Takeover target Helical too cheap

Helical has been streamlining its portfolio over the past three years, disposing of non-core assets including logistics, retail and retirement villages, to focus exclusively on London and Manchester offices. In June last year the three remaining non-core assets were sold at a 6.2 per cent premium to March 2018 book value. Admittedly, that meant net rent declined by almost a third last year, but those disposals also helped reduce the loan-to-value (LTV) ratio to a level more in line with peers of 30.6 per cent at the end of March, up from 39.9 per cent in the prior year and 55 per cent in 2016. That reduction in LTV also lowered finance costs – with the cost of debt falling from 4.3 per cent to 4 per cent last year – and should give the group access to improved debt terms. It also enabled the group to repay its five-year £100m convertible bond, which had been issued in 2014. 

Attention has now turned to crystallising the value within its development portfolio and refurbishing existing assets to boost rental income. By the end of March the group had completed three out of four of its onsite development schemes, with work continuing on the 88,680 square feet (sq ft) office development at Farringdon East, due for completion by December. Practical completion was achieved at The Bower and One Bartholomew in London EC1 and at Trinity, Manchester, in January 2019, delivering a total of 455,127 sq ft of new space. 

Risks associated with developments were reduced further last year, including the full leasing of 1 Creechurch Place in East London and 70 per cent letting of the Bower. This helped push the portfolio’s valuation up by 10.1 per cent, ahead of the 4.8 per cent return generated by the MSCI Central London Offices Total Return Index. New lettings in London were agreed at 3.2 per cent ahead of March 2018 estimated rental values, while in Manchester five new office lettings were signed at 15.9 per cent above estimated rental values at the same date. 

True, rent increases slowed in London – in 2018 rents were agreed at 8.1 per cent ahead of estimated rental yields at March 2017. What’s more, the group is exposed to a natural degree of construction risk – it was forced to take £13.7m in provisions against legacy assets and Carillion’s collapse last year. However, it still managed a total property return 18 per cent ahead of 2018 at £81.4m. In fact, the group’s NAV has grown at a steady compound annual rate of 6 per cent over the past four years.