Town Centre Securities — Reinvigorating strategy

Town Centre Securities (TOWN)

Last close As at 19/04/2024

133.50

0.00 (0.00%)

Market capitalisation

71m

More on this equity

Research: Real Estate

Town Centre Securities — Reinvigorating strategy

Town Centre Securities (TCS) has been hard hit by the pandemic, particularly in its car parking business, but the effects have been mitigated by the strategic repositioning of the property portfolio in recent years, reflected in relatively robust rent collection and capital values. Management expects a strong recovery in car parking as the lockdown eases. In property, retail asset sales reduce near-term income but further de-risk the business, creating a stronger footing on which to build, focused on well-performing regional cities and substantial strategic development opportunities.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Town Centre Securities

Reinvigorating strategy

Business outlook

Real estate

26 May 2021

Price

134p

Market cap

£71m

Net debt (£m) at 31 December 2020 (excluding finance leases)

147.6

Net adjusted LTV at 31 December 2020

48.6%

Shares in issue

53.2m

Free float

48%

Code

TOWN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.8

10.7

35.0

Rel (local)

(0.4)

4.6

11.2

52-week high/low

144p

82p

Business description

Town Centre Securities is a UK real estate investment trust operating across the UK, but with a regional focus, primarily in Leeds, Manchester, Scotland and (mainly suburban) London. It also has a car parking operation (CitiPark). The investment portfolio is intensively managed for income and capital growth.

Next events

FY21 year-end

30 June 2021

Analyst

Martyn King

+44 (0)20 3077 5745

Town Centre Securities is a research client of Edison Investment Research Limited

Town Centre Securities (TCS) has been hard hit by the pandemic, particularly in its car parking business, but the effects have been mitigated by the strategic repositioning of the property portfolio in recent years, reflected in relatively robust rent collection and capital values. Management expects a strong recovery in car parking as the lockdown eases. In property, retail asset sales reduce near-term income but further de-risk the business, creating a stronger footing on which to build, focused on well-performing regional cities and substantial strategic development opportunities.

Year end

Net revenue (£m)

EPRA
earnings* (£m)

EPRA EPS*
(p)

EPRA NTA/
share* (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/20

16.1

2.1

3.9

285

5.00

0.47

3.7

06/21e

11.9

(0.4)

(0.8)

269

1.75

0.50

1.3

06/22e

14.9

2.3

4.4

272

4.00

0.49

3.0

06/23e

16.9

4.2

7.9

275

7.25

0.49

5.4

Note: *EPRA EPS is adjusted to exclude revaluation movements, disposal gains/(losses) on investment property and exceptional items.

Repositioning has mitigated worst of pandemic

The most recent H121 results confirmed the relative resilience of TCS’s property investment business, with the car parking business most affected (reduced revenues and high fixed costs). EPRA earnings of £0.2m included a pandemic impact of £3.2m (management estimate), of which £2.3m was in car parking (c 30% of group operating profit pre-pandemic). The H121 car park operating profit of c £0.6m compared with £4.4m in FY19, but management anticipates a strong rebound as the lockdown eases. The resilience of the property business reflects a focus on strong regional markets (Leeds and Manchester) and the reduced weighting to retail & leisure (c 39% at H121 with pure retail 26%), with a focus on defensive areas such as supermarkets, convenience and discount retailing.

De-risking and focusing on core opportunities

Total asset sales in FY21 to date, mostly in H121, amount to £45.3m, focused on the retail sector and collectively at prices close to book value, with the proceeds initially being used to repay debt (H121 LTV: 48.6%). In the near term, this reduces income but creates a stronger footing for medium-term growth, including exploiting the strategic development pipeline (gross development value of c £600m). We expect a modest EPRA loss (c £0.4m) in FY21 before negative property revaluation movements, with EPRA NTA per share reducing to 269p, and assume no final DPS. Assuming a continuation of the lockdown easing and that it is sustained, we expect a recovery in FY22 across all business lines but led by the car parking operation, and for this recovery to build through FY23.

Valuation: Not discounting recovery potential

Management is strongly aligned with shareholders and is committed to restoring the level of dividends as soon as is practicable. Our FY23e DPS of 7.25p, fully covered by EPRA earnings, represents a yield of 5.4% while the shares trade at a c 50% discount to H121 EPRA NTA.

Investment summary

Re-invigorating strategy in face of COVID-19

Financial performance during the pandemic has demonstrated the relative resilience of TCS’s multi-sector property investment portfolio, focused on the strong regional markets of Leeds and Manchester. Management expects the hard-hit, capital-light and normally cash-generative car parking operations (c 30% of pre-pandemic operating profits) to recovery quickly as the lockdown eases. The property investment strategy, focused on active asset management and redevelopment, to optimise income and maximise the use of available capital, is being accelerated in response to the pandemic. Retail asset sales have been stepped up, while key office refurbishment projects in Leeds and Manchester were continued to completion, providing income and capital potential once re-let. With most of the sale proceeds used to repay debt, near-term income dividend-paying capacity is reduced; in the medium-term, and as trading conditions improve, TCS should be better positioned to grow, including exploiting its substantial strategic development pipeline.

Managing the pandemic

Retail & leisure exposure had already reduced from c 70% (by portfolio value) at end-FY16 to c 47% at end-FY20 and was 39% at H121 with asset sales continuing since. H121 pure retail exposure was 26% and focused on more defensive areas such as supermarkets, convenience and discount retailing. Rent collection has been consistent and reassuring on a quarterly basis through to March 2021, at c 88% collected/agreed to be collected, and by late March was above 92% for the most recent quarter. Although property valuations were materially weaker in FY20 (-6.9% like-for-like), total property return was ahead of the MSCI Quarterly UK Property Index and the H121 like-for-like decline of 0.8% was highly robust. The Merrion Centre continues to perform notably more strongly than the traditional shopping centre sector. The most recent H121 results showed small EPRA earnings of £0.2m after pandemic impacts estimated by management at £3.2m and car park operating profit (before valuation movements) of c £0.4m compared with £4.4m in FY19.

Financials and valuation

Including a full period impact from H121 asset sales, and continuing lockdown impacts in H221, we forecast an EPRA earnings loss of £0.4m in FY21, before further negative property revaluation movements, taking EPRA NTA per share to 269p (H121: 278p). We forecast no H221 DPS (H121: 1.75p). Assuming a continuation of lockdown easing, we expect a significant improvement in FY22, and building in FY23, across all business lines but led by the car parking operations. The management team is strongly aligned with shareholders and is committed to restoring dividends as soon as is practicable. We forecast 4.0p in FY22 and 7.25p in FY23, fully covered by EPRA earnings and a FY23e yield of 5.4%, while the shares trade at a c 50% discount to FY21e EPRA NAV, despite a focus on better performing regional markets.

Sensitivities

The main sensitivities (see page 17) are related to the broader macroeconomic background and the cyclical nature of the commercial property market, with COVID-19 and Brexit creating additional uncertainties. Commercial property has historically exhibited substantial swings in property valuation through cycles; income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. Management identifies the single greatest risk to the business model as the impact that further reductions in property values could have on banking covenants and future borrowing headroom. To mitigate this risk the company has accelerated disposal of mature and non-core assets, reducing H121 net LTV to 48.6%.

Family controlled with long-term strategy

Regional asset focus and strong dividend record

Town Centre Securities (TCS) is a UK Real Estate Investment Trust (REIT) operating a mixed use and increasingly diversified portfolio of commercial property across the UK, but with a strong regional focus, primarily in the two strongly performing northern cities of Leeds and Manchester (91% by value at 31 December 2020, end-H121), as well as Scotland and (mainly suburban) London. The property portfolio is intensively managed, exploiting a strong and detailed knowledge of the communities in which the company operates (especially in Leeds where the group is based) to enhance income and capital values over the long-term, and maximise the use of available capital.

