Bearing this in mind, I noted with great interest that Aim-traded property company Terrace Hill (THG: 26p) is making a £95m acquisition and has also successfully completed a £170m share placing. This is transformational for a company with a market value of £47m. Of significant interest too is news that the company is moving its listing from the Alternative Investment Market (Aim) and will transfer to the Official List on Thursday, 22 May.
Implications of corporate transactions
Post the acquisition and share placing, and a 10-for-one share consolidation, I calculate that Terrace Hill will have almost 140m shares in issue, a pro-forma net asset value of £308m (equivalent to 23.2p a share) and at the current share price a market capitalisation of £363m. This would make the company a shoe in for automatic entry into the FTSE SmallCap index. The placing was priced at 22.5p a share before the share consolidation, and the consideration for the acquisition was satisfied by issuing shares at 22.13p.
It looks an interesting deal as Urban & Civic, an unlisted property group founded in 2009 by Nigel Hugill and Robin Butler, specialises in strategic residential land developments in key growth areas of the UK. Urban & Civic owns two large strategic residential land sites in the UK which have a resolution to grant outline planning consent for 11,200 houses with a build out value (or GDV) of £2.7bn, assuming a build out of residential properties at current market prices and factoring in the open market value of commercial property.
The first development is the 1,432 acre Alconbury Weald site near Huntingdon in Cambridgeshire which already has a resolution to grant outline planning consent for 5,000 houses and 3.1m sq. ft. of commercial space with a GDV in excess of £1.3bn. Terrace Hill, which will change its name to Urban & Civic post completion of the acquisition, expects to receive the required approvals to allow works to start in the third quarter this year.
Urban & Civic’s second development is a 50 per cent interest in a 1,170 acre site in Rugby which has outline planning permission for 6,200 houses and approximately 1.3m sq. ft. of commercial development, with a GDV in excess of £1.4bn. Expect completion of the first houses by the third quarter of 2015.
Property valuers CBRE have valued the Alconbury site at £101m and the Rugby site at £55m, of which Urban & Civic's 50 per cent share is £27.5m. These valuations equate to £13,610 and £10,661 per residential plot, respectively. So with shareholders of Urban & Civic taking equity in Terrace Hill as full consideration for their shares, it is fair to say that Terrace Hill has paid a fair price for the sites given CBRE’s valuation. It also means that the previous owners will share in the upside from these developments through their holdings in the enlarged group.
Interestingly, only £50m of the £170m raised through the placing will be needed to develop further the sites at Alconbury Weald and Rugby. A further £30m will be used for current commercial developments and the balance to purchase and develop pipeline opportunities. That leaves around £90m of fresh equity that can be used for additional commercial developments. As a result the company can target substantially larger investments than currently committed on existing pre-let development schemes. These are mainly foodstore developments and property in the retail and leisure sectors.
But the company will not be overgearing its balance sheet because the board intends to target a loan to gross asset value ratio in the region of 30 per cent and limit the amount of borrowing secured against strategic residential developments, as there is already significant operating leverage in the land bank.
A sound strategic move
I believe the focus on residential and supermarket development is a sensible strategy. Assuming the company hits its target internal rate of return of 20 per cent on strategic land sites and commercial property, it is also one that should deliver upside for shareholders through capital growth. There is an income stream too as the board are targeting a progressive dividend policy with the pay-out equating to one per cent of the placing price for the financial year to September 2015.
In light of this, and having previously advised banking a 100 per cent gain on Terrace Hill shares in mid-December ('Property play fully valued', 13 December 2013), before turning buyer again post profit taking at 23.75p when I updated my Bargain share portfolio (‘How the 2013 portfolio fared’, 7 February 2014), I feel that the shares remain an attractive proposition.
True, Terrace Hill’s equity is being valued on an 18 per cent premium to proforma book value, but with the housing market in south east England now enjoying the ripple effect from the London housing boom, that discount could narrow quickly given the inherent operational leverage in the residential land holdings. And with the benefit of a cash rich balance sheet, the company is ideally placed to pick off other smart looking property deals to capitalise on. It also has around £19m of profits to be booked over the next few years from its existing foodstore and commercial developments. So trading on bid-offer spread of 25.5p to 26p, I continue to rate the shares a medium-term buy.
Please note that I am working my way through a list of companies on my watchlist that have reported results or made announcements recently including: Eros (EROS), Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Thalassa (THAL), Camkids (CAMK), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis Homes (BVS).
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