But updating profitable holdings is easy: researching and forming reasoned advice on losing positions is another matter entirely, as it raises questions about your judgement, even if on reflection you conclude that the investment case is still sound. And that is the task facing me this week as two of my real estate holdings have not worked out as I had planned.
Value in First Property
Aim-traded commercial property fund manager First Property made the smart move to get out of the UK commercial real estate market before the bubble burst and turn its attention to Poland, the only country in the EU that didn't fall into recession during the financial crisis in 2008-09.
It proved a sensible decision, too, as the company has not only benefited from the upside on two directly held office properties in Warsaw, but it has been well-placed to take advantage of the funds flowing into eastern European property. However, the ongoing eurozone crisis has materially changed the investment backdrop and shareholders will acknowledge that suspending purchases of properties by Fprop Opportunities, the company's Polish focused fund, is only sensible in the circumstances. The real economy in Poland is still performing well but, with capital markets so volatile, it pays to be risk averse right now.
It may, therefore, come as surprise that this sea-change in the investment climate has not stopped the company in its tracks. That's because First Property's management team, led by chief executive Ben Habib, made another shrewd decision a few years back to capitalise on the significant falls in UK property by setting up a £106m fund. That fund is now over 90 per cent invested and, with the portfolio of properties trading well, discussions are ongoing with a number of institutions about establishing a new UK fund to replicate the existing one. As a result, First Property's total assets under management have held steady at £366m year on year despite the weakening of the euro which impacts valuations of central European properties.
It also means that full-year results due on Monday 11 June are going to be bang in line with analysts' estimates. It may also come as a surprise, given this uncertain backdrop, that First Property has grown earnings strongly in the past year. Broker Arden Partners is forecasting pre-tax profits of £3.8m and EPS of 2.5p for the 12 months to the end of March 2012, up from £3m and 2p, respectively, in the prior financial year. On that basis, the shares (FPO: 17p) are rated on seven times earnings. There is substantial dividend support, too, because, even if the board only holds the payout at 1.06p, the yield is over 6 per cent. That was one of the reasons I recommended buying First Property's shares at 18.5p in February last year. It is also a key factor why they have held up so well. In fact, the 8 per cent share price fall is minor compared with the 24 per cent decline in the FTSE Aim index. Moreover, factor in 1.07p of dividend income in the past year and my paper loss is almost wiped out.
Investors will also be attracted by First Property's significant asset backing. As Chris Thomas, an analyst at Arden Partners, rightly points out: "The company's own cash, property and investments are worth nearly 20p per share at market value." In other words, that leaves a profitable fund management business in the price for nothing.
So, even factoring in the worrying eurozone situation, I still conclude that there is value in First Property's shares at 17p. Admittedly, that could take time to realise. Nonetheless, I would use short-term weakness as a medium-term buying opportunity.
Food for thought at Terrace Hill
Shares in Terrace Hill have performed poorly even though the Aim-traded property development and investment company is making progress selling off its residential property to focus on more profitable food store developments.
Last month, the company's 49 per cent-owned associate disposed of a residential portfolio for £75.3m and a few weeks ago Terrace Hill sold a site in Whitchurch, Shropshire, to Sainsbury's. New developments include a new 100,000 sq ft store at Wessington Way, Sunderland. Construction on the £35m scheme, pre-let to Sainsbury's, has just commenced, having been fully funded by Osprey Equity Partners, which de-risks the investment. Completion is scheduled for March and around the same time a 50,000 sq ft store in Sedgefield, also pre-let to Sainsbury's, completes, too. Other schemes include a 41,080 sq ft Asda supermarket in Skelton, East Cleveland, due to complete early in 2013.
In my view, investors are ignoring the fact that Terrace Hill has a secure pipeline of foodstore projects, with a build-out value of £240m, so it's hardly short of work even if market leader Tesco is scaling back UK store expansion. That news has dampened sentiment and means that Terrace Hill's shares are now priced a hefty 60 per cent below EPRA net asset value of 25p. True, debt maturity on the company's loans is short-dated but, with a loan-to-value ratio of 48 per cent, refinancing should not be an issue.
It's worth noting, too, that the chairman, chief executive and finance director were all buying shares at prices ranging from 11.6p to 12.25p in March. That's hardly a sign of a company in financial distress as the share price implies. So, even though the shares are at a 12-month low of 9.5p (TIDM: THG), I can see clear medium-term catalysts for a re-rating as food store schemes complete and Terrace Hill banks profits. I remain a patient buyer at this depressed level.
**Simon will be presenting at the London Investor Seminar on 18 June - book your place today.**