Significant and ongoing repositioning of the portfolio in recent years, driven by capital recycling, has seen the significant reduction in retail and leisure exposure offset by increases in offices, hotels and residential assets. In addition to the income producing assets the existing portfolio contains an extensive pipeline of potential development projects, primarily in Leeds and Manchester, with an estimated gross value – once funded and developed – of more than £600m. This significant long-term growth opportunity is not captured within the carried book value and represents an attractive differentiating factor for the group.

Alongside property investment, the car parking operation (CitiPark) is a strong and profitable standalone business in its own right. It has a good track record of growth and provides a complementary earnings stream, not driven by the property cycle, capable of monetising development sites what would in some cases be empty, non-income producing development assets. CitiPark represented c 30% of group operating profit prior to the pandemic and while unsurprisingly it has seen a significant negative impact from the lockdowns it has remained profitable and management expects a swift recovery as the economy re-opens.

The combined value of TCS’ investment properties, developments, joint ventures and car parks at end-H121 was £331.4m with a passing rent of £23.1m.

Dividends have historically been a core element of shareholder return and until the pandemic forced a reduction in FY20 DPS, TCS had built an unbroken 58-year track record of increased or maintained dividend payments. In FY20 the aggregate annual DPS was reduced from 11.75p to 5.0p and the uncovered DPS of 1.75p declared for H121 reflected management expectations of a post-lockdown easing earnings recovery, led by CitiPark, while underlining the continuing commitment to distributions.

Exhibit 1: Geographic split of portfolio by value*

Exhibit 2: Sector split of portfolio by value*

Source: Town Centre Securities. Note: *31 December 2020.

Town Centre Securities. Note: *31 December 2020

Exhibit 1: Geographic split of portfolio by value*

Source: Town Centre Securities. Note: *31 December 2020.

Exhibit 2: Sector split of portfolio by value*

Town Centre Securities. Note: *31 December 2020

Family control shapes long-term strategy

TCS was founded in 1959 by Arnold Ziff, father of the current chief executive and chairman, Edward Ziff. The company listed on the London Stock Exchange soon afterwards, in 1960, and became a UK REIT in 2007. Members of the Ziff family continue to have a substantial interest in the company and through a relationship agreement the Ziff family concert party represents a combined shareholding of c 52%. The principal family shareholders are Edward, his brother, Michael Ziff, and sister, Ann.

This strong family interest aligns the interests of management and all shareholders and significantly contributes to shaping the company’s long-term strategic horizon and a continuing focus on dividend payments as a key element of shareholder returns. Family control makes access to new external equity capital more complex (requiring significant family shareholders to participate or be willing to cede control), and this is compounded by the recent wide valuation discount to NAV; and this has created an additional incentive to optimise the use of existing capital resources through the intensive management of existing assets and active capital recycling to fund new initiatives.

The executive team members represented on the board are the chairman and chief executive (Edward Ziff) and the managing director for CitiPark (Ben Ziff, Edward’s son). Following the departure of group property director (Lynda Shillaw) in FY20 this role has been split into separate property and development roles reporting directly to the chairman and chief executive. Following the departure of CFO, Mark Dilley, in February 2021, the finance function reports directly to the CEO. Biographies for the executive directors can be found on page 20.

The board of directors consists of six members, the two executive members plus four non-executive members. The non-executive members are Michael Ziff (appointed July 2014), Ian Marcus (January 2015), Paul Huberman (January 2015), and Jeremy Collins (February 2018); together they bring substantial experience across a wide range of relevant areas including retail, retail property development and management, investment banking, and finance, and corporate governance. Biographies can be found on the company’s website.

Actively managed portfolio

Management recognises that property values and income can reach mature levels where the potential for future returns become muted, especially in a lower growth environment. As a result, a key element of the strategy for long-term value creation is the recycling of capital from such assets into new opportunities, including an exceptionally strong pipeline of development opportunities from within the existing estate.

Following a relatively quiet year in terms of sales and purchases in FY20 there was a strong pick-up in sales activity in H121 as the COVID-19 crisis prompted an acceleration the multi-year retail and leisure disposal programme. Management indicates that it plans further disposals. The FY21 year to date disposals (£45.3m completed and £46.7m including agreed sales) take aggregate investment property sales since the beginning of FY17 to £95.6m, of which c 96% has been retail & leisure sector assets. During this period TCS has acquired properties amounting to £30.6m (of which just 24% were retail & leisure sector assets) and in addition has invested more than £40m into refurbishment and development projects. The latter includes the ibis Styles and Premier Inn hotels in Leeds, the Merrion House office redevelopment, the Burlington House private residential scheme development in Manchester and refurbishment of the 123 Albion Street and Dulcie House offices in Leeds and Manchester.

Exhibit 3: Active capital recycling

Sales

Purchases

£m

o/w retail & leisure

£m

o/w retail & leisure

FY17

22.3

88%

4.0

46%

FY18

10.1

95%

9.0

0%

FY19

14.0

100%

16.0

25%

FY20

2.5

100%

1.7

100%

H121

41.2

100%

H221 to date*

5.5

100%

Total

95.6

96%

30.6

24%

Source: Town Centre Securities, Edison Investment Research. Note: *Edison estimate including property where contracts exchanged.

Increased diversification and significant retail reduction

The significant, and ongoing, repositioning of the portfolio can be clearly seen in Exhibit 4. The portfolio has become increasingly diversified with a significant reduction in retail and leisure exposure offset by increases in offices, hotels, and residential assets.

Exhibit 4: Increasingly diversified portfolio

Source: Town Centre Securities, 31 December 2020 (H121) by value

The retail & leisure exposure in the portfolio had fallen to 39% by end-H121 (and we estimate c 38% currently on a pro-forma basis including H221 disposals) while pure retail exposure was just 26%, with a focus on defensive areas such as supermarket, discount, and convenience retailing.

During H121 TCS has sold 6 retail assets for a combined £41.2m, only slightly below book value (within 2%), targeting ex-growth assets, and comprising:

Two Waitrose stores in Scotland, in Milngavie and Glasgow, with combined annual rents of c £1.2m, sold as a single lot for a combined £23.2m, similar to the 30 June 2020 valuation.

An Aldi/Home Bargains store in Milngavie, with annual rent of c £0.5m, sold for £10.7m compared with a 30 June 2020 valuation of £10.8m.

A retail property (with residential upper floors) in Chiswick, London, with annual rent of c £0.1m, sold for £1.4m, ahead of the c £1.1m 30 June 2020 valuation.

Three retail units (two in Wood Green in London and one in Blackpool) for £6.0m.

So far in H221 TCS has announced:

The exchange of contracts, in February 2021, on a £1.4m retail asset in Leeds which we anticipate may now have completed.

The completed sale, in April 2021, for £4.1m, of the group’s primarily retail property interest at Thornton Chambers in Leeds.

Management has indicated that further disposals are likely as it seeks to optimise its capital allocation and adjust its exposures, but this is not reflected in our forecasts. Disposal proceeds have initially been applied to reducing borrowings although over the medium-term we expect redeployment of capital into non-retail & leisure assets to replenish the income base as well as investment in the group’s large development pipeline.

