My interest in the company was, and for that matter still is, based on the belief that the yield compression seen in the London commercial property market would ripple out to the regions as investors took advantage of the wide yield differentials on offer between prime London space and those available in local property markets. I last recommended buying the shares at 315p (‘Platforms for success’, 30 September 2015) aiming for fair value of 350p by the year-end. I was not that far off the money as the shares peaked out at 336p in early January, before drifting ahead of yesterday’s half year results. The question is whether or not my 350p target price is still realistic?
The latest results were very solid. Net asset value per share rose by 4 per cent to 359p in the six months to end December 2015, and was 10 per cent ahead year-on-year. This mainly reflects a 4 per cent like-for-like property revaluation, driven evenly by a rise in estimated rental value on the portfolio and a 20 basis point compression from 5.8 per cent to 5.6 per cent in the initial yield used by surveyors to value Town Centre’s £330m investment portfolio.
Retail valuations continue to rise in the regional markets, which is why the company has been able to sell £13.3m of property (office buildings in Glasgow and Leeds) at above book value since the end of the first half. Another £20m of property is earmarked for disposal over the next 12 months, the cash proceeds from which are being recycled into new investments offering potential to enhance tenant mix, rental income and yield. For instance, Town Centre has recently acquired three retail units in Wood Green, North London for £6m on an initial yield of 5.5 per cent. It plans a refurbishment programme to enhance the property and is also converting the upper floors into residential flats to take advantage of the strong London housing market.
The board have ample firepower to make further selective purchases given that net borrowings of £180m on the portfolio, including the development book, implies a modest loan-to-value ratio of 49 per cent. Around £106m of debt is funded through a mortgage debenture which has 15 years to run and carries a coupon of 5.375 per cent. The company also has significant headroom above its banking facilities, having renewed its revolving credit lines with Handlesbanken (£35m), Lloyds (£35m) and RBS (£30m), all of which are on three-year terms. There is development upside too as Town Centre is investing over £35m in a raft of schemes.
Development upside
For instance, the company is well on track with the redevelopment of Merrion House in Leeds, encompassing a complete refurbishment of the existing 120,000 sq ft of offices and creation of 50,000 sq ft of new office space. The budget for the project is £34m, of which £18m is being funded by Leeds City Council, the company’s joint venture partner in the development. Completion is scheduled for the first quarter in 2018 and the project is expected to add £5m to Town Centre’s net assets and £900,000 to its annual income. To put this into perspective, analysts at brokerage Liberum Capital predict Town Centre will generate net rental income of £18m in the financial year to end 30 June 2016 and estimate a year-end net asset value of £193.7m, or 364p a share.
The company is also progressing redevelopment of the Merrion Hotel in Leeds, located opposite the Leeds First Direct Arena, a 13,000 capacity entertainment venue. The project encompasses a 134 room Ibis Styles hotel and 4,000 sq ft Marco Pierre White restaurant. The build cost is £9.2m and completion is scheduled for the first half of next year. On completion, the project is expected to add £600,000 to the company’s annual income, rising in time to £1m.
It’s worth noting too that Town Centre has signed a 25 year lease with an initial annual rent of £680,000 with budget hotel operator Premier Inn on a 136 bedroom hotel on Whitehall Road, part of the Whitehall Riverside Scheme in the West End of Leeds. The build cost is £10m with preparatory works on site already underway. The value of the development upon completion, which is expected in the first half of 2017, is estimated to be in excess of £12.5m. Discussions are ongoing in respect of the next phase of the office development at Whitehall Riverside and a 500 space multi-storey car park on the site.
There is residential upside too as the company has entered into a joint venture at Piccadilly Basin, Manchester with a specialist residential contractor and developer. Planning consent and funding is already in place for the initial phase of 91 units.
Solid income stream
It’s the solid and rising income stream from the company’s existing portfolio, and the large retail element within, that’s enabling Town Centre to invest in all these development projects. Its flagship Merrion Shopping Centre in Leeds accounts for a third of the company's investment properties by value, a further quarter is invested in retail and leisure, and 14 per cent in out-of-town retail. This means that nearly three-quarters of the portfolio by value has a retail element.
Importantly, the company's property book has a decent spread of high-quality tenants, low vacancy rates and generates robust cash flows, so it is ideally placed to benefit from the retail property recovery. This was in evidence in yesterday’s results as the company completed over 100 leasing transactions in the six month period, and maintained occupancy rates at 97 per cent across the portfolio.
In turn, the expected net rental income of £18m from these properties in the current financial year enables the company to cover annual administrative expenses of around £5m, forecast finance costs of £6.6m, and still leave enough cash left over to fund the £5.5m cash cost of a 10.4p a share dividend. In other words, the company can continue to make the payout without needing to sell properties, or rely on valuation uplifts to do so.
It was this stable income stream, coupled with a track record of delivering decent investor returns, that attracted me to the company in the first place. The share registrar also suggests that this payout is as safe as houses. That’s because Town Centre, which floated on the London Stock Exchange in 1960, is run by Edward Ziff, the son of founder and philanthropist, Israel Arnold Ziff. Mr Ziff is chairman and chief executive, having been with the company for 34 years. Through direct holdings and beneficial interests he controls 46 per cent of the issued share capital and his brother, Michael, owns a further 28.6 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 rise by two thirds to 10.44p a share in the past decade. Town Centre 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.
Prospects for further valuation uplifts
The attractions of a 3.5 per cent dividend yield and 15 per cent share price discount to its latest net asset value aside, I also feel that there is scope for further yield compression to drive net asset value per share higher. The net initial yield on Town Centre's Securities investment portfolio is now 5.6 per cent, down from 6.7 per cent in June 2014, but still above the 5 per cent yield that marked the commercial property market peak in 2007.
I am not the only one thinking this way as analysts at Liberum are maintaining their net asset value per share forecast at 364p and 412p, respectively for the June 2016 and June 2017 fiscal year-ends. This means that the shares are currently being priced on a 26 per cent discount to net asset value forecasts for June 2017. Add to that a rock solid dividend – the interim payout of 3.1p a share is due to be paid on 24 June 2016 to shareholders on the registrar on 27 May 2016 – and it’s not hard to be positive on the investment case.
In the circumstances, and offering almost 15 per cent upside to my maintained target price of 350p, I continue to rate Town Centre shares a buy on a bid-offer spread of 300p to 305p. Buy.
Please note that I have published eight columns and have given investment opinions on a total of 12 companies this week, all of which are available on my IC homepage and are listed in chronological order below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 79 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p (‘Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation’s lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ Town Centre Securities: Buy at 305p, target price 350p (‘Property income play with capital upside’, 25 February 2016)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
