Strong trading in H218 and beyond
Circle recently provided a trading update ahead of the June publication of results for the year to 31 March 2018. It has followed that with news of a significant letting of recently refurbished vacant space at Somerset House in Birmingham. Ongoing asset management initiatives are continuing to drive operational progress, delivering strong growth in rental income and cash earnings, and lifting investment portfolio valuations. As a result, we have increased our estimates for the third time since we first initiated on Circle in September 2017.
The highlights of the trading update are:
■
The portfolio valuation has increased to c £114.0m from c £93.0m at the end of March 2017 and c £103.5m at 30 September 2017. We estimate that c £12m of the increase reflects revaluation movements, with capex and a recent acquisition in Bristol (see below) accounting for the balance.
■
Annualised contracted rent has increased to c £6.8m from c £5.6m at the end of March 2017 and c £6.0m at 30 September 2017. Since 31 March 2018, Circle has let 36,300 sq ft of office space covering six floors, at Somerset House in Birmingham (see below) increasing the contracted rent roll by a further 11.6% to c £7.6m.
■
The majority of the FY18 increase in rent roll was organic, with half of the 21.5% gain being attributable to progress with leasing refurbished space from within the development assets, representing recently completed major refurbishment projects, and 21% attributable to lease renewals within the core stabilised portfolio where occupancy has remained high at c 99%. The balance of contracted rent growth in FY18 came from the Bristol acquisition.
■
The estimated rental value (ERV) on the portfolio increased by 12.45% during FY18 to c £9.9m. Adjusting for the Bristol acquisition, we estimate that the underlying increase in ERV during the year is c 7%, a strong result given market levels of rental growth.
■
Circle has acquired numbers 710 and 720 Aztec West business Park in Bristol for £4.2m, where it already owns the 13,285 sqft number 135. All three of the properties are fully occupied, with numbers 710 and 720 being acquired on a net initial yield of 7.9%, with a weighted average unexpired lease term of 4.85 years, and generating £351,573 pa of additional passing rent. The acquisition has been funded through a £5m extension to the existing £50m loan facility with RBS. Management continues to review a strong pipeline of acquisition opportunities that it is keen to progress.
■
The letting of vacant office space takes occupancy at Somerset to 100%, with the two ground floor restaurant units having been let during FY18. The property will generate total rental income of c £1.2m per year (after rent fees and incentives expire), with upwards-only five-year rent reviews.
■
The remaining upside potential to rental income, as measured by the gap between ERV and contracted rents remains significant at c £2.3m, of which we estimate c £1.1m is attributable to the potential from letting the remaining vacant space at two other recently completed major refurbishments (K2, Milton Keynes, and 36 Great Charles Street, Birmingham).
Exhibit 1: Edison estimated contracted rents and ERV
£m |
|
Contracted rent roll at 31 March 2018 |
6.8 |
Somerset House, Temple St., Birmingham |
0.8 |
Adjusted contracted rent roll |
7.6 |
Development assets expected rent (ERV) |
|
K2, Kents Hill Business Park, Milton Keynes |
0.6 |
Great Charles St, Birmingham uplift |
0.5 |
Potential rent including development assets |
8.7 |
Other, rent reversion potential |
1.2 |
Total portfolio ERV at 31 March 2017 |
9.9 |
£m |
Contracted rent roll at 31 March 2018 |
Somerset House, Temple St., Birmingham |
Adjusted contracted rent roll |
Development assets expected rent (ERV) |
K2, Kents Hill Business Park, Milton Keynes |
Great Charles St, Birmingham uplift |
Potential rent including development assets |
Other, rent reversion potential |
Total portfolio ERV at 31 March 2017 |
|
6.8 |
0.8 |
7.6 |
|
0.6 |
0.5 |
8.7 |
1.2 |
9.9 |
Source: Edison Investment Research, company data
The continued progress in ERV and leasing has lifted the externally assessed valuation of the portfolio above the level that we had assumed, with a positive impact on forecast NAV per share. Adjusting the fair value of c £114.0m for our estimate of lease incentives gives a balance sheet value of £106.5m compared with £92.3m at 30 September. Adjusting this movement for estimated capex and the Bristol acquisition (including acquisition costs) implies a H218 revaluation gain of c £4.5m, higher than the £1.0m we had previously allowed for. This adds a little over 12p per share to our end-FY18 NAV per share estimate.
The FY18 period-end contracted rent income was higher than we have been forecasting and, depending upon the timing of the H218 leasing progress (not disclosed in the trading update) may indicate upside to our FY18 estimated income earnings. We estimate that the subsequent letting of vacant office space at Somerset House takes contracted rental income to c £7.6m, a similar level to our existing forecast for end-FY19, adjusted for the Bristol acquisition.
