Property stocks have suffered very mixed fortunes since the Brexit referendum, but I believe some companies in this sector are now quite attractively valued.
In this piece I’m going to look at two potential buys — a small-cap upstart and a big name property stock with a long pedigree.
Rapid growth
AIM-listed Palace Capital (LSE: PCA) has delivered rapid growth since its flotation in 2013. The reported value of its property portfolio has risen from around £60m in 2014 to £183.2m at the end of March.
News today suggests that this value could soon head north of £200m. Palace has announced plans for a £67.8m deal to acquire RT Warren, a property company with a £71.8m portfolio of industrial and residential properties.
Palace plans to raise £70m through a share placing to fund this deal. The group’s plan is to sell the London residential properties and focus on improving the rental yield from the commercial properties.
There are several things I like about this. The first is that by raising the whole value of the deal in fresh equity, management expects to deliver a significant drop in leverage. The group’s loan-to-value ratio is currently quite high in my view, at 43%. But if the RT Warren deal goes through as planned, this is expected to fall to less than 35%.
The second thing is that the RT Warren assets generated a rental income of £3.6m last year. This gives a rental yield of about 5%, which is below the group’s average. However, management believes a number of the new properties have the potential to deliver higher returns.
Palace’s special focus is on active management to maximise rental yields. So far, it’s been quite successful. Net asset value per share rose by 7% last year, while adjusted pre-tax profit rose by 20% to £6.7m.
The shares currently offer a yield of 5%. For small-cap income investors, they might be worth a closer look.
A 35% discount
FTSE 100 property group British Land Company (LSE: BLND) has a £13.9bn portfolio that’s focused on prime London office space, and retail centres around the UK.
Neil Woodford has been buying British Land stock for his income funds, most recently in August. And although some of Mr Woodford’s picks have come in for a lot of criticism this year, I believe this one makes sense.
The stock currently trades at a 35% discount to its net asset value of 915p, and offers a forecast dividend yield of 5.1%. British Land is well funded and the portfolio has a loan-to-value ratio of less than 30%, which seems fairly prudent.
The group doesn’t need to refinance any of its borrowings until early 2021 and has a weighted unexpired lease term of 8.3 years. Occupancy stands at about 98%.
One risk is that some of the group’s major tenants — perhaps retailers — could fall into financial distress and default on their rent payments. However, despite this possibility, I think it’s fair to say that forward visibility of earnings is pretty good.
In my view, the stock’s discount-to-book value is large enough to provide some protection against falling prices and lower rents. British Land has been on my watch list for a while. I’m certainly getting closer to making a purchase.