A combination of Brexit uncertainty and concerns over the retail sector has left shares in regional property developer Town Centre Securities (TOWN) trading at a significant discount to net asset value. But the quality of the group's assets suggests the sell-off has been overdone – the jewel in the crown is the Merrion Centre in Leeds, and the portfolio also has exposure to offices, distribution centres, residential property and car parks, none of which is in the south-east.
Shares at a big discount to net asset value
Rising rental income
Exciting development programme
Effective, hands-on management style
High level of debt
Brexit uncertainty affecting investor sentiment
Portfolio valuations may have been affected by adverse sentiment in the wider property sector, but the key point with Town Centre is that rental income continues to rise. Adjusted profits in the year to June 2017 were up 6.7 per cent at £7m, underpinned by a like-for-like rise in passing rent of 2.3 per cent. And demand for premium space is solid, with occupancy levels running at 99 per cent. There’s plenty of room for further growth, too. Chairman and chief executive Edward Ziff reckons that while some of London’s hot spots have seen rents double in the past 10 years, rents in Leeds are still 25 per cent down on their pre-crash peak.
Town Centre operates a very hands-on management style and is confident of improving rent through effective asset management. That includes recycling capital where the opportunity arises; £19.5m was realised in the year to June from the sale of assets in Scotland, all ahead of previous valuations, with a further £6.3m concluded after the year-end.
| TOWN CENTRE SECURITIES (TOWN) | ||||
| ORD PRICE: | 300p | MARKET VALUE: | £160m | |
| TOUCH: | 290-305p | 12M HIGH: | 325p | LOW: 260p |
| FORWARD DIVIDEND YIELD: | 4.2% | DEVELOPMENT PROP: | nil | |
| DISCOUNT TO FORWARD NAV: | 22% | |||
| INVESTMENT PROPERTIES: | £355m | NET DEBT: | 99% | |
| Year to 30 Jun | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 345 | 5.8 | 12.1 | 10.4 |
| 2016 | 357 | 11.9 | 22.4 | 11 |
| 2017 | 359 | 6.7 | 12.7 | 11.5 |
| 2018* | 368 | 7.3 | 13.7 | 11.8 |
| 2019* | 377 | 7.6 | 14.2 | 12.2 |
| % change | +2 | +4 | +4 | +3 |
| Normal market size: | 1,000 | |||
| Matched bargain trading | ||||
| Beta: | 0.23 | |||
| *Liberum forecasts, adjusted NAV and PTP | ||||
At the Merrion Centre, a record 11.5m people entered the gates in 2016-17, up 3.4 per cent on the previous year, and on a like-for-like basis the rent roll increased by 3.3 per cent. A recently completed refurbishment of the north side of the centre should maintain this momentum. Spotting an opportunity, Town Centre took full ownership of its previous joint venture on Buckley House in Leeds. The timing is apposite because it now owns the island site immediately outside the new Victoria Gate John Lewis scheme.
The development programme holds the potential to increase annual rental income by £1.8m. At Merrion House, where the ibis Styles Hotel opened earlier this year, total completion is expected in January 2018, while there are plans to develop Piccadilly Basin in Manchester. Two joint ventures have already been secured as part of a £240m residential programme.
And although net debt looks high, the money being spent on development schemes is paying off - while the valuation on the established portfolio was down a little last year, development property benefited from a 20.1 per cent valuation uplift, leaving the loan-to-value ratio at a more manageable 49 per cent.