Increasing targeted retail exposure

TCS is not looking to exit the retail and leisure sector altogether and remains committed to selected retail formats in the right locations. The Merrion Centre, the group’s single largest asset, is well placed in the centre of Leeds, adjacent to the Leeds Arena amidst a large and growing student population. It has been transformed over the past 10 years from a classical shopping centre to a truly mixed-use destination reflective of its location. The centre incorporates offices, a hotel and restaurant, and car parking in addition to retail & leisure. The Merrion Centre retail and leisure exposure accounts for c two-thirds of the group total. It includes a significant food and beverage offering, accounting for 29% of the space at end-FY20, with a focus on the convenience and discount segments of the market that are less affected by online shopping, with Morrisons supermarket accounting for an additional 12%. With various redevelopment opportunities still existing, TCS continues to see the Merrion Centre as a valuable long-term opportunity. As we discuss in the financial section below, the reduction in retail and leisure exposure within the TCS portfolio, and the increased focus on food and convenience formats have mitigated the impact of the pandemic on both rent collections performance and portfolio valuation performance.

Exhibit 5: Breakdown of Merrion Centre

Exhibit 6: Breakdown of total retail & leisure exposure

Source: Town Centre Securities, 30 June 2020 (last available data).

Source: Town Centre Securities, 31 December 2021

Exhibit 5: Breakdown of Merrion Centre

Source: Town Centre Securities, 30 June 2020 (last available data).

Exhibit 6: Breakdown of total retail & leisure exposure

Source: Town Centre Securities, 31 December 2021

Focus on strong regional markets

TCS has a regionally focus property portfolio with an emphasis on the northern cities of Leeds (69%) and Manchester (22%) which together represented represent 91% of the end-H121 portfolio by value. These cities remain core to the group’s strategy and are home to the majority of the group’s extensive pipeline of development opportunities that should be a major driver of future growth. Leeds and Manchester are two of the largest conurbations in the UK and have attracted significant investment from both UK and international investors, attracted by strong economic growth over the past five years. Despite a high level of uncertainty with respect to the UK economy, the continuing political agenda to rebalance economic activity more evenly towards the north, combined with significantly lower occupational costs compared with London and the south-east should continue to be positive factors. In the office sector there is a growing view that encouraged by the pandemic, the regions will continue benefit from continuing business relocation out of London and the adoption of (London) hub and (regional) spoke strategies. Meanwhile, with rent levels remaining relatively low, development activity has been modest and a tight supply of Grade A office space should support good quality secondary assets.

Extensive growth opportunity from existing portfolio

Despite the pandemic, TCS pressed ahead with key office refurbishment projects in Leeds and Manchester. The £4.0m refurbishment of 123 Albion Street in Leeds reached practical completion in late calendar 2020 and with its central Leeds location, in close proximity to the Merrion Centre, and is receiving healthy occupier interest. The property was acquired for £12.0m in 2018 at a high yield of 12.5%, reflecting near-term tenant departures, which could be used by TCS to upgrade the property and enhance its income and capital, using its local knowledge and active asset management expertise. Post completion, the available space has all been let and TCS expects to deliver a running yield in excess of 8.5%. The valuation, which increased by £2.5m to £14.6m in FY20, increased further to £16.3m in H121, and management expects a further increase by end-FY21. The £2.2m refurbishment of Ducie House in Manchester has also now completed and management expects strong interest. It was acquired in 2018 and solved a right of light issue at Eider House (valued at £1.5-£2.0m), where TCS now has planning permission for a PRS development. Net income is expected to increase by c £0.3m as a result of the refurbishment and TCS expects a post investment return in excess of 8.5%. Reflecting the refurbishment, the property value increased by c £1.0m to c £9.0m at end-H121 and management expects this to increase further as vacant space is let.

TCS also has a very significant pipeline of development opportunities within its current portfolio, much of it with detailed planning consent or forming part of the local strategic framework (Exhibit 7). Management estimates the gross development value at c £601m with an income potential of c £34.0m, representing a significant potential for future growth in income and capital, subject to financing (potentially through joint ventures), the full value of which is not captured in the current net asset value. Most of the projects, by value, are situated within two strategic development sites in Manchester (Piccadilly Basin) and Leeds (Whitehall Road), two strong regional markets. Other projects include further developments at the Merrion Centre. The development pipeline has been built up over time and TCS takes a conservative long-term approach to development, exploiting opportunities when it believes the timing is right and market conditions supportive, controlling the pace of development and ensuring that it does not overcommit its financial resources.

The projects are listed in Exhibit 7 in line with management’s current best view of the likely order in which they may proceed, although this is subject to material variation according to changes in the marketplace. Top of the list is Eider House, a second residential private rented sector development and following the successful completion and letting of Burlington House in FY20. TCS sees long-term value in residential property, particularly in prime sites with major transport links and intends to proceed with Eider House, although the exact timing remains under review.

Exhibit 7: Significant value opportunity in long-term development pipeline*

Project

Sector

Status

Gross development value (E)

Income (E)

Yield on cost (E)

Manchester- Eider House

Residential

Detailed planning

£41m

£1.6m

5.2%

Leeds - car park

Car park

Detailed planning

£14m

£1.2m

9.1%

Leeds - Whitehall Road No2

Offices

Detailed planning

£92m

£5.3m

7.0%

Leeds - Whitehall Road No3

Offices

Strategic framework

£40m

£2.8m

9.3%

Leeds - Whitehall Road No7

Offices/leisure

Strategic framework

£28m

£2.0m

9.2%

Leeds - 100MC Merrion Office

Offices

Detailed planning

£62m

£4.0m

7.1%

Manchester - residential tower A

Residential

Strategic framework

£82m

£3.5m

5.2%

Manchester - residential tower B

Residential

Strategic framework

£55m

£2.4m

5.2%

Manchester - residential tower D

Residential

Strategic framework

£28m

£1.1m

4.9%

Manchester - Ducie House

Offices

Un-scoped

£21m

£1.3m

7.8%

Manchester - commercial

Mixed use

Strategic framework

£76m

£5.0m

7.9%

Manchester - car park

Car park

Strategic framework

£12m

£0.8m

7.2%

Leeds - Merrion corner tower

Residential/mixed use

Un-scoped

£50m

£3.0m

6.4%

Total

£601m

£34.0m

Source: Town Centre Securities. Note: *Management estimates for illustrative purposes and subject to material variation including from changes in the scope of works.

Car park operation is a substantial & growing business

The TCS car parking operation, known as CitiPark, is a strong standalone business in its own right, with a good track record of growth that has unsurprisingly been punctuated the pandemic lockdowns. Despite a significant negative impact from COVID-19 in the last four months of FY20 and through much of FY21 it has remained profitable and TCS expects a strong rebound as the economy re-opens. CitiPark provides the group with a low capital intensity, complementary earnings stream, independent of the commercial property cycle and capable of monetising development sites what would in some cases be empty, non-income producing development assets.

CitiPark provides a total of c 8,500 car parking spaces, spread across 19 sites, including freehold sites, leasehold car parks, and three car parks that are operated under management contracts. Two recent management contracts won are the Manchester Arena car park, building on a successful existing partnership with John Lewis in Cheltenham. CitiPark sees car park management services as a growth opportunity for the business going forward.

Exhibit 8: CitiPark a growing share of the group

Source: Town Centre Securities data, Edison Investment Research forecast for FY21. Note: Recurring operating profit excludes valuation adjustments.

To support its growth, CitiPark has invested in technologies to improve its customer service, operational efficiency and marketing reach. The development of “touchless” online and mobile payment and booking may well be advantageous in the current climate. The main investment projects have included:

developing and launching its own mobile app, enabling customers to pre-book parking and other services, and enabling third-party integration (see YPS below).

Offering digital season tickets, downloadable onto a mobile device.

Providing mobile pay and scan solutions.

