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Dividends rise at Local Shopping Reit

RESULTS: A solid operating performance from Local Shopping Reit was offset by falling valuations
May 24, 2012

Local Shopping Reit demonstrated the pernicious effect of high gearing when property prices are falling. The company’s portfolio of high-yielding corner shops only fell 2.8 per cent in value over the half, but that had a big impact on book value because the company operates at a gross loan-to-value ratio of 72 per cent.

IC TIP: Buy at 43p

Valuations aside, the portfolio continues to generate strong cashflow. Like-for-like rental income fell 1 per cent as some new leases were rebased at lower levels. But the vacancy rate remained steady at 10.6 per cent and recurring income increased thanks to fees for managing joint ventures. The company has formed three funds over the past 18 months, two with asset management companies keen for exposure to local shops or convenience stores and one with a UK bank that needs to unwind distressed loans (and prefers to remain nameless). As the company automatically distributes 100 per cent of its recurring income, the dividend increased.

The rental yield on the wholly-owned portfolio is now 8.21 per cent - higher than its average cost of debt at 5.5 per cent; the same gearing that is magnifying falling property values is also boosting the yield.

Following downgrades, broker Espirito Santo expects adjusted full-year NAV of 65p (2011: 76p).

LOCAL SHOPPING REIT (LSR)

ORD PRICE:43pMARKET VALUE:£ 35m
TOUCH:42.5-44p12M HIGH / LOW65p42p
DIVIDEND YIELD:9.5%TRADING PROP:nil
PREMIUM TO NAV:-27%
INVESTMENT PROP:£187m*NET DEBT:261%

Half-year to 31 MarNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2011712.53.01.90
201259-3.3-4.12.00
% change-17--+5

Ex-div: 30 May

Payment: 29 Jun

*Including investments in joint ventures