London & Stamford's star has faded since the heady days of 2009, when its veteran managers Raymond Mould and Patrick Vaughan were feted across the property industry for a number of perfectly-timed acquisitions. Yet the merger in January with retail landlord Metric Property Investments has brought fresh energy and strategic focus to the company, paving the way for a return to outperformance.
- Experienced, entrepreneurial management
- High dividend yield
- Improving sentiment towards regional property
- Focus on adding value
- Uncovered dividends will weigh on book value
- Ongoing exceptional losses
Renamed LondonMetric (LMP), the company is now led by Mr Vaughan as chairman and Andrew Jones of Metric as chief executive. With the exception of Mr Mould, who has taken the opportunity to retire, the new executive team reunites the key figures at Pillar, a portfolio of retail parks founded by Mr Mould and Mr Vaughan in 1991 and sold to British Land in 2005.
They want to refocus LondonMetric on the retail sector - but with a difference. Instead of concentrating exclusively on shops, of which they readily admit Britain has too many, they will also invest in the distribution centres retailers need to meet online orders. At the same time, Mr Jones is not ruling out the kind of opportunistic deals for which London & Stamford became renowned.
This strategy has involved reshaping the portfolio. Intriguingly, the company is selling off its prime London assets and replacing them with higher-yielding ones outside the capital - a call that remains contrarian after three years of relentless outperformance by London.
Three big deals, all concluded since the merger, illustrate the direction of travel. First, the company spent £92.4m on a portfolio of six retail parks - a deal Mr Jones labels "opportunistic". It then bought Primark's British distribution hub for £60.5m. Finally, it launched a road show in London and Asia to sell the company's London flats. So far sales have been agreed worth £59.6m on 116 units out of 520. The company has also put one of its two City offices up for sale.
The risk with this strategy is that income merely replaces capital growth as low-yielding London continues to pull head of the provinces - the London flats accounted for virtually all the company's 1.7 per cent valuation improvement over the year to 31 March. Yet Mr Jones reckons "good secondary" properties will now start to outperform in many sectors, as the hunt for yield finally spreads beyond the M25.
LONDONMETRIC PROPERTY (LMP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 115p | MARKET VALUE: | £722m | |
| TOUCH: | 114-115p | 12-MONTH HIGH: | 122p | LOW: 103p |
| FWD DIVIDEND YIELD: | 6.3% | TRADING PROPERTIES: | £3.8m | |
| DISCOUNT TO FWD NAV: | 1% | |||
| INVESTMENT PROPERTIES: | £1.11bn | NET DEBT: | 78% | |
| Year to 31 Mar | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 120 | 104.8 | 24.8 | 4.4 |
| 2011 | 123 | 56.8 | 8.3 | 6.3 |
| 2012 | 116 | 5.0 | 0.5 | 7.0 |
| 2013 | 108 | -9.0 | -2.4 | 7.0 |
| 2014* | 117 | 51.2 | 6.6 | 7.3 |
| % change | 8% | - | - | 4% |
Normal market size: 5,000 Matched bargain trading Beta: 0.5 *Investec Securities estimates | ||||
There are also two practical reasons why it makes sense for LondonMetric to switch out of prime. First, Mr Vaughan and his highly-experienced team can justifiably claim a competitive edge in shops that they do not have in other property sectors. Relationships stretching back decades should enable them to buy or develop shops and e-commerce hubs that meet retailers' fast-changing needs.
Second, the company currently pays uncovered dividends. Having sold a portfolio of 17 distribution warehouses in April 2012 and its stake in Meadowhall shopping centre in October, underlying profits fell 12 per cent to £21.3m over the year to the end of March compared with £38m paid out. Mr Jones believes the current high level of dividends is sustainable as long as the proceeds of its residential and office disposal programme can be reinvested in regional retail or industrial stock - a process he expects to complete by next March.
Uncovered dividends are a problem because, in the absence of portfolio growth, they eat into the company's book value. That is one reason why LondonMetric's book value has been falling for the last two years. Another is so-called exceptional costs, which last year wiped out reported profits entirely.