Plans to increase the roll out of electric vehicle charging points across all of the car parking locations.

Increasingly, CitiPark is looking to expand beyond its traditional car park activities. It already runs three solar energy farms in Leeds and Manchester and has recently internalised its previously outsourced parking enforcement activities, seeing an opportunity to reduce costs and add an additional revenue stream. A strategic investment in YourParkingSpace, an online parking marketplace, has recently completed a further growth financing, including a £5m investment by Pelican Capital. As part of the transaction, TCS exercised its third and final investment option and now has a 19.9% voting share (plus a 1.2% non-voting share with conversion option). Its equity investment has been externally fair valued at £1.5m compared with the £1.0m cost.

COVID has punctuated recent performance

During FY20 and H121, the pandemic has had a material impact on financial performance and has required a shift in financial focus towards maximising capital and managing cash flows. With asset disposals focused on the retail and leisure sector the strategic repositioning of the portfolio has been accelerated. A summary of recent financial performance is shown in Exhibit 9 below.

Including a £3.6m COVID-19 impact (management estimate) in the last quarter of the year, H220 recorded a EPRA earnings loss of c £2.0m, reducing full year EPRA earnings to £2.1m (FY19: £6.4m) or EPRA EPS of 3.9p (FY19: 12.0p). The COVID-19 impact comprised:

A £1.2m impact on the property business, primarily relating to provisions against outstanding rents.

A £2.0m impact on CitiPark from lost car parking income.

A £0.4m impact on the ibis Styles hotel driven by reduced bookings.

Despite a longer period of lockdown measures, the H121 pandemic impact was reduced to £3.2m (management estimate) and TCS generated a small £0.2m profit on an EPRA basis. The result was also affected by disposals (£0.4m net of interest saving on repayment of debt from the proceeds); loss of income during refurbishments was offset by dilapidation receipts. The H121 COVID-19 impact comprised:

A £0.5m impact on the property business, primarily relating to provisions against outstanding rents offset by targeted cost savings.

A £2.3m impact on CitiPark due to lower levels of demand and income, exacerbated by the level of fixed costs.

A £0.4m impact on the ibis Styles hotel driven by reduced bookings.

Including net realised and unrealised property revaluation losses the statutory IFRS result remained in loss during H121 (c £3.5m loss) but at a much-reduced level compared with H220 (c £23.9m loss). EPRA net tangible assets per share continued to reduce in H121 but also at a much-reduced rate (c 2.5% compared with c 15% in H220). The final FY20 DPS of 1.75p was paid shortly after the end of H121 (January 2021) and a H121 DPS of 1.75p, uncovered by EPRA EPS of 0.4p, is due to be paid in June 2021.

Net debt continued to reduce during H121, and at a faster pace than asset values, such that net loan to value (net LTV)1 reduced from 53.2% at end-FY20 to 48.6%. Financial headroom (cash and available borrowing facilities) at end-FY21 was £12.8m.

  Net debt excluding lease liabilities as a percentage of non-current assets excluding IFRS right of use asset and fixtures & fittings.

Exhibit 9: Financial performance summary

£m unless state otherwise

H121

H120

H220

H121/H120

Gross revenue

10.4

15.9

12.1

-34.3%

Provision for impairment of debtors

(0.0)

(0.1)

(1.4)

Property expenses

(4.2)

(5.6)

(4.8)

Net revenue

6.3

10.2

5.9

-38.6%

Administrative expenses

(2.8)

(3.1)

(3.1)

-11.5%

Other income

0.5

1.1

0.1

Other expenses

0.0

0.0

(0.8)

Share of JV profit before property gains

0.5

0.4

0.4

Net finance costs

(4.2)

(4.5)

(4.5)

EPRA earnings

0.2

4.1

(2.0)

n.m.

Reversal/(impairment) of car park assets

0.3

0.3

0.0

Valuation movement on investment property

(4.1)

(4.6)

(21.7)

Profit/(loss) on disposal of investment property

(1.1)

0.1

0.1

Valuation movement on JV property

1.3

0.0

(0.4)

IFRS PBT & net earnings

(3.5)

(0.2)

(23.9)

Other data:

IFRS EPS (p)

(6.6)

(0.5)

(45.0)

EPRA EPS (p)

0.4

7.7

(3.8)

n.m.

DPS declared (p)

1.75

3.25

1.75

-46.2%

EPRA NTA per share (p)

278

335

285

-17.0%

EPRA NTA total return

-1.8%

-0.8%

-14.0%

Investment portfolio valuation

331.4

391.3

372.5

-10.3%

Net borrowing (excluding finance leases)

(147.6)

(174.0)

(183.6)

LTV

48.6%

48.0%

53.2%

Source: Town Centre Securities data

Portfolio summary and performance

Exhibit 10 shows a summary of the total group portfolio, including the investment portfolio, development assets, car parking assets and the TCS share of joint venture assets, as at end-H121, and does not reflect the disposals made since. The total portfolio value at end-H121 was £331.4m (end-FY20: £372.m). Completed rental income-generating investment properties represented 80% of the total by value (£264.6m) and 90% by estimated rental value, or ERV (£20.6m). Income is also generated by the car parking activities from both dedicated car park assets as well as certain land sites earmarked for medium-term development. Investment property ERV was £3.6m (c 20%) ahead of the £17.0m passing rent, representing one source of potential income growth from the current portfolio.

Disposals were the main driver of the reduction in the portfolio value and, allowing for this as well as capex, the underlying like-for-like decline in value was extremely moderate in H121 when viewed against the market backdrop at 0.8% (6.9% decline in FY20) or c £2.5m. Although across the market retail and leisure have been hardest hit by the pandemic, TCS’s assets in the sector continued to outperform (H121 like-for-like decline of 5.5%), benefiting from the focus on supermarkets and discount and convenience formats. The mixed-use Merrion Centre saw a decline of just 3.7%. Substantially offsetting the decline in retail and leisure values, office and development values increased. Offices showed a c 3% like-for-like increase, driven by Merrion House (+3.2%) and completion of the refurbishment at 123 Albion St (+5.9%). Development values increased by 6.1%, driven by a 9.7% increase in Piccadilly Basin in Manchester reflecting a strong private rented sector market locally.

Exhibit 10: Portfolio summary as at 31 December 2020 (end-H121)

Passing rent
(£m)

ERV
(£m)

ERV
(%)

Value
(£m)

Value
(%)

Initial
yield

Reversionary yield

Retail & Leisure

2.3

2.6

11%

30.8

9%

7.2%

7.9%

Merrion Centre (exc office)

5.6

7.6

33%

82.6

25%

6.4%

8.7%

Offices

5.3

6.2

27%

86.9

26%

5.8%

6.7%

Hotel

1.2

1.6

7%

23.1

7%

4.8%

6.7%

Out of town retail

1.1

1.2

5%

14.5

4%

7.1%

7.5%

Distribution

0.4

0.4

2%

6.0

2%

6.5%

6.7%

Residential

1.1

1.1

5%

20.8

6%

4.8%

5.0%

Total investment properties

17.0

20.6

90%

264.6

80%

6.1%

7.4%

Development property (car park income)

1.6

1.6

7%

40.1

12%

Car parks

0.9

0.9

4%

26.8

8%

Total portfolio

19.5

23.1

100%

331.4

100%

Source: Town Centre Securities

Strong tenant relationships supporting rent collections

Across the UK commercial property sector, retail and leisure tenants have been hardest hit by the pandemic and have therefore struggled most to maintain rent payments. Against this backdrop TCS has shown a consistently robust level of collections over the past year with management stressing the importance of strong tenant relationships, often built up over a number of years. With the lockdown easing TCS says that it is now seeing collection levels improving on a quarter-by-quarter basis and that it expects this improvement to continue.

