Town Centre Securities — Robust performance while delivering strategy

Town Centre Securities (TOWN)

Last close As at 24/05/2024

133.50

0.00 (0.00%)

Market capitalisation

71m

More on this equity

Research: Real Estate

Town Centre Securities — Robust performance while delivering strategy

Town Centre Securities (TCS) will release its results for the year ending 30 June 2019 (FY19) on 24 September. Despite the tough retail environment, in a trading update the company states that the year ended in line with expectations. We expect a robust recurring earnings performance and an unchanged but fully covered and attractive dividend yield. The year saw continuing progress with the strategy of repositioning the portfolio away from retail and recycling capital into more attractive opportunities, including the group’s significant pipeline of development opportunities.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Town Centre Securities

Robust performance while delivering strategy

Trading update

Real estate

18 July 2019

Price

204p

Market cap

£108m

Net debt (£m) at 31 December 2018 (excluding finance leases)

182.4

Net LTV at 31 December 2018

46.8%

Shares in issue

53.1m

Free float

48%

Code

TOWN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.3)

(6.6)

(30.7)

Rel (local)

(6.5)

(7.0)

(29.2)

52-week high/low

290p

199p

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

Final results

24 September 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

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

Town Centre Securities (TCS) will release its results for the year ending 30 June 2019 (FY19) on 24 September. Despite the tough retail environment, in a trading update the company states that the year ended in line with expectations. We expect a robust recurring earnings performance and an unchanged but fully covered and attractive dividend yield. The year saw continuing progress with the strategy of repositioning the portfolio away from retail and recycling capital into more attractive opportunities, including the group’s significant pipeline of development opportunities.

Year end

Net revenue (£m)

EPRA
earnings* (£m)

EPRA EPS*
(p)

EPRA NAV/
share* (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/17

19.4

7.0

13.2

359

11.5

0.57

5.6

06/18

19.3

6.9

13.0

384

11.8

0.53

5.8

06/19e

20.1

6.4

12.1

353

11.8

0.58

5.8

06/20e

20.4

6.6

12.4

354

12.1

0.58

5.9

06/21e

21.3

7.3

13.8

359

12.5

0.57

6.1

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

FY19 recurring income in line with expectations

The board expects FY19 results in line with its, and we believe the market’s, expectations. Like-for-like passing rents increased by 2.6% with overall occupancy at 96%, a similar level to H119 and up from 95% at end-FY18. The car parking operation, CitiPark, continued to grow revenues and profits. With a lack of exposure to the big high street names in its retail portfolio, and a tenant profile that includes a number of strong covenants (including Waitrose and Morrisons), TCS has avoided the worst of the retail sector problems. The fast re-letting of most of the vacated properties, on favourable terms, is a positive indicator for the quality of the portfolio. We leave our recurring earnings forecasts unchanged but trim our NAV by c 3% in line with continued market weakness in retail valuations.

Active strategy for income and growth

As a family run business, TCS has a strong focus on dividends and has increased or maintained DPS in each of the last 58 years, while investing for growth. To achieve this, it recycles capital and actively manages its assets and in the past two to three years has significantly repositioned the portfolio to reduce income risk, particularly in relation to retail exposure, and unlock value from development opportunities. By H119 retail and leisure assets had fallen to 52% of the total (2016: 70%) and management signals it will continue this process. An extensive pipeline of potential development projects from within the existing portfolio represents a substantial growth opportunity for which the company continues to explore funding options. The estimated gross value, once funded and developed, is now estimated by management at more than £600m.

Valuation: Strong dividend commitment

TCS has a strong dividend focus while continuing to invest for growth. Our forecast FY19 DPS represents a yield of almost 6%, fully covered by recurring earnings. The share price discount to EPRA NAV is more than 40%.

Further details from the trading update

Like-for-like rental growth of 2.6%

The re-letting of the retail asset on Main Street at Milngavie is the main driver of the improvement. Previously occupied by Homebase, which gave notice to vacate in late 2017, the unit was sub-divided and has been let to Aldi and Home Bargains. The rent of c £0.6m pa has been increased by 8% and the valuation has increased by 23% on its end-FY18 level.

