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OPINION

A high-yield property play in the north

A high-yield property play in the north
February 18, 2013
A high-yield property play in the north
IC TIP: Buy

I have now banked profits on the first two of those companies, but maintained my interest in the sector by highlighting another two special situations in my 2013 Bargain Share portfolio: Inland (INL), a residential and mixed-use property development business specialising in buying brownfield sites; and Aim-traded property development and investment company Terrace Hill (THG). Shares in both have racked up 20 per cent plus gains since I highlighted the anomalous valuations on offer 10 days ago. Moreover, as I noted last week, the decision to play the housebuilder first quarter effect is paying off yet again with share prices of the eight FTSE 250 companies now up by an average of 10.4 per cent since the start of the year, a five percentage outperformance of the benchmark FTSE All-Share index ('Seeking Alpha among the housebuilders', 11 February 2013).

It was more of the same last week, when I uncovered two mid-cap property companies - Daejan Holdings (DJAN) and Mountview Estates (MTVW) - priced on deep discounts to net asset value, offering decent yields and on the verge of major chart break-outs ('Chart break out for a solid income play', 12 February 2013 and 'Buy the break-out', 14 February 2013). That has now happened and with the fundamental case for investing highly supportive, the break-outs look the real deal to me and I am maintaining my conservative target prices of 4,000p for Daejan and 5,600p for Mountview. While researching those companies I also noted another interesting play in the sector: Leeds based property investment and development company, Town Centre Securities (TCSC:198p). Interestingly, the share price looks on the cusp of a major chart break-out, too, so this looks an opportune time to investigate the investment case.

 

Attractive dividends

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 today the company's investment portfolio compromises an estate of over 900,000 sq ft of retail space and 360,000 sq ft of prime office space in the UK including major retail developments, Merrion Centre in Leeds and Urban Exchange in Manchester. Overall, occupancy rates are almost 98 per cent across the book.

Town Centre, which floated on the London Stock Exchange in 1960, is now run by Mr Ziff's son, Edward, who is chairman and chief executive, having been with the company for 32 years. Through direct holdings and beneficial interests Edward Ziff controls 47.8 per cent of the issued share capital and his brother, Michael, owns a further 31.1 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 the progressive dividend policy which has seen the pay-out more than double in the past decade to 10.44p a share. Town Centre Securities PLC 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 13.8p in the financial year to 30 June 2012 easily covered that payment so, with the shares offered in the market at 198p, the dividend yield of 5.3 per cent is not only attractive, but secure, too.

 

Low cost debt and secure income streams

True, gearing may look a tad high at 108 per cent of shareholders funds of £140m, but it’s worth noting that £106m of net borrowings of £153m relates to a debenture that runs until 2031 and which carries a coupon of 5.375 per cent. Town Centre also has a revolving credit facility of £90m, with three banks, which are not due for renewal until 2015 and 2016 so there are no pressing debt issues.

In fact, the company has been taking advantage of attractive valuations and at the end of last year acquired two investment properties, at a total cost of £9.4m, at a running yield of 9.2 per cent. This looks good business when you consider that Town Centre’s average weighted costs of debt is only 4.6 per cent so the purchases bring in secure income streams (one of the properties is occupied by Lloyds TSB Bank) well below the cost of capital. Moreover, income from investment properties was £8.7m in the half year to end December with a further £2.5m generated from car parks which easily covered net finance costs of £3.8m and £4m worth of property and administration expenses in the six-month period.

 

Deep 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. However, there is undoubted medium-term value on offer here as Town Centre's equity trades a hefty 30 per cent below triple net asset value of 286p a share. That's despite the fact that the portfolio has minimal voids and generates profits that easily cover annual running costs to enable the board to declare rising and attractive dividends.

Interestingly, Town Centre's share price has been edging up and post last week's half-year results took out the 190p level which had been acting as a glass ceiling since April last year. The next hurdle is the March 2011 high at 203p and any close above that would be very bullish indeed and signal that a run up to around 230p could be on the cards. If achieved, this would offer us 15 per cent upside over the next few months and narrow the share price discount to book value to a more reasonable 20 per cent. Trading buy.

■ I have also published another online column today ('A fund raising well worth backing', 18 February 2013). My next article will appear online tomorrow morning on my homepage.

Please note that I released seven online articles last week: 'A share set to hit the jackpot','A highly profitable arbitrage play, 'Seeking Alpha among the housebuilders','Chart break out for a solid income play', Time to dial into profit', 'Buy the break-out', 'A conundrum to solve', 15 February 2013.

Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 32 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:

Week of Monday 18 February 2013

Communisis ('A fund raising well worth backing', 18 February 2013)

Week of Monday 11 February 2013

API (A conundrum to solve, 15 February 2013)

Daejan Holdings (Buy the break-out, 14 February 2013)

IQE (Time to dial into profit, 13 February 2013)

Mountview Estates ('Chart break out for a solid income play', 12 February 2013)

Bellway (Seeking Alpha, 11 February 2013)

Marwyn Value Investors (A highly profitable arbitrage play, 11 February 2013)

Netplay TV (A share set to hit the jackpot, 11 February 2013)

Week of Monday 04 February 2013

Oakley Capital, Randall & Quilter, Inland, Terrace Hill, Heritage Oil, Cairn Energy, Polo Resources, Trifast, Noble Investments, Fairpoint (Bargain Shares for 2013, 8 February 2013)

Telford Homes, MJ Gleeson, Stanley Gibbons, Molins, Indigovision, Trading Emissions, Mallett, Bloomsbury Publishing, Rugby Estates, Eurovestech (How the 2012 Bargain Shares fared, 8 February 2013)

Future (Decision time after a bright start, 5 February 2013)

Sanderson (An 'app' online investment, 5 February 2013)

Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)

Week of Monday 28 January 2013

BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)

Bellway ('Profit from the London property boom', 30 Jan 2013)

Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)

Week of Monday 21 January 2013

Market timing ('Lessons to learn', 24 Jan 2013)

Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)

Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)

PV Crystalox Solar ('Seeing the light', 21 Jan 2013)

Week of Monday 14 January 2013

Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)

Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)

Eros ('A share firmly in the picture', 15 Jan 2013)

Netcall ('Jumping the gun: take two', 15 Jan 2013)

Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)

Week of Monday 7 January 2013

Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 2013)

IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)

S&P 500 portfolio of dog shares ('Dog shares barking back', 8 Jan 2013)

Air Partner ('A share ready to take off', 7 Jan 2012)

Week of Monday 31 December 2012

FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)

Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)