In recent months, I have been building exposure to property investment companies that hold industrial and logistic warehouses, having recommended buying into both AEW UK REIT (AEWU) and Schroder REIT (SREI). That’s because the investment case is well underpinned by strong investor demand, record take-up of warehouse space, relatively low levels of vacancy and a structural shift of retail sales moving online. This means that rental increases are set to drive capital values even without factoring in further yield compression. That’s good news for shareholder pay-outs.
Moreover, dividend yields of 6.7 per cent and 5.4 per cent, respectively, offer investors a defensive income stream in a negative real interest rate environment where inflationary is eroding the real value of money.
This favourable backdrop is one reason for the strong ongoing financial performance at one of my 2022 Bargain Shares Portfolio constituents, Sheffield-based Henry Boot (BOOT), a leading land development and construction group.
Boot has 943,000 sq ft of industrial and logistic developments underway with a gross development value (GDV) of £187mn, of which 92 per cent is pre-sold or pre-let, and 75 per cent of the group’s £1.4bn GDV development pipeline is focused on industrial and logistic property, too.
Primed for a strong re-rating
- 2021 pre-tax profit doubles to £35.1mn on revenue of £230.6mn
- Net debt of £43.5mn equates to 12 per cent gearing
- Return on capital of 9.6 per cent approaching 10-15 per cent target
- Dividend per share hiked 10 per cent to 6.05p
- Analysts upgrade 2022 pre-tax profit estimates by 4 per cent to £47.2mn
Boot is not only exposed to the favourable backdrop for developing warehouse assets, but owns a £126mn investment portfolio, which delivered 14.4 per cent underlying valuation growth and a total property return of 19.5 per cent in 2021 on the back of rising values for the asset class (50 per cent portfolio weighting). There should be further valuation upside too. That’s because 15 per cent of the portfolio is being marketed for rent following redevelopment, so the gap between the passing rent roll (£5.2mn) and estimated rent value (£6.7mn) could narrow dramatically this year. Boot is planning for only 5 per cent voids at the year-end.
The group’s residential-focused businesses are also performing well. Land developer Hallam Land sold 3,008 plots for £58.5mn to boost its pre-tax profit contribution by almost £4mn to £18mn. Moreover, the unit has already exchanged contracts on a further 1,880 plots since the year-end, and could get to its annual sales target of 3,500 plots in double quick time given that a site at Didcott, Berkshire (2,000 plots) is set to gain planning consent in the near future and will be marketed for sale shortly thereafter.
In the past year, Hallam Land’s land bank increased 5 per cent to 92,667 plots of which 84,654 plots are secured through option or planning promotion agreements. The business model not only reduces the capital tied up in land, but a conservative accounting policy – inventory is held at the lower of cost or net realisable value – means that Hallam makes hefty gains when plots are sold. Bearing this in mind, UK greenfield land values increased by 8.8 per cent in 2021 and the strong housing market is underpinning robust demand for sites as major housebuilders increase land buying activity to meet the ongoing demand for new homes.
In addition, Leeds-based premium housebuilder Stonebridge delivered 120 completions last year at an average selling price of £509,000. The plan to deliver 200 units this year is well on track. Not only are 154 homes already reserved, but strong house price growth in Yorkshire, Humberside and the North West suggests another step change in profitability. Furthermore, almost 80 per cent of Stonebridge’s 1,157-plot land bank already has planning permission, the equivalent of 4.6 years’ supply at current run-rates, thus supporting the ongoing ramp up in output to 280 completions in 2023.
Boot’s progress has not gone unnoticed since I suggested buying the shares last month, at 285p (my benchmark is the 300p opening offer price on publication day), having risen to 320p. It’s more than justified as Peel Hunt now predicts 33 per cent growth in earnings per share (EPS) to 27.9p in 2022 to support a 6.7p a share pay-out, implying the shares are rated on a modest forward price/earnings (PE) ratio of 11.4, offer a prospective dividend yield of 2.1 per cent and are priced on 1.2 times conservative book value. I maintain my sum-of-the-parts valuation of £639mn (479p a share), or 50 per cent above the current price. Buy.
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