 2013, interest rates were close to 0%. And in that context, the cash yield alone of the operational portfolio, which provided our shareholders with a mid-single digit return through the dividend income, was a highly compelling investment proposition in its own right.
In this higher interest rate environment, understandably, investors need more, and over the past two years we have further strengthened our dividend offering, passing through to shareholders the benefit of higher inflation, which for Foresight Solar leads to increased revenues.
We recognize that we need to do more and haven't stopped there. So our strategy continues to be focused on delivering capital growth alongside this strong income. And that's where the proprietary development pipeline comes in.
The operational portfolio will continue to generate revenue, and that will continue to be distributed to shareholders in the form of quarterly dividends. But on top of that, our solar and battery storage pipelines — nearly a gigawatt worldwide under development — will be brought through development, construction, and into commercial operations.
As they do so, they'll become increasingly valuable. At each stage of that development cycle, we'll have the opportunity to either sell the projects to crystallize that value, or otherwise commit the resources to finance those projects through to the next phase. Thereafter, they can start producing, selling electricity, and growing profits for the company as a whole. The ownership structures of our proprietary development pipelines allow us to capture the value uplift entirely for the benefit of our shareholders.
Proactive: Overall, what would you say are Foresight Solar's competitive advantages?
Toby Virno: Foresight Solar's investment proposition is built on four key pillars.
Firstly, income and growth strategy. As we've just talked about, since IPO we've consistently delivered a steady income with a growing dividend. We've never missed a payment. And at current share prices, our shares yield around 10%. Looking ahead, with the benefit of our proprietary development pipeline activity, we are offering the potential to enhance returns over and above this.
Secondly, geographic diversification. As nations worldwide transition to a low-carbon economy, our strategic focus on not just the UK but also mainland Europe provides shareholders with exposure to a range of different support mechanisms, regulatory frameworks, and markets — and also varying levels of solar irradiation with different weather patterns. This continental footprint helps us to maximize returns and deliver and mitigate risks in an efficient manner.
Operational excellence is our third pillar. Foresight Solar has outperformed its production forecasts in eight of the eleven years since we employed our dedicated portfolio team — involved from construction through to operations — who track performance and maintain availability to deliver significant value uplift for shareholders.
And finally, specialist investment management. Foresight Group is a leading real assets manager with offices in eight countries around the world and over 180 infrastructure professionals. Foresight has got international scale and the local network and experience to deliver the strategy and contribute to Foresight Solar’s long-term success.
Proactive: Toby, I hope you'll continue to keep us updated on your progress. Thank you very much for speaking with us today.