Running property gains

Investors have been warming to the investment attractions of Urban&Civic (UANC:265p), a listed property group specialising in strategic residential land developments. The shares have risen by 25 per cent since I outlined a strong case to buy at 215p just before Christmas ('Built for gains', 19 December 2016), buoyed by a bullish set of results much as I had anticipated when I subsequently advised buying at 239.5p ('Taking profits and running gains', 4 April 2017). It’s only fair to acknowledge that the holding is now only back to the entry level at which I initiated coverage (‘Plotting a break-out’, 15 October 2015), and that’s after factoring in 5.75p a share of dividends paid out, having taken a major knock last summer post the EU Referendum. However, it’s clear that this year’s re-rating is more than justified.

That’s because the company’s EPRA net asset value (NAV), which increased by 8 per cent to 293p a share in the 12 months to end March 2017, should post significant gains in the future given that unserviced residential EPRA values at the company’s 1,432 acre freehold site at Alconbury Weald, incorporating Cambridgeshire's Enterprise Zone with permission for 5,000 homes, are only in the books at £25,300 per plot based on an average house price of £290 per sq ft. The most recent land parcels have been sold at more than double this valuation.

There is decent upside too at the 1,170 acre site in Rugby where permission has been granted for 6,200 new homes. Plots there are still only in the books at £16,500 each, based on an average house price of £260 per sq ft, even after rising by 10 per cent in the past six months. In fact, the directors admit that the “difference between the current retail valuation [of land] and the wholesale figures included in our EPRA calculations now amounts to an estimated £103m, or the equivalent of 71p per share.”  When I last highlighted this hidden value in the balance sheet the difference was 60p a share, so even more value has been added to these sites.

Importantly, there are sound fundamentals supporting Urban&Civic’s development programme including a chronic housing shortage in the south of England, and robust financial strength of the listed housebuilders, key buyers of land. True, some members of Bank of England rate setting committee are now warming to raising rates to counter UK inflation pressures, but fixed and tracker mortgage rates will still be ultra-low and supportive of affordability even if this occurs. So, with the substantial hidden value in Urban&Civic’s balance sheet, I would run your gains.

Vulture fund hits target

Shares in Aim-traded property vulture fund Conygar (CIC:180p) have hit the 180p target price I outlined when I suggested following the directors lead and buying at 140p last summer ('Insiders buying on solid foundations', 11 August 2016).

Sentiment has undoubtedly been helped by the sale of its investment portfolio for £129.8m to Regional REIT (RGL:106p), a property company that owns a £630m portfolio of UK commercial property, predominantly office and industrial units in regional centres outside the M25 motorway. This disposal has not only crystallised gains made on that portfolio over the past eight years, but left Conygar completely debt free and with a £46m cash pile on its balance sheet, so has markedly de-risked the investment case.

The company also received £28m of new shares in Regional REIT as part of the transaction on which it receives dividend income of £2m, thus substantially covering its administration costs. This means cash and the Regional REIT shareholding account for more than half of Conygar’s NAV of £142m, thus giving the directors the firepower to make opportunistic acquisitions. They have wasted no time in doing so, acquiring a 40-acre site for £13.5m in Nottingham that was formerly the Boots HQ. Located close to the train station, the site has potential for a mixture of office, residential and student accommodation.

Conygar is also well placed to realise value from its £40m development portfolio, valued in the accounts at cost, which includes the flagship project at Haverfordwest, Pembrokeshire. The 93-acre site is held in the accounts at £22m, so 'oven-ready' residential land is in the books for £30,000 per plot, significantly less than the £40,000-plus value that should be achievable when sold to housebuilders. Moreover, expect news on a planning application for a development of 10 retail units, a 60-bed hotel, five-screen cinema and five new restaurants at the site later this month.

So, having last advised running profits ahead of the interim results ('Running bumper gains', 7 March 2017), I feel there is scope for the 10 per cent discount to a conservative NAV of 201p per share to narrow further. Run profits.

A royal investment

It was difficult not to be impressed by the full-year results from Palace Capital (PCA:380p), a regional commercial property investment company. Reflecting a combination of trading profits, revaluation uplifts and profits on disposals, reported pre-tax profit and net asset value per share both increased by 7 per cent to £12.6m and 443p, respectively, in the 12 months to end March 2017.

Recurring pre-tax profits, which exclude revaluation and disposal gains, surged up by 20 per cent to £6m to deliver EPS of 22.2p, a performance which enabled the board to hike the payout per share by 15 per cent to 18.5p. The directors were able to do so because the company’s 165 tenants produce a total contracted rent roll of £12.7m and a net income of £11m after head rents, service charges and business rates on empty property. This easily covers interest costs charged at an average rate of 2.9 per cent on gross borrowings of £78.7m, one of the lowest rates in the sector, secured on the £184m portfolio. In turn, the company retains ample firepower to make further shrewd off market property purchases offering potential to add value through active asset management, refurbishment and development initiatives. In fact, since the company made its first major acquisition in the autumn of 2013 its NAV per share has more than doubled.

