Circle Property (CRC) specialises in acquiring short-let or part-vacant regional offices, and adds value through rent reviews, lease renewals and refurbishments. That’s nothing new, but where Circle scores is by concentrating on premises that are too expensive for the private landlord to consider, but small enough to pass under the radar of the big operators.
Shares at a big discount to net asset value
Significant 'reversionary' element
Targeting regional office sweet spot
Several refurbishment projects yet to add to rental income
Modest dividend yield
Shares relatively illiquid
Its skill at sweating such assets can be seen from the half-year results to September 2017, when rental income grew by 26 per cent and net operating profit by 57 per cent. The shares are thinly traded, but that alone is hard to justify the near one-third discount to forecast net asset value.
In fact, ahead of its annual results, which are due to be published next month, Circle released data that showed its property portfolio had risen in value by nearly a quarter from a year earlier and by over a half since the IPO in February 2016. And while contracted rents rose by an impressive 21 per cent to £6.8m a year, estimated rental values were £9.9m, highlighting the significant 'reversionary' potential were all properties rented out at current market rates.
| CIRCLE PROPERTY (CRC) | ||||
| ORD PRICE: | 157.5p | MARKET VALUE: | £45m | |
| TOUCH: | 150-165p | 12-MONTH HIGH: | 168p | LOW: 153p |
| FORWARD DIVIDEND YIELD: | 3.5% | TRADING STOCK: | nil | |
| DISCOUNT TO FORWARD NAV: | 32% | NET DEBT: | 73% | |
| INVESTMENT PROPERTIES: | £96m | |||
| Year to 31 Mar | Net asset value (p)* | Net rental income (£m)* | Earnings per share (p)* | Dividend per share (p) |
| 2016* | 153 | 1.1 | 2.3 | 2.5 |
| 2017 | 183 | 4.4 | 3.1 | 5 |
| 2018** | 214 | 5.2 | 7.0 | 5.3 |
| 2019** | 232 | 5.9 | 8.6 | 5.5 |
| % change | +8 | +13 | +23 | +4 |
| Normal market size: | 750 | |||
| Beta: | 0.31 | |||
*Period from 4 Dec 2015 to 31 Mar 2016 **Edison forecasts, adjusted NAV, NRI and EPS figures | ||||
Solid tenant demand for decent regional offices has been exacerbated in the last few years firstly by an absence of new build and also by a steady loss of space through implementation of the permitted rights legislation, allowing change of use for residential. As rents remain too low to justify new building by some margin, supply should continue to lag demand for some time. Identifying the right property in the right location is still vital, and this is Circle's forte. For example, it recently acquired 710 and 720 Aztec business park in Bristol in an off-market transaction at a 7.9 per cent initial yield. This expands Circle's presence in the premier business park of a city that has seen office space shrink by 17 per cent in the past year.
Recent letting activity is also encouraging and this month Circle agreed a new 15-year lease with BE Offices at its recently completed Somerset House redevelopment in Birmingham city centre. This means the property is fully let just five months after the redevelopment completed. The new letting will increase Circle’s contracted rent roll by 11.6 per cent, and the property will generate total rental income of £1.23m a year; not a bad return considering that the whole redevelopment cost £3.5m.
Net debt at the half-year of £43m represented an acceptable loan-to-value ratio of 47 per cent, and given the upward revaluation since then, this should have dropped at the year end. Management owns around 30 per cent of the shares, adding to liquidity issues and the sizeable spread between the bid and offer price, which buyers should try to trade inside of. And while improving, the dividend yield is relatively modest.