Relatively modest impact from retail sector stress

Over the past year, eight tenants have gone into administration or launched a CVA, a similar number to the trailing 12-month total reported with the interim results, indicating the continuing but manageable effect of the tough retail environment. Three of the eight units affected over the past 12 months have been re-let to new tenants and a further three have seen the incumbent retailer choose to remain at the same rent. The two remaining void units, accounting for c 0.5% of the total rent roll, are in the process of being re-let. Those properties that have been re-let, or where the incumbent retailer has remained, have actually seen a small (1%) increase in base rent. Including temporary voids and lease incentives and other letting costs we would expect a similar negative income statement impact in H219 to the £0.25m impact reported in H1.

Portfolio repositioning

Management has actively recycled capital in the past three years to significantly reposition and diversify the portfolio. The portfolio weighting to regional offices, hotels, and residential property has increased with a corresponding reduction in retail and leisure exposure to 52% by value at end-H119 compared with 70% at end-FY16.

Exhibit 1: Increasing portfolio diversification

Source: Town Centre Securities

Significant developments in FY19 included the previously reported sale of the Rochdale Retail Park for £13.2m in January 2019 and the acquisition of the Cube, a mixed use asset opposite the Merrion Centre in Leeds, for £12.0m in October 2018. Since the interims, TCS has achieved practical completion of its private residential sector (PRS) development at Burlington House in Manchester. The company says the scheme has been well received and was more than 50% rented within a month of completion.

Although TCS is managing the stress in the retail sector well, it sees no early change in market conditions and plans further retail sector divestment and portfolio repositioning. We believe that reinvestment may take the form of acquisitions with greater expected growth and value-add potential, further diversifying the portfolio, or further investment in the group’s pipeline of development opportunities where the estimated gross development value has now increased to more than £600m.

Forecasts and valuation

We are making no changes to our recurring income forecasts, set out in detail here but we will review these when FY19 results are published in September. With those results we would expect management to provide more detail on its intentions to further reposition the portfolio away from retail. Given the higher yields attaching to retail assets and the potential for disposals ahead of reinvestment it is likely that near-term (ie FY20 onwards) income will be negatively affected but the aim will be to reinvest in areas with stronger rental growth and total return prospects.

Exhibit 2: Portfolio split by value at 31 December 2018

Source: Town Centre Securities

Our previously published forecasts explicitly excluded any assumption of property revaluation movements given the uncertainty of doing so. Our last published FY19 NAV forecast of £193m (363p per share) compares with the Bloomberg consensus of £187m (353p per share). Given management’s comments that the performance is in line with expectations, and in light of the further evidence of continuing weakness in retail sector valuations, we have trimmed our FY19 NAV forecast by £5m and NAV per share to 353p. The £5m equates to a c 1.4% reduction in the H119 portfolio value or a c 2.5% reduction in the value of the retail and leisure assets (52% of the total portfolio, comprising the retail and leisure, out of town retail, and Merrion Centre retail and leisure segments shown in Exhibit 2).

For FY20 and FY21 we continue to make no assumption regarding further revaluation movements.

Exhibit 3: Forecast revisions

Net revenue (£m)

EPRA EPS (p)

DPS declared (p)

EPRA NAV/share (p)

LTV (%)

New

Old

% change

New

Old

% change

New

Old

% change

New

Old

% change

New

Old

% change

06/19e

20.1

20.1

0.0

12.1

12.1

0.0

11.8

11.8

0.0

353

363

(2.6)

48.2

47.6

1.4

06/20e

20.4

20.4

0.0

12.4

12.4

0.0

12.1

12.1

0.0

354

363

(2.6)

50.4

49.8

1.3

06/21e

21.3

21.3

0.0

13.8

13.8

0.0

12.5

12.5

0.0

359

369

(2.5)

51.8

51.2

1.2

Source: Edison Investment Research

In Exhibit 4 we show a share price performance and valuation summary of companies that we consider to be a group of peers to TCS, taken from within the broad property sector. The group includes companies focused on regional property as well as those with retail exposure.

Over the past 12 months the TCS share price performance has been weaker than the group average, which we ascribe to poor investor sentiment towards retail exposure. In the past three months it has more closely tracked the average despite a continuing poor performance from the purer retail plays, with significant shopping centre exposure, such as Capital & Counties, Hammerson and Intu.

In terms of valuation TCS provides an attractive yield, with a strong management commitment to dividends and an alignment of interest between management and shareholders. Additionally, its regional focus (Leeds and Manchester), increasingly diversified portfolio and significant development opportunities for further growth are all potential catalysts for a re-rating, in our view.

