Town Centre is acknowledged as a pioneer of the mixed-use property scheme and the company's investment portfolio currently compromises an estate of over 900,000 sq ft of retail space and 360,000 sq ft of prime office space in the UK including major retail developments, Merrion Centre in Leeds and Urban Exchange in Manchester. Overall, occupancy rates are almost 98 per cent across the book.
Family holdings
Town Centre is now run by Mr Ziff's son, Edward, who is chairman and chief executive, having been with the company for 32 years. Through direct holdings and beneficial interests, Edward Ziff controls 47.8 per cent of the issued share capital and his brother, Michael, owns a further 31.1 per cent. These sizeable holdings limit the free float and liquidity in the shares, but they are also highly supportive of a progressive dividend policy which has seen the pay-out more than double in the past decade to 10.44p a share.
Town Centre Securities is a real-estate investment trust, so it is obliged to pay out 90 per cent of the profits of the property rental business, after certain deductions, to shareholders as a Property Income Distribution. Underlying EPS of 13.8p in the financial year to 30 June 2012 easily covered that payment so, with the shares offered in the market at 199p, the dividend yield of 5.3 per cent is both attractive and secure.
However, the shares have yet to join in the property party and are trading in line with my buy-in price of 199p ('A high-yield property play in the north', 18 Feb 2013). A large family holding and a business focused on the north of England market may not appeal to the hot money which has been zoning in on commercial property players exposed to the buoyant London and south-east real estate markets. But there is undoubted medium-term value on offer here as Town Centre's equity trades a hefty 30 per cent below triple net asset value of 286p a share. That's despite the fact that the portfolio has minimal voids and generates profits that easily cover annual running costs to enable the board to declare rising and attractive dividends.
Sound finances
There are no debt concerns, either. Balance sheet gearing may look high at 108 per cent of shareholders' funds of £140m, but it's worth noting that £106m out of total net borrowings of £153m relate to a debenture that runs until 2031 and carries a coupon of 5.375 per cent. Town Centre also has a revolving credit facility of £90m with three banks, which are not due for renewal until 2015 and 2016, so there are no pressing debt issues. Moreover, Town Centre's investment property portfolio brings in secure income streams and is value enhancing given the healthy gap between its underlying property yields and average weighted cost of debt of only 4.6 per cent.
Ahead of a trading update in mid-May, I remain a buyer of Town Centre's shares on a bid-offer spread of 195p to 200p. I still believe that a run up in the share price to around 230p is possible, to provide us with 15 per cent upside.
Terrace Hill on solid foundations
Shares in Aim-traded property developer and investor Terrace Hill (THG: 18.5p) surged almost 40 per cent after I recommended buying at 15.4p three months ago, but have drifted back on profit-taking. This looks another decent buying opportunity to me, especially as the investment risk has improved markedly in the interim and the shares still trade 33 per cent below EPRA net asset value of 26.8p.
In fact, once you factor in the net proceeds from a site sale and forward funding agreement for the company's 1,104-unit student accommodation scheme in Southampton, and the disposal of the majority of its remaining residential assets, Terrace Hill's net borrowings have been slashed from £47.2m to £20.2m. On that basis, balance sheet gearing drops from 78 per cent to 34.6 per cent of shareholders' funds of £58.4m.
We can also expect further debt reductions, because Terrace Hill is also selling off the remainder of the residential portfolio, comprising 35 units in Manchester and the south west, to owner-occupiers. These are in the books for £5.5m and are expected to "achieve prices at levels in excess of book value", according to chief executive Philip Leech. The company is due to announce its half-year results in the middle of next month and expect more good news on this front.
We can also expect some decent news flow on Terrace Hill's core foodstore property development business which has a secure pipeline of projects with a build-out value of over £240m. Clients include Sainsbury and Asda. In terms of the pipeline, three new stores have been pre-let, forward funded and are under construction; another four sites are in the planning process; and nine additional sites are under consideration. Forward funding purchases mitigates risk and underlines the profit potential from these schemes when supermarkets complete on their purchases.
So, given these positive fundamentals, the strengthening of the company's balance sheet and positive news flow expected in less than six weeks time when the company reports its financial results, I can see scope for the share price discount to book value to narrow significantly. I have a target price of 23p on a six-month basis which, if achieved, would provide us with almost 25 per cent upside with the shares currently priced on a spread of 18p to 18.5p.
MORE FROM SIMON THOMPSON ONLINE...
My next article will appear online by 12pm on Friday 3 May and will included updates on Heritage Oil (HOIL), Polo Resources (POL) and IQE (IQE). I have also written four other online articles so far this week, all of which are on our home page:
'Seasonal stock picking strategies', 30 Apr 2013
'Small cap stock picks', 1 May 2013
Please note that I am working my way through all the recommendations I have made in the past six months and will update all of them as soon as I have been able to reassess the investment case; reappraise new analyst research; analyse any company announcements since I went on leave to write my book at the end of March; and talk to management of the company's concerned if need be. Rest assured I will update the positions as soon as possible.
■ My new book Stock Picking for Profit will be published at the end of May and is being sold only through YPDBooks at £14.99 plus £2.75 postage and packaging. Pre-orders can be placed online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213.
