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The regional office property specialist has high occupancy rates and is also selling off property at premium to book value
March 23, 2021
  • Rent collection of 90.5 per cent for nine months to the end of December.
  • Pre-let of 13,800 sq ft office building to generate annual income of £297,000.
  • Sale of Milton Keynes office building at a 9 per cent premium to book value.

Circle Property (CRC:180p), an internally managed Jersey-registered property company that actively manages a £138m portfolio of well-located regional office properties, has issued a trading update that highlights exactly why the 36 per cent share price discount to analysts’ spot net asset value (NAV) estimate of 280p (31 March 2020: 285p) is completely unwarranted.

Firstly, the company has collected 92 per cent of rents for the December quarter, the majority of the arrears being attributable to its limited retail assets (two public bars and restaurant in Birmingham). The tenants remain solvent, the businesses are expected to reopen when lockdown restrictions ease, and the majority of the arrears should be paid in due course.

Secondly, Circle’s portfolio of office properties is highly reversionary (around 15 per cent is under-rented), so making it far less likely that existing tenants will exercise break clauses. Indeed, Circle’s overall occupancy rates have held steady at around 92 per cent, and are likely to remain robust given that vacancy rates for high-quality regional office space remains low. The same is true of the rent roll, which has driven up net income by over £1m to £7.9m in the past 12 months. This is mainly because rent-free periods on recently granted leases have come to an end, but Circle is also signing new leases. For example, a 13,800 square foot (sq ft) office building in Bristol that is undergoing refurbishment has just been pre-let on a 15-year lease at £21.50 sq ft.

Interestingly, property consultancy Savills published a report late last summer that compared the current supply/demand dynamics in the regional office market with the last recession in 2009. The report estimated that since 2015, excluding London, 31m sq ft of office space has been converted to residential under Permitted Development Rights in England. Current availability of Grade B and C space across the regional markets in England has fallen by 45 per cent since 2015.

At the same time, there has been limited speculative office development in the regions in recent years, one reason why the total available office supply of 11.3m sq ft in the UK regional office markets has declined 17 per cent since the end of 2019. However, of that just over 3m sq ft is Grade A, reflecting a 4 per cent decrease since the end of 2019. Effectively, this means that there is only enough supply to meet demand for 11 months based on average take-up levels. These dynamics are supportive of demand for Circle’s high-quality space.

Thirdly, the company’s experienced management team reacted promptly to greater tenant demand for fully fitted space by fitting out 16,000 sq ft of vacant suites within the portfolio (Birmingham and Maidenhead). There has since been a notable rise in viewings and letting offers.  

Fourthly, the sale of an office building in Milton Keynes to the current tenant, Stephen Eagell Group, the largest Toyota Dealership in Europe, will realise £3.55m, a 9 per cent premium to book value. Other small disposals are being targeted, too, as the board is aiming to reduce its loan-to-value ratio from 41 per cent to between 30 and 40 per cent within the next 12 months. Deleveraging the balance sheet will not only free up cash flow to raise the payout ratio – Cenkos forecast a dividend of 5.5p a share from EPS of 9.9p in the 12 months to March 2021 – but should drive a narrowing of the unwarranted 36 per cent share price discount to NAV. UK commercial property sector average discount to NAV is around 15 per cent based on Liberum Capital’s universe of companies.

Palace Capital peer group analysis
CompanyMarket capitalisationPremium/discountDividend yieldPercentage NAV Total return
1-year3-year
AEW UK REIT£129m-13.1%9.8%7.4%25.8%
Alternative Income REIT£58m-14.0%6.3%-5.3%7.6%
Conygar Investment Co£57m-35.8%0.0%nana
Custodian REIT£386m-3.4%4.4%-2.6%8.5%
Drum Income Plus REIT£13m-53.2%6.5%-11.9%-10.4%
Ediston Property Investment Co£142m-20.2%6.0%-14.3%-11.3%
BMO Commercial Property£568m-39.2%5.9%-8.2%-7.2%
BMO Real Estate Investment£174m-26.2%3.5%-1.1%6.4%
LXI REIT£771m1.8%4.8%9.2%37.4%
Picton Property Income£482m-7.9%3.1%3.3%20.2%
Regional REIT£332m-20.0%8.3%-7.0%14.8%
Schroders REIT£203m-29.4%5.6%-2.4%-2.0%
Standard Life Investment Property Income£246m-24.3%5.4%-4.5%8.9%
Stenprop£395m-3.1%4.8%nana
Supermarket Income REIT£723m5.8%5.4%13.8%32.2%
Tritax Big Box REIT£3,163m4.8%3.5%4.8%22.0%
UK Commercial Property Trust£933m-16.7%2.6%-0.8%3.9%
Urban Logistics£375m3.8%5.4%5.2%44.0%
Warehouse REIT£531m9.9%5.0%17.8%39.8%
Average  -14.8%5.1%0.2%14.2%
Circle Property£52m-35.7%3.1%0.0%29.6%
Source: Liberum Capital UK commercial property sector data (12 March 2021). Circle Property calculations based on 31 March 2021 Cenkos Securities NAV estimates (8 March 2021).

Fifthly, there is potential for a major liquidity event if Circle offloads the Compass element (valued at £35m) of its Kent Hills Business Park, Milton Keynes, a 244,000 sq ft complex encompassing offices, hotel, health centre and conference facilities. FTSE 100 food and support services group Compass (CPG) pays £1.6m of rental income on a lease subject to annual RPI-linked uplifts, which has 21 years unexpired. A blue-chip covenant and a hedge against inflation risk are likely to prove attractive to property buyers.

So, having first suggested buying Circle’s shares, at 204p (‘A deep value property play’, 21 Feb 2020), I strongly believe that they continue to offer decent upside at the current price. This is a company that has delivered a 101 per cent NAV total return since IPO five years ago, and has delivered a three-year NAV total return of almost 30 per cent, double that of its peer group. It simply shouldn’t be trading on a 21 percentage point deeper share price discount to NAV than peers. Buy.

 

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