The most recent update on rent collections performance covers the period to 21 April 2021. Between March 2020 and March 2021 of the £25.2m of rent and service charges (including VAT) billed by TCS 88% had been successfully collected (87%) or remained to be collected under agreed deferral arrangements (1%). Of the remaining amounts billed (c £3.0m), c £1.6m had been waived in return for improvements in the terms or length of leases and £1.4m remains outstanding and due.

For the most recent quarter2, the collection rate was 92%, comprising 80% cash collected and 12% deferred by agreement. The remaining amounts billed (c £0.4m) remains due and subject to discussions with tenants.

The most recent English quarter only covering collections due on 25 March 2021 and 1 April 2021. Scottish rent quarter days differ.

Cumulatively, since March 2020, the collection rate id 89%, comprising 86% cash collected and 3% deferred by agreement. Not all outstanding and due rents (c £1.8m) represent an inability to pay by the tenant and in some cases are likely to reflect the impact of the continuing (until at least 30 June 2021) suspension of landlord lease forfeiture rights for non-payment on the payment patterns of tenants who are otherwise able to pay.

Exhibit 11: Rent collection performance (to 21 April 2021)

March 2020-March 2021*

Latest quarter**

Cumulative

Total Billed

£25.3m

100%

£5.1m

100%

£30.4m

100%

Total collected

£22.0m

87%

£4.1m

80%

£26.1m

86%

Agreed to be deferred***

£0.3m

1%

£0.6m

12%

£0.9m

3%

Agreed total

£22.3m

88%

£4.7m

92%

£27.0m

89%

Source: Town Centre Securities. Note: *English & Scottish quarters, and monthly billings (collections from 25 March 2020 to date). **English quarter only (collections due on 25 March 2021/1 April 2021). ***Agreed to be deferred and still outstanding.

During FY20, TCS provided c £1.5m against outstanding rent receivables, ending the year with a provision balance of c £1.8m. During H121, an undisclosed provision was netted against rental income rather than being separately disclosed and, although no update on the provision balance is available, we expect this to have increased.

Divisional performance and forecasts

In this section we review the recent divisional performances in more detail as well as our forecasts. Across the divisions, underlying our forecasts is the expectation that lifting the pandemic lockdown will be sustained and that remaining restrictions will be relaxed in time such that conditions will have normalised for FY22.

Property investment

Management estimates the net negative pandemic impact on the property investment business at £1.2m in H220 and £0.5m in H121, primarily related to charges against rent receivables, partly offset by pandemic-driven cost savings. The H121 charges against receivables were accounted for as a reduction in gross revenues, while the H220 charges were shown separately. H220 also included a number of other non-recurring items, including a c £0.8m provision against previously incurred costs in respect of the abandoned George Street development project, and a £0.5m write-off of service charge receivables, unrelated to the pandemic (H120 included a positive £0.5m dilapidations payment). In total, the H220 non-recurring items amounted to c £2.5m, such that on an underlying basis, the H121 operating result (before valuation movements) was at a broadly similar level to H220. H121 remained marginally profitable after a greatly reduced revaluation loss compared to with H220.

Our forecasts assume a c £2.5m annualised revenue impact from the H121 disposals with the full year impact in FY22 offset by the first benefits of re-letting at Ducie House and 123 Albion Street (we assume c £1.3m on an annualised basis). We have also assumed an additional £0.4m net in receivables impairment in H221 (taken as a revenue reduction). We anticipate a further reduction in property valuation in H221, amounting to c £3.1m or around 1.5% on a like-for-like basis, although we would describe this as illustrative given the level of uncertainty. On a similar basis, we assume no valuation change in FY22 and FY23. By way of comparison, the most recent consensus forecasts published by the Investment Property Forum (IPF) are for an all-property valuation gain of 1.8% in each of 2022 and 2023, driven by the industrial sector. The consensus for standard retail is a decline of 1.6% in 2022 followed by a small 0.2% gain in 2023; shopping centre values are forecast to decline by 3.8% in 2022 and 1.6% in 2023.

Exhibit 12: Property Investment

Half-yearly

Annual

£m

H121a

H120a

H220a

FY20a

FY21e

FY22e

FY23e

Gross revenue

6.6

8.1

7.8

15.9

12.4

12.4

12.6

Provision for impairment of property debtors

(0.0)

(0.1)

(1.4)

(1.5)

(0.0)

0.0

0.0

Total property expenses

(1.1)

(1.3)

(1.4)

(2.7)

(2.0)

(1.8)

(1.7)

Net revenue

5.4

6.7

5.0

11.7

10.3

10.7

10.9

Administrative expenses

(2.2)

(2.6)

(2.5)

(5.1)

(4.6)

(4.8)

(4.9)

Other income/expenses

0.5

1.1

(0.7)

0.4

0.7

0.4

0.4

Share of post-tax profits from JV

0.5

0.4

0.4

0.8

1.0

1.0

1.0

Operating profit before valuation movements

4.1

5.6

2.2

7.8

7.3

7.2

7.3

Valuation movement on investment properties

(4.1)

(4.6)

(21.7)

(26.3)

(7.2)

0.0

0.0

Profit on disposal of investment property

(1.1)

0.1

0.1

0.2

(1.1)

0.0

0.0

Valuation movement on properties held in JV

1.3

0.0

(0.4)

(0.4)

1.3

0.0

0.0

Operating profit

0.3

1.0

(19.7)

(18.7)

0.4

7.2

7.3

Source: Town Centre Securities historical data, Edison Investment Research forecasts

Car parking (CitiPark)

CitiPark has been significantly impacted during the pandemic by lower levels of revenue and relatively inflexible cost base, in particular rent and rates (with car parks unable to benefit from the government’s business rates relief scheme). Nevertheless, the business remained profitable and adjusted for management’s £2.3m estimate of the net pandemic impact delivered a similar £2.9m operating profit in H121 as in H120. On this adjusted basis operating profits were ahead of the underlying £2.4m reported for H220 (after adding back the £2.0m pandemic impact estimated by management).

Exhibit 13: CitiPark (car parking)

Half-yearly

Annual

£m

H121

H120

H220

FY20

FY21e

FY22e

FY23e

Gross revenue

3.5

6.4

3.8

10.2

7.0

10.0

12.0

Total property expenses

(2.6)

(3.2)

(2.8)

(6.0)

(5.2)

(6.0)

(6.6)

Net revenue

0.9

3.2

1.0

4.2

1.8

4.0

5.4

Administrative expenses

(0.6)

(0.6)

(0.6)

(1.1)

(1.1)

(1.1)

(1.1)

Operating profit before valuation movements

0.4

2.7

0.4

3.1

0.7

2.9

4.3

Reversal of impairment of car parking assets

0.3

0.3

0.0

0.3

0.3

0.0

0.0

Operating profit

0.6

2.9

0.4

3.4

1.0

2.9

4.3

Source: Town Centre Securities historical data, Edison Investment Research forecasts

TCS expects the car park business to recover quickly as the lockdown easing measures take effect, an expectation that is supported by the monthly revenue data shown in Exhibit 14. Revenues fell to c 20% of normal levels during the first lockdown but quickly recovered to almost two-thirds of normal as this ended, only to fall again when the further measures were introduced. Clearly much uncertainty remains, and our forecasts anticipate a similar performance in H221 as in H121 with a recovery in revenues in FY22 to c 80% of the FY19 (pre-pandemic) level. We do not anticipate revenues returning to more normal levels until FY23 although this could prove to be conservative given the range of growth initiatives targeted by the business and discussed above.

