The key take for me in the release was the near 6 per cent rise in net asset value (NAV) to 326p a share. On a like-for-like basis the investment portfolio increased by 4.7 per cent in value from £300m to £313.6m, but excluding capital expenditure the uplift was nearer £9m, almost all of which reflected the redevelopment of part of the flagship Merrion Centre in Leeds. It was a smart piece of business by Town Centre too.
That’s because for a total spend of £5.6m on retail units, the company can expect to reap £800,000 in rents on the new premises, so based on a further 80 basis points contraction in the initial yield to 6 per cent (used by chartered surveyors to value the portfolio at the end of last year), this investment alone has produced an £8m return on capital spend. Other ongoing redevelopments include £7.5m spend earmarked for the Merrion Hotel, and the addition of 50,000 sq ft of new office space and refurbishment of 120,000 sq ft of existing space at Merrion House, all of which will be let out to Leeds City Council on a new 25 year lease.
Importantly, leasing activity remains robust across the portfolio which is focused on Leeds (56 per cent of the book), Manchester (18 per cent), Edinburgh and Glasgow (22 per cent), and London (4 per cent). The company completed 99 leasing transactions in the period and occupancy rates have been maintained at 97 per cent. So with rental income solid, the average cost of debt only 4.2 per cent, and balance sheet gearing modest – the loan-to-value ratio is 47 per cent and two thirds of net debt of £159m is funded by a debenture with 15 years to maturity – then the board have firepower of around £55m to make opportunistic purchases and fund new development programmes.
Moreover, this is exactly what Town Centre’s management team have been doing. In the latest six month trading period, a property in Princes Street, Edinburgh let out to Mountain Warehouse was acquired for £2.4m on an initial yield of 6 per cent; the company received planning permission for 91 flats on a residential site at Piccadilly Basin, Manchester; and having gone through the planning process, it expects to receive consent for a 70,000 sq ft office block on Whitehall Riverside, Leeds in the very near future. Profits booked on disposals include a £1.8m gain on a £5m land deal to a house builder at Apperley Bridge, Bradford.
Further yield contraction to come
The key now is whether improved tenant demand and a hardening of rents (as both consumer spending and the domestic economy recover), combined with strong investment demand for regional property, can drive up NAV per share further. Analysts John Cahill and Miranda Cockburn at broking house Oriel Securities certainly believe so as they predict a June 2015 year-end NAV of 342p a share, rising to 367p by June 2016. On this basis, the shares are priced on a 15 per cent discount to June 2015 estimates. It’s quite possible that there could be upside to those estimates if investment yields contract further.
It’s also worth noting that the company pays a solid dividend of 10.44p a share. The interim payout of 3.1p a share goes ex-dividend on 27 May. As a real-estate investment trust (REIT), Town Centre Securities’ board is required to pay-out 90 per cent of the profits of the property rental business, after certain deductions, to shareholders. Annual underlying EPS of 14.4p (excluding valuation gains) easily covered that payout to give a dividend yield of 3.57 per cent. That is still an attractive yield in the context of a zero interest rate environment and one where UK government bond yields have been contracting to record lows and expectations of the first Bank of England base rate rise have been pushed out to next year. This environment is also supportive of commercial property as an asset class. In the circumstances, I would run profits on this holding ahead of a pre-close trading statement in mid-May.
Fair weather gains ahead
Shares in Aim-traded Plymouth marina and property company Sutton Harbour (SUH: 36.5p) duly rose to around their book value of 40p a share after my last article (‘Set fair for gains’, 10 July 2014), and after a multi-month consolidation period a return to those highs looks on the cards once again.
The newsflow has certainly been positive as following a letting at Guy's Quay, a prime waterfront site at the heart of the Barbican area of Sutton Harbour, Plymouth, the portfolio now has an occupancy rate of 93.3 per cent, up from 89 per cent at the end of September 2014 and 86 per cent in March last year. The company has also just received planning consent for its 'Boardwalk' scheme in the Vauxhall Quay area of Sutton Harbour, a milestone in the 'Vision for Sutton Harbour' initiative to establish the harbour as a recognised visitor destination of regional importance. The scheme comprises a total 7,807 sq ft of lettable space in two units for a visitor-orientated restaurant and a smaller pavilion unit. In addition, having launched in October 2013, the company’s King Point Marina has achieved 59 per cent occupancy and importantly the take-up of new berths there has not had an adverse impact on the customer base of the mature Sutton Harbour Marina. In fact, occupancy rates there actually increased to 86 per cent.
Key share price drivers
In my opinion, the most important driver for share price gains above the 40.7p a share latest book value will be whether or not the ongoing improvement in investor demand for regional commercial property feeds through to a contraction in the net initial yield used to value Sutton Harbour’s properties by Jones Lang La Salle surveyors at the full-year stage. The yield currently used is quite high at 8.9 per cent, so even a modest contraction would have a very positive impact on NAV per share given that the company’s net debt equates to 54 per cent of shareholders funds of £39.1m. This seems a realistic scenario since it’s clear that investor appetite for regional commercial property continues to improve and the spate of lettings can only help increase the desirability of the properties.
The other potential driver, albeit one for the medium-term, concerns progress made on the former Plymouth airport site in Derriford which is in Sutton Harbour's books for £11.5m. The leasehold agreement entitles the company to a 25 per cent share of sale proceeds in the event the 113-acre site is sold. Plymouth City Airport Limited, a wholly owned subsidiary of Sutton Harbour, ceased airport operations three years ago and is working with Plymouth City Council (PCC) to achieve best value from alternative use of the site. Net proceeds will be split 75:25 in favour of PCC which is the freeholder of the site. The council wants to create a sustainable mixed-use urban centre on the site and Sutton Harbour's plans encompass a business park, education facilities, new district centre, commercial and retail units, hotel and housing. Clearly, if this scheme gets the go ahead, then there will be significant upside to Sutton Harbour’s investment. It's going to take time though.