Prospects for the year ahead look rosy given the potential to add further value to developments as recently refurbished and shrewdly acquired office space in Manchester, Leeds and Milton Keynes is let out. Chief executive Neil Sinclair points out that these lettings “will have a material effect on values too.” He has a valid point. Take for example last summer’s opportunistic purchase of Boulton House, a 75,300 sq ft multi-let office building close to Manchester Piccadilly Station. The net initial yield on the £10.6m purchase price was 5.5 per cent and equated to a capital value of £145 per sq ft which was predicted to rise to 6.9 per cent based on conservative rental values of £12 per sq ft. Palace Capital has since refurbished 13,500 of vacant space as well as the ground floor reception and entrance hall at a cost of £700,000. I understand that terms are being negotiated with potential tenants at rentals “ahead of expectations at the time of purchase.” I would also flag up that the company is looking to pull off a £20m property acquisition to use the £11.2m low yielding free cash on its balance sheet and boost net income.

Trading on a 14 per cent discount to book value, offering a 4.9 per cent dividend yield, and with the benefit of a modestly geared balance sheet which includes unencumbered property worth £15m, I feel the shares have further upside potential. So, having initiated coverage on the shares last autumn at 335p (‘A royal investment’, 17 October 2016), and upgraded my target price to 400p when I subsequently  advised buying at 350p ahead of the recent full-year results ('Running bumper gains', 7 March 2017), I would run profits as the valuation discrepancy with peers is unwarranted. Run profits.

Local Shopping’s share price discount to narrow

Local Shopping REIT (LSR:32.25p), a small-cap retail sector-focused property investment company that's selling down its portfolio with a view to returning the cash proceeds to shareholders, has announced the results of its disposal programme. Since the start of April, the company sold off a total of 41 properties including 27 at auction for a total of £4.45m. After taking into account £235,000 of costs, including agent’s fees, legal fees and VAT, this resulted in a net loss of £175,000, a decent result considering these properties are smaller and harder to sell. This means that since the company commenced its accelerated disposal programme last autumn, it has sold a total of 104 properties for £13.9m, more or less in-line with book value.

The key point to note is that Local Shopping REIT looks well on course to hit its target of offloading 125 properties as planned by the end of this year, so that it can then market the core portfolio of 200 larger better quality properties which have a combined book value of £55m. After accounting for the latest sales, net debt is around £30.5m on a portfolio now worth £61.5m well within the company’s £43.5m banking facility with HSBC which runs until the end of 2019, and was renegotiated at an attractive rate of 2 per cent above Libor.

My view remains that a liquidation value of 36p a share, implying a value for the equity of £29.7m, is the minimum shareholders should expect. It could be more as my estimate of liquidation value equates to a 17 per cent discount to last reported NAV of £35.6m, and there is potential for a larger rival to bid outright for Local Shopping REIT’s core portfolio of high yielding property as Conygar’s recent portfolio disposal highlights, as does the takeover of small-listed property company Industrial Multi Property Trust (IMPT:330p) by FTSE 250 property group Hansteen (HSTN:127p), a deal I commented on at the time ('Small-cap trading updates', 24 May 2017).

So, having advised buying Local Shopping REIT’s shares at 26.5p last summer ('Shopping for a property bargain', 23 August 2016), and recommended running profits at 32.5p ahead of last month’s interim results ('Value opportunities', 11 April 2017), I still feel the 27 per cent share price discount to NAV of 43p a share has scope to narrow further. Run profits.

London & Associated value trap

I have lost patience with small cap shopping centre operator London & Associated Properties (LAS: 23p), a minnow of the stock market. I last recommended buying the shares at 26.5p ('Voids fall sharply at London & Associated', 5 May 2016), and they have resolutely failed to join in the sector wide rally.

Part of the reason for the lack of investor interest is the continuation of losses even though 98 per cent of the portfolio is occupied and property values held steady in the past 12 months. True, the company has two expensive debentures which mature this year and next and the debt should be refinanced at significantly lower interest rates, but that’s really a side issue. The failure of the board to reduce operating costs so that the company can actually turn a profit and reward shareholders with a decent dividend is the real issue.

For instance, the chief executive take home pay is more than four times the distribution to shareholders. That’s rich considering the company has accumulated pre-tax losses of £5.75m over the past three years, during which time its fully diluted NAV has declined by almost a quarter to 44.8p a share and fell yet again this time round. So, despite the deep share price discount to book value, I see little point holding on. Sell.

Finally, I will produce an update on residential property investment company Mountview Estates (MTVW:11,250p), a constituent of my 2015 Bargain share portfolio, after its annual report and accounts is posted out in mid-July.