A lack of transactional volume left valuers with very few clues about property values in the immediate aftermath of the UK's referendum on EU membership, and the subsequent markdown of real estate stocks was a somewhat intuitive response. West End landlord Shaftesbury (SHB) did not escape the consequences. Although results for the 12 months to the end of September 2016 did not show a repeat of the big valuation gain seen in the previous year, a £108m uplift helped to push adjusted net asset value per share ahead by 19p to 888p illustrating the rock solid credentials of its portfolio. In fact, the increase would have been higher still without the effects of early termination of debenture debt and interest rate swaps that accounted for 24p a share.
- Solid and diverse revenue stream
- Modest gearing
- Significant reversionary value
- Very low vacancy rate
- Modest dividend
- Tenants face hike in business rates
What makes Shaftesbury different to other London real estate investment trusts is location. It owns over 14 acres in the heart of London's West End, centred on Covent Garden, Chinatown, Soho and Charlotte Street. That includes 584 shops, restaurants, cafés and pubs which make up 70 per cent of the portfolio by income. The balance is split almost evenly between apartments for rent and offices. With over 400,000 sq ft of office accommodation, it is the largest provider of space for small companies in Soho and Covent Garden, and also owns 559 apartments.
With such a strong flow of visitors to the West End - something that Brexit is unlikely to affect very much - tenants tend to stay put, and there is always someone ready to snap up vacant space. Indeed, the vacancy rates at the September year-end represented a meagre 1.6 per cent of estimated rental value (ERV), and two-thirds of that was under offer. Such burgeoning demand has helped Shaftesbury more than double annualised rental income over the past decade to £110m. There is plenty of room for further upside from the existing estate, too, because the reversionary gap - the difference between rents on old leases and rents from recently agreed leases - has stretched to 27 per cent, suggesting there is a further £29m of rental income to be crystallised.
| SHAFTESBURY (SHB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 904p | MARKET VALUE: | £2.52bn | |
| TOUCH: | 904-904.5p | 12M HIGH: | 1,008p | LOW: 650p |
| FWD DIVIDEND YIELD: | 1.8% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORWARD NAV: | -0.8% | |||
| INVESTMENT PROP: | £3.26bn** | NET DEBT: | 32% | |
| Year to 30 Sep | Net asset value (p) | Net rental income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 713 | 74 | 12.2 | 13.1 |
| 2015 | 869 | 79 | 13.0 | 13.75 |
| 2016 | 888 | 91 | 14.0 | 14.7 |
| 2017* | 905 | 97 | 16.5 | 15.4 |
| 2018* | 911 | 104 | 18.1 | 16.2 |
| % change | +1 | +7 | +10 | +5 |
Normal market size: 3,000 Matched bargain trading Beta:0.35 *Numis forecasts, adjusted NAV, net rental income and EPS **Including joint ventures | ||||
One issue faced by Shaftesbury is that it's not easy to buy assets on the open market, but last year it still managed to spend £62.7m on nine shops, five restaurants and cafés, 2,850 sq ft of office space and four apartments. There is a further £32.6m being spent on refurbishing 202,000 sq ft of space, representing 11 per cent of ERV. Major schemes include Thomas Neal's Warehouse, Seven Dials and Charing Cross/Chinatown, all of which are expected to benefit from increased footfall as the Elizabeth (Cross rail) line opens in 2018. Earnings visibility is likely to be further enhanced because with tenants investing heavily in fit-out, letting periods are likely to be longer. Once let, these schemes will generate £7.4m in annual income.
A 30-45 per cent increase in business rates from next April equates to 2-3 per cent of tenants' occupancy costs. That could dampen rental growth, but the effects are likely to be muted given the draw of the location, and the issue is yet to be brought up during rent negotiations. The high value of Shaftesbury's properties also makes it potentially more sensitive to the impact of rising interest rates on property values, but the quality of the portfolio also offers grounds for reassurance.
While acquisitions increased net debt last year, the loan-to-value ratio remained modest at 25.8 per cent. And the cost of debt going forward will be lower because the 8.5 per cent 2024 debenture stock has been refinanced with £285m of mortgage bonds at 2.487 per cent, dated 2031. This raised additional net resources of £189.4m, while termination of £55m interest rate swaps will alone reduce future finance costs by £1.9m per year.
