Town Centre Securities (TCSC) owns properties in Leeds, Manchester, Glasgow and Edinburgh - just the kind of big regional cities that should benefit as the commercial property recovery spreads beyond London. Yet its shares are cheap. Having lagged the market over the past year, they trade at less than three-quarters forecast book value. With limited risk of further property writedowns and ample scope for a share price re-rating and property valuation gains as investors warm to the potential of a regional property market recovery, we think now is prime time for investors to bag a well-covered 5.1 per cent dividend yield while awaiting more upside.
- 5.1 per cent dividend yield
- 24 per cent discount to NAV
- Property markets bottoming out in regional cities
- Strong long-term track record
- Secure debt
- Stagnant rental markets
- Bias towards challenged retail sector
Town Centre was floated in 1960 by Arnold Ziff, whose father made a fortune founding the shoe retailer now known as Barratts. Its most significant development was a 1963 mall in central Leeds, the Merrion Centre, which still forms the core (27 per cent by value) of the portfolio. There is similar continuity in the management, now led by Arnold's son Edward, and in the ownership, still dominated by Ziff family members.
The family connection may explain why Town Centre Securities has proved a good long-term store of wealth. A sum of £1,000 invested in 1969, from when records are available, would now be worth £430,000. It did not emerge from the 2008-09 property crash unscathed - its portfolio deflated with the market - but unlike its large-cap brethren it did not cut dividends or raise capital.
Admittedly, growth has since been scant. Londoners "haven't noticed what's been happening in the regions", says Mr Ziff, stressing the deleterious impact of administrations on rents, particularly in the retail sector that accounts for nearly three-quarters of the portfolio. "Confidence is now improving, but there are still a lot of empty shops around." He believes rental growth will be "marginal" during the current financial year to June 2014.
Yet investors with a three-year time horizon can expect conditions to be better when they come to sell and property values could start rising much sooner. Retail sales are picking up across the country, and this should eventually feed into rental growth in Town Centre's portfolio, which consists of retail warehouses and city shops, as well as the Merrion Centre.
Property prices may start to rise much sooner as institutional investors, tired of the low rental yields on offer in London, have already started to hunt out bargains in the regions. Shop valuations as measured by IPD, a benchmark provider for institutional property investors, rose for the first time in almost two years in August. Regional high streets and retail warehouses - sectors that have suffered more than their fair share of bankruptcies - contributed to the gains.
TOWN CENTRE SECURITIES (TCSC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 204p | MARKET VALUE: | £109m | |
| TOUCH: | 202-207p | 12-MONTHHIGH: | 224p | LOW: 178p |
| FWD DIVIDEND YIELD: | 5.1% | DEVELOPMENT PROP: | £13.6m | |
| DISCOUNT TO FWD NAV: | 27% | |||
| INVESTMENT PROP: | £289m | NET DEBT: | 112% | |
| Year to 30 Jun | Net asset value (p) | Pre-tax profit* (£m) | Earnings per share* (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 269 | 7.62 | 14.8 | 10.36 |
| 2011 | 288 | 8.20 | 15.1 | 10.44 |
| 2012 | 270 | 7.25 | 13.6 | 10.44 |
| 2013 | 267 | 7.28 | 13.7 | 10.44 |
| 2014* | 280 | 7.20 | 13.5 | 10.44 |
| % change | 5% | -1% | -1% | - |
Normal market size: 1,000 Matched bargain trading Beta: 0.0 *Oriel Securities forecasts, underlying EPS and PBT figures | ||||
Town Centre's rental income will also be boosted by acquisitions and, in the longer term, development. It bought four properties for £11.6m over the year to 30 June, and only sold one for £2.7m. The extra income helped offset the impact of higher finance costs following the company's latest refinancing in late 2011, so that underlying profits remained flat at £7.3m. As for development, the company is currently building new shops and restaurants on the back of the Merrion Centre. When finished in December, they should produce an extra £650,000 in rent - 60 per cent of which is already secured through pre-let agreements - at a cost of £8m.
Such investments have increased the company's debt load, which now totals £158m, and represents a loan-to-value ratio of 53 per cent. Yet, about two-thirds of that is in debenture stock that expires in 2031, carrying minimal risk. The rest should not be hard to refinance in 2015-16.