We have adjusted our FY19 recurring earnings forecast for the accretive impact of the Bristol acquisition and will review it again once we have seen the detail of the FY18 results and management comments on the expected pace of further letting during the year. The risk to our current FY19 estimate is firmly on the upside.
Exhibit 2: Estimate revisions
|
Net rental income (£m) |
Adjusted net profit (£m)* |
Adjusted EPS (p)* |
NAV per share (p) |
DPS (p) |
|
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
03/18e |
5.2 |
5.2 |
0.0 |
2.0 |
2.0 |
0.0 |
7.0 |
7.0 |
0.0 |
214 |
227 |
5.7 |
5.3 |
5.3 |
0.0 |
03/19e |
5.9 |
6.2 |
6.0 |
2.4 |
2.6 |
8.2 |
8.6 |
9.3 |
8.2 |
232 |
245 |
5.6 |
5.5 |
5.5 |
0.0 |
Source: Edison Investment Research. Note: *Adjusted for gains/losses on sales of investment property, revaluation movements, and non-recurring items.
As we have previously noted, the letting of vacant space at a faster pace than we have allowed for in our estimates is a potential source of significant upside to our forecast adjusted earnings, dividend paying capacity and NAV. Our FY19 forecast is struck on the basis of contracted rents being no higher at year end than they are today (c £7.6m), whereas full letting of the vacant space at the other two recently completed refurbishments has the potential to add c £1.1m to this figure. That would still leave upside to ERV of £1.2m across the portfolio as a whole.
On an annualised basis, full letting of the two refurbishment assets alone has the potential to increase our FY19e underlying EPS of 9.3p by c 50% and NAV per share towards 250p.
Discount to NAV remains wide; income earnings building
For Circle, unlike a REIT, capital returns are expected to be a significant element of overall total returns, which we think is best measured by NAV total return (the change in NAV per share plus dividends paid per share). In the 10 years to FY16, the average annual return was more than 7.5% pa. NAV total return since IPO has increased and we calculate a 24.1% annual total return for FY17 and our revised estimates suggest a 26.6% annual total return in the current year (previously 19.9%).
For an investor, expected future capital returns are perhaps less easy to predict than expected dividend returns driven by contracted rental income. However, given Circle management’s experience and track record, the discount of c 30% to our upwardly revised forecast FY18 NAV per share supported by a dividend yield of more than 3%, with DPS well covered by a growing income stream, continues to represent a relatively low valuation; nothing is obviously being factored in for the upside potential to income and NAV.
Some discount for Circle’s relatively small market capitalisation and thin share trading liquidity, and for its above-average gearing, may be anticipated. Moreover, while the relatively concentrated nature of the Circle portfolio has allowed the company to successfully focus its efforts, it does not provide the risk diversification offered by some larger regional commercial property companies. Circle remains keen to grow the portfolio, with the potential for earnings accretion in addition to scale and diversification benefits. Moreover, management has previously stated it is considering options for enlarging the shareholder base and growth through an expansion of capital resources, both equity and debt, could provide a welcome boost to liquidity.
Exhibit 3: Financial summary
Year ending 31 March |
FY16 |
FY17 |
FY18e |
FY19e |
£000s |
IFRS |
IFRS |
IFRS |
IFRS |
INCOME STATEMENT |
|
|
|
|
Rental income |
664 |
5,266 |
5,980 |
7,087 |
Other income |
595 |
138 |
93 |
0 |
Total income |
1,260 |
5,404 |
6,073 |
7,087 |
Property expenses |
(123) |
(1,037) |
(920) |
(870) |
Net rental income |
1,137 |
4,366 |
5,152 |
6,217 |
Administrative expenses |
(293) |
(2,115) |
(2,116) |
(2,202) |
Operating profit before valuation gains |
844 |
2,251 |
3,036 |
4,015 |
