Capital & Counties (CAPC) may have finally sold its interests in the beleaguered Earls Court sites at the end of last year, but the £425m price tag was £83m, or 16 per cent below book value, and £211m of the proceeds are being spread over the next two years. Meanwhile, we have low expectations of a rebound in fortunes for the commercial property landlord's remaining portfolio. Half of the group’s assets are let to retailers and the value of its core Covent Garden portfolio fell last year, reflecting pessimism about the potential for rental growth. The shares may offer a sizeable discount to net asset value (NAV), but we see scope for continued NAV declines and forecast downgrades.
Conservative LTV
Earls Court interests exited
Estimated rental values decline
Asset valuations falling
High retail exposure
Dividend held flat
Capital and Counties' portfolio consists of a mixture of retail, food and beverage, office and residential properties in Covent Garden, as well as 50 per cent of a residential development in Lillie Square in Fulham.
Covent Garden, which accounts for 94 per cent of the portfolio, suffered a 1.4 per cent decline in value in 2019, compared with a 1.6 per cent like-for-like increase in the prior year. The yield on the assets moved out to 3.65 per cent, from 3.59 per cent in 2018 (a rising yield represents a falling valuation), and estimated rental values (ERV) reduced by 0.1 per cent after a 1 per cent decline in the second half. That was driven by negative valuation movements for units in Long Acre and James Street, reflecting pessimism from the valuers about the group’s ability to re-let or renew leases at higher rents in future.
Admittedly, rents agreed last year from 92 new leases and renewals were 1.3 per cent above 31 December 2018 ERV, but this is the worst result since the company's 2010 float by some margin (see graph).
While 80 per cent of the second phase of the Lillie Square joint venture is reserved or exchanged, the group’s 50 per cent share in the development also suffered a 5.4 per cent like-for-like decline in value. All in all, 2019 represented a negative property total return (change in NAV plus dividend yield) of 9.6 per cent. Worse than the negative return of 2 per cent in 2018.
| CAPITAL & COUNTIES (CAPC) | ||||
| ORD PRICE: | 195p | MARKET VALUE: | £1.66bn | |
| TOUCH: | 194.7-195p | 12-MONTH HIGH: | 275p | LOW: 181p |
| FW DIVIDEND YIELD: | 0.8% | TRADING PROPERTIES: | nil | |
| FW DISCOUNT TO NAV: | 38% | NET DEBT: | 16% | |
| INVESTMENT PROPERTIES: | £2.56bn* | |||
| Year to 31 Dec | Net asset value (p)** | Net operating income (£m) | Earnings per share (p)** | Dividend per share (p) |
| 2017 | 334 | 66.9 | 1.3 | 1.5 |
| 2018 | 326 | 64.4 | 0.9 | 1.5 |
| 2019 | 293 | 61.1 | 1.0 | 1.5 |
| 2020** | 295 | 72.3 | 2.1 | 1.5 |
| 2021** | 317 | 75.8 | 2.5 | 1.5 |
| % change | +7 | +5 | +19 | |
| Normal market size: | 7500 | |||
| Beta: | 1.00 | |||
| *Includes investments in joint ventures | ||||
| **Peel Hunt forecasts, adjusted NAV and EPS figures | ||||