Exhibit 4: Peer comparison table

Price (p)

Market cap. (£m)

P/NAV (x)

Yield (%)

Share price performance

1 month

3 months

12 months

From 12M high

Capital & Regional

18

131

0.31

13.4

22%

-26%

-64%

-64%

Custodian

119

486

1.11

5.5

1%

3%

-3%

-3%

Hammerson

279

2135

0.38

9.3

-1%

-17%

-48%

-48%

Helical

378

453

0.78

2.7

-3%

9%

9%

-7%

Intu

75

1014

0.26

6.1

-13%

-28%

-58%

-63%

McKay Securities

230

217

0.71

4.3

-6%

-5%

-12%

-19%

Mucklow

645

408

1.13

3.6

-1%

24%

16%

-2%

NewRiver

170

521

0.60

12.6

-10%

-30%

-38%

-41%

Palace Capital

285

131

0.68

6.7

-3%

0%

-18%

-21%

Picton

94

516

1.02

3.7

-1%

3%

1%

-6%

Real Est Inv

57

105

0.82

6.4

4%

5%

5%

-9%

Regional REIT

107

399

0.93

7.5

-2%

1%

13%

-3%

St Modwen

428

951

0.88

1.7

0%

5%

6%

-5%

Schroder REIT

57

297

0.83

4.5

2%

-3%

-8%

-15%

Average

0.74

6.3

-1%

-4%

-14%

-22%

Town Centre Securities

205

109

0.57

5.7

2%

-3%

-29%

-30%

UK property index

1,691

4.0

1%

-2%

-8%

-8%

FTSE All-Share Index

4,098

4.5

2%

1%

-3%

-4%

Source: Company data, Edison Investment Research. Note: Based on last reported EPRA NAV and trailing 12-month DPS declared. Prices as at 17 July 2019.

Exhibit 5: Financial summary

Year ending 30 June (£000's)

2015

2016

2017

2018

2019e

2020e

2021e

INCOME STATEMENT

Gross revenue

22,714

26,265

27,540

30,178

31,479

31,922

33,077

Total property expenses

(5,248)

(7,661)

(8,148)

(10,896)

(11,403)

(11,497)

(11,794)

Net revenue

17,466

18,604

19,392

19,282

20,076

20,425

21,283

Administrative expenses

(5,321)

(5,493)

(6,295)

(6,574)

(7,302)

(7,219)

(7,385)

Other income

1,468

599

707

888

625

400

400

Valuation movement on investment properties

14,791

3,018

(2,085)

5,932

(16,227)

0

0

Reversal of impairment of car parking assets

0

500

1,000

1,300

(300)

0

0

Profit on disposal of investment property

236

1,140

303

1,677

(856)

0

0

Share of post-tax profits from joint venture

2,621

1,400

1,342

3,757

1,025

1,045

3,445

Operating profit

31,261

19,768

14,364

26,262

(2,960)

14,650

17,743

Net finance costs

(7,258)

(7,847)

(7,639)

(7,887)

(7,984)

(8,068)

(8,333)

PBT

24,003

11,921

6,725

18,375

(10,944)

6,582

9,410

Tax

0

0

0

0

0

0

0

Net profit

24,003

11,921

6,725

18,375

(10,944)

6,582

9,410

Adjustments to EPRA:

Valuation movement on investment properties

(14,791)

(3,018)

2,085

(5,932)

16,227

0

0

Reversal of impairment of car parking assets

(5,013)

(500)

(1,000)

(1,300)

300

0

0

Valuation movement on properties held in joint ventures

0

(668)

(471)

(2,561)

0

0

(2,100)

Profit on disposal of investment/development properties

(236)

(1,140)

(303)

(1,677)

856

0

0

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

2,488

0

0

0

0

0

0

EPRA earnings

6,451

6,595

7,036

6,905

6,439

6,582

7,310

Average number of shares (m)

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

(20.6)

12.4

17.7

Basic & fully diluted EPRA EPS (p)

12.1

12.4

13.2

13.0

12.1

12.4

13.8

DPS declared (p)

10.44

11.00

11.50

11.75

11.75

12.10

12.45

BALANCE SHEET

Investment properties

336,982

346,388

349,266

359,734

349,055

355,055

362,055

Investment in joint ventures

19,344

25,093

27,852

39,742

12,833

24,108

34,883

Goodwill

4,024

4,024

4,024

4,024

4,024

4,024

4,024

Other non-current assets

1,214

2,151

3,922

3,669

4,025

4,025

4,025

Total non-current assets

361,564

377,656

385,064

407,169

369,937

387,212

404,987

Investments (listed equities)