Exhibit 14: CitiPark (car parking) monthly revenues

Source: Town Centre Securities data.

ibis Styles Hotel

The ibis Styles Hotel is situated at the Merrion Centre and operated under management contract. It remained operational despite the pandemic, providing key-worker accommodation but revenues were nevertheless significantly negatively affected, with a c £0.4m net revenue/operating profit impact on TCS in each of H220 and H121.

Exhibit 15: ibis Styles Hotel

Half-yearly

Annual

£m

H121a

H120a

H220a

FY20a

FY21e

FY22e

FY23e

Gross revenue

0.4

1.4

0.5

1.9

0.7

2.0

3.0

Total property expenses

(0.5)

(1.1)

(0.7)

(1.8)

(0.9)

(1.8)

(2.4)

Net revenue/operating profit

(0.1)

0.3

(0.1)

0.1

(0.2)

0.2

0.6

Source: Town Centre Securities historical data, Edison Investment Research forecasts.

The monthly revenue data for the hotel (Exhibit 16) show a similar but more muted pattern to CitiPark coming out of the first lockdown. Our forecasts allow for a partial recovery in FY22 with net revenues/operating profit recovering to pre-pandemic levels (c £0.6m pa) in FY23.

Exhibit 16: ibis Styles Hotel monthly revenues

Source: Town Centre Securities data

Gearing and borrowing

Total borrowing facilities at end-H121 amounted to c £208m, comprising £99.5m of long-term, fixed-rate borrowing (5.375% First Mortgage Debenture Stock 2031) and £108m of shorter-term, floating rate revolving bank credit facilities. During H121, TCS had the opportunity to repurchase £6.5m of the debenture at only slightly above par value, reducing the average cost of debt and increasing LTV headroom within the facility.

There are three revolving bank debt facilities: a £33m facility with NatWest, extended since year end by one year on similar terms and margin and now to expire in April 2022; a £35m Lloyds facility with an initial three-year term that expires in June 2021 with two one-year extensions, currently in the process of being requested; a £35m Handelsbanken facility due to expire in June 2023; and a £5m overdraft facility.

The end-H121 balance sheet financial liabilities of £195.6m include finance lease/IFRS 16 lease liabilities and excluding these the debenture/bank borrowings were £150.0m, secured by fixed charges on the portfolio. The debenture has a minimum asset cover ratio requirement of 1.50x.

The end-H121 weighted average maturity of the debt was 6.1 years, with a weighted average cost of debt of 4.1%. Allowing for cash of c £2.5m, net debt was £147.6m (end-FY20: £183.6m) and the loan to value ratio (LTV) was 48.6% (FY20: 53.2%).

Exhibit 17: Funding summary

H121

FY20

Net debt

£147.6m

£183.6m

Loan to value

48.6%

53.2%

Interest cover (underlying)

2.2x

2.1x

Weighted average cost of debt

4.1%

4.1%

Bank facilities

£108.0m

£108m

Debenture

£99.5m

£106m

Weighted average maturity

6.1years

6.7 years

Source: TCS

Management has identified the single greatest risk to the business model as the impact that further reductions in property values could have on banking covenants and future borrowing headroom. Borrowing headroom at end-H121 was £12.8m (end-FY20 was £14.8m), or c 4% of portfolio value. The headroom is below the c £57m of undrawn borrowing due to the existing fixed asset charges that were in place. TCS expects continuing asset sales and, if necessary, a potential restructuring of the security pool (enabling a more efficient use of the available assets) to provide additional headroom.

Our cash flow forecasts are shown in the financial summary (Exhibit 21), indicating a small reduction in net debt over the forecast period, with no change in gross borrowings and a small net cash surplus.

Group forecast summary

Our last published forecasts pre-date the onset of the pandemic and therefore publication of the FY20 results. Because of the pandemic impact on the closing months of FY20, the published results were clearly below our forecast, but would have been slightly ahead but for the c £3.6m negative pre-tax pandemic impact estimated by management. Our previous FY21 estimate is significantly reduced as a result of:

the ongoing pandemic effects;

the impact of asset disposals; and

deferred development activity.

We expect the recovery in revenues, earnings, DPS and NAV to begin in FY22. Given the strong emphasis that management places on dividends we are forecasting a reduced but uncovered DPS in FY21, partly anticipating the potential for FY22 recovery.

Exhibit 18: Summary of forecasts

Net revenue (£m)

EPRA earnings (£m)

DPS declared (p)

EPRA NTA/share (p)

Act.

F'cast

% diff.

Act.

F'cast

% diff.

Act.

F'cast

% diff.

Act.

F'cast

% diff.

06/20a

16.1

19.4

(17.2)

2.1

6.0

(65.1)

5.0

11.8

(57.4)

285

342

(16.7)

New

Old

% change

New

Old

% change

New

Old

% change

New

Old

% change

06/21e

11.9

20.6

(42.0)

(0.4)

7.0

(106.2)

1.8

11.8

(85.1)

269

352

(23.4)

06/22e

14.9

N/A

N/A

2.3

N/A

N/A

4.0

N/A

N/A

272

N/A

N/A

06/23e

16.9

N/A

N/A

4.2

N/A

N/A

7.3

N/A

N/A

275

N/A

N/A

Source: Edison Investment Research

Our forecast for FY21 EPRA NTA per share is a c 7% reduction to 269p (FY20: 285p; H121: 278p), with modest improvements in FY22/FY23. Compared with our forecasts, a 1% increase/decrease in the overall property portfolio valuation increases/decreases FY21 NAV per share by c 7p.

Valuation

For the UK commercial property sector as a whole income returns have historically been much more predictable over time compared with the observed significant swings in capital values and capital returns across cycles. This same pattern can be seen in the TCS returns despite the significant pandemic impact on CitiPark. Weaker capital returns since FY19, particularly in FY20 as the pandemic hit, reduced the rolling 5-year average annualised total return (change in NAV plus dividends paid) quite materially between end-FY19 (+5.4% pa) and end-H121 (-1.7% pa) although the income returns show a relatively small change between the periods. Our forecasts imply a negative total return in FY21 (4.2%) due asset disposals (reducing income) and further COVID-19 pressures, including a reduced DPS. For FY22/23 our forecasts imply positive returns (1.6% and 2.9% respectively) driven entirely by income returns (we forecast no change in portfolio values) reflected in a rebuilding of DPS. Although the forecast FY22/23 returns are relatively modest by historical standards, risk free rates remain low (the 10-year UK gilt yields remain below 1%) and given the significant (c 50%) discount to EPRA NTA at which TCS shares are trading, our DPS forecasts for FY22/23 represent a much more significant return on the share price.

Exhibit 19: Total return analysis

FY15

FY16

FY17

FY18

FY19

5 years to end-FY19

FY20

H121

5 years to end-H121

Opening EPRA NTA/share (p)

308

336

350

352

376

308

347

285

359

Closing EPRA NTA/ share (p)

336

350

352

376

347

347

285

278

278

Dividend per share paid (p)

10.4

10.4

11.2

11.5

11.8

55.3

11.8

1.8

51.0

NAV total return

12.5%

7.0%

3.8%

10.2%

-4.8%

30.4%

-14.4%

-1.8%

-8.3%

Income return

17.9%

14.2%

Capital return

12.4%

-22.5%

Average annualised total return

5.4%

-1.7%

Source: Company data, Edison Investment Research

In Exhibit 20 we show a summary valuation comparison of TCS with what we consider to be a group of peers from within the broad property sector, including companies focused on regional property and those with significant retail exposure. For consistency of comparison, the valuation data are presented on a trailing basis, using the last reported RPRA NAV/NTA and 12-month trailing DPS declared.

