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Research: Real Estate
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.
Town Centre Securities |
Robust performance while delivering strategy |
Trading update |
Real estate |
18 July 2019 |
Share price performance
Business description
Next events
Analysts
Town Centre Securities is a research client of Edison Investment Research Limited |
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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 |
EPRA EPS* |
EPRA NAV/ |
DPS |
P/NAV |
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.
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Exhibit 1: Increasing portfolio diversification |
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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.
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Exhibit 2: Portfolio split by value at 31 December 2018 |
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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% |
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Town Centre Securities |
205 |
109 |
0.57 |
5.7 |
2% |
-3% |
-29% |
-30% |
UK property index |
1,691 |
4.0 |
1% |
-2% |
-8% |
-8% |
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FTSE All-Share Index |
4,098 |
4.5 |
2% |
1% |
-3% |
-4% |
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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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Research: Healthcare
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.