Where there's Mucklow, there's brass

West Midlands-based A&J Mucklow was founded in 1933, and has been developing and investing in commercial and industrial property in the Midlands ever since.

Having ridden out many a property cycle, the group converted itself into a real-estate investment trust (Reit) in July 2007, cannily cutting its borrowings at the top of the market by selling off a large slug of its investment property. Valued at £220m at the end of last year, the portfolio mainly consists of industrial and commercial buildings in the Midlands. Most of its industrial estates are located close to motorway junctions, and the majority are modern, multi-let estates (often developed by Mucklow) let to good-quality tenants. The largest single tenant accounts for 3 per cent of the annual rent, and the overall occupancy rate is respectable at 92 per cent.

With borrowings down to just 20 per cent of net assets, Mucklow's bosses have indicated that they are looking to take advantage of weak property prices by making acquisitions. To this end, Mucklow is seeking lot sizes of between £3m-£10m within a 50-mile radius of Birmingham. A long-established expert in its field, it should be capable of picking up some shrewd deals.

Obviously, Mucklow has not been immune to the recession. In the first half of 2008-09, £43m - or 16 per cent - was chopped off the value of its portfolio, and City analysts expect a further paper loss of at least £15m when the company reports its full-year results early next month. But, excluding valuation losses, underlying operating profits for the first half were resilient at £6.5m (£8.7m), as net rental income held fairly steady.

Going forward, any increase in profits will rely heavily on the impact of rent reviews and new lettings. Conversely, income could be hit as some tenants fail. These pluses and minuses were clearly evident in the first four months of 2009. In that period, Mucklow leased 87,000 sq ft of space, but had 109,000 sq ft of space returned, mainly due to tenant insolvencies. And empty space now comes with an additional cost since the abolition of rates relief on empty industrial properties.

Elsewhere, Mucklow's stock of development land should not be underestimated. Granted, it will be a while before housebuilders come looking for land, but pre-let deals are still a possibility. For example, Mucklow is negotiating with a major retailer that wants to lease a 130,000 sq ft distribution depot in Coventry. Mucklow has now obtained outline planning consent for the property, for which build costs of £9m are estimated. When the depot is complete, it will boost annual rental income by £1.3m.

As a Reit, Mucklow is obliged to distribute its rental profits to shareholders. However, that payout could come under pressure because it must also be covered by rental income, less ongoing costs. As things stand, the payout for 2008-09 forecast by Mucklow's adviser, Arden Partners, is just about covered by earnings (see table). If too many tenants fail, that delicate balance may change. That said, the company's bosses will try hard to maintain the dividend if only because 36 per cent of the equity is owned by the Mucklow family, for some of whom the dividend is very important. That may be why the directors have taken a 10 per cent pay cut for 12 months.