Exhibit 20: Peer comparison

Price
(p)

Market cap (£m)

P/NAV
(x)

Yield
(%)

Share price performance

1 month

3 months

12 months

From 12M high

Capital & Regional

88

98

0.56

0.0

2%

22%

-17%

-35%

Custodian

92

386

0.94

4.9

-7%

0%

10%

-12%

Hammerson

35

1420

0.43

1.1

-12%

34%

3%

-46%

NewRiver

94

286

0.55

5.8

-9%

-5%

72%

-14%

Palace Capital

244

112

0.70

4.1

2%

21%

33%

-9%

Picton

80

435

0.84

3.7

-13%

-9%

25%

-13%

Real Estate Investors

40

71

0.72

7.6

7%

19%

23%

-1%

Regional REIT

85

367

0.83

7.2

3%

11%

11%

-9%

Schroder REIT

44

228

0.75

3.6

1%

7%

31%

-7%

Average

0.70

4.2

-3%

11%

21%

-16%

Town Centre Securities

134

71

0.48

2.6

0%

12%

26%

-7%

UK property sector index

1,718

-1%

7%

22%

-4%

UK equity market index

4,010

1%

8%

20%

-2%

Source: : Company data, Edison Investment Research, Refinitiv prices as at 26 May 2021. Note: *Based on last reported EPRA NAV, **Based on last 12-month DPS declared.

The share price performance data provide a mixed picture with the share prices of many stocks, the companies with significant shopping centre exposure (eg Capital & Regional and Hammerson), recently showing recovery from very low levels. The share prices of companies with a more diversified sector exposure, particularly when this diversified exposure is combined with an income focus (eg Custodian, Picton, Regional REIT, Schroder REIT) experienced less weakness during the first half of 2020 and are consequently showing a less pronounced recovery.

Despite its increasingly diversified exposures across the property sector as well as through its CitiPark car parking operation, and the relatively robust recent performance of the property business in terms of rent collection and capital values, TCS trades at one of the lowest P/NAV ratings in the group. In part, this may be explained by its relatively higher gearing and lower share trading liquidity (a function of market capitalisation and free float) as well as the depressed level of trailing DPS; although disposals have reduced gearing and balance sheet risk, they will also reduce earnings and dividend paying capacity. Nevertheless, management’s intention is to maintain a solid footing on which to continue the successful long-standing strategy of active management and redevelopment to drive income and capital growth. The management team is strongly aligned with shareholders and is committed to restoring dividends as soon as is practicable. Although the UK economic outlook remains uncertain, we note TCS’s focus on better performing regional markets (Leeds and Manchester) that should continue to benefit from government initiatives to rebalance economic activity away from London.

Sensitivities

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles, the impact of which on shareholder equity/NAV may be amplified by gearing. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. Aside from its general economic impact, the pandemic has created near-term uncertainty in terms of non-payment of rents, increased risk of tenant failure, and a slower lettings market while the longer-term implications for tenant demand and lease structures is far from clear. From a sector viewpoint we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. In particular we note:

The COVID-19 pandemic and the impact of Brexit continue to create uncertainty regarding the UK economic outlook. UK GDP fell by 9.9% in 2020 but is expected to bounce back strongly in 2021 and 2020. The HM Treasury comparison of independent forecasts for the UK economy published in April 2021 shows an average forecast of 5.3% growth in 2021 and 5.7% in 2022. Reflecting the level of uncertainty, the range of expectations remains wide at 3.3–7.4% for 2021 and 2.2–8.5% for 2022. Consensus expectations are for the rate of unemployment to increase (to 6.3% in Q421, falling to 5.5% in Q422 from 4.8% in the three months to March 2021) but the expected increase has recently moderated. Inflation expectations have recently been stable but anticipate an increase in CPI to 2.1% in Q421 (RPI: 3.0%). There is no current expectation for short-term interest rates to increase.

Sector risk: some of the inherent cyclical risk to vacancy in commercial property can be mitigated by portfolio diversification. The sectoral diversity of the TCS has increased significantly into recent years and we expect this to continue, including the build-up of lower volatility residential assets. The car parking business (historically c 30% of group operating profits but greatly reduced in the near term by the pandemic) is a structurally cash-generative and growing business with no direct correlation to the property cycle.

Development risk. Current activity has been reduced due to market uncertainties. Although we expect asset management and development projects to continue to be a driver of future property income growth and capital returns, we would expect TCS to proceed cautiously and for active projects to represent a relatively low share of the overall portfolio at any point in time. Many are undertaken with joint venture partners, spreading investment risk, and all are undertaken by external contractors to whom most of the construction risk passes.

Funding risks. Management identifies the single greatest risk to the business model as the impact that further reductions in property values could have on banking covenants and future borrowing headroom. To mitigate this risk the company has accelerated disposal of mature and non-core assets, achieving a reduction in LTV. Although relatively expensive (5.375%) compared with current interest rates, the fixed rate debenture significantly reduces the potential negative impact on interest costs from ant increase in market borrowing rates, although the floating rate bank debt would more quickly adjust to higher short-term market rates. Any material increase in long-term market rates would be likely to negatively impact property valuations and NAV.

Exhibit 21: Financial summary

Year ending 30 June (£m)

2015

2016

2017

2018

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

Gross revenue

22.7

26.3

27.5

30.2

31.4

28.0

20.1

24.4

27.6

Provision for impairment of debtors

0.0

0.0

0.0

0.0

(0.2)

(1.5)

(0.0)

0.0

0.0

Total property expenses

(5.2)

(7.7)

(8.1)

(10.9)

(11.6)

(10.5)

(8.1)

(9.6)

(10.7)

Net revenue

17.5

18.6

19.4

19.3

19.6

16.1

11.9

14.9

16.9

Administrative expenses

(5.3)

(5.5)

(6.3)

(6.6)

(6.9)

(6.2)

(5.7)

(5.9)

(6.1)

Other income/expense

1.5

0.6

0.7

0.9

0.6

0.4

0.7

0.4

0.4

Valuation movement on investment properties

14.8

3.0

(2.1)

5.9

(18.3)

(26.3)

(7.2)

0.0

0.0

Reversal of impairment of car parking assets

0.0

0.5

1.0

1.3

0.2

0.3

0.3

0.0

0.0

Profit on disposal of investment property

0.2

1.1

0.3

1.7

(0.7)

0.2

(1.1)

0.0

0.0

Share of post tax profits from joint venture

2.6

1.4

1.3

3.8

1.1

0.5

2.3

1.0

1.0

Operating profit

31.3

19.8

14.4

26.3

(4.4)

(15.2)

1.1

10.3

12.2

Net finance costs

(7.3)

(7.8)

(7.6)

(7.9)

(8.0)

(9.0)

(8.3)

(8.0)

(8.0)

PBT

24.0

11.9

6.7

18.4

(12.5)

(24.2)

(7.1)

2.3

4.2

Tax

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net profit

24.0

11.9

6.7

18.4

(12.5)

(24.2)

(7.1)

2.3

4.2

Adjustments to EPRA:

Valuation movement on investment properties

(14.8)

(3.0)

2.1

(5.9)

18.3

26.3

7.2

0.0

0.0

Reversal of impairment of car parking assets

(5.0)

(0.5)

(1.0)

(1.3)

(0.2)

(0.3)

(0.3)

0.0

0.0

Valuation movement on properties held in joint ventures

0.0

(0.7)

(0.5)

(2.6)

0.0

0.4

(1.3)