Gains on disposal of investment properties |
0 |
279 |
0 |
0 |
Revaluation of investment properties |
0 |
7,361 |
11,772 |
4,000 |
Exception items |
374 |
88 |
0 |
0 |
Operating profit |
1,217 |
9,979 |
14,807 |
8,015 |
Net finance costs |
(112) |
(13) |
(1,120) |
(1,261) |
Profit before tax |
1,106 |
9,966 |
13,687 |
6,754 |
Tax |
(32) |
(22) |
73 |
(128) |
Net profit |
1,073 |
9,944 |
13,760 |
6,626 |
Adjusted for: |
|
|
|
|
Gain/(loss) on disposal of investment property |
0 |
(279) |
0 |
0 |
Revaluation of investment property |
0 |
(7,361) |
(11,772) |
(4,000) |
Fair value movement on interest rate swaps |
2 |
(96) |
1 |
0 |
Exceptional items |
(374) |
(88) |
0 |
0 |
Adjustment for effective interest rate on borrowings |
(54) |
(1,232) |
0 |
0 |
Adjusted earnings |
648 |
889 |
1,989 |
2,626 |
|
|
|
|
|
Shares ('000s) exc. own shares held |
28,297 |
28,297 |
28,297 |
28,297 |
IFRS EPS (p) |
3.8 |
35.1 |
48.6 |
23.4 |
Diluted adjusted EPS (p) |
2.3 |
3.1 |
7.0 |
9.3 |
Dividend declared (p) |
2.4 |
5.0 |
5.3 |
5.5 |
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
Investment properties |
75,781 |
86,054 |
106,488 |
111,488 |
PPE |
22 |
29 |
26 |
26 |
Trade and other receivables |
1,771 |
6,518 |
7,037 |
7,037 |
Deferred tax |
915 |
1,142 |
1,142 |
1,142 |
Financial instruments at FV through P&L |
0 |
1 |
0 |
0 |
Total non-current assets |
78,490 |
93,744 |
114,693 |
119,693 |
Trade and other receivables |
2,555 |
1,195 |
1,350 |
1,586 |
Deferred tax |
105 |
128 |
322 |
322 |
Cash and equivalents |
4,516 |
4,894 |
4,005 |
5,084 |
Total current assets |
7,176 |
6,217 |
5,677 |
6,992 |
Total assets |
85,665 |
99,962 |
120,370 |
126,685 |
Borrowings |
(40,028) |
(45,590) |
(53,831) |
(53,891) |
Financial liability at FV through P&L |
(95) |
0 |
0 |
0 |
Total non-current liabilities |
(40,123) |
(45,590) |
(53,831) |
(53,891) |
Trade and other payables |
(2,306) |
(2,550) |
(2,429) |
(3,103) |
Total current liabilities |
(2,306) |
(2,550) |
(2,429) |
(3,103) |
Total liabilities |
(42,430) |
(48,140) |
(56,260) |
(56,994) |
Net assets |
43,236 |
51,822 |
64,110 |
69,691 |
Basic and diluted IFRS NAV per share (p) |
153 |
183 |
227 |
245 |
|
|
|
|
|
CASH FLOW |
|
|
|
|
Profit before tax |
1,106 |
9,966 |
13,687 |
6,754 |
Adjusted for |
|
|
|
|
Net finance expense |
112 |
1,245 |
1,120 |
1,261 |
Depreciation |
1 |
7 |
6 |
7 |
Share-based payments |
0 |
0 |
0 |
0 |
Gains on revaluation |
0 |
(7,361) |
(11,772) |
(4,000) |
Gains on disposal of investment properties |
0 |
(279) |
0 |
0 |
Amortisation of loan arrangement fees |
7 |
40 |
59 |
60 |
Goodwill, interest rate and swap valuation movements |
(1,751) |
(1,523) |
1 |
0 |
Working capital movements |
1,132 |
(3,512) |
(866) |
438 |
Cash from operations |
607 |
(1,416) |
2,236 |
4,520 |
Tax paid |
0 |
0 |
(26) |
(128) |
Net interest (paid)/received |
(56) |
(1,346) |
(1,120) |
(1,261) |
Net cash from operations |
551 |
(2,763) |
1,089 |
3,131 |
Net cash from investing |
3,610 |
(2,255) |
(8,688) |
(1,007) |
Net cash used in financing |
356 |
5,396 |
6,710 |
(1,500) |
Net increase/(decrease) in cash and equivalents |
4,516 |
378 |
(889) |
624 |
Opening cash |
0 |
4,516 |
4,894 |
4,005 |
Closing cash |
4,516 |
4,894 |
4,005 |
4,629 |
Debt |
(40,028) |
(45,590) |
(53,831) |
(53,891) |
Net debt |
(35,512) |
(40,697) |
(49,826) |
(49,261) |
Net LTV |
45.7% |
43.9% |
43.8% |
41.4% |
Source: Edison Investment Research
Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Circle Property and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. |
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Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Circle Property and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany |
London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom |
New York +1 646 653 7026 295 Madison Avenue, 18th Floor 10017, New York US |
Sydney +61 (0)2 8249 8342 Level 4, Office 1205 95 Pitt Street, Sydney NSW 2000, Australia |
|
