The world and his wife can’t seem to see anything in front of them apart from Brexit, which is a shame, but is also the source of potential opportunity for investors in listed real estate companies. Brexit fears come at a time when investors have already been pulling in their horns due to the risk that the current cycle in the commercial property market could be reaching a peak, especially in prime central London where property owner and developer Great Portland Estates (GPOR) operates. However, while nearly all property company bosses expect valuations to retreat next year, this is not to say that the bottom is about to fall out of the London property market.
Shares trading at a discount to net asset value
Very small loan to value ratio
Plenty of firepower to pick up distressed assets
Significant reversionary value yet to be crystallised
Vulnerable to broader market Brexit malaise
Modest dividend yield
Great Portland looks very well positioned for more challenging times. During its first half it sold properties for a total of £329m at prices only slightly (0.6 per cent) below book value. More disposals are expected in the second half of the year, taking the percentage of properties with long leases – properties considered to have less asset management upside to tap – down from 16 per cent to less than 9 per cent of the portfolio. What's more, there is a further £120m of commercial and residential property in the market for sale.
The sales have not only given Great Portland balance sheet defences, but also make it exceptionally well placed to take advantage of any downturn that throws up bargains. This is an approach that chief executive Toby Courtauld used with great effect when the company picked up nearly half of its property portfolio in the wake of the financial crash. And while a downturn of such severity seems unlikely, the company is in a very strong financial position, with cash and committed credit facilities at the half-year-end of £682m, with a £450m revolving credit facility signed after the period end. Indeed with a loan-to-value (LTV) ratio of less than 6 per cent the company has seen fit to announce a £200m buyback to ensure the balance sheet is not too stodgy. Even after accounting for the return of capital and all outstanding development commitments, LTV would only be 18.4 per cent.
Inevitably this has reduced net rental income, although leasing activity remains healthy. So adjusting for the disposals means that the rent roll in the six months to September rose by 2.5 per cent.
| GREAT PORTLAND ESTATES (GPOR) | ||||
| ORD PRICE: | 731.3p | MARKET VALUE: | £2.06bn | |
| TOUCH: | 731-731.7p | 12-MONTH HIGH: | 760p | LOW: 602p |
| FWD DIVIDEND YIELD: | 1.8% | TRADING PROP: | £17.7m | |
| DISCOUNT TO FORWARD NAV: | 12% | |||
| INVESTMENT PROP: | £2.57bn | NET DEBT: | 7% | |
| Year to 31 Mar | Net asset value (p)* | Net rental income (£m) | Earnings per share (p)* | Dividend per share (p) |
| 2016 | 847 | 84.3 | 13.5 | 9.2 |
| 2017 | 799 | 90.3 | 17.3 | 11.3 |
| 2018 | 845 | 98.1 | 20.4 | 11.3 |
| 2019* | 843 | 91.8 | 20.9 | 12.3 |
| 2020* | 835 | 91.9 | 21.0 | 13.3 |
| % change | -1 | - | - | +8 |
| NMS: | 3,000 | |||
| BETA: | 0.70 | |||
| *Liberum forecasts, adjusted NAV and EPS figures | ||||
The portfolio is extremely high quality, with 92 per cent of properties in proximity to London’s new Crossrail line. Furthermore, its properties are let off low rents, and while £1.9m of rent hikes have been locked in since March 2018, there is another £9.8m, based on current market rent levels, yet to be crystallised.
No acquisitions were made in the first half, and the emphasis is on exploiting existing assets. There are 11 uncommitted projects in the development pipeline, but crucially all but one is income-producing. There is also significant hidden value, for example at New City Court in the London Bridge quarter, where it is hoping to increase the existing 97,800 square foot (sq ft) building to more than 370,000 sq ft.