0.0

0.0

Profit on disposal of investment/development properties

(0.2)

(1.1)

(0.3)

(1.7)

0.7

(0.2)

1.1

0.0

0.0

(Profit)/Loss on disposal of investment properties held in JVs

2.5

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

EPRA earnings

6.5

6.6

7.0

6.9

6.4

2.1

(0.4)

2.3

4.2

Average number of shares (m)

53.2

53.2

53.2

53.2

53.2

53.2

53.2

53.2

53.2

Basic & fully diluted IFRS EPS (p)

45.2

22.4

12.7

34.6

(23.4)

(45.4)

(13.4)

4.4

7.9

Basic & fully diluted EPRA EPS (p)

12.1

12.4

13.2

13.0

12.0

3.9

(0.8)

4.4

7.9

DPS declared (p)

10.44

11.00

11.50

11.75

11.75

5.00

1.75

4.00

7.25

BALANCE SHEET

Investment properties

337.0

346.4

349.3

359.7

348.7

331.1

305.4

306.1

306.7

Investment in joint ventures

19.3

25.1

27.9

39.7

13.4

13.8

16.0

17.0

17.9

Goodwill

4.0

4.0

4.0

4.0

4.0

4.0

4.1

4.1

4.1

Other non-current assets

1.2

2.2

3.9

3.7

4.1

3.8

4.5

4.5

4.5

Total non-current assets

361.6

377.7

385.1

407.2

370.2

352.6

330.0

331.7

333.3

Investments (listed equities)

2.0

2.1

2.4

3.5

5.9

3.5

3.9

3.9

3.9

Non-current assets held for sale

3.5

0.0

0.0

0.0

0.0

23.2

0.0

0.0

0.0

Trade & other receivables

6.9

7.4

3.3

6.3

5.4

3.5

5.1

3.5

3.5

Cash & equivalents

1.5

0.0

3.1

23.1

23.7

12.6

17.4

20.3

21.9

Total current assets

13.8

9.5

8.8

33.0

34.9

42.8

26.4

27.7

29.3

Total assets

375.4

387.1

393.9

440.1

405.1

395.4

356.5

359.4

362.6

Trade & other payables

(11.9)

(11.5)

(10.8)

(38.0)

(34.7)

(13.1)

(11.6)

(13.5)

(15.2)

Financial liabilities

(38.7)

(.9)

0.0

0.0

0.0

(72.3)

(17.0)

(17.0)

(17.0)

Total current liabilities

(50.5)

(12.4)

(10.8)

(38.0)

(34.7)

(85.4)

(28.5)

(30.4)

(32.2)

Non-current financial liabilities

(142.0)

(184.9)

(192.0)

(198.1)

(182.2)

(154.6)

(180.5)

(180.2)

(179.9)

Total liabilities

(192.5)

(197.3)

(202.8)

(236.0)

(216.9)

(240.0)

(209.1)

(210.6)

(212.1)

Net assets

182.9

189.9

191.1

204.1

188.3

155.5

147.4

148.8

150.6

Period end shares in issue (m)

53.2

53.2

53.2

53.2

53.2

53.2

53.2

53.2

53.2

NAV per share (p)

344

357

359

384

354

292

277

280

283

EPRA NTA per share (p)

336

350

352

376

347

285

269

272

275

CASH FLOW

Net cash flow from operating activity

2.2

5.7

10.1

6.3

3.4

6.8

(1.1)

8.1

8.2

Investment in investment properties

(37.0)

(17.0)

(23.2)

(2.9)

(29.5)

(7.1)

(3.0)

(2.0)

(2.0)

Proceeds from disposal of investment property

26.8

16.1

21.6

7.5

17.1

2.5

42.2

0.0

0.0

Purchase of fixtures, equipment and motor vehicles

(0.5)

(1.5)

(0.6)

(0.3)

(0.8)

(0.1)

(0.4)

(0.5)

(0.5)

Proceeds from sale of fixed assets

0.0

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

Investments and loans to JV

0.0

(4.9)

(4.3)

(8.8)

(0.7)

0.1

0.0

0.0

0.0

Distributions received from joint ventures

0.0

0.6

1.0

0.7

28.1

0.0

0.0

0.0

0.0

Proceeds from sale of joint ventures

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Payment for the acquisition of non-listed investments

0.0

0.0

(2.0)

(0.2)

(0.4)

(0.1)

(0.3)

0.0

0.0

Cash flow from investing activity

(10.8)

(6.8)

(7.4)

(4.0)

13.8

(4.7)

38.5

(2.5)

(2.5)

Proceeds from borrowing

17.5

4.2

7.2

6.1

(16.3)

8.0

(34.2)

0.0

0.0

Dividends paid

(5.6)

(5.6)

(5.9)

(6.1)

(6.2)

(6.2)

(1.9)

(0.9)

(2.4)

Other cash flow from financing activity

0.0

0.0

0.0

0.0

0.0

(1.7)

(1.6)

(1.6)

(1.6)

Cash flow from financing activity

11.9

(1.3)

1.3

(0.0)

(22.5)

0.1

(37.7)

(2.6)

(4.0)

Change in cash

3.4

(2.4)

4.0

2.3

(5.3)

2.2

(0.3)

2.9

1.6

Opening cash

(1.8)

1.5

(0.9)

3.1

5.5

0.2

2.4

2.1

5.0

Closing cash

1.5

(0.9)

3.1

5.5

0.2

2.4

2.1

5.0

6.6

Overdraft

0.0

0.9

0.0

17.7

23.5

10.3

15.3

15.3

15.3

Cash as per balance sheet

1.5

0.0

3.1

23.1

23.7

12.6

17.4

20.3

21.9

Financial liabilities (excluding finance leases/IFRS16)

(176.1)

(181.3)

(187.5)

(193.6)

(177.7)

(186.0)

(152.3)

(152.6)

(152.9)

Net debt

(174.6)

(182.2)

(184.4)

(188.1)

(177.5)

(183.6)

(150.2)

(147.6)

(146.3)

Net LTV

49.2%

49.7%

48.7%

46.9%

52.5%

53.2%

50.0%

48.7%

47.8%

Source: Town Centre Securities historical data, Edison Investment Research forecasts

Contact details

Revenue by geography

Town Centre House
The Merrion Centre
Leeds LS2 8LY
UK
+44 (0)113 222 1234
www.tcs-plc.co.uk

Contact details

Town Centre House
The Merrion Centre
Leeds LS2 8LY
UK
+44 (0)113 222 1234
www.tcs-plc.co.uk

Revenue by geography

Leadership team

Chairman and chief executive: Edward Ziff OBE

Managing director, CitiPark: Ben Ziff

Edward Ziff joined TCS in 1981 and was appointed to the board in 1985. He became managing director in 1993 and chief executive in 2001. In 2004 he also became chairman, succeeding his father, Arnold Ziff, who founded the company in 1959. He has strong links to the Leeds community and in 2017 was awarded the OBE for his services to the economy and community of Leeds.

Ben Ziff joined TCS in 2008 and has been managing director of CitiPark since 2009. He joined the board in September 2015. He has led a significant expansion of the TCS car parking operation, broadening its geographic footprint, branding as CitiPark and harnessing technology both to improve the customer experience and drive business efficiencies.

Principal shareholders

(%)

The Ziff family concert party

51.3

New Fortress Finance Holdings

9.0


General disclaimer and copyright

This report has been commissioned by Town Centre Securities and prepared and issued by Edison, in consideration of a fee payable by Town Centre Securities. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Town Centre Securities and prepared and issued by Edison, in consideration of a fee payable by Town Centre Securities. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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