London and Stamford makes its mark

The 43 per cent hike in full-year dividends from property investor London & Stamford, unveiled at its annual results on 26 May, took the City by surprise. The property company was founded in 2007 as a vulture fund to take advantage of the collapsing market and, with £157m of cash, is still far from fully invested. That's an unusual profile for a company whose shares yield 4.8 per cent on 2010-11's payout - more than shares in old-timers British Land or Land Securities.

The payout is a measure of how far London & Stamford (L&S) has come since it spent its first trading year waiting for the crash. It also because it's better structured. It converted into a real-estate investment trust (Reit) last October, at the same time bringing management in-house and moving its shares from Aim to the main market, where they are now in the FTSE 250 index. Reits pay no tax, but must distribute 90 per cent of their income in dividends - hence the attractive yield.

More importantly, its bosses have splashed cash on some well-timed deals. In particular, L&S bought a 50 per cent stake in British Land's super-prime shopping centre Meadowhall, Sheffield, in February 2009. It has also picked up some less sexy properties on high yields, notably three portfolios of industrial warehouses last year for £414m.

Rental income more than doubled last year as a result of these and other acquisitions, supporting an underlying profit of £20.1m (ie, stripping out revaluations and other paper gains). That figure is crucial because it forms the basis of dividends. This year the dividend should rise substantially, too, as last year's profit was all earned in the second half.

Although L&S is now a Reit - which implies a dull-but-reliable rent-collection vehicle - management is determined not to fall into the trap that caught out other Reits during the crisis. "What we won't do is buy assets, watch them appreciate and then watch them depreciate again," insists finance director Martin McGann.

That claim will only be tested when the next property crash comes, but one deal last year bears it out. The company sold the Racecourse Retail Park, Aintree, to the Crown Estate for £102m, having bought it from Land Securities for only £61m in June 2009 - a gain of 67 per cent in little more than a year.

L&S is also different from the established Reits in its scope. It has signed two deals in residential property - a sector most institutional property players avoid. The first was £41m-worth of apartments in Arsenal Football Club's former stadium in Highbury Square; the second was at Bridges Wharf, a Thames-side development in Battersea. Both were keenly priced because the sellers wanted to sell in bulk and quickly, and rental growth prospects are bright.

More deals are expected, although Mr McGann freely admits progress has been slower than hoped. Having been outbid on a couple of chunky projects last year, the company still has roughly £1bn of firepower, including debt and equity. Management is currently in negotiations on further deals, but Mr McGann insists the company "won't overpay".

If the deals don't materialise, L&S will have lots of low-yielding cash on its balance sheet acting as a drag on income growth. It's also a concern that L&S's shares already trade at about parity with forecasts for year-end net asset value, which means that a familiar route to a higher share price is blocked.