So in my view the immediate share price progress will be determined by future progress on lettings and potential for yield contraction as the improving regional property market and the UK economic recovery increase the value in Sutton Harbour’s businesses. On that score, I rate the shares a buy.
MORE FROM SIMON THOMPSON...
Please note that since the start of February I have written articles on a total of 64 companies all of which are available on my IC homepage... and are detailed in chronological below with the relevant web links for ease of reference.
■ Flowtech Fluidpower: Buy at 130p, target 165p (‘A fluid performance’, 2 February 2015)
■ Inland: Buy at 57.5p, target 70p (‘A fluid performance’, 2 February 2015)
■ UK housebuilding sector: Run profits (‘A fluid performance’, 2 February 2015)
■ Globo: Conditional buy at 47p, target 60p (‘Going Global’, 3 February 2015)
■ Epwin: Buy at 92p, target 140p (‘Going Global’, 3 February 2015)
■ SeaEnergy: Buy at 21p, target 60p (‘Going Global’, 3 February 2015)
■ Fairpoint: Buy at 119p, target 190p (‘A valuable point to make’, 4 February 2015)
■ Greenko: Buy at 123.5p, target 225p to 230p (‘A valuable point to make’, 4 February 2015)
■ Safestyle: Buy at 165p (‘A valuable point to make’, 4 February 2015)
■ 600 Group: Buy at 15.5p, target 24p (‘Engineering growth’, 5 February 2015)
■ Global Energy Development: Speculative buy at 42p (‘Engineering growth’, 5 February 2015)
■ Pure Wafer: Hold at 42p (‘Engineering growth’, 5 February 2015)
■ Faroe Petroleum: Buy at 75.5p, target 94p (‘A slick operator’, 6 February 2015)
■ 2014 Bargain share portfolio updates:
Barratt Developments: Run profits at 458p; Taylor Wimpey: Run profits at 135p; 1pm: Buy at 67p; Bloomsbury Publishing: Hold at 148p; Camkids: Hold at 21p; Fortune Oil: Sit tight at 10p; Charlemagne Capital: Hold at 11p; Arden Partners: Hold at 47p; PV Crystalox Solar: Hold at 10.5p (‘How the 2014 Bargain share portfolio fared’, 6 February 2015).
■ 2015 Bargain share portfolio buy recommendations:
Mountview Estates, Crystal Amber, H&T, Pittards, Inspired Capital, Record, Netplay TV, Arbuthnot Banking, AB Dynamics and Stanley Gibbons (‘Bargain share portfolio 2015’, 6 February 2015).
■ Oil price (‘Profiting from the oil price slump’, 9 February 2015)
■ Getech: Buy at 45p, target 67p (‘Exploit a chart breakout’, 10 February 2015)
■ Moss Bros: Buy at 93p, target 120p-130p (‘A triple play of chart break outs’, 11 February 2015)
■ Manx Telecom: Buy at 189p, target 210p (‘A triple play of chart break outs’, 11 February 2015)
■ Oakley Capital: Buy at 155p, target 180p (‘A triple play of chart break outs’, 11 February 2015)
■ Walker Crips: Buy at 45p, target 54p (‘Delivering on a plan’, 12 February 2015)
■ Trakm8: Buy at 92p, target 120p (‘Zoming in on a profitable price move’, 16 February 2015)
■ Trifast: Buy at 111p, target 140p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ 600 Group: Buy at 16.5p, target 24p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ Pittards: Buy at 135p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ GLI Finance: Buy at 62.5p, target 80p (‘Income plays with capital upside’, 18 February 2015)
■ BP Marsh: Buy at 135p, target 170p (‘Income plays with capital upside’, 18 February 2015)
■ Henry Boot: Buy at 205.5p, target 249p (‘A bootiful investment’, 19 February 2015)
■ Jarvis Securities: Take profits at 435p (‘Decision time’, 23 February 2015)
■ Avation: Buy at 142p, target 200p (‘Decision time’, 23 February 2015)
■ Inland: Buy at 63p, conservative target 70p (‘Decision time’, 23 February 2015)
■ Globo: Buy at 49.25p, target 60p (‘Catalysts for re-ratings’, 24 February 2015)
■ Communisis: Buy at 56p, target 85p (‘Catalysts for re-ratings’, 24 February 2015)
■ SeaEnergy: Buy at 25p, target 60p (‘Catalysts for re-ratings’, 24 February 2015)
■ Netcall: Take profits at 71p (‘Taking profits’, 25 February 2015)
■ Eurovestech: Hold at 8p, target 10p (‘Taking profits’, 25 February 2015)
■ GLI Finance: Buy at 62.5p, target 80p (‘Taking profits’, 25 February 2015)
■ Amino Technologies: Run profits at 137p, target 150p ('Riding bumper profits', 26 February 2015)
■ Tristel: Buy at 80p, target 100p ('Riding bumper profits', 26 February 2015)
■ 32 Red: Buy at 60p, target 75p to 80p ('Riding bumper profits', 26 February 2015)
■ Non-Standard Finance: Buy at 103p ('A non-standard investment, 2 March 2015)
■ W.H. Ireland: Buy at 92p, target 140p ('A non-standard investment, 2 March 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 March 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 March 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 March 2015)
■ Simon Thompson's 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 stockpicking'
