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OPINION

Hot property sales

Hot property sales
August 31, 2016
Hot property sales

It was a strong signal that the share price was out of line with the likely cash returns to be made from asset sales, and that news on this front could be imminent. I took the hint after noting that the insiders at LXB Partners LLP, the company’s investment adviser, had made some massive share purchases: Tim Walton had bought 1.2m shares at 54.3p and holds 12.6m shares, or 7.5 per cent of the issued share capital; and Jo Duffield purchased 521,867 shares at an average price of 63.13p and holds 1.64m shares, or 0.98 per cent of the share capital. Not to be outdone, the main board directors got in on the action too as Daniel Kitchen purchased 60,984 shares at 67p per share to take his stake to 622,927 shares, and Steve Webb purchased 75,661 shares at 66p and currently holds 319,046 shares. A few days after my article was published, the Ice Blue Directors Pension Scheme, of which LXB director John Irvine is a trustee, acquired almost 2.4m shares at prices between 57.9p and 60p to take its stake to 3.64 per cent.

They had solid foundations for making such purchases because LXB's shares were being priced well below Stifel's end September 2016 net asset value estimate of 79p even though the main board had stated that they expect future capital returns to shareholders to exceed the 64.2p a share end March 2016 net asset value by a "comfortable margin." With the majority of the portfolio forward funded and pre-sold to institutions, so guaranteeing cash receipts when they are handed over on completion, the share price discount to net asset value looked anomalous to me, so much so that I had no hesitation rating the shares a buy at 56p (‘Deep value small caps’, 13 Jul 2016).

I have history here as I initiated coverage last autumn at 85p ('Bag a retail property bargain', 6 Oct 2015), so after adjusting for a 38p subsequent cash return earlier this year ('Exploiting a valuation anomaly', 11 May 2016), this gives an entry point of 47p.

And as I anticipated the insider buying has been followed by some pretty positive newsflow. That’s because in the past fortnight the company has announced the sale of its investment at B&Q, Greenwich, London, to a private investor for £43.3m, or £1m above book value and reflecting a net yield of 4.85 per cent. Net of bank debt of £23m secured on the asset, this releases cash proceeds of £20.3m for the company. In addition, LXB has completed the sale of its investment at Kingsmead, Stafford to a private investment vehicle for £26m. Net of bank debt, this releases £4.2m of cash proceeds. That’s below book value, but the effect of the two transactions is to divest almost £70m worth of property at close to the last combined balance sheet valuation. That sum effectively wipes out LXB’s bank borrowings of £64.7m at the end of March 2016.

LXB had cash balances at the time of £11.1m and this sum will have swollen significantly since then. That’s worth noting because once the sale of the B&Q, Greenwich investment completes on Monday, 12 September, LXB’s board will announce details of another capital return to shareholders.

Cash inflows

Bearing this in mind, the cash pile has been boosted since the end March by around £3.2m from the sale of a residential development site in Sutton to Linden Homes, the housebuilding arm of Galliford Try (GFRD:1,150p). LXB will receive a further £4m next month when the Sainsbury’s foodstore is completed on the same development. The company also owns a 999-year lease on the 27,000 sq ft ground floor retail space which will be handed over in phases between October this year and early 2017. It has already pre-let one unit to Costa Coffee, another to kitchen retailer Magnet and is receiving good interest from potential occupiers.

And having received £65.2m of cash proceeds from The Crown Estate for its Rushden Lakes scheme, LXB subsequently returned £64m of this sum to shareholders through a capital return of 38p a share.

Since LXB’s half year results three months ago, the company has sold two of the three industrial land sites in Gloucester and a third plot is currently being marketed for sale; received a small balancing payment from The Crown Estate following the final lettings at the pre-sold scheme at Banbury Gateway; and will shortly be due a cash payment of £5.2m when the scheme at Brocklebank, Greenwich, which was sold to The Charities Property Fund, achieves practical completion. In addition, the final phase of the Biggleswade retail development has now completed and LXB will receive the £7m balancing payment from Aberdeen Property Trust when all the existing leases have been completed. All bar three of the units had been let in early summer and all of the committed tenants are expected to be trading by next month.

In other words, I reckon LXB could easily have net cash of around £33m, a sum worth 20p a share, by the time it releases its financial results for the 12 months to end September 2016. So, with news of another capital return imminent, the balance sheet effectively degeared, and the board aiming for an orderly realisation of the rest of the portfolio by end April 2017, the shares are attractively priced on a 20 per cent discount to end September 2016 net asset value estimates.

Needless to say, I continue to rate LXB’s shares a buy on a bid-offer spread of 63p to 64p.