The high yield and wide discount offered by shares in retail landlord Capital & Regional (CAL) reflect the market's fears about the future of the sector as it faces pressures from online shopping and possible consumer spending squeeze. However, with a strategy of focusing on 'community' shopping centres catering for the non-discretionary needs of local clientele (try getting a haircut or dental work online), there appears to be a growing disconnect between the lowly rating being put on Capital & Regional's shares and the far more encouraging performance of this real-estate investment trust's (Reit) properties.
Attractive dividend
High occupancy
Footfall better than national trends
Cheap rents
Relatively high debt
Highly dependent on retail shopping
Capital & Regional has done a lot of research to find out how its shopping centres can be made more attractive both to customers and tenants. First up is the need to generate a community feel about going shopping. This is all about adding features such as seating areas, baby changing facilities – including free nappies – and somewhere for the children to play while mum and/or dad has a cup of coffee. The type of tenants and feel Capital & Regional tries to bring to its centres means they complement rather than compete with with any nearby, large regional malls – such as Westfield Stratford City, which happily co-exists with Capital & Regional's nearby Ilford centre.
Crucially, rents are cheap; less than half the rates charged are at the top end of the scale. And tenants such as Lidl and Travelodge have been attracted. So, in the five months to the end of November 2017, there were 15 new lettings and 18 lease renewals at a combined premium of 7.1 per cent to estimated rental value.
In addition, the outperformance of new lettings over estimated rental value reflects both the low level of rent and the attractiveness of the schemes. And while some renewals have been settled at lower levels, this reflects a growing trend among tenants to settle for a lower level of rent rather than taking rent-free incentives. Occupancy levels remain tight too at 96.6 per cent. And while a 0.2 per cent rise in footfall in the first 21 weeks of the second half (starting on 1 July 2017) looks modest, it’s a lot better than the 2.7 per cent fall in the national average.
| CAPITAL & REGIONAL (CAL) | ||||
| ORD PRICE: | 53.9p | MARKET VALUE: | £387m | |
| TOUCH: | 53.6-53.9p | 12-MONTH HIGH: | 63p | LOW: 50p |
| FORWARD DIVIDEND YIELD: | 7.4% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORWARD NAV: | 25% | NET DEBT: | 84% | |
| INVESTMENT PROPERTIES: | £924m | |||
| Year to 31 Dec | Net asset value (p)* | Net operating income (£m) | Earnings per share (p)* | Dividend per share (p) |
| 2014 | 59.0 | 34.1 | 2.2 | 1.0 |
| 2015 | 70.6 | 45.6 | 3.3 | 3.1 |
| 2016 | 68.0 | 54.0 | 3.7 | 3.4 |
| 2017* | 70.0 | 55.6 | 4.1 | 3.7 |
| 2018* | 72.0 | 58.2 | 4.4 | 4.0 |
| % change | +3 | +5 | +7 | +8 |
| Normal market size: | 5,000 | |||
| Matched bargain trading | ||||
| Beta: | 0.09 | |||
| *Peel Hunt forecasts Adjusted EPS and NAV figures | ||||
Debt levels are relatively high, but there is a cost reduction programme that expects to achieve a 20 per cent saving on 2016 costs equivalent to £1.8m a year. For shareholders, there is also the attraction of a progressive dividend policy, with payments covered by after-tax earnings. For the year to December 2018, Peel Hunt is forecasting an annual payout of 4p a share, equivalent to a yield of over 7 per cent.
An ongoing development programme is expected to cost around £80m in total, with some work already completed, and planning applications submitted to deliver leisure facilities at Hemel Hempstead and Walthamstow. These will also include 470 new residential apartments.
