It’s hardly surprising given that the UK economy is now growing strongly. That’s not just good news for corporate profits, but with consumers feeling more confident and the housing market booming, then investor demand for commercial real estate in the regions has been picking up as the smart money takes advantage of the bumper yields on offer.
Evidence of this was seen in last week’s trading update from Leeds based property investment and development company, Town Centre Securities (TCSC: 247p). The company was formed by businessman and philanthropist, Israel Arnold Ziff, in 1959, and quickly built a reputation for pushing the boundaries with landmark developments. Town Centre is widely acknowledged as a pioneer of the mixed-use property scheme and its investment portfolio now compromises an estate of over 900,000 sq ft of retail space and 360,000 sq ft of prime office space in the UK.
Major retail developments include Merrion Centre in Leeds and Urban Exchange in Manchester. They are proving popular amongst retailers as occupancy rates are over 97 per cent across the company’s book. The developments are also proving popular with consumers as the Merrion Centre has an annual footfall of over 10m visitors and only two units remain unlet following a redevelopment of the shopping centre. It’s worth noting that outside London, Leeds is the UK’s second largest city and the largest financial and legal services hub. As a whole, Leeds city region has a population of 3m and an economy worth £52bn per year, so can be seen as a barometer of the health of the UK regional economy outside southern England.
The Merrion Centre site accounts for almost 40 per cent of Town Centre’s £299m investment portfolio which was last valued on an initial yield of 6.8 per cent at the end of December 2013, a 40 basis point contraction from the June 2013 revaluation. Bearing this in mind, if tenant demand remains strong, and investors continue to seek higher yielding regional property plays, then it’s fair to assume that further valuation uplifts will be forthcoming. Tenant quality is certainly supportive of the investment case as reflected by the lack of bad debts. In fact, over 99 per cent of quarter day rents are collected within five days.
Exciting development programme
Town Centre has a decent development programme too. Following exchange of contracts with Leeds City Council for the refurbishment and extension of Merrion House at The Merrion Centre, the contractor tender process is now underway and planning consent is expected to be secured by the end of June. The proposed 170,000 sq ft office development will be occupied by Leeds City Council on completion in 2017. The Council have agreed to sign a 25-year lease on the building, thus offering a valuable rental stream for Town Centre.
At Whitehall Riverside, Leeds, the company has obtained detailed planning consent for a 128 bedroom hotel and outline planning consent for a mixed use development, including three eight-storey office buildings encompassing 450,000 sq ft of space and a 500 space multi-storey car park. At a time when there is little or no available large floor plate, Grade A facilities in central Leeds, the company appears well placed to secure tenants for the site. In Glasgow, the pre-let development of a 36,000 sq ft supermarket for Waitrose at Milngavie has now commenced and construction should complete by spring 2015. In total, the company’s development properties are in the books for £13.7m, but the potential profit is far higher.
A family holding safeguards dividend
Having floated on the London Stock Market in 1964, Town Centre is now run by Mr Ziff's son, Edward, who is chairman and chief executive. Edward Ziff has been with the company for 33 years and through direct holdings and beneficial interests he controls 47.8 per cent of the issued share capital. His brother, Michael, owns a further 31.36 per cent.
Admittedly, this limits the free float and liquidity in the shares, but it also means that there is every incentive for the board to maintain 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 became a real-estate investment trust (Reit) in 2007, so 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 13.7p in the financial year to 30 June 2013 easily covered that payment so, with the shares offered in the market at 247p, the dividend yield of 4.2 per cent is secure.
Or put it another way, net property revenues of £18.5m on the investment portfolio easily cover annual administration costs of £4.2m, a £7.7m interest bill and the £5.5m cost of the dividend payment.
Low cost debt and secure income streams
True, gearing may look a tad high at over 100 per cent of shareholders funds of £150m, but it’s worth noting that £106m of total gross borrowings of £156m relates to a debenture that runs until 2031 and which carries a coupon of 5.375 per cent. Town Centre also has revolving credit facilities of £90m, with three banks, which are not due for renewal until late 2015 and 2016 so there are no pressing debt issues. In addition, the company has a £5m overdraft facility, so headroom of around £45m offers ample scope for additional property purchases.
Indeed, following the sale of £10m worth of properties in Scotland, some of the proceeds have been re-invested in a retail unit let to Mothercare, albeit this is outside the northern heartland as the shop is located on Holloway Road, North London. The company has also recently exchanged contracts on the purchase of a long-leasehold 600 space multi-storey car park in Ilford, a transaction in line with the company’s strategy to expand its car park business.
Last year, the car park division accounted for almost £5m, or over a fifth, of Town Centre’s gross rental income. In total, Town Centre Car Parks operates eleven car parks and has over 5,000 spaces in Leeds and Manchester. Initiatives undertaken in the past 12 months include the roll-out of new parking management systems at sites in Leeds. This, coupled with the launch of the new web site (www.towncentrecarparks.com), has enabled more flexibility in pricing and a better customer experience. This helped the business to drive up like-for-like net profits by more than 3 per cent in the last fiscal year. And the great thing about car parks is that they are relatively low maintenance, so Town Centre is virtually guaranteed a regular annual income stream without the need to undertake major capital spend.
Unwarranted discount to book value
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 players exposed to the buoyant London and south east property markets. But there is clear value on offer as Town Centre's shares trade on a hefty 18 per cent discount to triple net asset value of 301p even though the portfolio has minimal voids and generates profits that easily cover running costs thus enabling the board to declare a rising dividend.
Moreover, property values are now moving up again as in the first half of the financial year the company reported a 4 per cent valuation uplift and a 6 per cent rise in net assets. Mr Ziff noted that his company has benefited from the improved sentiment towards the regional property market as well as from a focus on property management and development projects. His confidence is not misplaced and I feel a return to the 12-month high of 280p and beyond could be on the cards when Town Centre issues results in mid-September for the 12 months to 30 June 2014. Indeed, further yield compression driven by investor demand for regional property could make for another robust uplift in net asset value per share.
In the circumstances, I have little reason to change my upbeat view on the shares having first advised buying at 198p just over 15 months ago ('A high yield play in the north', 18 Feb 2013). Since then we have banked total dividends of 13.54p a share. So offering 17 per cent upside to my upgraded target price of 290p, I continue to rate the high yielding shares a buy.
■ Simon Thompson’s new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
