Town Centre Securities owns shops and offices in Northern cities – just the sort of business that will suffer as government cuts start to bite. Yet that story is so well known the company's shares trade at over 40 per cent below their net asset value and come with a dividend yield approaching 7 per cent. That looks like a classic value buy.
- Fat dividend yield
- Shares trading far below net asset value
- Solid financing
- Good-quality assets
- Poor property market
- Fairly high debt
The company's fiefdom is Leeds, where it owns a large shopping-cum-office complex, the Merrion Centre. This asset accounts for 42 per cent of Town Centre's portfolio and has a strong track record. The rental income it generates has risen in each of the past six years, and at an impressive 3.8 per cent clip in the 12 months to June 2011.
It will be harder to pull off that trick this year. The retailing environment is tough – Peacocks, a core tenant of the Merrion Centre, declared bankruptcy last month (although it's not clear what impact that will have on the store portfolio). Land Securities is also building a new mall at the other end of the Leeds town centre, with an expected completion date next February.
TOWN CENTRE SECURITIES (TCS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 160p | MARKET VALUE: | £85.1m | |
| TOUCH: | 153-160p | 12-MONTH HIGH: | 204p | LOW: 130p |
| DIVIDEND YIELD: | 6.6% | DEVELOPMENT PROP: | £13.4m | |
| DISCOUNT TO NAV: | 42% | |||
| INVEST PROPERTIES: | £282m | NET DEBT: | 94% | |
| Year to 30 Jun | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 420 | -67.6 | -21.0 | 8.15 |
| 2009 | 202 | -112.6 | -210.3 | 8.15 |
| 2010 | 269 | 39.3 | 74.6 | 10.36 |
| 2011 | 288 | 15.4 | 28.8 | 10.44 |
| 2012* | 275 | -0.9 | 14.1 | 10.50 |
| % change | -5 | – | – | +1 |
Normal market size: 1,500 Matched bargain trading Beta: 0.5 Oriel Securities estimates (EPS not comparable to prior years) | ||||
Yet the Merrion Centre may prove resilient. Complete with a car-park also owned by Town Centre, the mall is the gateway to Leeds city centre and attracts high footfall. Meanwhile, rents remain low at just £14 per sq ft on average. It is home to solidly downmarket brands, such as KFC and Home Bargains, that won't be interested in Land Securities' glitzy scheme. The key office tenant (and the largest tenant in Town Centre's portfolio) is Leeds City Council, which won't go bust.
This is key because a stable rental income at the Merrion Centre will underpin stable dividends. These are the main reason to buy Town Centre's shares. Unlike most property companies, Town Centre didn't cut its payout in the financial crisis. Over half of the shares are owned by the founding Ziff family, whose income needs the current chairman and chief executive, Edward Ziff, son of the founder, serves.
Town Centre's track record with net asset value is patchier. Like most of its listed peers, it had too much debt going into the downturn. Debt to equity is consequently higher than we would like, given the gloomy outlook for retail property values. Mr Ziff has also warned shareholders that interest costs will rise when the company re-negotiates banking facilities this year.
Yet Town Centre's £140m debt pile is less risky than it looks. Three-quarters of it comprises debenture bonds that don't mature until 2031. With refinancing risk limited to the remaining quarter, Town Centre can afford to regenerate the Merrion Centre. The council is building a 13,500 seat arena behind Town Centre's site, and Mr Ziff sees this as an opportunity to re-front his mall with bars and restaurants, which will boost rental income from 2013.