1,962

2,070

2,394

3,530

4,478

4,478

4,478

Non-current assets held for sale

3,450

0

0

0

0

0

0

Trade & other receivables

6,871

7,388

3,311

6,288

3,760

3,900

3,937

Cash & equivalents

1,515

0

3,124

5,473

9,340

7,676

2,910

Total current assets

13,798

9,458

8,829

15,291

17,578

16,054

11,325

Total assets

375,362

387,114

393,893

422,460

387,514

403,266

416,311

Trade & other payables

(11,857)

(11,496)

(10,846)

(20,278)

(12,532)

(13,001)

(13,122)

Financial liabilities

(38,668)

(887)

0

0

0

0

0

Total current liabilities

(50,525)

(12,383)

(10,846)

(20,278)

(12,532)

(13,001)

(13,122)

Non-current financial liabilities

(141,959)

(184,874)

(191,969)

(198,057)

(187,100)

(202,100)

(212,100)

Total liabilities

(192,484)

(197,257)

(202,815)

(218,335)

(199,632)

(215,101)

(225,222)

Net assets

182,878

189,857

191,078

204,125

187,882

188,164

191,089

Period end shares in issue (m)

53.2

53.2

53.2

53.2

53.2

53.2

53.2

NAV per share (p)

344

357

359

384

353

354

359

CASH FLOW

Net cash flow from operating activity

2,191

5,656

10,108

6,348

6,487

6,765

6,950

Investment in investment properties

(37,045)

(17,014)

(23,246)

(2,859)

(29,398)

(6,000)

(7,000)

Proceeds from disposal of investment property

26,821

16,050

21,574

7,534

17,204

0

0

Purchase of fixtures, equipment and motor vehicles

(532)

(1,496)

(586)

(340)

(794)

(900)

(900)

Proceeds from sale of fixed assets

0

54

61

0

23

0

0

Investments and loans to JV

0

(4,916)

(4,250)

(8,809)

(211)

(10,500)

(7,900)

Distributions received from joint ventures

0

567

1,031

676

28,145

270

570

Proceeds from sale of joint ventures

0

0

0

0

0

0

0

Payment for the acquisition of non-listed investments

0

0

(1,950)

(175)

(385)

0

0

Cash flow from investing activity

(10,756)

(6,755)

(7,366)

(3,973)

14,584

(17,130)

(15,230)

Proceeds from borrowing

17,475

4,247

7,197

6,088

(10,957)

15,000

10,000

Dividends paid

(5,550)

(5,550)

(5,928)

(6,114)

(6,247)

(6,300)

(6,486)

Cash flow from financing activity

11,925

(1,303)

1,269

(26)

(17,204)

8,700

3,514

Change in cash

3,360

(2,402)

4,011

2,349

3,867

(1,664)

(4,765)

Opening cash

(1,845)

1,515

(887)

3,124

5,473

9,340

7,676

Closing cash

1,515

(887)

3,124

5,473

9,340

7,676

2,910

Bank overdraft

0

887

0

0

0

0

0

Cash as per balance sheet

1,515

0

3,124

5,473

9,340

7,676

2,910

Financial liabilities excluding finance leases

(176,147)

(181,281)

(187,507)

(193,595)

(182,656)

(197,656)

(207,656)

Net debt

(174,632)

(181,281)

(184,383)

(188,122)

(173,316)

(189,980)

(204,746)

Net LTV

49.7%

49.5%

49.3%

47.5%

48.2%

50.4%

51.8%

Source: Town Centre Securities, Edison Investment Research


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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

1,185 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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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

1,185 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

1,185 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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Oryzon Genomics — Interim data from Phase IIa ETHERAL AD study

On 15 July 2019, Oryzon presented interim data from the Phase IIa ETHERAL trial at the Alzheimer’s Association International Conference (AAIC 2019) in Los Angeles. A randomised, double-blind, three-arm study is enrolling mild- to moderate Alzheimer’s disease (AD) patients to investigate vafidemstat, an LSD1/MAOB inhibitor. The interim analysis of the blinded data from the first 104 patients (out of 125 in European centres plus 30 more patients in the US) showed the drug was safe and well tolerated. The trial remains blinded, so no conclusions on efficacy can be made at this point, but Oryzon’s presentation included an initial assessment of certain functional parameters and some biomarker data. The placebo-controlled, 24-week treatment results from the European part of the trial are expected in H120. We maintain our valuation of €430m or €11.0/share.

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